雅各布工程 (J) 2022 Q3 法說會逐字稿

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jacobs Fiscal Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Thank you. Jonathan Doros, you may begin your conference.

Thank you. Good morning to all. Our earnings announcement and 10-Q were filed this morning, and we have posted a copy of the slide presentation on our website, which will be referenced during the call.

I'd like to refer you to Slide 2 of the presentation materials for information about our forward-looking statements, non-GAAP financial measures and pro forma figures. For pro forma comparisons, the current and prior periods include the results of recent acquisitions, including StreetLight Data and BlackLynx as well as our strategic investment in PA Consulting for the full fiscal period.

Turning to the agenda on Slide 3. Speaking on today's call will be Jacobs' Chair and CEO, Steve Demetriou; President and Chief Operating Officer, Bob Pragada; and the CEO of PA Consulting, Ken Toombs; and President and Chief Financial Officer, Kevin Berryman. Steve will begin by reviewing our third quarter results and then discuss how Jacobs and PA are accelerating positive social impact. Bob will then review our performance by line of business. Ken will provide an update on PA Consulting. And Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, Steve will provide details on our updated outlook, along with some closing remarks. And then we'll open the call up for your questions. In the appendix of this presentation, we have provided additional ESG-related information, including examples of our leading ESG solutions.

With that, I will now pass it over to Steve Demetriou, Chair and CEO.

All right. Thank you for joining us today to discuss our third quarter fiscal year 2022 business performance and our near-term outlook. We're excited to be conducting today's call from PA Consulting offices in London, and I'll provide more color in just a moment on our strong early on success of our investment in PA.

But first, turning to Slide 4. At Jacobs, the combination of a proactive approach to strategic portfolio management and driving a high-performance culture has created a top-quality business, with substantial recurring revenue that's resilient during a variety of macroeconomic conditions. This is complemented by our focus on secular growth in the areas of Climate Response, Consulting & Advisory and Data Solutions.

Our competitive advantage is based on strength, staying true to our values. We harness our deep technical expertise to reinvent the way we solve problems and shape the next generation of innovative solutions for our clients.

As I shift to the quarterly results, we're clearly seeing strong underlying trends and accelerated growth at Jacobs. From the velocity of our sales pipeline, our recent major wins that we'll talk about today and next quarter, to increasing trends in utilization, we're positioned for strong profitable growth going forward.

During the quarter, net revenue grew 8% year-over-year and double digit on a constant currency basis, with growth across each line of business. More importantly, bookings were strong across the company, resulting in revenue backlog up 10% year-over-year and actually up 13% in constant currency. We saw continued strong performance in our advanced facilities business, as demonstrated by our 25% year-over-year top line growth, and an acceleration in [TMTS] bookings during the quarter within our Americas business, driven by awards related to the U.S. infrastructure modernization.

Within Critical Mission Solutions, we were awarded a strategic $3.9 billion NASA Johnson 10-year rebid, significantly larger than our existing contract and which will be added to our backlog in the fourth quarter. This is one of many long-term recurring contracts that provide revenue visibility for the business.

On a constant currency basis, PA Consulting continued to show strong growth, with revenue up 22% and backlog up 19% year-over-year. The strong visibility of our diverse business with upside from secular growth trends, combined with robust cash flow generation, affords us the ability to generate returns for our shareholders through times of economic uncertainty.

Now turning to Slide 5. This time 2 years ago, in the height of the pandemic, we were zeroing in on the PA Consulting transaction. And (inaudible) PA is significantly exceeding our financial expectations, and revenue synergies are accelerating. Results are strong across all PA's key performance indicators. In culture and talent, the number of partners has increased more than 20% since the transaction closed, with additional key hires across operations, research, technology and sales further strengthening PA's capabilities and client solution. And very exciting is their women and leadership program, with the current PA leadership team now at 50% female.

Financial performance continues strong, with the weighted pipeline up more than 40% compared to the prior year. Fiscal year-to-date revenues are up 20% in constant currency, with an operating margin of 21%, which is an indicator of PA's high-quality business. On the operations and strategy front, PA is seeing success following the launch of its IP monetization. And they are gaining momentum in the U.S. with new leadership in an expanding portfolio. And in the area of revenue synergies, we have posted 18 joint wins since the beginning of the partnership and are seeing significant collaborative opportunities in multiple markets, including health and life sciences, energy and utilities and consumer products. Our partnership with PA has been one of the most successful and value-creating investments, and our Consulting & Advisory accelerator is a clear priority for future capital deployment.

Turning to Slide 6. A key to our successful partnership has been the close alignment of our purpose around creating solutions that have positive social impact. Whether it's working together to improve health care for families through leading-edge cell and gene therapy; addressing patient safety and emergency departments across the U.S.; solving issues of connectivity and decarbonization for global rail market; delivering resilient solutions in the areas of deforestation and fire prevention in the U.K. and the undergrounding of 10,000 miles of cable for PG&E to mitigate forest fires in California; and on the clean energy front, collaborating on analyzing investments for private equity in clean hydrogen. Once again, looking ahead, we believe our partnership with PA is critical to delivering our new Jacobs strategy.

Now I'll turn it over to Bob Pragada to discuss our line of business.

Thank you, Steve. Moving on to Slide 7 to review Critical Mission Solutions. The CMS business continued its strong performance in the third quarter, with total backlog increasing 7% on a reported basis -- reported and pro forma basis to $10.2 billion. Our CMS strategy is focused on creating resilient recurring revenue growth and margin expansion by offering technology-enabled solutions aligned to critical national priorities. Our service and solution offerings are delivered across our core customers' markets: space, national security, cyber and intelligence and energy environment. And we are leveraging our growth accelerators of Data Solutions, Climate Response and Consulting & Advisory to catalyze the business.

We have substantial revenue visibility as approximately 85% of CMS' portfolio consists of large enterprise contracts with durations greater than 4 years and 88% from federal-level government funding. Although economic and geopolitical uncertainties continue, our strong Q3 ending backlog gives us confidence in our next 12 months forecasted revenue. Three market trends that we see contributing to our continued growth include: space debris management, robotics and 5G network buildout.

Beginning with space debris management. Decades of space travel resulted in large amounts of space debris damage today's satellites and future launches, adding to the cost of operating satellite and other space platforms, like the International Space Station, or ISS. If debris destroys a satellite, it could take months and cost hundreds of millions of dollars to restore the service. We support the orbital debris tracking program at NASA and provide plume analysis and communication systems simulation for vehicles visiting the ISS. In addition, we provide meteor tracking data for multiple government agencies. Space retracting is one of many services Jacobs provides on the recently awarded Johnson Engineering, Technology, and Science, or JETS II contract, which builds on Jacobs' more than 17 years of continuous support at Johnson Space Center. Under this contract, we will provide multidisciplinary technical services to support the future of human space exploration as well as help NASA incubate the emerging commercial space economy. This 10-year $3.9 billion win will book in Q4 and represents a $1.8 billion increase to our existing contract. This service illustrates the continuing strong massive Jacobs partnership.

Moving on to robotics. We are increasingly delivering valued solutions to our clients by utilizing robots that reduce costs and increase accuracy and safety in otherwise manual human processes. And we're excited to announce that last quarter, we integrated the Resolve Robotics team in the U.K. into CMS, who brings software expertise and IP to help accelerate our growth.

Our existing CMS robotics team already delivers groundbreaking innovations, developing and deploying robotic systems in challenging environments, such as the robotic tool to retrieve sand-like debris from inside a damaged nuclear reactor at Fukushima in Japan, autonomous systems to map riverbeds for the British Army and designing robotic systems for ITER, the world's largest fusion power experiment.

Finally, demand for 5G telecommunications. Our telecom group provides full solutions for the deployment of next-generation wireless and wireline networks for leading telecommunication companies like AT&T, Verizon and T-Mobile as well as Fortune 1000 health care and commercial companies looking to build their own 5G networks. We also support the infrastructure market, providing 5G integration, network optimization and technical services alongside our P&PS teams to accelerate growth.

While rollout of 5G infrastructure deployment is still in its early ramp phase, we continue to see increased demand for both integrated 4G and 5G solutions from our commercial telco, infrastructure, health care and government clients. During the quarter, our telecom group added several new awards totaling more than $150 million to deliver projects advancing 5G nationwide. We are excited for the team's recent successes and are well positioned for growth as adoption of 5G use cases and penetration grow.

In summary, we continue to see solid demand for our CMS solutions. Last week, we were notified that we were awarded a $470 million 6-year cyber and intelligence-related task order, which we expect to benefit beginning -- begin ramping at the end of this current quarter. The sales pipeline remains robust with the next 24-month qualified new business pipeline at approximately $25 billion, including $10 billion in source selection with an expanding margin profile.

Turning to Slide 8. During the quarter, People & Places Solutions delivered record-setting quarterly bookings that top pre-pandemic levels. We also enjoyed year-over-year bookings growth of 11% and backlog growth of 13%, delivering a high mark for operating profit in the quarter. Despite macroeconomic concerns, we performed well due to the balance of public and private sector clients with a multinational focus, resulting in continued high percentage of revenue already booked in backlog.

As I talk about the quarter, I'll address our 4 ongoing themes of supply chain diversification, infrastructure modernization, climate response and data solutions.

Starting with supply chain diversification. With continued breakthroughs in biotechnology, strong customer demand and robust operating cash flow, life sciences clients are investing in manufacturing expansion and contract operations capacity globally. As a leader in the market, Tier 1 clients have confidence in Jacobs' ability to deliver highly complex greenfield and expansion projects at speed that provides time to market for our clients to maximize their competitive advantage in new therapeutics.

Growing health service needs are leading to innovative approaches to care. We are optimizing facilities for clients such as the University of Iowa Hospitals & Clinics, where we serve as their project delivery partner. We are improving sustainability access and energy efficiency for NHS Scotland as well as increasing much-needed access to critical mental health care in Australia.

We continue to see robust demand for semiconductor chips, data center capacity expansion and growth in the electric vehicle market and have secured recent confidential wins in all 3 categories. On top of strong secular demand for semiconductors, we are pleased to see the passing of the $53 billion U.S. CHIPS bill, which will incentivize investment in U.S. semiconductor manufacturing and specialized tooling.

Infrastructure modernization. Increased client investments in mega and gigascale infrastructure continues. And with our #1 ENR ranking and program management, our delivery reputation has been a key differentiator in staying ahead of our clients' needs in a dynamic global environment. We recently have been awarded several strategic full life cycle programs for new transformative scale cities in the Middle East that will address social, economic and climate priorities and will have flexible and long-term contracting vehicles. With a renewed interest in equitable, sustainable transportation, we are experiencing a significant investment in the transit and rail sector with wins across the globe, such as Irish Rail, British Railways, multiple clients in Australia and resilient transit planning for Sacramento Area Council of Governments here in the U.S.

The Infrastructure Investment and Jobs Act is resulting in a steady increase in new project awards to modernize and increase the resiliency of U.S. infrastructure. For example, we won a major water supply resilience program for Eastern New Mexico Water Utility Authority, a 5-year stormwater implementation program for the city of Baton Rouge, and a funding strategy with Oklahoma DOT. Additionally, our IIJA advisory team is positioning our clients to win funding opportunities, with over 50 differentiated grant applications across transportation, water and energy. We anticipate additional awards in the coming quarters as the opportunities in our sales pipeline move into the next phase of procurement.

Moving to Climate Response. We see our clients continuing to invest in clean energy across all sectors, with primary spend related to grid modernization, cost-effective renewable energy generation and EV charging infrastructure, or EVCI. Our progress in these areas is demonstrated globally: in Asia, through advisory and policy consulting for the Asian Development Bank; in Canada, with a pipeline utility program; in Australia, through transmission and distribution design projects with AusNet Services; and in the U.S. via a new consulting and advisory framework to advance energy transition with a leading provider.

Transportation electrification and advanced charging infrastructure plans have topped our clients' agendas across all regions for aviation, sports, highway and rail and transit. This includes projects for Heathrow Airport in the U.K. to implement landside EVCI, Ohio DOT statewide EV infrastructure program and a major U.S. transportation authority transitioning operations to zero emissions for one of the world's largest bus fleets by 2040. Collectively, this is a very exciting space for us and aligns strongly with our Climate Response accelerator.

Moving to Data Solutions. We are using advanced data analytics to optimize our clients' decision-making as well as their ability to derisk long-term investments. For example, in collaboration with the California Air Resources Board, our StreetLight Data team is using advanced analytics to better measure and manage transportation emission. We are also continuing our technology consulting support for a U.S. state DOT with integrated corridor management, connected automated transportation systems and other advanced mobility solutions to maximize use of their existing transportation infrastructure.

In the water market, we were awarded a contract with The Water Research Foundation to develop the first full-scale deployment of machine learning, predictive control for wastewater systems, a new technology to advance the global water industry. Our cyber and digital services teams were awarded projects in support of the operational technology resiliency plan for a major U.K. utility network operator. And in Australia, we have secured the digital and data advisory services scope to support advanced analytics across Brisbane City Council's entire asset life cycle.

In summary, our strong sales pipeline is supported by well-funded government budgets to modernize their infrastructure and commercial clients that are addressing secular growth opportunities. The agility of our global workforce, combined with elevated spend on transformative, complex infrastructure uniquely positions us to deliver differentiated value to our clients. Given these dynamics and the visibility of our revenue and backlog, we are excited in the growth trajectory for our People & Places business, both now and into the future.

As Steve mentioned, we are impressed with PA's strong results, which underscores the strategic logic for our investment. We're excited to be joined by PA's CEO, Ken Toombs, who'll provide a quarterly update. Ken, over to you.

Thanks, Bob. Moving to Slide 9. PA's current quarter continued to see strong sales bookings, up 25% and backlog was up 19% in constant currency. Here's what I see driving that. We have unique value proposition that starts with our purpose, bringing ingenuity to life to build a positive human future. This enables us to deliver both financial

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Our purpose is critical in our ability to attract and retain top talent. Our differentiation extends to our strategy, which is focused on helping clients address some of the biggest forces shaping society with our unique end-to-end innovation offering. Indeed, having technologists, scientists, engineers and designers working together creates a unique set of propositions.

Let me shift gears and talk a bit about our partnership with Jacobs. As Steve mentioned, our partnership supports key aspects of our strategy. We have numerous key accounts in common. Those accounts are ones where we can leverage PA's relationships at the C-suite to bring Jacobs into the mix early and create a differentiated solution. In some cases, it could be the advantage of scale that Jacobs has or a specialized expertise.

It can also work the opposite way where Jacobs has a key relationship and brings PA into complex deals. A great example is PG&E in California, where Jacobs has a strong existing relationship. The differentiation on this project was a combination of Jacobs' program management expertise with PA's strategic consultancy advise and deep domain expertise. And more than a year into the partnership, these types of opportunities are growing.

Another area of our strategy is expansion in the United States, where the outlook is very promising, with strong double-digit revenue growth over the last 6 months. Beyond the synergies with Jacobs, we see a big demand for our end-to-end services. We're focused on 3 sectors, in particular: energy and utilities; health and life sciences; and consumer and manufacturing. In each of these areas, we're winning and delivering exciting purpose-driven work.

For example, innovating cell and gene therapy manufacturing with Ori Biotech and creating a growth strategy for Green Boom, a start-up, which has developed a sustainable (inaudible) to prevent, reduce and clean up oil spills. Over time, we've made several U.S. acquisitions, which have provided a platform for further organic growth. Additionally, the significant hiring of great new talent at the partner level is another way we are stimulating growth. Since the beginning of 2020, we've grown the number of U.S. partners by 60%.

Now I'd like to spend a minute on resiliency of our business. We enjoy a loyal client base, with approximately 90% of revenue typically coming from repeat clients over the last 5 years. And our expertise continues to be in high demand. We also enjoy resiliency given our balance between private and public sector work. For example, during the pandemic, we transformed the entire corporate business models to account for new customer behaviors. While in the public sector, we work with some of the biggest government agencies that provide critical services that are largely unaffected by short-term budget decisions, like the U.K. National Health Service and Ministry of Justice. This helps to mitigate risk from future macroeconomic trends.

So to summarize, we're running a purpose-driven business with a clear strategy to address our clients' biggest challenges in an end-to-end manner that separates us from the competition. And structurally, we're set up to be able to pivot in response to external factors, ensuring we're well positioned for the future.

Kevin, I'll hand it over to you.

Thank you, Ken. I'm going to turn to Slide 10 for a financial overview of third quarter fiscal 2022 results. Third quarter gross revenue grew 7% year-over-year and net revenue grew 8%. Pro forma for our acquired revenue, net revenue also grew 7% year-over-year, which is an acceleration in growth from the second quarter. Currency negatively impacted revenue growth by nearly 400 basis points. And given current foreign exchange spot rates, we expect FX to impact our Q4 revenue by nearly 450 basis points on a year-over-year basis. On a reported basis for the fourth quarter, we expect revenue growth in the mid- to high single digits, which translates into double-digit growth on a constant currency basis.

Adjusted gross margin in the quarter as a percentage of net revenue was 25.8%, down 180 basis points from a year ago, primarily driven by our CMS line of business related to newly ramping remediation contracts and the timing of the ramp on higher-margin federal contracts and the investment in incremental resources in PA in advance of expected growth. We expect gross margins to marginally improve in the fourth quarter and expand further during fiscal 2023, driven by a higher-margin backlog and sales pipeline, favorable revenue mix within CMS, an acceleration in P&PS revenue and continued strong PA performance.

Adjusted G&A as a percentage of net revenue was 15.6%, down nearly 100 basis points from Q2 and down 130 basis points year-over-year. We expect our G&A as a percentage of revenue to remain at this level in Q4 as we balance our investments to support growth in fiscal 2023 and beyond.

GAAP operating profit was $266 million and was mainly impacted by $52 million of amortization from acquired intangibles and other acquisition deal-related costs and restructuring efforts of $10 million, with over half of that associated with integration costs associated with acquisitions. Adjusted operating profit was $327 million, up 4% year-over-year on both a reported and pro forma basis. On a constant currency basis, adjusted operating profit was up 8% year-over-year. Our adjusted operating profit to net revenue was 10.3%, and we expect a similar level in Q4. I'll discuss the moving parts later when reviewing the line of business performance.

GAAP EPS from continuing operations was $1.52 and included a $0.27 impact related to our amortization charge of acquired intangibles, $0.04 from transaction-related costs, only $0.02 of other restructuring costs and a $0.01 benefit adjustment to align to our effective tax rate. Excluding these items, third quarter adjusted EPS was $1.86, up 13% year-over-year. On a year-over-year basis, FX impacted our EPS negatively by $0.09.

Within the other income line on the P&L, important to note, we realized a cash pretax gain of approximately $14 million or $0.08 in after-tax EPS from the sale of our ownership in commercial cybersecurity provider, WatchGuard Technologies, that came as part of the KeyW acquisition. This benefit was captured within our other income line and adjusted EBITDA, but not reflected in operating profit results. The sale of this strategic investment was driven by contract terms associated with our interest, which would have limited future monetization of our investment. We remain excited about our continued partnership with WatchGuard.

Jacobs' consolidated Q3 adjusted EBITDA was $363 million and was up nearly 13% year-over-year, representing 11.4% of net revenue. On a constant currency basis, adjusted EBITDA was up 16% year-over-year.

Finally, turning to our bookings during the quarter. The revenue book-to-bill ratio was 1.1x and did not include the estimated $550 million backlog value of the 10-year $3.9 billion NASA Johnson win, which we'll recognize in backlog in our fourth quarter. As Bob mentioned earlier, the contract savings of this rebid win is significantly higher than our existing contract and is an agency-wide contract not limited to Johnson Space Center. We plan to backlog the first 2 years of the approximate current revenue run rate, but expect on-contract growth to the ceiling value over the life of the contract.

Regarding our LOB performance, let's turn to Slide 11. Starting with CMS. Q3 revenue was up 8% year-over-year and up 7% on a pro forma basis. FX negatively impacted growth by over 200 basis points. For the fourth quarter, we expect revenue growth to approach double-digits, and after adjusting for an estimated FX impact of 250 basis points, deliver constant currency double-digit growth.

Q3 CMS operating profit was $104 million, down 3.5% year-over-year, but flat on a constant currency basis. Operating profit margin was down over 90 basis points year-over-year to 7.9%. Q3 operating profit and margin percentage continued to be impacted by the delay of the higher-margin, shorter-cycle awards that were pushed to the right due to the continuing resolution as well as related timing of our investments ahead of new cyber and intelligence contract wins. Due to these investments and the timing of both new and anticipated awards, we expect CMS operating profit margin to remain under 8% for the fourth quarter, but improving in 2023 and beyond.

Moving to People & Places. Q3 net revenue accelerated to 7% year-over-year growth, including a negative effect of 350 basis points from FX. On a constant currency basis, P&PS overall grew double digits year-over-year. Also on a constant currency basis, each People & Places segment demonstrated net revenue growth, with strong year-over-year growth acceleration in our Americas business as impact from U.S. infrastructure spending begins to materialize.

Our advanced facilities business continues to demonstrate robust double-digit net revenue growth, with strong performance in both semiconductor and life sciences. We expect this performance to continue given our strong backlog and sales pipeline. Our international business growth on a constant currency basis also remains strong as those governments continue to prioritize infrastructure modernization and investments related to our ESG solutions.

Total P&PS Q3 gross profit grew year-over-year, and gross margins were consistent with Q3 2021, with Q3 operating profit up 2% year-over-year and up 8% when eliminating the impact from FX translation.

In terms of PA's performance, PA revenue grew 8% year-over-year in U.S. dollars, an impressive 22% in PA's local currency. Q3 adjusted operating profit margin was 18.5% due to lower utilization, but still up 2% when factoring the impact of currency. The lower utilization during Q3 was driven by a proactive effort to add resources for additional growth expected in 2022 and 2023 for the PA team. Consequently, we expect PA's operating profit margin to return to greater than 20% next quarter and continue to strengthen further in 2023. We also expect continued double-digit revenue growth on a constant currency basis.

Our nonallocated corporate costs were $38 million, down year-over-year as we benefited from continuing moderation in medical costs, and to a lesser extent, from a positive currency impact on our support costs and other benefits. We now expect nonallocated corporate costs to be in the range of $170 million to $190 million versus our previously communicated range of $200 million to $250 million for fiscal 2022.

Turning to Slide 12 to discuss our cash flow and balance sheet. We had another quarter of solid underlying cash flow generation. On a reported basis, free cash flow was a negative $281 million, but included a $480 million cash outflow related to the previously discussed INPEX legal settlement as well as $10 million related to transaction costs and other items. Excluding these outflows, free cash flow was strong and conversion was in line with our expectations. DSOs were relatively flat year-over-year. We expect solid free cash flow in the fourth quarter, again, in line with our previous conversion expectations for the full year.

During the quarter, we've repurchased approximately $200 million of our shares. As we have said before, we will remain agile and opportunistic in repurchasing shares as we see dislocation in the market. As a result of the strong underlying cash flow, we ended the quarter with cash of $1.1 billion and a gross debt of $3.6 billion, resulting in $2.5 billion of net debt. Our net debt to adjusted 2022 expected EBITDA of approximately 1.8x is a clear indication of the continued strength of our balance sheet. As of the end of Q3, approximately 60% of our debt is tied to floating rate prepayable debt. And as a result, we are expecting incremental interest costs going forward, which we have incorporated into our outlook. Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which we recently announced.

Before I turn it back to Steve, I'd like to talk about the resiliency of our portfolio. The portfolio is strong and resilient, aligned around high-priority federal government spend areas and state and local institutions supported by government stimulus programs. The private sector business is centered on high-margin markets like semiconductors and life sciences, which are currently focused on incremental investment in capacity to resolve supply chain constraints and support novel therapies. As a result, while we may not be totally immune to the global economic uncertainties, we're confident that we are positioned to deliver the level of growth identified in our strategy.

Over to you, Steve.

All right. Thank you, Kevin. As Kevin described, we have a diverse portfolio with significant reimbursable recurring revenue. It provides us the ability to grow under multiple economic scenarios and manage the impacts of inflationary pressures on our business. With this diversity comes some exposure to foreign currency translation, as we have approximately 34% of our revenue outside of the U.S., with 21% of that revenue in U.K. pound sterling.

As a result of the latest foreign exchange dynamics, we're providing updated guidance for the fourth quarter of adjusted EBITDA in the range of $340 million to $360 million and an adjusted EPS of $1.75 to $1.85, with the midpoints tied to the current FX rates. We feel very confident in our underlying business trends in the fourth quarter and have provided the lower end of the range to reflect the possibility of any FX erosion.

It is important to note that relative to our fiscal 2022 forecast back in November, foreign currency translation has impacted our full year expected fiscal 2022 net revenue outlook by approximately $320 million, adjusted EBITDA by approximately $40 million and adjusted EPS by nearly $0.20. So in short, our change in annual guidance and EPS is effectively driven by currency volatility versus our original expectations.

In closing, we are excited about the momentum across all of our business as demonstrated by our accelerating revenue growth, our strong bookings and backlog and a robust sales pipeline globally.

Operator, we'll now open the call for questions.

(Operator Instructions) Your first question comes from the line of Jamie Cook from Credit Suisse.

I guess 2 questions. First, Kevin, you talked about the resilience of your business model in a macro downturn and understanding the guide lower was largely FX. One, can you sort of speak to, are you seeing any signs of macro weakness when you talk to your customers? And which parts of your portfolio would be most impacted assuming we are going into a recession or are in a recession?

And then the second question is just a clarification. The gain, I think, was from WatchGuard. That is included in the EPS number that you guys laid out, the $1.52 and the $1.86?

First point, relative to client. Look, we're really not sensing any significant commentary from clients which are indicating concerns on the impact to their business associated with their investment profile. And look, if you look at the, I'm going to call it the private parts of the portfolio, specifically life sciences and semiconductor, those clients are really continuing to be quite robust in their outlook.

And I'll go on to your second question and see if my colleagues want to add any color on that. But your second question about the WatchGuard, yes, it was included in the $1.86 EPS that we had for the quarter. It's important to note that we had about $0.09 of FX challenges in the quarter associated with kind of the weakening of the -- or strengthening, excuse me, of the U.S. dollar. But in addition to that, we took the opportunity to cruise some additional expenditures in support of employee-related costs in the quarter, offsetting some of the benefit of that WatchGuard gain.

Your next question comes from the line of Bert Subin from Stifel.

Bob, you mentioned the CHIPS bill in your prepared remarks. How much of a tailwind, if any, should we expect that to be for your fab design business? And then just a quick follow-up to what you were talking about on the Resilient side. Is it fair to think that PA Consulting would be sort of the most volatile piece of your business as we think about sort of going through a potential economic recession?

Yes. Bert, on the first part, on the CHIPS bill, I think the way that we're thinking about it is that, that was already such a robust business for us based on the clientele that we have and what the business drivers were for them. What the CHIPS bill did though is put even more credibility as well as substantiation of continued growth for those clients that are actually changing their business model. So I think it's putting more confidence that the cycle that we used to talk about being traditional 18- to 36-month cycles, going even further with now support from the federal government. So we're excited about that.

With regards to the volatility in PA's business, PA's very unique model, it's structured where the traditional management consultant relying on discretionary spend of their clients for business transformation activities is not really where PA sits. PA sits in product innovation and in using that product innovation to transform businesses. And so these are really at the core of the clients that they serve. So we're not really -- we're not seeing that as evidenced by the bookings trends that we saw with PA this quarter being at the highest that they've been eventually ever, which is really putting some credibility in the backlog moving forward.

Your next question comes from the line of Jerry Revich from Goldman Sachs.

I'm wondering if you could just expand, Kevin, on the -- Kevin, if you wouldn't mind just expanding on the margin comments in your prepared remarks for Critical Mission Solutions and People & Places. Exiting the fourth fiscal quarter, it sounds like you've got some idiosyncratic moving pieces that might impact normal seasonality as we head into the December quarter. Can you just tease that out a bit based on contract cadence, et cetera, that you alluded to for full fiscal year '23?

Yes, Jerry. A couple of points. First is on the win profile associated with our CMS business. We've been ramping some of the big environmental contracts, the nuclear remediation contracts, which are embedded into our forecast, which as you know, is lower margin. And we've previously discussed that the balance of the year, we'd start to see an uptick in margins because of all of the shorter cycle and cyber and intelligence wins which are coming. And actually, Bob announced that one was we just heard about this week actually, and so -- or last week. And so look, at the end of the day, all of those are happening. They're just not happening and won't ramp in Q4, which was our original expectation.

So if you look at that dynamic, that puts a little bit of pressure on the Q4 margins that we have. In addition, we continue to have the investment profile. And we're not backing off of that in Q4 because of the anticipation of the growth in 2023 and beyond. So it's a double -- kind of a double impact on Q4, but ultimately then translates into 2023 starting to rebound back into the margin profile that we've seen in the past. Now it's going to take a while to get there. But ultimately, we're confident that the margin profile will start to kick back up in '23.

Your next question comes from the line of Steven Fisher from UBS.

I just wanted to follow up on that discussion about the cyber contracts. And you mentioned that $500 million one, I guess that's the one from last week. I guess I'd call that a midsized award compared to the NASA-type opportunities. Can you just talk a little bit more about how much more of that you have in the pipeline and the timing of those and then how relatively important they are to that 2023 plan?

Yes. So it's Steve here. The good news is we actually had 2 wins in the last 30 days in the cyber and intelligence business. There was the $500 million one that did get booked late in the third quarter. And then we've had one just in the last week that Kevin just talked about. That's just under $500 million. And those are 2 good-sized cyber and intelligence awards, with better margins than some of our longer-term enterprise contracts that we have in CMS. So they're going to be margin accretive in -- and we're really going to see those playing out as early as -- as far as the P&L in the first quarter of 2023. So -- and then on top of that, we have about $1.5 billion of things that could hit sometime in the fourth quarter as far as pursuits out there. And if you look at our normal win rate, that's going to add on top of that. And then on the back of that, there's a series of other pursuit opportunities that will play out sometime in the first half of '23.

So we are excited about cyber and intelligence. A little frustrated that it's taken a few quarters longer than we had expected.

And then I just want to add on the back of that, outside of cyber and intelligence, which also gives us some optimism, is that the Americas IIJA initiatives, we are clearly seeing momentum now in that. The pipeline is building. We've had some early on wins. We've got about 50 grants out there that we are highly confident of winning a large share of, and that's going to translate into business. And we see that starting to accelerate in 2023. And so it really hasn't been a material impact on our business to date. And we all know that, that's coming because of the commitment of the U.S. government around that IIJA. So those are reasons for optimism as we get into both top line and margin improvement as we enter 2023.

Your next question comes from the line of Chad Dillard from Bernstein.

So on the back of the announcement of the 2022 inflation reduction bill, particularly the climate change portion, can you give a little bit of color on that? And just like how much would be addressable to Jacobs?

Yes. It's very similar to the IIJA. When you look at the climate change portion, which is in the high $300 billion, I think it's somewhere in the $370 billion, $380 billion. We see somewhere in the 85-plus percent coverage by Jacobs of when you break that bill down to what we're able to see so far. And we haven't been able to get 100% of it. But based on some of the specifics and what we're hearing, it's going to be a majority of it that's going to be an opportunity for Jacobs.

Your next question comes from the line of Andy Wittmann from Baird.

I guess just a clarification. I think Kevin, in your remarks, you made a comment, there was an FX benefit in your corporate unallocated. Is that the $8 million? And was that like a -- did you sell a swap or a currency hedge there to realize that? I'm just curious if that was cash or noncash as well.

No. This is basically translation-related efforts or impacts, I should say, Andy. So effectively, if you think about the revenue and the gross margin, all of that is negatively impacted by the dollar strength as the foreign currencies get translated into lower revenue and gross margin. That's partially offset by the fact that our costs are also reduced in terms of our international operations. So it's really driven more by that. No effective kind of transaction was related to that.

Your next question comes from the line of Louie DiPalma from William Blair.

With the announcement of this earnings call from PA Consulting headquarters in London, do you have any plans to acquire the remaining 40% of PA Consulting that you don't already own?

We've talked about this in the past and continue to have the same view that we really love the model that we've set up for the investment in PA. I think it not only is unique, but it's one of the reasons why we were able to get that and to get this investment across the finish line. And there could be a scenario where we incrementally grow our ownership. But right now, over the long term, we think having the PA partners and employees have ownership and the collaborative opportunities that, that gives us is really part of -- is really a key reason why we're off to such a strong start in the first year plus. And so we see that kind of model continuing going forward.

Your next question comes from the line of Michael Feniger from Bank of America.

I realize you added in some areas, investing in people, adding resources for the stronger growth outlook. You're talking about CMS, how some of these cyber contracts which are higher margins are going to pick up next year. Just based on what you're saying and the expected pickup in funding, should we be seeing an outsized level of margin expansion in 2023 as utilization levels are likely to pick up?

Michael, this is Kevin. Is your comment about CMS specifically? Or overall?

It's about P&PS and overall, the mix of the business.

Well, look, if we look at our margin profile just in Q3 and Q4, we do believe there's going to be an ability to increase margins as we come out of this dynamic that we're facing in Q3, Q4 where growth hasn't kicked in as much as we want or continuing to vest, so we do believe that there's margin upside in 2023 versus current level. But I wouldn't say extraordinary because we're going to ultimately continue to drive investments and support our business ability to grow longer term and at higher gross margins.

Your next question comes from the line of Josh Sullivan from The Benchmark Company.

As far as the Russia war in Ukraine, rising tensions in the Taiwanese Strait, can you just talk about if you've seen any specific uptick in demand for Jacobs' capabilities in space, cyber? You've seen international demand or mostly domestic? And then I guess a related question on the commercial side. What is the flow of European energy projects look like at this point?

Yes, Josh, I'd say [2 parts]. The short answer is yes. We have seen an uptick in the client conversations and just the dialogue around potential opportunities. I break it down into 2 main parts and then to address your energy comment in Europe. For cyber services, yes, these are predominantly U.S.-based framework agreements that we have in place, and we've seen efforts around those agreements be applied to cyber and intelligence activities, specifically surrounding what's going on in the Ukraine. And then the second part has been around defense infrastructure. And so you mentioned what's happening in the Taiwanese Strait. You'll probably say that our posture -- well, when I say, the Western Hemisphere's posture around defense infrastructure in Asia has been going on for the better part of the decade. But now in addition to that, we're seeing more requests. In fact, we've been awarded confidential -- a few jobs already in Eastern Europe around similar types of laydown platforms in defense infrastructure in Eastern Europe as a whole.

On the second part around energy in Europe, the answer again is yes. Energy transition and -- in that effort, not just in Continental Europe, but in the U.K. and in Ireland as well, is probably at an all-time high with regards to the activity. And that continues to be a strong catalyst for growth for us in our European business.

Your next question comes from the line of Gautam Khanna from Cowen.

I had a couple of quick questions. First, on the CMS segment. You talked about the $10 billion of source selection bids out there. Does that -- is that net of the $4 billion NASA contract? And in general, what are you looking at for the September quarter? Are you looking for some fairly sizable bookings? And if you could also refresh us on the recompete dynamic over the next 12 months. How much of the CMS business is up for rebids?

Let me just start and then maybe, Bob, you can pick up. So the in-source selection, around the $10 billion, it's net. So the -- I just want to be clear that the Johnson win is not in our backlog in the third quarter and will be added to the backlog in the fourth quarter. But what we're talking about now moving into the fourth quarter with our bid process is, I already covered several billion of that being around the cyber and intelligence business and also some opportunity, specifically in our aero segment working with the U.S. government. And so we're talking about that around -- net around all of that.

Bob, anything to add?

No. I mean probably the biggest recompete is NASA Kennedy that is coming up later in the year. We're currently under an extension there. So we like our -- we're confident about our opportunities in both Q4 and Q1.

Let me just clarify. The $10 billion is new business, not rebids? So it's new awards pending.

New awards and in-source collection. And it's net of NASA.

Yes.

Your next question comes from the line of Sean Eastman from KeyBanc Capital Markets.

I just wanted to come back to the investments being made this year. I think it's been clear all through this year that this is somewhat of a major investment year for Jacobs. And it sounded like that actually ramped up in the third quarter, with sort of incremental investments offsetting that gain on sale. I just wondered how much of that ramp is Jacobs really getting more aggressive and really bolstering that personnel to support growth versus -- and ending up costing more than you thought at the start of the year to build up that personnel to support growth. I hope that's a fair question.

Let me characterize our investment profile. Certainly, we entered the year with the -- as we've talked about over the course of the fiscal year, some pretty strong investment profiles associated with the expected growth. We've actually reduced that a tad in Q3 and Q4 as we've seen a delay in some of the revenue build that we have envisioned happening faster and sooner in the second half of 2022. Now this one particular investment partially offset the WatchGuard benefit. But I think we've continued to be very proactive in supporting people. I know that PA has invested in terms of salary improvements and have increased the pricing associated with efforts in that regard. So effectively, I think it's been broad based that we continue to be investing against our people and supporting our people, but actually probably faster and -- in the first half versus the second half other than this incremental investment we just made because of the WatchGuard benefit.

Your next question comes from the line of Andy Kaplowitz from Citigroup.

Can you give a little more color into PA Consulting margin? I know you talked about it being pressured by FX and incremental investments. Can you quantify those investments possibly? And I know you mentioned margins. You returned over 20% in the short term. But do you still have confidence in your longer-term margin expectation for PA, that sort of 20%, 30% flattish as you go out over the next several years?

Yes, I'll take a crack at it. And then we have Ken here with us, and I'll turn it to him to see if he has any additional color. But the PA team has been very aggressive in getting new talent into the organization, both at an executive level and at a partner level, which ultimately helps drive and support incremental growth going long term. They were very successful, especially in Q3 and bringing on board a bevy of talent, which is going to be positioning them for really strong growth going forward in 2023. That all came together. And fundamentally, when they brought those folks on board, they're not obviously originally billable from day 1. And so that will put some pressure on the gross margin. Now it's just about adjusting the hiring going forward, determining how much they need, and they'll start to see an improvement back up to the operating profit margin that we discussed in the prepared remarks, over 20% in our fourth quarter and ultimately beyond into 2023 and beyond. And we feel confident on that. Ken?

Yes. I think you hit it, Kevin. Two things. One was a significant amount of senior executive hiring, which came together all at the same time. So we actually had 5 senior executives joined in the same quarter, which had significant cost [with it]. And then the second part was, given the large deals that we have in the pipeline that we certainly have not had, we've started to ramp up hiring in advance that to ensure we can actually service those should we win one or more of them. So we're very confident about the profile going forward. We obviously watch our recruiting go forward, and the pipeline remains very active and strong and we're confident.

Your next question comes from the line of Sabahat Khan from RBC Capital Markets.

Just kind of the first question is the 50 grants that I think Steve called out earlier related to the IIJA. Any way you could quantify sort of the dollar amount or how much of that money sort of come through already? And then just the second question is, maybe a bit more philosophical, but as you mentioned earlier, you're seeing not really any meaningful slowdown in the outlook. But -- and in the past downturns, governments really stepped up with spending across some of your end markets and regions. In the conversations you're having and how much those governments have spent over the last couple of years, what do you think the propensity is there to step up if there is any meaningful slowdown as you look over the next 1, 2, 3 years?

Yes. Let me start. Steve here. Let me start with it and then I'll turn it over to Bob. But first of all, congratulations. We understand you just had a new baby and wish you success on that. Big opportunity for your family. So on the grant side, I mentioned 50, there's -- we really -- right now, there's some small fees associated with that, but the big opportunity is that we see the first 12 coming to fruition as far as a go decision over the next few weeks. And then those will start to ramp up. And there's other grants on the back of that. So we have yet to see the benefit of those, and we're pretty excited about what those will lead to as the procurement cycle progresses on those.

Bob, I'll let you handle the rest.

Yes. And maybe just to add on to that, which would then lead into those growth trajectories that we highlighted in our strategy, which we're gaining more confidence around that, specifically in our infrastructure business, in the 3 major markets, which -- actually 4. We got the Middle East, but in the U.S., U.K. and Australia.

On the government's historical reaction to recessionary-type periods and then how does that compare to what's happening right now, we actually see that step up as being positive again. We're seeing governments pretty bullish on infrastructure spend. And then in areas where that might be a little bit in debate, those political candidates that seem to have some traction in the marketplace are making very vocal comments about putting more money into major programs in those geographies. So all in all, we're feeling very positive about what the future looks like in infrastructure.

Gautam, you also asked about the percent of money that's out there. I think it's over 30% now on IIJA. I don't know exactly what the number is right now, but it's over 30%.

And there are no further questions at this time. Mr. Steve Demetriou, I turn the call back over to you for some closing comments.

I just want to thank everyone for calling in, and we look forward to updating you next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.