Jacobs Solutions Inc. (J) Earnings Call Transcript & Summary

Good morning, everyone. This is Sheila Kahyaoglu with the Jefferies Aerospace and Defense Equity Research team, and welcome to the Jefferies Virtual Industrials Conference. We have the Jacobs team up, and we have Dawne Hickton, who's EVP and COO of Critical Mission Solutions as well as Jonathan Doros for backup from Investor Relations. Dawne, thank you so much for being here with us again today, albeit virtually. I just wanted to maybe open up with you reported earnings yesterday, so I'm sure it's a busy week for you all. You had a 2% organic decline in CMS, but a 19% increase in operating margin as you transition off to lower-margin contracts with revenues up double digits, excluding those items. So can you maybe talk about the highlights of the quarter and the key takes for your business?

Sure, Sheila, and good morning. Thanks for having us. This is a great opportunity following on yesterday's earnings call. I am going to answer your question, but if I could just slide in first and comment at a high level, if we go to my first slide. Let me just kick this off, Sheila. Jacobs truly does present a compelling investment story. So not only do we have overall a strong record of execution, but we've got a growing backlog, growing pipelines. And the diversity of our portfolio across both P&PS and CMS as well as PA Consulting really allows us to continue this strong trend. And I don't want to take a lot of time on this slide because I do want to jump right into CMS. I do think a couple of highlights are bear repeating. Q3 revenue, we increased 11% year-over-year, and our adjusted EBITDA rose over 26%. And I think you can see we're positioned in the really strong growth areas. Obviously global infrastructure modernization. But then when you think of CMS, that national security, including cyber and intelligence. So let's go right into CMS, and I can address your questions. So not only do we continue to see growth in our base business at CMS, and that's really, as we think about it, those large enterprise multiyear contracts. They provide that long-term stability for us, but they also allow us to, within those contracts, provide high solution opportunities and continue to slide up that margin. They also provide strong cash flow. But really, what we're seeing is the increasing portion of our business that's higher margin, particularly when you think of that cyber and intelligence work. And also even within those large enterprise contracts, we provide those higher-margin solutions such as Intelligent Asset Management, where we're driving margins higher. So these are really great opportunities for us. And for those of you just maybe looking at the slide that may be new to CMS, we are about roughly around 80-20, if you think about it, U.S. International, but almost 90% government, and that's not just United States government. We also work with our coalition allies, so we do a lot of work with the U.K. MOD as well as the Australian MOD. And then, of course, just again, kind of just looking at these graphs and the charts, I just want to point out a large portion of our business is that federal civilian. So that's where we have our NASA work and our Department of Energy work. And then also a big portion of the business is with the Department of Defense and then that cyber intelligence work with a smaller piece that's commercial. And then when we think of that DoD and cyber and intelligence, we really have that strong growth in the space, in the C5ISR work and really driving that strong growth in those areas. I just want to highlight a couple of recent customer wins here, and I'll talk a little bit more about it. So we just won during the third quarter, the Idaho National Lab remediation. And while our backlog, when you look at it in the third quarter, it might be a little light. It's really something you've got to look at for us across the quarters, right? So next quarter, we're going to see huge increases. We had about $780 million from that contract to the backlog. And then Cyber Intelligence, we also won a new opportunity that will go in the fourth quarter backlog. And then as you see at the bottom, we also have a new space intelligence win for a confidential client. So if we jump right into the next slide, really want to highlight where we are today, how we got here and why you really can't compare us to our competition. We've taken a very focused journey, and this has been all about our strategy to grow the Critical Mission Solutions business in this government sector. So it started way back when we made an acquisition of the FNS systems, but really growing that, Van Dyke, the Canopy. The big CH2M acquisition brought us a lot of additional opportunities not only with the PPS side of the business but also for CMS. But then the real trigger, of course, in the last couple of years, really the last 24 months, the KeyW acquisition, bringing us really strong capabilities in the C5ISR with nuclear, allowing us to expand to really being that premier nuclear provider. And it's not just remediation. This is nuclear new build. It's nuclear systems. And it's really when you think of energy transition, and that's what's going to drive a lot of our growth in nuclear. In fact, I think if you listened to yesterday's call, you heard Bob Pragada, our President of Jacobs, talk about some of the new opportunities we're seeing in energy transition as we work with those small nuclear reactors and advanced modular reactors. So really great opportunities there. And then, of course, most recently, The Buffalo Group, bringing us incredibly new capabilities. So if we jump ahead to the next slide. This really highlights that expansion. Look at where we were in 2013 for CMS. A lot of ops and maintenance, a lot of basic platform testing and evaluation, really important work, really solid work for our government customers. But now as we go into the future, where we are today and where we're driving the business, that C5ISR work, of course, what is that, right? That's command, control computers, cyber and communications within that, intelligence, surveillance, reconnaissance world. We're representing today 12 of the 18 -- we work with 12 of the 18 intelligence agencies and with the Department of Defense. And this really drives what we're doing as you see this digitalization and modernization of the systems and where the Department of Defense is driving the future. And then I mentioned already nuclear, talked about cybersecurity. But again, we're still doing a lot of our facility engineering and operations work as well as that really true technical engineering services because the people we have within CMS are just truly phenomenal technical folks with great capabilities and skills. And we see that carrying on throughout as we grow the business. So if we jump to the next slide, I don't want to spend a lot of time on this, but it really does highlight where you see sort of these 5 pillars of the business and some of our key customers. So -- and maybe I'll start on the far right side of this chart on the bottom. Again, I mentioned the intelligence work we're doing, a little under $1 billion, working with the intelligence agencies as well as the military intelligence agencies. In fact, I had an opportunity recently to visit one of our major customer sites out of Fort Huachuca down in Arizona and really seeing the great work we do with military intelligence, just phenomenal team, phenomenal opportunities to grow that business. And then when you look at defense, whether Army, Air Force, Navy Marine Corps, Space Force, and also, obviously, the Combatant Commands, really another great opportunity. I'm getting out and visiting customers, and they're saying, how much more can you do for us Jacobs as they see the strength of what we've been able to do and our new solutions going forward. If you look at the right hand -- pardon me, left-hand side of the chart as I face it, starting at the bottom, I mentioned our federal civilian work, NASA, Energy. We're also working with the treasury department as well as Homeland Security and then we have some work we're doing with, we say, education, with the federal student home loan situation where we're helping out with their cybersecurity there. And then international, I mentioned a little bit about what we do with the U.K. There, we're working not only from a -- with the commercial side of it or the civilian side of it, I would say, with EDF helping to grow that nuclear new build as we transition to make that energy transition for a cleaner energy, if you will, but also working with the Ministry of Defense on things like the AWE systems complex. And then commercial, we have our telecom work some aerospace and moving on. So let's jump to the next slide. I'm not going to read any of this, but I really do think it highlights how we enable the client mission. And maybe where I might start out is if we really look at our NASA work, that's just so exciting because everybody is saying, "Well, where is space today? Where is NASA?" And for me, the commercial space is really driving opportunities for us. So whether it's SpaceX, Blue Origin, Virgin Galactic, Relativity Space, the excitement being generated in space, I think of it and we think of it as a team as the new frontier, right? So space exploration, when it was government-funded, was one thing, and that's where our base is, but we're finding opportunities that, that interest in space continues to accelerate, whether it's work we're doing on Mars today or whether it's really the strength of the Artemis program, where we are a key enabler to that program as we look to get the first woman on the moon and then off to Mars. So really exciting opportunities. And when we think about federal budgets, the NASA budget is strong and actually has increased about 6%. So we're sitting very solid in that and we see that as great growth -- continued growth and opportunities for us. And again, kind of going across the board, I'm just trying to look and see if I want to highlight anything in particular. Maybe on this intelligence side when we think about what we're doing in that world of open source intelligence as well as cybersecurity. Again, really key areas where, from the United States standpoint, national priorities are driving increases in the budgets in the areas where Jacobs is doing its finest work. Let me just -- let me pause for a moment as you take a look at that slide, but perhaps we can just move on in the interest of time. I want to talk about some recent notable contract wins. And again, you see this is where we're driving that business. And Sheila, maybe it's back to your question, how are we seeing -- the revenue was a little bit slight only because we were rolling off some large lower-margin opportunities as they rolled off as we drive that strategy to those higher-margin opportunities. And you certainly see this in some of these awards we have there. So if we start right out, we're providing weapons operations, maintenance and sustainment in NORAD, huge opportunity for us, great talented workforce, again, as we do work out in Cheyenne Mountain to help secure and protect against really those future concerns we have, right, as we pivot to what our new concerns for democracy across the world. I can tell you that Jacobs is in the forefront of supporting our Department of Defense and supporting our systems. And then, of course, at NASA, we were awarded at the Kennedy Space Center a follow-on contract, continuing to manage those space operations programs. And with -- over in Australia, so I mentioned we do have this international portion. There, again, working with the Ministry of Defense, the Department of Defense in Australia. Great opportunity there working with the Air Force as we support their joint strike fighter program. And then for -- when we think about our new BOS contracts and the work we're doing with the Department of Defense, we just won the King's Bay program this year. And this is an opportunity where you really do see this opportunity for Jacobs to provide those higher-end solutions. What's driving our wins there is that intelligent asset management approach to doing business. So we win the base contract by actually bidding these new higher solution opportunities. where we're really tops in the field and performing that. And that's been a proven technology. And when you think of the -- again, kind of going back to your early question, Sheila, on margins, historically, one of these large enterprise base operations contracts, you'd see that at perhaps mid-single-digit margins. But by providing these higher-end solutions, we can drive that up to higher single-digit opportunities. On the right-hand side of the chart, of course, I already mentioned the award we have for $6.4 billion with the Department of Energy, Idaho's National Lab. And again, one of the reasons we've been -- we're able to win that was our ability to provide these high-tech solutions. And this was really driven as we look to bid that opportunity, taking advantage of our global nuclear team and looking at the resources we have across the globe, not just North America nuclear, but adding the additional capabilities we brought with that Wood Nuclear acquisition. Then the wonderful INSCOM 902 contract that we just won, I mentioned that on the earlier slide. That will go into the backlog next quarter where we anticipate that will be in next quarter's backlog really, again, providing those advanced cyber and intelligence solutions as we think about the work we do for the Army there. And then we continue to grow our 5G on Civil on the air commercial side. We just were awarded a multiple IDIQ independent -- indefinite duration, indefinite quantity award with AT&T's Turf 5.0 program. That's going to support that nationwide push as we accelerate expansion of 4G and 5G across the United States. And then lastly, we have been provided various unmanned aircraft and radio frequency satellite payload services. And this is for the Air Force as part of their ABMS systems. And so that's an area where we are part of that focus supporting those programs for the Department of Defense. If we could go to the next slide. I thought I would just jump quickly through the different business units. So you can see what we have inside CMS. So this quickly gives you a snapshot of our cyber and intelligence business unit. And I'll remind you, 2 years ago, we didn't even have a cyber and intelligence business unit. We started acquiring some smaller companies. We grew it today. We're close to $1 billion business unit. 3,600 cyber and intelligent professionals, multiple active projects, and you can see we have 90% cleared staff. And the differentiated solutions we highlight in the middle portion of this slide, we're advancing that cyber training top trainer really for the intelligence world. And then just looking at that all-source multi-domain opportunities we provide with open source intelligence and really using data analytics -- pardon me, artificial intelligence, data analytics and predictive analytics to take that intelligence and really get the information to the world quite in a timely basis when they need it and really, for our leaders within the Department of Defense and really across our administration to be able to make the decisions they need in a timely fashion with the information they need. If I jump ahead. We're continuing to grow this business, and this is where we really see an opportunity in the growing budgets with the administration. This is where we see national priorities. This is the new frontier of warfare, and that is cyber and -- cyber and intelligence. It has been brought home to us by recent attacks such as SolarWinds. And we've got the team behind the scenes that can work to help prevent those future attacks and to address and analyze what happens when we have those attacks. So we see this as a great growth opportunity. And as we brought in The Buffalo Group to expand some of our current capabilities, we'll continue to look at strategic M&A to grow this business. Jump ahead. Now I mentioned briefly our global nuclear portfolio. Here, again, another quick snapshot at this, about just under about $1.4 billion plus in revenue. Here, we have over 5,000 employees. We're on over 50 nuclear programs, and we have 20 locations across the globe. And again, people, I think, historically thought of our nuclear portfolio as remediation-only. It's a lot more than that, as you can see, set forth here. So certainly, decommissioning, remediation, environmental remediation is a very important part of this portfolio. But as we look to the future and we think of ESG and as we transition to sustainability, who better to focus on transitioning to clean energy than the team that really understands nuclear, and that's what we have here. And we've got a history of working on new build design and construction, working on projects with EDF, whether it's Hinkley Point C or other projects across Europe. And again, I mentioned earlier that we have a recent award, where we're working here in the United States, on looking at some of the technology and developing the design for small modular reactors as we think about energy transition, because that energy transition is going to be more than solar, wind. You're going to always have a component of nuclear. So really phenomenal nuclear portfolio and what we can bring to the table. If we go to the next slide. Our space portfolio. And when we think of our total space portfolio, it's again, a little under $1.5 billion, about $1 billion of that really represents what we do for NASA. We've got over 6,600 employees in this space, pun intended. We're around 50 aircraft programs, 29 locations, probably 20-plus locations. You can see some of the customers we support there. But we're really a key partner working with our customers. So in addition to NASA, if we go to the next slide, you can see some of the additional solutions we're providing to NASA. So whether it's updating the systems, working on launch support. So even when you think about it, it's not just launching NASA rockets. We're also providing the support for some of these commercial launches. So really great opportunities I mentioned in the beginning. And program management. And then some of the fun things we do is working on the space suits at our Johnson Space Center designing that space suit for the future because if you think about it, we're going to be in space longer. We're going to go further, and we're going to be doing more. And we need much better, more efficient and much more interesting space suits, if you will. So lots of exciting stuff with the NASA. And then also within space itself, that gets us back to that space intelligence area. If I can jump to the next slide. Now we're talking about the Jacobs defense space. And this is where we're working, whether it's with the Missile Defense Agency, on weapons -- pardon me there, weapon systems sustainment as we think of the work we do, monitoring the satellites, making sure we're able to gather the information, maintain the information, analyze the information, do modeling and simulation, just across the board. And then, of course, our expertise with satellite payloads. And you've seen that recently with our successful launches of Mango One and working on those very sophisticated payloads for our space and intelligence customers. And if I can jump to the next slide. I'll just wrap it up there and turn it back to you, Sheila, for some closing out questions, but really think of Jacobs as truly that growth-oriented technology solutions provider today. And we are an employer like no other. So in terms of -- we've been able to bring in some new employees, and we're driving the business, and we're focused on the future.

No. That's super helpful overview as President of the CMS business, so thank you for that, Dawne. You've provided us a great overview. I guess when we sum it all up, how do we think about your growth profile from here? And what leads growth of all your great businesses, whether that's cyber intelligence, defense, if you could maybe just touch on that.

Sure. For us, again, I had mentioned earlier, I didn't give you the specifics on the federal budgets. But if you think about it, we've seen increases in the budgets for cyber and intelligence, and that's where -- that's going to drive our growth in that arena. We've also seen a 6.6% increase in the funding for NASA. So obviously, a big part of our portfolio. And then again, as we think about sustainability and ESG, what we can do with our energy business, huge drivers in growing those programs. And we're looking at this as growing the margins, too. So getting those higher technology digital services, if you will, moving into that digitalization approach.