Q4 2019 Earnings Call
[noise], ladies and gentlemen, thank you for standing by welcome to the Jacobs fiscal fourth quarter 2019 earnings conference call and webcast. At this time all participants are in listen only mode.
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Sounds like that had the conference over to your speaker today, Jonathan Doros of Investor Relations. Thank you. Please go ahead Sir.
[laughter] Oh earnings announcement was filed this morning, we posted a copy of a slide presentation to our website, which will reference in our prepared remarks.
Next I'll refer you are forward looking statement disclaimer, which are summarized on slide three.
Certain statements contained in this presentation constitute forward looking statements as such as the finding section 20, Sevena Hey, just curious after 1933 as amended its actually 20, Marty Securities Exchange Act and 1934 at imagine [laughter] such statements are intended to be covered by the safe Harbor provided by the same payments made in this presentation.
That are not based on historical.
Our forward looking statement, although such statements are based on management's current estimates and expectations.
Currently available competitive financial and economic.
Oh looking statements are inherently uncertain, you should not place undue reliance on the statement as actual results may differ materially.
Because of the reader there are very risks uncertainties and other factors that could cause actual results may differ materially from waste contain rejected or implied or forward looking statement for a description of these risks and uncertainties. Another factor. They may occur I could arise actual results may differ from our forward looking statements. Your annual report on Form 10-K video.
Yeah. This September 27 2019.
Here are not under any duty to update any forward looking statements. After that date of his presentation to conform to actual results, except as required by applicable law.
During the presentation over referring to certain non-GAAP financial measures. Please see slide two of our presentation for more information on these figures. In addition during the presentation well discuss comparisons are current results at Pryor curious on a pro forma basis for more information on the calculation of these pro forma metrics, we provided historical pro forma results.
The appendix of this investor presentation.
We believe this information helps provide additional insight into the underlying trends of our business when comparing performance against prior periods.
Included in our historical figures as an adjustment to backlog for the prototype for me can you w.'s backlog methodology bookings only the first two years of large multiyear contracts.
No quite a bit of color on the accounting treatment related to our transition service agreements yesterday, we're really relate to the sale of our you see our business My guess standpoint, because I didnt see assays services provided to early I reflected an S.G. today, but the reimbursement we're really related costs are recorded in other income below operating profit.
As a result, this treatment understates the true operating profit associated with GSK effort. As these costs are being encouraged specifically to support services provided to world.
And our non-GAAP figures me a class reclassified this income as SG anyway from other income.
We've made a suggestion to reflect the more accurate representation of our underlying operating arms. Let me also reviewed the components of our adjusted EBITDA outlook provided today.
Our adjusted EBITDA results and outlook are based on adjusted operating profit plus depreciation methodology will be transitioning to referencing in providing guidance on adjusted EBITDA includes the net impact of other income and non controlling interests. Please see reconciliation on slide 24, we believe the current.
Consensus expectations include a mix of EBITDA methodology. So we encourage ourselves type of model adjusted EBITDA calculation to include the net impact or non controlling interest and other income. In addition, when calculating EBITDA from adjusted operating profit remember that our adjusted operating profit Ari add back amortization from intangibles.
Turning to slide transmit agenda on slide four speaking on today's call will be our chair and CEO , Steve do each year, and President and CFO , Kevin Berryman. In addition, president and COO I forgot what joining today will be participating in today's session. Steve will begin by providing a recap of our financial results.
Discuss key elements of our strategy and our view of performance by line of business. Kevin will then provide some more in that discussion of our financial metrics and provide an update on our acquisitions and you see our divestiture as well as review our balance sheet and cash flow finally, Steve will provide an update outlook along with some closing remarks, and then we'll open the call up your questions with that ill now pass it over to stay.
Dimitrios chair and CEO .
Thank you John turning to slide five thanks for joining us today to discuss our fourth quarter fiscal year 2019 financial results and the progress, we're making executing against the strategy. We outlined at our February 2019 Investor Day.
Before we discuss our results I'd like to recap last week's announced expanded leadership roles for Bob forgot to Kevin burn.
Well I was promoted to president and Chief operating Officer, Jvs and will not will oversee all global operations. Kevin is promoted to president and Chief Financial officer, adding to its current responsibilities are Jacobs digital and information technology function.
Albeit leaders have been instrumental in driving Jacobs industry, leading financial performance superior shareholder value creation.
Ill ill continue to lead Jacobs working closely with Bob Kevin and the rest of the executive leadership team to build on our momentum and execute our strategy to deliver compelling value for our clients and shareholders.
As you've heard me say, we're on a journey to create a company like no other.
Over the last few years, we've been transforming our business to a higher value higher growth solutions focused company.
Today, our company is well diversified across sectors and geographies and exposure to multiple secular growth trends on climate change governmental resiliency space intelligence urbanization and the convergence of IPO to.
As well as exposure to long term sustainable cash flow streams, such as national security Nash and nuclear cleanup that enhance the stability of our portfolio.
More importantly, we believe the combination of our relentless drive to achieving a high performance culture, demonstrating a strong execution discipline to profitably grow and making innovation our CAMECA Foundation.
We will be a competitive advantage for decades to come.
For the most recent quarter our financial results were strong.
On a year over year basis fourth quarter net revenue grew by 10% on a pro forma basis, including KBW.
Fourth quarter adjusted operating profit was 15% higher than last year, and adjusted EPS of $1.40 gig was up 29%, including nine cents of discrete tax benefits.
Well the fiscal year, we posted double digit adjusted EBITDA and EPS growth, even when excluding the benefit from acquisitions and discrete tax items.
During the quarter, we executed a 250 million dollar accelerated share repurchase and bought back approximately $850 million of our shares during fiscal 2019.
From a flexibility standpoint, we maintained a healthy balance sheet that provides the opportunity to further deploy capital toward high return investments.
Given our strong operating performance and positive outlook, we're introducing adjusted EBITDA EPS guidance, which at the midpoint represents double digit growth and we're well positioned to reach our 2021 EBITDA growth targets.
Now on to slide fix to discuss our new brands.
Many of you may have seen our new brand video when you joining todays earnings call for those that haven't I encourage you to visit our Investor site, where we've included a link on the earnings call slide deck.
It's part of it in that companies with strong brands, having significant competitive advantage in terms of attracting and retaining the best talent and building stronger relationships with clients unlocking velocity compound above market growth rates.
We have created a new brand to reflect our transformation unite our people under a common purpose and showcase the innovative meaningful work, we do for our clients and communities.
Given our transport business now is the opportune moment to tell our story to the world combining our rich history on future strategy.
Central to the brand as our new tagline challenging today Reinventing tomorrow.
During our transition from engineering and construction, so a global technology forward solutions company.
Challenges today as our response to the increasing complexity our world is experiencing at calls on us to join forces wondering our knowledge and imagination together to reinvent the way we solve problems in shape. The next generation innovative solutions.
Reinventing Tomorrow is our promise and an invitation to challenge so accepted and raise the bar in everything we do.
The brilliant solutions, we create with our clients to be open inclusive culture, we create for our people from the positive difference we make in our communities to be added value, we delivered to our shareholders.
Together, we're pushing the limits of what's possible. We stay ahead to create a new standards our future need.
A combination of the some symbolized within our new logo.
As you have seen we chose to change our ticker symbol, so Jay signify our focus on delivering integrated solutions.
And we're also preparing to change our legal name so Jacobs solution.
Continuing with discussion on our Brian , let's turn to slide seven.
Jacobs is crucial to our strategy to align around common values gaidar behavior in Europe , I asked as one company worldwide when interacting with clients employees communities and shareholders.
Well the values our company has always stood for Havent changed the way we articulate have.
First we do things right.
Which means we always act with integrity, taking responsibility for our work caring for our people we make investments on our clients company community. So we can grow together.
An example is our sustainability strategy, maybe plan beyond which focuses on planning beyond today for more sustainable future for everyone.
Second we challenge the accepted to create a better future we must pass the difficult questions always think curious we're not afraid to try new thank.
Beyond here is our global innovation program focused on our agility the challenges we accepted.
With the domain expertise to push beyond our boundaries and deliver part today and it took tomorrow.
Third we aim higher we don't settle always looking beyond to raise the bar deliver with excellence, we're committed to our clients, bringing more valuable solutions for shared success.
This value was reinforced with our beyond excellence approach to solving our customers challenges with the highest standards of quality performance excellence.
And finally, we live and closure, we have an unparalleled focused on inclusion with a diverse team of bankers visionaries and doors, we embrace all perspective to make a positive impact.
Together beyond is our approach to living inclusion and enabling diversity and the quality globally.
For us this means creating a culture belonging where we thrive and embrace all perspective.
Turning to slide eight.
Earlier this year at our Investor Day, we announced five innovation hubs today I'd like to discuss how we're leveraging two of those hubs aiotv and predictive analytics.
Across our businesses, we have accumulated decades of domain intelligence contained at both structured and unstructured data sets.
When applied against advanced algorithms powered by nearly infinite compute capacity are driving revolutionary outcomes for clients and higher margins for Jacobs.
We're only at the tip of the iceberg in terms of what's possible.
For example, today, we're partnering with a leading technology provider to bring to market and artificial intelligence solution for our water customers.
Decades of work in a water sector. We've created one of the most extensive video data set and classifying defects and varied infrastructure. We have taken this dataset and adjusted it into a specialized cloud based AI algorithm to auto score water infrastructure inspection video to deliver higher quality and more consistent.
Risk score.
The result is a tenfold increase in the analyzing throughput of this inspection technology, we plan to formally introduce us to our client base over the next 12 months.
The return profile of this type of solution is orders of magnitude higher than a traditional approach has this capability lowers the cost for our customers increases our per unit profitability and establishes an incremental network effect on data, which further enhances the quality and insights of our technology.
Now moving to slide nine.
Before I go into each of our two businesses I'd like to highlight our new line of business next year.
Using the new brand does inspiration we renamed our lines of business to reinforce our transformation to a solutions based company and reflect the sense of price our people have for the outcomes, they're delivering with our clients.
Our new line of business things are critical mission solutions formally aerospace technology, and nuclear which puts our clients mission at the center of everything we do.
And people in place and solutions formally buildings, <unk> infrastructure and advance facilities, which reinforces our drive to improve the lives of people everywhere in the positive impact on value our solutions bring to our clients communities in society as a whole.
So now starting with critical mission solutions.
Our pro forma backlog is up $400 million from last year to 8.5 billion.
And when considering the full value of our contracts, including options and extensions critical mission solutions backlog would be almost 40% larger.
We continue to call out two significant critical mission solutions contracts hampered plateau remediation classified network security program with the U.S. government.
That are burning revenue without a corresponding increase in backlog.
Without this dynamic are critical mission solutions backlog would have increased in the high single digits for prior year.
Critical mission solutions unique delivery model, combining strong technical expertise.
Alive delivery in an efficient cost structure and continues to deliver growth and ultimately a transition to higher unit margins.
From an industry sector standpoint space exploration continues to be an attractive opportunity.
Jay This is proud to be masses largest provider a professional technology services.
In fiscal year 19, our NASA portfolio continued to grow as we build deliberate solutions to their most important missions.
In partnership with the Johnson Space Center Jacobs plays a crucial role across five NASA centers supported the RMS Moon program.
Through our intelligent asset management solutions, we continue to improve operations and reduce the cost of maintenance of NASA facilities.
A great example is our work on the five year modernization program at the games are Jack complex.
Critical mission solutions also provides strong technical expertise in mission critical sectors, serving the us military Warfighter intelligence agencies.
We saw significant incremental revenue during the quarter from our recent win of the Army's military intelligence, what's your what's UCO training and support contract or Jacobs provides critical training and testing programs.
In addition, we were recently awarded a role to provide intelligence analysis services. The defense Intelligence Agency Andre multibillion dollar five year two contracts.
We also recently won a recompete assignment for the National Science Foundation.
Our superior agile software development capability was critical to winning.
This was originally a contract from Wolfcamp b, demonstrating the continued benefits from this strategic acquisitions.
And consistent with our organic growth strategy critical mission solutions successfully expanding further into higher growth and higher margin sectors like telecom Fiveg data analytics cyber security and C is our.
Our telecom business grow by approximately 50% in fiscal year 19, benefiting from a ship to fiveg small cell sites and cities deployed intelligent infrastructure.
Our telecom team provides a differentiated consulting and infrastructure services to support this multi decade opportunity in close collaboration with our people and placement solutions line of business.
The kw acquisition closed in June .
Fourth quarter performance was inline with our expectations.
We're off to a great start with our integration process and well positioned to achieve both cost and revenue synergies in fiscal year 2020.
Kw is a strategic game changing investment deliberate mission IP cyber security solutions, along with intelligence surveillance and reconnaissance products. During the first quarter 2020, leveraging the combined Jacobs kw capabilities, we want a five year $216 million contract for the department.
Defense Cyber crime center for specialized cyber security training.
This win represents the first of many tw revenue synergies that we expect to achieve and that is exciting to see our teams come together, so quickly in delivering incremental strategic growth opportunities.
In summary, we're pleased with the critical mission solutions performance and as we look forward are on factored pipeline has drawn to $33 billion and opportunities up 10% from last quarter.
We're excited to begin the new fiscal year with such momentum.
Positioning us for the next major set of incremental awards toward the end of fiscal year 2004.
Now moving to slide 10 people in place some solutions posting strong fourth quarter results with backlog growing 10% year over year $14 billion.
Our people in places solutions business as a diversified set of high value industry sectors and geographies, we are well aligned to multiple secular growth trends such as climate change resiliency access to clean water urbanization advances in cell and gene therapy cloud computing and the convergence of information on operations technology.
At our Investor day early this year, we focused on three areas market digital and global connectivity together, we believe these strategic pillars allow us to execute against higher value opportunities and respond quickly ever evolving market conditions.
Our market connectivity as a differentiator during customer pursuits as advancements in technology drive connected infrastructure.
We are clear leader across multiple sectors, such as environmental water transit advance facilities as well as delivery platforms, such as program management and strategic consulting.
We believe combining our deep domain expertise across different sectors at scale will lead to share gains through cycles.
We have institutionalize the execution of this strategy through our global solutions from technology organization.
Alliance Jacobs subject matter experts to drive thought leadership and to develop the next generation of global talent.
We are clearly capturing a higher percentage of opportunities as we continue to leverage with Jacobs CH two combination let me provide a recent example.
In Germany, we were selected as program manager for it seemed like a new renewable energy projects to integrate wind and solar power into Germany's electricity grid Jacobs was chosen based on our differentiated delivery solution and comprehensive expertise and complex one of a time programs.
Moving to digital connectivity, we're leveraging our deep domain expertise and existing digital capabilities across the entire company to provide our clients World Class solutions. For example, we recently won a project deliberate enterprise IP operation solutions with a major U.S. airport.
The project incorporate cyber security and data analytics from our recent KBW acquisition with our smart cities technical expertise.
We integrated our industry, leading aviation domain knowledge, whether our with our advanced security operations capabilities. So when this multiyear opportunity.
Going forward, we expect our digital solutions to be a major driver of growth as we further connect our technological expertise and intellectual property across our businesses.
Our global productivity affords us the ability to utilize global Jacobs talent to provide unique solutions the local clients.
Again, this primarily in two ways deploying highly technical expertise in a variety of disciplines to local projects around the world and digitally delivery complex solutions from our global delivery centers.
During the quarter some volume of work, we delivered through our global integrated delivery model more than doubled with further potential for strong growth.
This increase provides benefits to profitability through better utilization and creates multiple centers of excellence to attract develop and retain the best and brightest talent.
An example of a recent win driven by our global connectivity is in Asia, a fast growing eight aviation market.
We were able to leverage the best thought leaders within our global aviation practice, who have delivered many of the world's largest most complex airports with a local expertise to when the program management for the Manila International Airport.
This may be some facility will include remove terminals for runways and support facilities on over 6200 acres of reclaimed land and will accommodate up to 100 million passengers per year, making at one of the world's largest air travel hubs.
Lifting our connectivity strategies together is our acquisition of a 50% share in symmetrical UK based organization with global reach that specializes in social value measurement and well being analysis.
As the public and private sectors make infrastructure investments that impact local communities returns are not always straightforward to assess and involve understanding the overall impact on society, including economic environmental and wider social impacts.
Metric Guy has developed industry, leading techniques and technologies for assessing social value deploying today at over 1000 clients.
We will work with symmetric up to scale these offerings that solutions, both locally and globally.
As you can see our people are places solutions business is making meaningful meaningful progress implementing its strategy and deriving the benefits of market digital and global connectivity.
You see a continued expansion of our sales pipeline on a year on year basis with many of our larger opportunities slated for award in the second half of fiscal 2020.
Now I'll turn the call over to Kevin to discuss our financial results in more detail.
Thank you see some what's how we view our results I'd like to remind everyone that recast pro forma adjusted figures have been included in our penta seems to this presentation.
We have updated and provided results for all quarters in fiscal 2018, and 19 on a consistent basis from the time. They were provided in the second quarter fiscal 2019.
You can find this updated historical disclosure to ensure clarity as to how the business is performing on a comparable basis year over year.
I will be referring to these figures throughout my remarks.
For fiscal 2019 growth rates factoring a full quarter CH to him for fiscal Q1, 2018, which closed during that quarter. I would also note that the change to our line of business then does not impact our line of business financial reporting.
So let me turn to slide 711, well discuss a more detailed summary of our financial performance for the fourth quarter.
Fourth quarter gross revenue increased 13% year over year with pro forma net revenue, including key W of 10%.
Both critical mission solutions and people and places solutions contributed to the strong topline growth.
Fourth quarter, adjusted gross margins as a percent of net revenue or 24.9%.
Up 100 basis points sequentially, but down a bit 50 basis points year over year, primarily due to a mix of larger contracts and people in place. It solutions that tend to have lower gross margins, but also deliver substantial absolute gross margin dollar levels.
We also continue to recognize meaningful procurement related revenue within critical mission solutions, which also carry a lower lower reported gross margin, but again attractive and low risk return on capital dynamics.
Our adjusted DNA as a percentage of net revenue fell by 50 basis points year over year, and 75 basis points on a pro forma basis, including kw to 15.4%.
Mccain continued strong cost control on the realization of cost synergies from CH Joanna Tw.
It's important to keep in mind that as we scale on become more efficient.
Part of any GNC savings full back to government services via lower Reimbursable rates. This phenomena is associated with federal pricing requirements by both federal and state and local clients.
Our this may know our gross margins it has a clear benefit to gionee and operating profit levels. It also of course increases our competitor then competitiveness when pursuing these types of contracts.
GAAP operating profit was $99 million and include 103 million of restructuring and other charges $5 million a transaction costs incurred primarily in connection with the what acquisition and $45 million of other adjustments consisting of $23 million of amortization from acquired intangibles and 20.
$2 million a cost associated with the worldly transition services agreement previously noted by John of which $21 million of costs were reimbursed on reported in other income.
Adjusting for these items adjusted operating profit was $253 million.
18% from the prior year and 11% on a pro forma basis, including Tw.
Moving on our adjusted operating profits and net revenue was 9.4% flat year over year margin included the headwind from critical mission solutions offset by strong operating margin expansion and people on places solutions.
Discuss further the underlying drivers by line of business later in my remarks, Q4, adjusted EBITDA was $274 million or 10% of net revenue.
GAAP net earnings and EPS from continuing operations were $22 million.16 per share impacted mainly by 61 cents per share of after tax restructuring and other charters charges as noted above four cents per share of after tax transaction costs, primarily associated with the wood acquisition.
And 67 cents per share of adjustments in consisting mainly of intangible amortization of 13 cents.
Mark to market adjustments associated with really equity and other SCR related matters of 36 cents and tax reform related adjustments of 18 cents.
I will reconcile really reconciliation detail can be found in the press release and in the appendix of this investor presentation.
Excluding these items fourth quarter, adjusted EPS was $1.48, including the mindset benefit from discrete tax items kw did not materially contribute EPS during the quarter as the operating profit was effectively offset by the incremental interest expense associated with the transaction.
Finally, turning to our bookings during the quarter our perform a book to Bill ratio was about 1.1 time for Q4 and note that our backlog only includes the first two years, that's certainly when per our bookings policy. In addition, the backlog does not include the recently awarded Q1.
2020, Cyber Security Award discussed earlier Hi, Steve.
Turning to review our fiscal year 2019 results on slide 12.
Gross revenue increased strongly to 20%.
Year over year and pro for pro forma net revenue increased 11%.
Book to Bill for the year was 1.1 time.
Overall, the pipeline of opportunities across all business remains strong as we begin to CCH Joanne and keep the synergies flow into revenue.
GAAP operating profit was $405 million and adjusted operating profit was $893 million, an increase of 17% year over year on inorganic and pro forma basis. Adjusted operating profit margins were 8.8% for the year up 50 basis points year over year we.
Made strong initial progress against our strategic target objective of over 150 basis points of margin expansion pack in year 2021.
Driven by successfully executing against CH, two and cost synergies.
And we see further upside to adjusted operating profit margins as we leverage our global delivery model executing against higher margin opportunities in the pipeline and also being able to benefit from operating leverage as we continue to grow the topline.
GAAP earnings EPS were $291 million at $2, a nine cents, respectively and included 175 of restructuring costs cost $1.75 cents EPS.
It is 12 cents was related to transaction related costs $1.10 of other costs and that includes 42 cents of amortization of intangibles. In addition, it also includes a $1.75 of restructuring charges.
Going forward, we expect our GAAP to adjusted EPS differential to significantly improve as we exit our second quarter 2020 after completion of the CR separation and other restructuring actions.
Adjusted EPS was $5 in five cents up 30% year over year and at the high end of our $4.75 to $5 outlook when excluding the benefit of the nine cents of discrete tax items in the fourth quarter.
It's important to note that adjusted EPS includes 32 cents a fiscal year discrete tax benefits.
Excluding the impact of these texted discrete tax benefits actually in this year and less adjusted EPS grew over 20%.
Finally, adjusted EBITDA was $981 million up over 13% on both a pro forma and organic basis and was at the midpoint of our updated 965 million to 1 billion dollar outlook.
Regarding our LLP performance, let's turn to slide 13.
Starting with critical mission solutions pro forma revenue, including kw grew 10% year over year during the fourth quarter inline with last quarter revenue mix was impacted by large reimbursable enterprise contracts and higher procurement activities, resulting in operating profit for the quarter margin at 6.7%.
Importantly, these contracts remain highly attractive from a total return basis, I'd say offer multiyear stuff stability lower risk and minimal working capital investment levels.
For the year on a pro forma basis, including kw revenue and adjusted operating profit were up 13, and 14% respectively fiscal year operating profit margins were 6.8% of revenue.
Over the course of fiscal 2020, we expect operating profit margins to benefit from our shift to higher value mix, including more fixed price services contracts in a higher contribution from the recently acquired Pwc.
Again, it is important to note that our focus in critical mission solutions, where demand on driving operating profit growth.
Given that the structure of joint ventures can impact our revenue may or may not reported on our PML.
Which can impact headline margin percentages.
We continue to believe that operating profit growth is the best indicator of our performance and we expect a critical mission solutions operating profit compound annual growth rate in line with our previous guidance provided.
Regarding Tw September results were in line with our expectations and the strategic project for the acquisition and associated revenue synergies over the medium term is proving out actually real time as our pipeline and bookings efforts are already building momentum as Steve mentioned, our joint teens or do you want to major Cyber Cup.
Contract.
Clear indication that synergies are materializing.
Moving to People's on places solutions.
Q4, net revenue grew 9% year over year, an operating profit was up 19%.
The percentage of net revenue operating profit was 14.3% for the quarter up 120 basis points from year ago.
People in place a solutions had a very strong fiscal year 2019, including the Q1 2018 pro forma impact from CHF 10, net revenue was up over 9% and operating profit was up 14% year over year.
Operating profit margins were 12.7% of 50 basis points versus year ago.
Our strategy to TARP target continued margin improvement going forward will be driven by aligning the portfolio secular growth opportunity leveraging the benefits of scale from our global model.
Strong project execution, and focusing on higher margin opportunities.
Our non allocated corporate overhead costs were $33 million for the quarter and $131 million for the year.
As we continue to be focused on driving cost effectiveness into our corporate related cost structure, we expect $25 million to $35 million per quarter of unallocated corporate expenses. Notwithstanding our continued focus on cost discipline, we will proactively evaluate incremental investments that will support our digital and innovate.
In Germany.
Now turning to slide 14, I'd like to LCR initiatives relative to our recent M&A and divestiture transformational actions.
As noted previously stated the CHF one integration is near complete with net cost of revenue synergies exceeding our original business case for the acquisition.
Regarding the CDCR to date, we've incurred $153 million a vote of the over $200 million related transaction separation and restructuring costs. We expect nearly all remaining cost incurred near the end of the first half fiscal 2020.
Regarding key W.
Synergies realized in the quarter were quite minimal.
At the end of Q4, we achieved a run rate of $11 million of our target of $15 million in cost synergies, which resulted in our spending $17 million of our estimated $25 million or cost to achieve those synergies today. We have also incurred $13 million of transaction fees and other onetime acquisition.
And related costs.
Regarding woods, a nuclear business our acquisition remains on track to close in our fiscal Q tap to two quarter. Our integration team is proactively finalizing integration plans.
As we discussed we also acquired a 50% ownership and Symmetricom, which was immaterial from a financial standpoint, but certainly quite strategic in our drive towards becoming more value added solutions provider.
Now on the cash flow generation in the balance sheet on slide 15.
During the quarter underlying free cash flow again improved.
Well reported free cash flow for the quarter was negative. This included multiple one time items related to our transformation efforts, specifically, we paid 300 million $390 million a cash taxes related to the gain on our 3.4 billion dollar sale of VCR, which actually close.
In the fiscal third quarter.
In $100 million for the settlement of a newly found legal matter, which is also related to the CR business.
$9 net cash flows related to restructuring and sale of VCR and onetime expenses related to the kw acquisition.
Excluding these amounts associated with our transformation and consistent with normal seasonality, our Q4 cash flow conversions factor was well above our long term target. We believe that this provides further evidence of our ability to try to a free cash flow conversion factor of one time longer term.
Dsos ticked down compared with Q3, two Matt 2019, consistent with our drive to reduce this key metrics.
Mainly focused on improving collections now that we have made great progress moving to a common ERP platform and implementing associated working capital process.
In fact from Q1 this year.
So is improved by four days.
Okay.
We ended the quarter with cash of approximately $630 million and a gross debt of $1.4 billion, resulting in $770 million a net debt before attributing the benefit of our half a billion dollars inwardly equity.
Treating the worldly equity as cash our pro forma net debt position would be approximately $300 million or less than one time adjusted EBITDA.
It is clear we have strong financial flexibility, even when excluding the world the equity and but I believe the addition of our talented SCR team, which wearily will support long term value creation opportunities for the shares.
While our lockup period ends in December we were opening main thoughtful and strategic regarding our position in company.
Regarding our capital deployment in August we executed a 250 million dollar MSR with final delivery of the remaining 20% of shares expected in December .
We continue to believe that our shares are trading at a discount to their intrinsic value and we expect to fully utilize our remaining share buyback authorization overtime.
For modeling purposes, we would expect an average share count of $134 million for fiscal year 2020, although the timing of future share repurchases can be driven by short term dislocation in share price.
We also expect an effective tax rate approximately 24% for fiscal 2020.
When modeling quarterly EPS, we would suggest incorporated historical seasonality on an underlying basis, especially when considering the sequential chain change from the last quarter in fiscal 2019 after adjusting for discrete tax items for the first quarter fiscal 2020.
Given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was previously declared as 17 cents per share in September as you know our current did the dividend level represents an increase of 13% versus year ago.
Now I'll turn it back over to Steve for some closing thoughts on slide 16, Thanks, Kevin I'm excited about the continued traction of our business transformation. We're seeing a strong inclusive culture is developing across Jacobs, our pipeline is increasing year over year with larger higher margin opportunities and we're strategically leveraging our balance sheet investing in our.
Hello.
Finally share buybacks as well as disciplined targeted M&A activities and strong growth sectors.
We're introducing fiscal 2020 adjusted EBITDA outlook in the range of $1.05 billion to $1.15 billion. We're also initiating fiscal 2020, adjusted EPS guidance to a range of $5.30 a $5, an 80 cents, which at the midpoint represents a 17% year over year growth when excluding the impact from fiscal two.
Well the 19 discrete tax items.
In summary fiscal 2019 was a strong year performance, we have a clear vision and strategy for Jacobs and we'll remain disciplined and executing against it we are well aligned to capture secular growth opportunities. We have a strong balance sheet and we're well positioned to deliver on our financial targets. Operator, we'll now open the call for questions.
Thank you I'd like to remind those participating in the question answer session to limit themselves to one primary question and one follow up question.
Your first question comes from Jamie Cook of Credit Suisse. Your line is open.
Hi, good morning.
Hi, I guess just two questions.
No.
First on if you could talk to Kevin just whats implied organic revenue growth in margins by segment and niche in the 2020 guidance and what we're assuming from KBW and Wood and then my second question, just where we say okay. Your comfort level with the 77 bps targets that you guys gave at the analyst day last.
February for 2021.
Yes, we havent disclosed actually this specific numbers Cheney, Jamie and thanks for your your question relative to to then the growth factors in 2020, but on a net revenue basis. We certainly believe we're in the higher as opposed to lower.
Our single digit numbers in terms of our organic revenue growth and are excited about that of course all of this is consistent with what I would characterize as performing numbers. So we've adjusted history.
Relative to that so so good solid.
Let the mid to higher single digit level growth factors for for the businesses.
I think that as we think about the other comment still believes that the seven to eight dollar kind of what I would call earnings potential power is potentially out there and available to us our ability to ultimately deliver against that is going to be driven a lot by our ability to continue to.
Execute against share buybacks in a manner, that's consistent with creating incremental shareholder value and obviously the potential for incremental M&A activities, which.
Ultimately have to work from a strategic perspective, as well as a financial one so we feel great about where we are relative to that although it's clear that while the earnings potential is there it's got to make economic sense for us to be able to deliver against that and I think that's exactly consistent with how we thought about it back at Investor day, and so really no fundamental change.
And from our perspective.
Thank you.
Your next question comes from Andy Cat fluid Citi. Your line is open.
Hey, good afternoon guys.
Okay.
Could I ask if question are slightly different way, so pro forma net revenue growth for Fynineteen winds up 11% energy said.
I didn't start next three year period of 3% to 5% NSR growth. Obviously, good start to three year plan. So could you could you talk about what in your bigger firms is performing better than you thought.
Would you agree that that 3% to 5%.
Helane may end up being a bit conservative I know, it's only a year into the plant.
So let me characterize our gross.
In terms.
A range of levels and that certainly at this particular point in time, our net revenue growth would be kind has that kind of at the high end of our range right around that so I don't know that we would ultimately say that we're we're executing at a different level than what we've always said this is clearly.
Within the range of what we said we're very pleased with the fact that were at that at that upper end in the range and we would expect that hopefully we'll be able to continue to deliver against.
What we see right now is what is in front of us for 2020, if we think about going beyond into 2021 will play a year by year end execute accordingly, but we feel pretty good about where we are right now.
Thanks, Kevin have you wanting more than you thought in terms of re up on the government side or infrastructure side, I mean, any sort of more color on where you've done better.
Yeah, I mean, starting with.
The.
Building the people in place with solution.
Clearly the.
The momentum of Jacobson series to and unleashing the strength of that combination.
As has been exciting in this contributed to some of the higher numbers that you're seeing.
I think we'd but also pleased with the continuation on the advance facility side in both life Sciences and electronics.
We keep thinking about whether there's going to be but have a pullback and.
And the good news is continue to stay strong always through 2019, we actually see ourselves entering 2020 still in a very robust environment on on that sector and so overall the people in places solutions businesses.
This is really strong across the board with everything going on.
With infrastructure globally.
I think on the critical mission solutions, where we're seeing better than expected results on the NASA side of things. We've we've got our existing contracts, but theres been some pretty good plus ups going on.
The the best as aggressively now going after the whole artist Artemus mission that cuts across.
Five different space centers, where we participate so.
Thanks, I've gone well, there, but missile defense program.
We won bigger and a half or so ago.
We're actually finding that we're getting some add on opportunities as a result of the solutions that we are providing now that we're demonstrating in that relationship. So the existing programs I think are going very well and.
And we're winning what we're supposed to win so very pleased across both sides of the business.
Your next question Jerry Revich of Goldman Sachs. Your line is open.
Hi, good afternoon, and good morning, everyone.
I'm wondering if you folks can just give us an update on the M&A pipeline and the strategic capital allocation opportunities, where you folks have been able to do really well is reshaping the portfolio and I'm wondering as you look at the opportunity set today.
How does that compare versus when you initially laid out the strategy in terms of.
What's what's out there.
Feasible within the new portfolio.
The M&A pipeline is.
The continues to be.
Pretty rich because we.
Our M&A team is doing a great job working with the two business lines on.
Exploring.
Some other traditional bolt on opportunities as well as.
The the differentiated opportunities as we really look at strengthening ourselves in areas like consulting strengthening ourselves.
A little capability and innovative technology them and so there is.
Theres lots of opportunities out there, but as Kevin said I said in both our remarks, we're going to remain very disciplined.
You know, obviously, we're not going to make M&A moves just for the sake of scale they've got to be value, creating and we continue to believe that we've got great investment opportunity and ourselves.
So this is going to be a balance of.
Just monitoring M&A market against.
Buying back our own shares.
So our capital deployment strategy, we'll remain disciplined.
Okay, and then on key W. specifically.
The initial target was 2020 EBITDA of about $80 million. So can you just comment on whether it's still tracking in line with those expectations and does the classified network security program with the U.S. government can you just give us an update on.
Timing of when.
To proceed to to the bookings space I think those distinct from their Cybercrime Center Awards that you mentioned those are two separate platforms.
Yes, so as I've mentioned in my remarks.
We believe in the long term benefit of KBW. It we think it's going to be a game changer for Jacobs nothing is changed from the time, we bought it and if anything what is excited about.
Our the synergy opportunities across all objectives, so that the benefits that we're seeing our people in place and solution style going after in combination with acute W. organization.
I I think overall our opportunity is the same a mix of where it will come from some of it we may actually see spill over into the people in place of solutions business.
Versus some of the specific businesses that maybe we bought we're going to show up in the traditional key February just based on timing the special project that you've talked about.
We remain extremely confident if not more confident but the timing of it.
It's still sort of something that isn't obviously in our hands.
And where.
We're continuing to demonstrate the success on the staging of that.
But but but not sure that'll play through completely in 2020, as we had previously expected, but but as I said our team is more confident today that that's going to ultimately come to fruition and whether that spills over into the first half of 21 or second half 2020, we can't say for sure here today.
But.
I'll just give me one sort of example of why we're excited about GW in the combination with Jacobs prior to KBW.
We were and we Jacobs were at about 50% of the Intel agencies across the whole 60 billion dollar Intel business.
And now with KBW, where.
100% covered with all the agencies and that's where we're excited about the pipeline.
Maybe more than we had fought prior to acquiring and so whereas we've talked about the space intelligence is.
Tremendous opportunity, we're now getting even more excited about the cyber side and the hotel side the mission I T side.
And so thats, where I my comments were around the mix is different.
But the overall opportunity is.
This is very exciting going forward.
Jerry you also made the comment about the $80 million an EBIT da is that it was actually not $80 million in 2020, what we assumed when we quoted that number was understanding if we have received and gotten all synergies in place by that so our actual numbers that we were targeting targeting as it relates.
To the one we announced the acquisition was closer to 70 for then for the 2020 year not 80.
Your next question comes from Andrew Wittmann Welfare Your line is open.
Oh, great guys I wanted to just talk about a little bit about cash flow.
I guess, we'll we'll find this one on under the outlook for 2020 more than anything understanding here. Kevin you made the point on the fourth quarter. When you add back a couple of things that you know cash flows in line with your long term targets I guess for 2020 can you give kind of what the actual cash flow will be or what's your guidance is.
Considering that there are still our restructuring programs.
And other things that are going on so I just want to understand kind of whats your.
Kind of cap Guidances for cash flow and just if you just update us to bridge us into the what the underlying number would be.
So again, we don't we haven't guided to ultimately the cash flows the men. Let me make some Andrew comment said to help give you some implemented perspective and inside as it relates to that.
In our numbers for for the for the year 2019 at the end. There was there was a chunk of cash that ultimately went out.
Excluding the receipt of the proceeds from easier, but a lot of the other cash and whether it was restructuring our taxes or whatnot, probably at the end of the day over $450 million for the full year. So so that's one point that that's going to obviously start to significantly go away.
I would say Q1 is still going to be a fairly large investment profile and the restructuring efforts to.
Disassociate and separate the businesses as we exit from our TSR P. S E arrangement with poorly, but so a big chunk of cash will go out in the first quarter and that will start to tail off in the second quarter probably have.
Another 50 million plus of costs, mostly and I would say in.
In the fourth quarter I would say.
Excuse me, our first quarter 2020 stage Joanne is effectively Glenn willing to do not much and then really what we're talking about is the incremental stuff associated with key W and and wood, which we've already talked about in terms of what those onetime onetime costs costs on so while they're still lies.
As a chunk of let's call it restructure related activities less than 100, probably but certainly a heck of a lot.
Less than what the numbers that we incorporated 2019, so our cash flow as we enter into 2020, and then get to the end of the 2020 is going to become much cleaner and more operationally oriented.
If you kind of Peel away all of the one time items that were associated with our significant transformation and I would say 2018 is to die here, where all what's happening at the same time, finishing up CH driving SCR that fundamentally if you Peel away all of that we were kind of approach.
Being 85%, maybe a conversion factor relative.
To the income levels to the net income levels associated with them.
After adding back amortization, so so thats a baseline in my mind in terms of how we would think about driving our our business going forward from a cash flow I said to you in the past and I think Thats certainly our view is that our expectation is that over the course in 2020, we're going to be able to get to that conversion factor.
We've talked about a one times.
Okay. That's helpful. Just my follow up was just going to be is the would group nuclear acquisition in the guidance.
I would say technically yes, but weve adjusted at risk adjusted it because of lack of clarity as to when it's going to close and when that might be I think what maybe I would say that one we ultimately get the final hopefully completion of the deal sometime around the net.
All of our calendar excuse me our fiscal year.
Well, we'll give you an update and and let you know exactly where we are relative to two what the implications of wood will be relative to that but I would say technically yes, but it's not really very material because weve risk adjusted as to to some extent because of the of the unknown in terms of the timing.
Your next question comes from Steven Fisher.
Yes, Sir your line is open.
Thanks, Good morning.
The $25 million charge that you guys cited in the footnotes was that in the fiscal fourth quarter and can you give a little color on what caused that and then more broadly on margins could you just talk about which segment you see has the better potential.
To drive higher margin improvement over the next couple of years.
So the $25 million is where I am sorry.
You added in the footnotes in the release.
As it was a 25 million dollar charge in the fiscal year and I couldn't tell if it was.
And if there was a project charge I can tell if it was not fourth quarter or sometime earlier in the year.
So yes, it was related to.
Each specific project and the people some places solutions businesses, who is spread over the course of the year bulk of it in Q3 in Q4.
So yes that was in our 2019 results.
Okay, and just talk little bit more about what caused that and it's a completely done is there any ongoing risk there.
No. We believe that it's effectively done as a matter of fact, the profitability associated with that project was was quite good and ultimately.
I would say, even with that 25 million dollar cost it was.
Almost pretty close to our what we expected to be the margin in the project was when we when we actually won the award when couple of years ago.
So we're actually.
I'm happy that we had to have those adjustments, but ultimately the other profitability is very consistent with what our original expectations were on the project.
Your next question comes from Gautam Khanna of Cowen Your line is open.
Hey, Thank you guys. Thanks.
Couple of questions first I was wondering.
On the bid pipeline I think you said there was 33 billion pipeline what does the outstanding bids and if you could talk to what you anticipate.
In terms of book to Bill in the December quarter, maybe just based on where the adjudication timelines like.
How you think.
The rest of the.
How bookings cadence was going to play out through the year.
So thanks caused them.
Just a couple of quick comments.
First thing is is that there's yes, a couple of very large ones that probably will happen not now but into the is the second or third quarter of our fiscal year.
And so a big chunk of those will probably get to the finish line.
How furious or beyond and so there is of that 33 billion of a chunk that is I would say more in the back half than in the front half of.
The the year and of course as you will know in this in this business awards granted and then we all see what happens relative to protest and whatnot and our policy is that we don't bookings until we get clear of those protest.
Situations in that oftentimes results and in that kind of happening more later as opposed to earlier as it relates to some of these major initiatives. So I would say in general the expectation is second to third quarter is when we start to see things pop up.
As it relates to book to Bill ratios, but perhaps.
I'll turn it over to Bob as he has any additional commentary he'd like to me, yes, I think that pipeline is robust and guy and continues to from a pipeline standpoint, being the double digit percent year on year business.
If I think about a book to bill over the course of the year.
I do agree it's going to be higher on the second half, but it won't go below one it's a it's going to continue to be.
Positive side.
Even in Q1, you expected to be above one.
I do.
Okay, and just some clear was at 33 billion, an outstanding bids number or was that.
The aggregate.
Thanks.
Mailable opportunities.
Okay, what's actually up do you have that number.
As far as far as projects that we bid.
I'm sorry.
So Mike are you, saying, what's actually been did versus in the pipeline and we're going after about what's how to interpret your question.
Hello.
Your last comment so so look there I'd say just make an additional comment about clarity relative to the backlog certainly there is couple large ones that are in the midst right now as it relates to some of the activity surrounding hanthorn.
Those are those are big bids that are coming to fruition near the end of this quarter and into our second quarter fiscal year, we'll see how those play out but that's certainly those are expecting to get some adjudication next.
Three months, we would hope.
Notwithstanding potential protest.
Your next question comes from Michael Dudas of vertical research. Your line is open.
Good afternoon gentlemen.
Thinking about.
The digital connected enterprise or Jacobs, Panera enterprise, and what you're doing to drive than both lines of businesses.
We're in 2020, when we see more of the revenue and I guess potential margin benefit is it is it.
From CSM to PPS or vice versa.
Half of that when you're looking at acquisitions is that an area, where you are really focusing much more on relative to traditional trying to look at either skill sets on the aerospace or the infrastructure side.
Yes, you're right I answer the second second first.
The big discounts that I'd say, we're looking for.
Be more cross cutting and it probably focusing more on cyber right now fibers was predictive analytics.
As part of which way they are going it's pretty bilateral right. Now is that we're seeing a lot of our cyber expertise that we have within.
Within our critical mission solutions I have an effect on what would traditionally be infrastructure projects.
And then and then going the other way.
Well actually going both ways, our geo spatial expertise or utilizing what we have.
Within within our our accrual mission solutions as well as people in places or infrastructure as well as for a brother other other applications. So it's pretty broad it really is the connectivity between both lines.
If the technology.
And were in which areas or is it either line of business, where we see that more benefit as you look at the 2020 plan.
I guess would be pretty even.
Okay very good enough.
Yes.
And so just to follow my follow up would be when you and looking at the initial opportunities for 2021.
Is that assuming because the second half is going to little bit more weighted on the bookings side or are there some.
Economic or company or end market or country specific opportunities that are giving you that much more confidence in the early stage to achieving 2021 target. Thank you.
Look I would say on an as Kevin Michael So look I think that clearly the timing of our bookings are far more oriented around second quarter and beyond.
It's clear relative to that doesn't mean that the bookings in Q1 will not be okay. It's just that the the upside is more second quarter beyond and depending upon the timing of the adjudication of those opportunities. It certainly could translate into much more of a stronger booking in the in the third.
Fourth quarter than in the first half of the here and I think that clearly indicates that as we would exit 2020 and into 2021 that we're feeling like we're getting a set up for our performance in 2020 that will continue to be quite positive relative to our ability to execute against our share.
Switching so.
One of the CNN and we'll see how that plays out in terms of the timing, but but there is this develop being view that the second half that's going to end up being pretty strong in terms of the bookings and that obviously positions us well for 2021 I think just in the critical mission solutions side specifically.
We've been we're excited about some unusually larger.
For two entities that are in the pipeline.
So the exciting thing is that fair there.
There are larger than normal, but but because of a size, it's going to affect a little longer to play out too.
Oh through that process and hopefully Williams, we feel very positive about our positioning on it. So just building on Kevin's comment is why we when we were talking about the pipeline going up. It's this some significant size projects that will most likely play out in the second half this year.
Thanks.
Your next question comes from Michael Feniger of Bank of America. Your line is open.
Hey, guys. Thanks for taking my questions you mentioned, the bookings and the large opportunity that we could see come through in the second half just what's your exposure to some of these government agencies and even on a municipality side, how how do we view this bidding activity as we head into a rather.
Dynamic 2020 election cycle that had any impact on on on how we should view some of these opportunities in the second half of 2020.
Well, we want to comment.
Well, if you're so sure yes.
We're actually doing relatively comfortable in that.
On some of the larger opportunities.
Most of them, we're actually be incumbent.
So regardless of what happens from the political environment that we're sitting today.
It would give delayed as a result, but for whatever reason.
We would we would continue on the work that we have with ongoing task orders, so that gives us a bit of comfort on those.
Those not totally immune from what happens from a political standpoint, but but relatively comfortable.
That's helpful. And then you addressed the margins in critical missions and the mix impact there and how we should think about 2020 just on the operating margins for the People's in places segment Q4, we saw strength there just going into 2020 looking at your backlog now is there anything.
Special we should be aware of in terms of mix on how to think about the operating margins in Q2 thousand 20.
Yes, I think if you if you look at what we what we said during Investor day on the on the Ria hurdle were on path for that we do see from quarter to quarter a bit of.
I'm going to seasonality specifically in the first half and then back kind of makes its way through and Guy and we we saw for two consecutive years.
But more robust operating profit margins at the second half year, we see that continuing in the in the next year.
The incremental growth when you evaluated on a year on year basis.
Yes, I would I read that augment Bob's comment and say you shouldn't necessarily assume the strength in Q4 as the new the new norm you Q4 tends to be a very good quarter in this business and and tends to be our strongest quarter profile. So doesn't mean that we're not going to see some some good day.
Gains over the course of year consistent with what our strategic objectives are but that doesn't necessarily assume that that's the new norm because I think that would be an inappropriate assumption as you think about what the future margin profile.
How that will play out over the course of the year.
Your next question comes from Chad Dillard of Deutsche Bank. Your line is over.
Hi, good morning, everyone.
Hi, Jeff.
So I think Kevin you mentioned that the operating cash flow conversion rate when you exclude although the onetime items was about 85% in the fourth quarter, but.
But then I mentioned that kind of like the longer term target is one times.
Do you think at any point during 2020, you can get to a one cents conversion rate. If you exclude it sounds like the other I guess onetime items will occur in 2020, and just make sure we have our arms around otherwise color $100 million restructuring, but just want to see if theres anything else to be aware of.
No look I think I'd just point of clarification, Chad to make sure and one is understanding the conversion factor that I was talking about whereas an adjusted cash flow versus our adjusted earnings base. So excluding some of the restructuring activity just to make that clear.
The number that I said, which was approaching 85% wasn't for the quarter actually the quarter numbers were extraordinarily better than one times in terms that conversion factor.
Associated with the full year numbers on the basis that I. Just described so look I think that those are things that I think give comfort to us collectively as a team here and certainly our indication to you that we do have to wherewithal to be able to improve the dynamic going on of course clearly acquisition.
And could potentially play into that we could have other matters that come into the mix.
That we would have to two to incorporate into our analytics, but certainly from our perspective, we we feel like we're well positioned on an underlying operating basis to try to get to those numbers that we've been talking just strategically for certainly in the last nine to 12 months.
Got it and just another question senior Kevin I think on.
Prepared remarks, you talked about some discrete tax benefits and the impact on one key earnings.
For 2020, I was hoping you could get flushed out on how to think about I guess, one Q, earning seasonally.
Well, if you I had we don't give guidance specifically by quarter, but I would just make the comment Chad that.
If you take away the nine cents from RFP fourth quarter results go back and look at the normal seasonality that we have.
Q4 to Q1, because Q1 is our weakest cts quarter and Q4 as our strongest Cts quarter. So just be thoughtful as it relates to comparing strong to the weakest and that has a implication relative the underlying EPS and profitability associated with Q4 Q1.
And I'll leave it there so just make sure you guys a thoughtful as it relates to that process.
Okay.
And that was our final question for today I will now return the call to our presenters.
Thank you. So it's exciting time for Jacobs, our new brand, we've made a bowl change shaped by our employees clients shareholders. A brand reflects our proud history centered around our belief that we can create a more connected sustainable world together.
Balancing today reinventing tomorrow.
Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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