Ladies and gentlemen, thank you for standing by, and welcome to the Jacobs Fiscal Second Quarter 2021 Earnings Conference Call and Webcast. I would now like to turn the call over to Jonathan Doros, Investor Relations. Thank you. Please go ahead..

Thank you. Good morning to all. Our earnings announcement was filed this morning. We have posted a copy of this slide presentation on our website, which we will reference during the call.

During the presentation, we'll be in forward-looking statements, including with respect to the continuing effects of the COVID-19 pandemic, potential government stimulus programs and our financial outlook, among others.

I would like to refer you to our forward-looking statement disclaimer, which is included on Slide 2 regarding these and other forward-looking statements..

Thank you, John, and thanks to all of you for joining us today to discuss our second quarter fiscal year 2021 business performance at key initiatives. As the pandemic lessens its impact here in the United States, it's vital to recognize the significant struggles that are still occurring throughout the world, especially in India.

Jacobs made an immediate donation to the United Way in New Delhi for critical medical supplies. And I'm particularly proud of our company and employees who together have donated $200,000 through our internal giving platform collectively.

We have and will continue to support those that are still being impacted by the pandemic, including, for example, our operations in the Philippines. Turning to Slide 4.

Before discussing our second quarter results, it's important to continue to reiterate how we think about our business by aligning and executing against our long-term strategy to drive superior value for our stakeholders. We take a multiyear approach to our rigorous strategy formation.

This long-term mindset involves proactively assessing and aligning our portfolio toward large secular growth opportunities where we can deliver sustained double-digit profit growth. The transformation that Jacobs has undergone over the last several years has created significant value measured by relative total shareholder return.

As you have seen from our recent organic actions, the PA Consulting investment and the acquisition of the Buffalo Group, we believe there's a significant opportunity to deliver differentiated, digitally enabled solutions as the world accelerates its efforts to modernize infrastructure, improve global supply chain and enhance national security.

We have started the development of our new corporate strategy for fiscal year 2022 to '24, which we will present to the investor community later this year..

space exploration intelligence, all source intelligence, digital modernization and clean energy. Beginning with space exploration and intelligence. From idea to operations, Jacobs delivers know how and value to every stage of the space system life cycle for our civil and national security space plan.

NASA leads this global exploration and development of deep space with its Artemis program that will carry astronauts to and from the moon surface and beyond.

As NASA's largest service provider, Jacobs is involved in many aspects of the Artemis mission, including the space launch system, the Orion spacecraft and the exploration ground systems based at Kennedy Space Center.

We are proud to have expanded our NASA support to the Wallace Flight facility located in Virginia, and are now providing full life cycle operations and testing that deploy expertise we have developed at other NASA centers.

We remain heavily engaged in the NASA mission portfolio, including the recent support of the SLS hot fire test in the design, fabrication and full deployment of the calibration device on the Perseverance Rover now exploring Mars.

NASA continues to enjoy strong bipartisan congressional support with preliminary FY22 budget, including a 6% increase over 2021. We also support the DoD's joint all domain intelligence initiative, utilizing satellite connectivity in space and adding more capacity for intel analysis, such as our successful Mango One launch earlier this year.

Overall, defense based spending was up 28% in FY21 and is expected to show strong growth in FY22 as well. Moving on to all source intelligence.

Today's threat levels require intelligence analysts to utilize and coordinate multiple sources, including human, signal, open source, geospatial and measurement and signature to allow for better decision making in real time. The Buffalo Group acquisition greatly expanded Jacobs' all source intelligence capability.

We were awarded two exciting wins from the Defense Intelligence Agency in the quarter. Jacobs will provide counterterrorism analytical expertise for the Defense Combating Terrorism Center, DCTC, and integrated intelligence centers and direct support of war fighters around the globe.

We were also awarded a prime seat on the $12.6 billion Solutions for Information Technology Enterprise, or SITE III, IDIQ to address the evolving IT requirements vital to the security of the United States.

All those specific classified budget details were not provided in the preliminary budget, redirection of funds towards emerging cyber and intelligence threats from states are anticipated..

Thanks, Bob. And turning to Slide 9 for a quick financial review. Second quarter gross revenue increased 4% year-over-year and net revenue was up 7%. This was driven by solid underlying business performance, offset by the timing of advanced facilities projects.

Acquisitions and FX benefits continue to grow to growth by more than offsetting the burn off of two lower margin previously disclosed contracts in CMS. Including the pro forma impact from all acquisitions, net revenue was up low single digits.

For the second half of fiscal year 2021 compared to 2020, we expect total reported net revenue growth to be up in the low double digits year-over-year.

On a pro forma basis for acquisitions, we expect second half revenue up low to mid single digits versus a year ago as growth from the acquisitions and CMS and P&PS growth from a weaker second half 2020 compare more than offset continued headwinds in CMS from the lower margin contracts coming to an end.

Adjusted gross margin in the quarter as a percentage of net revenue was 25.8%, up 260 basis points year-over-year. The higher gross margin on a year-over-year basis was driven primarily by three factors.

Improvements in CMS gross margin as we continue to remix the portfolio to higher margin business, a favorable impact from lower benefit costs and the benefit from PA Consulting, which has a strong accretive gross margin profile versus the rest of the portfolio.

From a line of business standpoint, CMS gross margins increased strongly on a year-over-year basis as we benefited from higher margin revenue in the base business, new wins and improved portfolio mix. gross margin was up slightly year-over-year. Adjusted G&A as a percentage of net revenue was up slightly year-over-year to 15%.

As we look forward, we will continue to be disciplined in management of our G&A costs, but do expect an increase in GA as a percentage of revenue as a result of an expected rebound in labor related medical costs, IT related investments as we move to a flexible workforce and other investments to drive growth.

GAAP operating profit was a negative $41 million and was mainly impacted by a $267 million cost related to the closing of the PA Consulting transaction that we called out in our press release filed this morning. Let me provide additional detail on the nature of this cost.

The $267 million represents a portion of the aggregate purchase price consideration for our investment in PA. That per GAAP accounting is treated as compensation given retention related requirements and distribution of this amount post closing. We still view the total investment consideration unchanged at £1.4 billion.

I'll discuss the cash flotation of the $267 million later in my remarks. In addition, we had $42 million in deal and other costs associated with the PA consulting investment, $13 million of restructuring, transaction and other charges, including the Focus 2023 initiative and $31 million of amortization from acquired intangibles.

Adjusting for these items, adjusted operating profit was $311 million, up 32% with both lines of business showing strong organic profit growth. In addition, PA Consulting posted strong double digit growth in operating profit during their quarter ending April 2, 2021.

Our adjusted operating profit to net revenue was 10.5%, up 200 basis points year-over-year on a reported basis and was effectively 10% without the benefit from PA, a record for the company.

GAAP EPS from continuing operations rounded to $0 per share and included $0.86 per share from the PA investment consideration being treated as compensation previously mentioned, net of the associated tax impact, a $0.37 cost related to the mark to market investment in Worley and AR software provider, C3ai, which included the impact of monetizing a portion of our C3ai investment; $0.17 in deal and other PA consulting-related costs; $0.09 per share of after-tax charges primarily related to Focus 2023 and other miscellaneous restructuring costs; and $0.17 of amortization of acquired intangibles.

Excluding these items, second quarter adjusted EPS was $1.66, up 19% year-over-year. During the quarter, PA contributed $0.09 of accretion, net of incremental interest. We now expect $0.32 to $0.34 of 2021 accretion from PA.

For modeling purpose, we fully consolidate the impact of the P&A investment in our operating results, with the 35% minority interest backed out in noncontrolling interest. Q2 adjusted EBITDA was $332 million and was up 27% year-over-year, reaching 11.2% of net revenue.

Our adjusted EBITDA calculation includes the burden of the 35% minority interest impact from PA Consulting. Even excluding the strong double digit growth of PA, pro forma EBITDA growth was up 16% year-over-year. Finally, turning to our bookings during the quarter.

Our pro forma book-to-bill ratio was 1.06 for Q2 with over onetime book-to-bills across each business. Regarding our LOB performance, let's turn to Slide 10. Starting with CMS, revenue was up 5.3% year-over-year on a reported basis but down 2% pro forma when the acquisitions of Wood and the Buffalo Group are considered.

As previously communicated, we are transitioning off two lower margin contracts, which represented $115 million year-over-year revenue headwind during the quarter. When excluding the runoff headwinds, FX benefits and pro forma acquisitions, CMS base revenue growth was actually up 6% year-over-year.

We expect approximately $200 million a quarter of year-over-year headwinds and from these two contract roll-offs through the balance of this year and the first quarter of fiscal 2022. CMS operating profit was $114 million, up 35% and up 27% year-over-year on a pro forma basis, even when factoring in the headwinds noted earlier.

Operating margin was up 190 basis points year-over-year to 8.7%. The improvement was driven by our strategy to focus on higher margin opportunities and the benefit from the higher margin Buffalo Group business. For the second half fiscal 2021, we expect relatively flat CMS reported revenue growth when compared to the second half of fiscal year 2020.

As we continue to ramp new wins that when combined with the benefits from the Buffalo Group acquisition are expected to offset the revenue headwinds previously discussed.

Given the strategy to capture higher value business via both acquisitions and organic efforts, we continue to expect reported operating profit growth to be up double digit year-over-year in the second half versus the year ago period. Moving to P&PS.

Q2 net revenue was up 1.4% year-over-year, driven by continued solid performance in the Americas and the rebound in our international regions as well as benefits from FX. This growth is partially offset by year-over-year declines in our advanced facilities business due to the timing of contracts.

P&PS is now seeing strong pipeline growth as both our life sciences and electronics customers move forward with previously paused projects.

Total P&PS operating profit was up 7% year-over-year, and as a percentage of net revenue was 12.9% for the quarter, up 70 basis points year-over-year, driven by a slight increase in gross margin and disciplined G&A cost management.

In terms of PA’s performance, PA contributed $98 million in revenue and $28 million in operating profit for the stub period, which has been consolidated in our results. On a pro forma basis for a full quarter results, revenue grew 28% on a reported basis and 19% year-over-year in local currency.

Full quarter adjusted operating profit for PA was also significantly up year-over-year, representing strong adjusted OP margin as a percentage of revenue. Our non-allocated corporate costs were $33 million for the quarter, driven by continued strong cost discipline and favorable benefit costs.

For the second half of fiscal year 2021, we expect our non allocated corporate costs to be higher year-over-year, driven primarily by expected increases in medical costs, increased IT and other expenses, including travel and entertainment, as we begin to position the company for developing growth momentum that is expected in fiscal 2022 and beyond.

Now turning to Slide 11. I'd like to update you on our Focus 2023 and M&A activities. I'm excited to share that we accelerated our focused 2023 strategic initiatives by formally bringing on board a dedicated team from PA Consulting to partner in our work streams.

Focus 2023, again, is a strategic initiative that we believe will lead to enhanced employee and customer experience, improve our ability to capture emerging high growth, high margin opportunities and three, drive a more efficient cost structure through increased automation and process alignment for overall long term profitability.

During the quarter, we incurred an additional $5 million charge in cash flows of approximately $12 million related to our Focus 2023 initiative. Charges from previous acquisitions and other items fell to $13 million consistent with our guidance regarding these costs falling over the course of 2021.

Additionally, we incurred approximately $42 million in deal and other costs associated with the PA consulting investment. For the remainder of fiscal 2021, we expect another $50 million in P&L charges related to transaction, integration and other onetime costs, consistent with our previous guidance.

From a cash flow standpoint, for the second half of fiscal 2021, we expect approximately $65 million of cash flow associated with earlier noted items.

Please also note that the $260 million of PA price consideration will flow through cash flow from operations in our Q3 period, even though this cash flow represents effectively a part of our investment consideration in PA, which remains unchanged, again, at £1.4 billion. Now on to cash generation and the balance sheet on Slide 12.

During the second quarter, we generated $209 million on reported free cash flow as DSO again showed strong improvement. The strong Q2 cash flow included $42 million repayment of the UK VAT tax benefit from fiscal year ‘20 and a net negative of $74 million of costs associated with PA and Focus 2023 restructuring and other items.

Please note that PA represented a net cash outflow of approximately $15 million in the stub period given the timing of certain cash taxes paid and transaction related stamp duties. We continue to expect PA on a standalone basis to deliver strong free cash flow to adjusted net income on a rolling 12 month basis.

Our transformation of the company is now delivering the expected improvements in free cash flow. It is net worthy that the free cash flow of the company has totaled over $1 billion over the last trailing 12 month period, even when including net onetime headwinds.

We expect continued strong underlying cash flow through the balance of the year with full year cash conversion now expected to be over 100% when excluding onetime items and the $267 million investment consideration now characterized as P&L charge and included in free cash flow in the third quarter.

Regarding the balance sheet, we ended the quarter with cash of approximately $893 million and a gross debt of $3.5 billion, resulted in $2.6 billion of net debt for attributing the benefits of the Worley and C3ai equity.

Treating these items as cash, our pro forma net debt to expected adjusted 2021 EBITDA is approximately 1.7 times, a clear indication of the strength of our balance sheet. Regardless, we will continue in the near term to deploy excess cash toward debt repayment given our higher gross debt levels.

Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased to 11% earlier this year to $0.21 per share. Now I'll turn it back over to Steve..

Thank you, Kevin. Now let me review our total company outlook for fiscal 2021. Given our strong first half performance and the benefit from the PA consulting investment, we're raising our full year guidance ranges.

We now expect adjusted EBITDA outlook to be a range of $1.2 billion to $1.27 billion versus our previous outlook of $1.075 billion to $1.155 billion. We expect adjusted EPS to now be in a range of $6 to $6.30 versus our previous outlook of $5.30 to $6.

Looking beyond fiscal 2021, with optimism building around a major US stimulus package and significant opportunities related to climate change and digital modernization, we are positioned for strong revenue and double digit adjusted EBITDA growth in fiscal 2022 and beyond. Operator, we'll now open the call for questions..

Your first question comes from Joseph DeNardi with Stifel..

Maybe one for Bob or Steve, on the infrastructure side. Wondering if you could just focus on two things, timing. How quickly do you think you see it in your numbers, maybe what you're monitoring that will inform that? And then competitively, the industry is obviously a lot more consolidated now than it was in prior cycles.

Can you talk about the implications of that for your business and maybe the margin profile for over P&PS over this upcoming cycle?.

So let me just start with a couple of high level comments, Joe, is that the timing is something that we expect to -- we're not going to see the final decision and what this is all about until probably later this summer, could go into early fall. And so we'll start to see momentum pick up sometime in 2022.

But I think the strategic driver for us is that whether you look at the Biden proposal or even the Republican also, which was somewhat watered down and we expect it to be somewhere between the two is that it's significant growth, there's going to be a lot of opportunity for a lot of the companies out there.

And I think for us being a margin focused company and seeing the evolution of what we've been doing over the last few years is the two things for us is that as there's a need for resources, we have the best global integrated capability to bring the resources to the right place and to really focus on the highest margin opportunities as that unfolds in both businesses and P&PS at CMS.

Bob?.

Maybe the add on the competitive climate, So Joe, where we sit with regard to framework agreements that we've had, not just in the US, but stimulus is also affecting the UK and Australia and other locations around the world, are pretty ideal for where those monies would flow.

So if you look at transportation frameworks, water frameworks that we've been on for several years, it's going to position us extremely well. And those are pretty secure because the money needs to flow pretty quickly. So coupled with the fact that we're on these higher end services, I think the competitive climate we stand will fair well..

Your next question comes from Andy Kaplowitz with Citigroup..

Bob, maybe I could follow up in a sense that. During the 2019 Analyst Day, you listed a 4% to 6% target for P&PS, it was called something else at the time but it's similar sort of the move forward.

Are you able to give us any color regarding the ballpark of organic growth Jacobs may be able to deliver above and beyond that? And then if for some reason the similar doesn't go through given all these trends that you've been talking about ESG, sustainability, advanced facilities.

Is 4% to 6% the baseline you could do more than that you think going over the next couple of years?.

We're not going to provide any guidance relative to 2022 at this point in time. But I think we're feeling pretty good about the developing momentum. So we certainly, as we work through it, I think it's important to note Steve's comments relative to we're not going to go after everything.

We're going to go after those things that ultimately give us the best margin potential. So I think we're excited about what ‘22 can ultimately look to and certainly, I would suggest it's probably not going down..

Your next question comes from Jerry Revich with Goldman Sachs..

Really outstanding performance from PA Consulting out of the gate for you folks. I'm wondering can you talk about whether the $300 million quarterly run rate that the business was on in March.

How has that momentum translated into the second quarter? And how much variability is there in that business given the length of engagements now that we're getting to know the business a bit more?.

Jerry, I think the client engagements and the client stickiness call it, is solid. And so yes, the size of the engagement might be different than we would have historically seen at kind of Jacobs. But the longevity with their clients really just from the technology and the value they're contributing shows the future to be really bright.

So we're feeling very positive..

Just to build on the other part of your question, Jerry, is PA Consulting did a really great job on positioning themselves to win in sort of COVID solutions, and Bob talked about that and still got some runway on it.

But what they're also now seeing is several of there are other markets picking up and so that bodes well as some of the COVID work starts to phase out this other work phasing in..

Your next question comes from Josh Sullivan with The Benchmark Company..

Just a question on the space exploration and intelligence vertical, you highlighted in the remarks. Can you just give us some color on the commercial dynamics? You seem unique and that you're touching the very large launch but also have exposure on the small sat side with assets like Mango that you mentioned.

Are you leveraged to one end of the market or the other large or small sat? Just how should we think about Jacobs sitting into the conversation over cube sats versus some of these larger opportunities?.

Well, just, again, maybe to start with the broader space for us is it's pretty wide ranging for us.

As we have always been a major player with deep space exploration and NASA being a major client for ours and we're solidly positioned there around Artemis and the research and development work they're doing around hypersonics and space architecture, et cetera.

And now with the KeyW acquisition, ramping up very nicely, the whole low earth orbit, ISR, Rapid Solutions. And then you go beyond there with missile defense and some of the other aspects of space, it's become a very major market for us, specifically.

Bob, around the commercial sector?.

I think that the adjacent and knock on effects of what we're doing, not just exploration but how that feeds into intelligence is strong.

If you look at the Mango One launch, the application centered around intelligence but also the application into 5G and other commercial applications is going to continue to broaden markets that we haven't had exposed to in the past. So other things that Steve said is really expanding that aperture on the applications..

Your next question comes from Jamie Cook with Credit Suisse..

I guess two questions. My first question, sort of going back to potential infrastructure, Bill, Steve. Are there any investments that you think are required from Jacobs in order to capitalize it? Do you feel like you have the right labor for so you're in the right niches, or do you go back and sort of contemplate M&A again.

So I guess that's my first question. And then my second question, I think you noted revenues from ESG are approaching $5 billion or so. Can you talk to sort of what the underlying growth trends that you're seeing in that business and how to think about the profitability of the businesses that are more ESG focused..

We couldn't be better positioned from a standpoint of the M&A activity that's behind us. Obviously, CH2M combined with Jacobs positions us to be the major player here. And by the way that we can't keep getting to remind everyone, one of the biggest acquisitions in our industry going very well.

When you look at what we paid for that compared to what it's generating today, extremely attractive financially but obviously, Jamie, helps us position to be a big winner.

But then you have on top of that the PA Consulting acquisition, which now provides end-to-end capability from front end consulting all the way through delivery and ultimately things like O&M, et cetera. So from a climate change extent.

So as far as other M&A, we're going to continue to look at things that can move us up the food chain from a margin standpoint, possibly some geographic expansion. But as far as the US infrastructure stimulus opportunity, I think we're extremely well positioned with the organic capability we have today.

And on the climate change side, when you look at the $5 billion, it's really wide ranging of what we're in. But as you look at the growth going forward, it's going to be everything from how do we help our clients adapt and mitigate.

So whether it's C-level rise, or flooding, or bush fires and droughts, the whole energy transition equation moving away from fossil fuels into clean energy, and that's both working with our government and private clients, eveyone is looking to reduce their carbon footprint, that’s where we come in around the whole decarbonization and eliminating or reducing greenhouse gases and then things like natural resource stewardship, which is critical across the globe.

It's a global opportunity. We’re positioned well as an end to end solutions provider and bringing some unique tools and innovation, because it’s going to require digital transformation to achieve these type of climate change transformative expectations by our clients..

Your next question comes from Steven Fisher with UBS..

So at the risk of making this a broad question or maybe something that gone on your Investor Day. Could you just run through some of your key margin initiatives and where you see the most progress made and where you have the most upside potential here? I know you've got the CMS margin mix.

You've got the future of awards and a few other things, maybe just kind of give us an update on the margin potential?.

When you talk about margin initiatives, it's been both organic and inorganic.

One of the things we're extremely proud of around our Critical Mission Solutions line of business is all the acquisitions that recent acquisitions, KeyW, Wood Nuclear, Buffalo Group, they're all performing very well, strong first half versus last first half pro forma and they're all margin accretive to our CMS line of business.

And so from that standpoint, I think that's a key addition to our margin enhancement.

But then it really goes back to what we were talking about earlier to our whole global integrated delivery profile to not only bring the best resources but be more efficient in certain aspects of the whole delivery model and much more around the whole business acumen, commercial acumen side now versus several years ago and really identifying where the margin opportunities are, not just going after any business for the sake of growth.

Bob, what else on that front?.

Yes, I think it's just staying on that digital theme, Steve, and we're looking at it both externally and internally. So for example, rationalizing our internal platforms on how we transact our business is going to have derivative benefits. Kevin's talked about it before with regards to operating leverage.

And then externally, if you have to point to one, it really is around the digitization of our offering. So autonomous design, machine learning, looking at the digitization of the global delivery model and then how that can provide value solutions in a more efficient way, so it's a big ..

Your next question comes from Chad Dillard with Bernstein..

…focus on just some of the cybersecurity issue that we've -- that's materialized over the and really we focus the need to reinforce the infrastructure in the US.

And I just want to get a sense for how you guys are thinking about deploying what's been more like focused cybersecurity initiative to the private sector and how are you thinking about your go-to-market strategy there?.

Chad, I think we missed the first part of your question. It sounds like it's around cyber, but can you just kind of reask it and you summarize it..

So I just wanted to get a sense for how you're thinking about the opportunities on cybersecurities given that there's been kind of pack on the critical infrastructure here in the US over the weekend.

And then you guys have had a strong heritage in the government side and just wanted to understand how you're developing opportunities on the size and what your go-to-market strategy is there?.

We're actually in the middle of it right now and I can't speak too much into the details, but the events I think that you were highlighting over the weekend, we are engaged on that, too.

Kind of the portal there on leveraging it in the private sector has been our strong heritage also in the private sector with the other portfolio offerings that we have. Specifically, if it's in the hydrocarbon space, we did quite a bit of environmental remediation and regulatory work in that space.

Using that as the portal in order to bring in our cyber expertise, whether it’d be OT or IT has been a strong initiative and we're seeing some traction there, not just in an emergency situation but also as a part of cyber hardening of these companies. And then in other private sectors that we have, whether it’d be facility, specialized manufacturing.

All those things that we do for the government, the road map points to our ability to leverage our longstanding private sector relationships and do the same. So you'll see more of that coming in the coming months and coming quarters..

Your next question comes from Sean Eastman with KeyBanc Capital Markets..

I just wanted to go back to PA Consulting. I'm not sure if I'm looking at this the right way, but PA did $0.09 of accretion in the month of March. But if I take that out of the accretion update for the full year, it kind of implies they're doing $0.04 a month for the remaining six months of the fiscal year. So I'm trying to understand that.

And then also whether the previous expectation of $0.52 to $0.57 of accretion on a full year basis in fiscal '22 is still a good way to think about it?.

So a couple of comments, Sean. This is Kevin. So As you think about kind of the pace of their profitability over the course of their quarters, they, like us, we have four, four or five kind of months within each quarter.

And the way they handle their fixed costs and how they amortize that over the months versus the amount of revenue they get in that last month their last month tends to be the strongest month in the quarter. So effectively, don't necessarily take that $0.09 and assume that all the way through. So I think that that's one thing to recognize.

So if you look and take away the $0.09 and kind of go to your remaining kind of, let's call it, $0.04 a month for the remaining six months, it is basically that number. We think that, that is really strong performance consistent with what we had in our deal model.

And ultimately, we're hoping given the strong start that maybe there could be some opportunity to improve on that over the balance of the year. But so far, they started strong.

And Steve mentioned the comment about their current work being really, really strong in the first quarter, but some of that's going to go away over there second, third and fourth calendar quarters for their year. And they have to do a really good job on replacing that over the balance of the year. So we feel good about the guidance we've provided.

And ultimately, hopefully, that pipeline will continue to translate into incremental backlog, which could result in potentially being a little bit higher. But I think we're being prudent in terms of our guidance for PA at this point in time..

Your next question comes from Michael Dudas with Vertical Research..

Maybe for Bob, maybe to elaborate a little bit more on life science and advanced manufacturing. Certainly, the news flow and the supply chain issues with regard to the electronics industry has been front center many investors.

Are we getting to a point where there's going to be a significant investment that's going to show up and run through your PM work in the next six to 12 months. And even on the Life Science side, is it more of a global opportunity, and certainly globally positioned.

But we've been hearing more about US supply chain, but is there more -- you’re going to be more driven globally, whether it's a vaccine side or biologics, or some of the electronics opportunities that you're working with your clients there?.

Michael, let me kind of unpack both sides of that. On the semiconductor side, I'm not sure if you asked about that or life sciences, it is global. It's probably more focused in on the US for us right now. When I say US, US clients as well as agent clients that are building in the US.

You're even seeing it in the stimulus bill with President Biden's efforts in order to increase that capacity here on US soil as global supply chains have been kind of rejiggered. And so we do see that having a positive effect on Jacobs. I don't know if it's necessarily six months.

It's probably got a longer tail on that and eased through the next 12 to 24 months, but that's a strong trend. And it's both not only on the logic side but it's also on memory chips and some of the lower end chips that you're hearing from some of the automotive issues that are going around.

Online sciences, that is probably more global as it pertains to us, and that is the rebalancing of the product portfolio, all of this attention that’s been placed on vaccines, specifically around the coronavirus. Great development that's happening within the oncology world.

And as I said in the remarks, that's driving a real need for contract manufacturing, probably like nothing we've seen in history because of the volumes that are needed and the speed to market around these new therapies. So overall, really, really solid picture for at least the next couple of years..

Your next question comes from Michael Feniger with Bank of America..

There was a few mentions on the call about increasing investments in SG&A and IT, travel and medical. I understand the investments are for the better growth outlook.

When we think about your tentative guide for double digit EBITDA growth in 2022, is there any leverage on top of that top line or the initiatives around the margin? Is it really all set to really expand incrementals in 2023 and beyond? Just curious how we should think about that trade off with a better growth outlook and some inflationary pressures that'd be building as we think of the double digit and beyond for 2022 and 2023?.

So a couple of comments, Michael, first one on on the margin front or the percent of revenue that SG&A represents. We're still in a good spot relative to historical numbers. So don't think of this as being something that's going to be a big challenge for us, but we do find it necessary to make these investments.

I think the next comment I would make is that's what Focus 2023 is really all about to ensure that we get improved operating leverage through the process and system enhancements that we're talking about, which will allow us as the growth dynamic begins to accelerate, which we talked about, assuming it's going to happen in 2022, and that's going to be really important for two reasons, one, to get the operating leverage.

But I think the other way to think about it is if we can get that growth and afford ourselves the same ability not to hire at the same level that we've had to in past growth spurts, that's going to be really, really strong for us. So there obviously is a war for talent.

And to the extent that we're going to be able to supply that incremental growth with less headcount having to be added to support it that's going to be a big positive for us..

Your next question comes from Brent Thielman with D.A. Davidson..

First off, when we're thinking about PA Consulting, I know you guys have spoken to double digit EBITDA growth and about 12% revenue prior to the deal here.

But regarding the strategic partnership, how are you thinking about that going forward? Does that still feel like something comfortable or are there more opportunities now that the partnership is intact?.

There's more than we intended. In fact, what we've done -- so I mean the headline is the level of engagement and the collaborative pursuits that we have is strong.

And just to quantify, we kind of thought that we would be in that maybe 40 to 50 type collaborative pursuits that would have 12 to 18 month gestation period to them, that number’s -- probably double that right now, and we're getting heavily engaged and we see that getting even stronger as travel restrictions come down and we're able to jointly see clients together as well.

So very strong and I think it's contributing to our optimism as we look forward..

Your next question comes from Andy Wittmann with Baird..

I just wanted to clarify two things here. One on the guidance and one on the cash flow, probably both the questions for Kevin. But I guess just, Kevin, I just want to make sure we understand the new guidance correctly. I look at about 10 months of contribution of the EBITDA numbers that you previously talked about with PA, equates about $130 million.

Again, regardless of seasonality, it's kind of a rough and tough number. Your guidance, the EBITDA side is up roughly that amount. Is this a way of kind of saying like, hey, the organic outlook is still good but it's largely unchanged with most of the EBITDA raise from the acquisition.

And then on the EPS side, was there anything below the line that allowed you to take up the lower end of that EPS range a little bit more? Just maybe if you could talk about that. And then just on the free cash flow, if it's just worth clarifying the cash flow from operations, there was $230 million benefit in the quarter on accrued liabilities.

I'm guessing that might be associated with the $267 million that's going to be a cash outflow next quarter, but I don't know.

So I was wondering if you could just clarify that benefit to this quarter's cash flow from operations?.

So let me go through the second one first. You're exactly right, the $267 million, is a dynamic where the total consideration was reduced by the $267 million and now that $267 million flows through the P&L ultimately in the third quarter. So effectively, that dynamic is occurring. So you're right relative to how that works.

Total consideration doesn't change. We're still at the £1.4 billion on sterling. So note that, I think that's important to know, Andy. Second point, in terms of the guide, no, there's -- the guide is effectively -- we took the $0.09 and we felt like the guide that we previously provided was appropriate.

As I mentioned earlier in my comments, while their first quarter of their year was really strong, they got to giddy up and go relative to the pipeline that's in front of them, booking that and then burning that. And so effectively, we'll see how that plays out over the balance year. Let's hope that they do that.

And in fact, if they kind of continue at that rate, that was in Q1, obviously, there's going to be some upside, but I think we're being prudent relative to that. Remember, this business NPA is a book-and-burn business, so they got to always continue to drive towards that. So that's one thing. So back to the base business.

Yes, we had good performance in Q2 and effectively, that was a primary driver to our increase in the base business guide is how we’re able to characterize it.

And look, I think at the end of the day, given the investments that I talked about on the G&A side that we're looking at the balance I think that, that will offset any potential pending momentum that we got on the top line that may come to fruition. Pipeline is looking good relative to our, I would say, our state and local and government clients.

I think that, that's positive. The pipeline is building on the advanced facilities. So we'll see how that all plays out. But we really see this coming together more in terms of our late fiscal 2021, which positions us better for 2022 than 2021..

And your next question comes from Andy Kaplowitz from Citigroup..

Just wanted to ask you a follow-up on CMS in the sense that you guided revenue to flat all and I think for the second half 2021, given the higher headwind from the two new contracts. But you do have easier comparisons if I look at Q3 versus last year, the pandemic disruption.

And so are you seeing any delays in that project conversion there in CMS? And then if you look at backlog growth, it looks solid in Q2.

So do you see book-to-bill continue to be at or above 1 in the second half of '21?.

We've talked about it for several quarters. We're exiting two low margin large contracts. The Hanford contract and the classified contract that we've spoken about before. When you exclude those two, are critical and you exclude the acquisitions, our base business is growing. I think it's somewhere in the 8% range.

And then you add on top of that, obviously, the benefit of the acquisitions that are continuing to ramp up with that on a year-over-year basis more than our -- some of them weren't on our numbers.

So I think that we're feeling good about everything that we've talked about with regard to the -- where we're aligned with the growth trends, even though there's a flat defense budget. The things like Space Intelligence and hypersonics, and several of the other items that we mentioned are actually growing nicely.

And so there's a lot of shift in funding. Even the DoD climate change initiatives to modernize their infrastructure in the Department of Defense that's helping us. And so overall, we're very pleased with the revenue growth in Critical Mission Solutions..

And there are no further questions queued up at this time. I'll turn the call back over to management for closing remarks..

Thank you. So as I close the call, our thoughts are with the people, our people in India, including our Jacobs colleagues, and we'll continue to support them in dealing with the current significant challenges of the pandemic.

Looking to the future, we're excited about our strong performance and our solid foundation that provides Jacobs as we develop our new strategy and chart an existing future together, and an exciting future together. Thank you..

This concludes today’s conference call. You may now disconnect..