Jacobs Engineering Group Inc (NYSE:J) Q2 2023 Earnings Call dated May. 09, 2023
Corporate Participants:
Jonathan Evans — Vice President of Corporate Development and Investor Relations
Bob Pragada — Chief Executive Officer
Kevin Berryman — President and Chief Financial Officer
Claudia Jaramillo — Executive Vice President, Strategy & Corporate Development
Analysts:
Jamie Cook — Credit Suisse — Analyst
Andy Kaplowitz — Citigroup — Analyst
Michael Dudas — Vertical Research — Analyst
Sean Eastman — KeyBanc Capital Markets — Analyst
Bert Subin — Stifel — Analyst
Steven Fisher — UBS — Analyst
Chad Dillard — Alliance Bernstein — Analyst
Michael Feniger — Bank of America — Analyst
Gautam Khanna — Cowen — Analyst
Andy Wittmann — Baird — Analyst
Presentation:
Operator
Good morning, ladies and gentlemen, and welcome to the Jacobs Solutions Second Quarter 2023 Earnings Call and Webcast. [Operator Instructions]. And please be advised that this call is being recorded. [Operator Instructions]
And now at this time, I will turn things over to Mr. Jonathan Evans, Vice President of Corporate Development and Investor Relations. Please go ahead, Mr. Evans.
Jonathan Evans — Vice President of Corporate Development and Investor Relations
Thank you. Good morning. Our earnings announcement and 10-Q were filed this morning and we have posted a slide presentation on our website before reference during the call. In addition, this morning we published a release announcing our intent to create two independent companies with the separation of our Critical Mission Solutions business. I would like to refer you to Slide 2 of the presentation material for information about our forward-looking statements and non-GAAP financial measures.
Turning to the agenda. Speaking on today’s call, will be Jacobs CEO, Bob Pragada; and CFO, Kevin Berryman. We are also joined by our incoming CFO, Claudia Jaramillo. Bob will begin by providing an overview of today’s portfolio announcements, then summarizing highlights from our second-quarter results. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with closing remarks, and then we’ll open up the call for questions.
With that, I will turn it over to Bob.
Bob Pragada — Chief Executive Officer
Thank you, Jonathan, and thank all of you for joining us today to discuss our second-quarter fiscal year 2023 business performance. Jacobs has a storied 75-year history of delivering value for our clients, employees and shareholders. We have consistently strived to improve our company through a purposeful strategy of transforming our portfolio to capture higher-value opportunities in our core and adjacent markets.
Turning to Slide 4r. Today’s announcement marks a key inflection point as we progress on our journey of continuous improvement and value-creation. This morning, Jacobs announced our intent to separate our Critical Mission Solutions business through a spin-off. The decision to separate CMS is the result of a comprehensive review and evaluation to identify opportunities that streamline our portfolio and maximize strategic focus and potential growth opportunities for both future companies. We will sharpen both companies focused on their distinct strategy and operational initiatives that are most relevant to the specific industries in which they operate. Each company will have a tailored capital allocation and structure that is directed toward their respective growth strategies as well as a strengthened ability to attract and retain top talent.
Moving forward, in addition to our industry-leading position in core sectors, Jacobs will be a higher-growth, higher-margin technology-enabled solutions provider, continue to address the world’s most complex critical Infrastructure and sustainability challenges. Jacobs core skill sets in technical and consulting services coupled with data science and technology-enabled expertise will continue to differentiate us from our peers and allow us to provide end-to-end solutions to our global clients.
Our streamlined portfolio will include leading positions in critical infrastructure such as water and environment, energy transition, transportation and the advanced manufacturing sectors. Once the separation is complete, we can focus our attention on building additional capabilities and expertise that matter most to our clients in these areas. And importantly, will achieve even greater alignment with our three key accelerators, climate response, data solutions and consulting and advisory.
The new CMS will be a leading pure-play government services company that provides technical consulting, applied science research, training, intelligent asset management and program management services to federal government agencies. CMS generated approximately $4.4 billion in FY’22 revenue. Today’s announcement is another step in Jacobs long record of taking bold actions to drive value-creation and position our company for an even stronger future. And as we grow and thrive, our partners can achieve more as well. I want to emphasize that this announcement does not change how we work with our clients. As we work towards the separation, it will be business as usual. We remain committed to delivering world-class service to our clients who will be able to two rely on our people they know and trust.
Turning to Slide 5. The proposed capital structure, governance and other matters relating to the separation will be communicated at a later date. Subject to satisfaction of customary conditions, we are targeting to complete the separation in the second-half of fiscal year 2024 through a distribution that is intended to be tax free to Jacobs shareholders for US federal income tax purposes.
Turning to Slide 6. I want to reinforce the importance of our inclusive and forward-thinking culture. Last quarter, we reinforced our commitment to inclusion and diversity by including a gender equality KPI in our sustainability linked art. Jacobs remains categorically committed to this call.
Urning to Q2 and Slide number 7. I want to thank our more than 60,000 global teammates for delivering a record second-quarter as measured by both revenue and operating profit. Notably, our underlying business remains strong and we continue to drive growth organically. We continue to invest behind and grow share in all key areas of focus against our three needle-moving growth accelerators, climate response, data solutions and consulting and advisory. Our people and places line-of-business delivered strong performance with net revenue up 7% year-on-year, 10% in constant-currency and operating profit up 21% year-over-year, 25% in constant-currency. Our pipeline and gross margin and backlog increased, further supported by strong legislative drivers materializing in federal, state and local initiatives.
CMS remains a stable base of recurring revenue, driven primarily this quarter by the NASA-Kennedy rebid award. CMS Q2 revenue was 11% higher than the previous quarter and 5% higher year-over-year. In terms of bookings this quarter, CMS also achieved an impressive overall win rate and the outlook for FY’23 continues to look strong, with its pipeline up double-digits year-over-year. We continue to invest behind CMS, opening our Japan office during Q2. Our first organic office opening since 2004.
PA Consulting sales and backlog again increased year-over-year, led by sales in the energy and utilities and defense sectors, demonstrating momentum and consistency. I’m pleased to the margins improved in the quarter to over 20%, supported by milestone incentive achievement. PA continues to benefit from increased opportunities in Europe. For example, PA won a mandate for a private Scandinavian renewable energy company that is currently active in renewable electricity generation and storage. PA is working with the client to create a market entry strategy across offshore and onshore wind in several new European markets.
Our divergent solutions operating unit had a strong operating profit in the quarter with operating profit up 46% year-over-year. During the quarter, we extended our collaboration with Palantir across multiple infrastructure applications. Kevin will give more detail in his comments. Looking across the broader market environment, we continue to see tremendous opportunities for growth in climate response and energy and environment. For example, our approximately $2 billion water business continues to exceed expectations and reinforce our position in the water sector. Water continues to be a page setter with pipeline growth up materially year-over-year. During Q2, we were awarded the Donald Tillman Advanced Water
Purification Facility by the LA bureau sanitation, one of the largest portable reuse projects in the US, delivering a more sustainable drinking water source any drought stressed region. Fittingly, we would like to call attention to drinking water week, an opportunity to proudly celebrate the work we do with utility partners to provide safe drinking water to millions of people around the world.
Our cities and places pipeline also grew double-digits including key wins in the Middle-East where we are working to reimagine urban development, addressing major environmental and quality-of-life challenges, and predominantly powered by clean-energy. Globally, we are seeing significant energy transition opportunities. Last month we officially launched a dedicated business unit in P&Ps to focus on significant opportunities in global energy transition to accelerate growth and address the ever-expanding needs of our clients.
Turning to Slide 8. During Q2, we were awarded the Gold Medal award for international corporate achievement and sustainable development by the. World Environment Center, a non-governmental organization advancing sustainable development through corporate business practices. Their annual Gold Medal award recognizes one international company demonstrating a global vision and a commitment to sustainable development through innovative applications of policy, economic, environmental and social responsibilities. The independent jury commended our thoughtful approach to sustainability, combining commitments with global initiatives and partnerships with positive and far-reaching impact.
Turning to Slide 9. In summary, we remain well-positioned with our industry-leading ranking across multiple sectors. This is particularly evident in our advanced manufacturing business where our long-term pipeline increased double-digits year-over-year. Further, in our infrastructure business, legislative actions continue to provide visible growth opportunities despite continued political debate on broader topics. For example, recent wins this quarter include three significant intelligent O&M programs in California, Florida, and Louisiana, which we secured through strong differentiation with the use of our digitally-enabled platform. We expect operating profit growth to outpace organic top-line increases as we remain focused on quality of backlog.
Now I’ll turn the call over to Kevin to review our financial results in further detail.
Kevin Berryman — President and Chief Financial Officer
Thank you, Bob, and good day to everyone. Turning to Slide 10 for our financial overview of our second-quarter results. Second-quarter gross revenue grew 6% year-over-year and net revenue grew 5%. Net revenue grew 8% year-over-year on a constant-currency basis, a continuation of healthy growth against a tough 10% year-ago comparison. Adjusted gross margin in the quarter as a percentage of net revenue was 26%, sequentially in line with the first-quarter, but down year-over-year. I will provide additional comments regarding our segments later in my remarks.
Adjusted G&A as a percentage of net revenue was 16.6%, approximately flat sequentially, but down 90 basis points year-over-year, more than offsetting the lower gross margin percentage versus last year. While we felt the impact from inflationary pressure, costs were managed well overall to disciplined cost management. We are still targeting G&A as a percentage of net revenue to be stable at 16% for the full-fiscal year 2023.
GAAP operating profit was $290 million for the quarter and included $50 million of amortization from acquired intangibles, a $10 million non-cash charge related to decrease in our real estate footprint, aligned to our future of work strategy and other acquisition deal-related costs and restructuring efforts of $8 million. This deal-related costs are largely incentive compensation that was considered part of total consideration and PA non-cash contingent equity-based agreements associated with the PA transaction structure. Excluding these items, adjusted operating profit was $356 million, up 7% year-over-year. On a constant-currency basis, adjusted operating profit was up 11% year-over-year.
We remain committed to reducing our restructuring-related costs. Consistent with our previous comments, we expect approximately $15 million of restructuring charges for fiscal year 2023. We also expect a total of $50 million to $55 million in non-cash real estate impairment charges over the course of the year as we continue to further execute our work — future of work strategy. Finally, we expect $25 million of transaction-related expenses for the full-year from deal-related integration and other costs, most of which is performance-based incentives that were factored into our total purchase price consideration for these acquisitions. It also includes the non-cash contingent based equity noted earlier associated with our PA transaction structure. These costs do not include expenses to be incurred in connection with the planned separation of CMS, given the early stage of our process.
Our adjusted operating profit and net revenue was 10.4%, up 20 basis points year-over-year. I’ll discuss the underlying dynamics during the review by reporting segment. GAAP EPS from continuing operations was $1.70 per share and included a $0.20 — $0.26 impact related to the amortization charge of acquired intangibles, a $0.06 non-cash impairment charge related to reducing our real estate footprint, $0.03 from transaction restructuring and other related costs, and a $0.25 adjustment to align to our projected annual normalized adjusted tax rate as a result of the large 1048 [Phonetic] reserve release. Excluding these items, first-quarter adjusted EPS was $1.81, up 5% year-over-year. As we look ahead to our full-year forecast, Bob will provide an overview of our narrowed guidance range later in his prepared remarks. We also note that our Q3 EPS is expected to be relatively flat sequentially to Q2. I would like to highlight that the fiscal year 2022 third-quarter adjusted results benefited from a one-time $0.10 gain on an equity investment. Q2 adjusted EBITDA was $358 million and was up 5% year-over-year, representing 10.4% of net revenue. Finally, backlog was up 4% year-over-year and 5% on a constant-currency basis. The revenue book-to-bill ratio was 1.2 times with our gross margin and backlog again improving tear-over-year.
Regarding our LOB performance, let’s turn to Slide 11 for Q2. Our results in the quarter continued to demonstrate the strength of our portfolio and end-market resiliency, enabling us to deliver strong consistent OP growth. People and Places solutions continues to drive our momentum. Overall, P&PS delivered strong revenue and operating profit results, driven by an alignment to the secular growth trends and legislative drivers previously highlighted. Q2 net revenue was up 7% year-over-year and up 10% in constant currency. Growth was consistently strong across almost all business units, although Europe continues to see some pressure. Backlog grew 40% year-over-year, behind a book-to-bill of 1.1 times. Gross margin and backlog was up nearly double digits in constant currency.
Q2 operating profit was up 21% and 25% in constant currency, driven by strong growth and G&A control. Operating profit as a percentage of net revenue was 13.5%, up over 150 basis points year-over-year, again driven by solid revenue growth and continued cost discipline. We continue to expect year-over-year improvement in people and places operating profit margin, resulting in strong double-digit growth and full-year operating profit.
Our advanced facilities unit which benefits from the investments in the life sciences, semiconductor and electric vehicle supply chains posted another quarter of double-digit revenue growth. We continue to monitor the macro demand trends across sectors that impact our advanced manufacturing clients and we continue to see robust demand from our life sciences clients, which comprised approximately two thirds of this business. In semiconductors, the evolving macro backdrop has led some smaller clients to evaluate project timing, but we remain confident in the long duration opportunity ahead for Jacobs. Our backlog and sales pipeline remains robust across a diverse set of customers and as a result, we continue to expect our advanced facilities growth rate to persist against very strong year-ago comparisons.
But people and places Americas unit reported record Q2 profit, which 30% year-over-year growth as our high-quality backlog begins to convert to revenue at improving incremental margins. We remain enthusiastic about our growth opportunities as backlog and sales pipelines remain robust as we compare to a stronger year-ago comparisons. In particular, our water sales pipeline of opportunities continues to shine up double-digits. Our International business Q2 revenue and operating profit were up single digits year-over-year, Asia Pacific and the Middle East continues to grow, driven by strong pipelines and transportation, cities and places and energy transition.
Moving to critical mission solutions, CMS benefits from. highly recurring multi year contracts that requires limited overhead support. The business is aligned to space exploration, national security, nuclear remediation priorities and US 5G telecom investments. Q2 revenue was up 5% year-over-year and up 7% in constant currency. CMS book-to-bill was just over 1.4 times, benefiting from the Kennedy award that we previously disclosed. As a result, backlog is up 8% year-over-year. The sales pipeline also remained strong with $30 billion in new opportunities that we are pursuing. In addition, we are awaiting award on $10 billion in new business opportunities that are in the end game select process. CMS gross profit margins improved sequentially due to mix. CMS operating profit and OP margin were both up sequentially from Q1 consistent with our previous guidance, but down slightly versus the very strong year-ago quarter. We expect operating margins to improve in the second-half of fiscal 2023 with full-year CMS margins expected to approach 8% on a full-year basis as we convert on an IDIQ pipeline of higher margin opportunities.
Moving to divergent solutions. Net revenue declined 3% year-over-year as we focus on quality growth opportunities that will translate into higher margins. We continue to expect net revenue growth to accelerate in the second-half of our fiscal year as we start to see growth from our investments in sales, data solutions and technology offerings. Operating profit for the — operating profit margin for the quarter was above our corporate average at 11.1%. During the quarter, we recognized a large license sale which expanded the margin by more than 300 basis points. Sales of these types of solutions are now a longer-term financial benefits of our divergent solution strategy and a core offering of the reporting units, although deals of this size should not be expected to recur every quarter. Even excluding the benefits of a license sale, the underlying margin momentum seen in Q2 continued to improve sequentially for our previous guidance. As a result, we expect divergent quarterly margins to approach 10% as we near the end of the fiscal year, the scale begins to further mitigate the impact of the continued investments for growth.
Turning to PA consulting, revenue from PA was up 1% year-over-year in US dollars, but up over 11% in local currency. PA once again reported a book-to-bill over 1 times. We continue to expect revenue growth in British pounds to remain near or above 10% during the second-half of fiscal 2023. Turning to profitability, Q2 operating profit margin for PA was 21.8%, up 370 basis points sequentially due to fixed-price milestone achievements and lower incentive costs. As PA continues to take actions to improve utilization, we expect OP margins to be around 20% in the back-half, relatively close to their year-to-date OP margin performance.
Our unallocated corporate costs were $60 million in Q2, and an increase over our previous run-rate estimate, driven by inflationary pressure and healthcare and digital investments. For the full-year, we now expect our quarterly run rate for the balance of the year and unallocated corporate costs to be in line with our Q2 level, driven by inflationary pressure in healthcare costs and incentive costs.
Turning to Slide 12 to discuss our cash flow and balance sheet. We posted another strong quarter of cash flow generation. This is indicative of the quality of earnings power and cash conversion capabilities. Free cash flow was $97 million, resulting in approximately a 100% conversion of net income into free cash flow for the first-half of fiscal year 2023. As a result, we are well-positioned to deliver our anticipated 100% reported and adjusted cash flow conversion targets for the full-year.
Regarding the deployment of our free-cash flow, we will remain agile and opportunistic in repurchasing shares. We ended the quarter with cash of $1.2 billion and a gross debt of $3.5 billion, resulting in just over $2.2 billion of net-debt. Our Q2 net-debt to 2023 expected adjusted EBITDA up approximately 1.4 times is a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment-grade credit profile. As of the end of Q2, approximately 60% of our debt is tied to floating-rate debt and our weighted-average interest-rate was 4.8%. In February, Jacobs completed the refinancing of existing debt and Jacobs inaugural issuance issuance of a $500 million sustainability-linked bond. The bond was priced at a competitive fixed-rate and includes a KPI aligned with Jacobs commitment to increased gender diversity in leadership positions and to substantially reduce our greenhouse gas emissions
For your benefit, in the appendix of this presentation we have included additional detail related to our debt maturities, interest rate derivatives and quarterly interest expense. Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend which increased 13% year-over-year, and which will be paid on June 23rd.
With that, I’ll now turn the call back over to Bob.
Bob Pragada — Chief Executive Officer
Thank you, Kevin. Turning to Slide 13. Due to our continued momentum across our business, we feel confident in our ability to reach our previously-stated objectives and narrow our outlook for FY’23 adjusted EBITDA to a range of $1.42 billion to $1.47 billion, and adjusted EPS to $7.25 to $7.45. Finally, with today’s announcement, we are reinforcing our continuous commitment to take proactive actions to create greater shareholder value as well as strategic and value-creating benefits for both future companies and their respective stakeholders.
Operator we will now open the call for questions.
Questions and Answers:
Operator
Thank you, Mr. Pragada. [Operator Instructions] We’ll take our first question this morning from Jamie Cook of Credit Suisse.
Jamie Cook — Credit Suisse — Analyst
Hi, good morning, and congratulations on a nice quarter. I guess my first question just sort of related to the spin. Can you just sort of help us talk through your decision to spin versus sell the asset and/or any sort of dis-synergies associated with spinning CMS business? And then I have a follow-up question after that.
Bob Pragada — Chief Executive Officer
Okay. So, maybe I’ll start off and then Kevin I’ll turn it over to you. With regards to the second part first Jamie. We do not see dis-synergies with the spin. Understand specifically, we were looking for the most optimal tax free benefit for our shareholders, as well as our confidence in the business that it has the credibility and the horsepower to operate successfully as an independent — an independent entity. So those were kind of the drivers we’re looking to obviously maximize shareholder value. Kevin, anything you want to add?
Kevin Berryman — President and Chief Financial Officer
Yeah, look. I think we’ve evaluated all alternatives and at the end of the day given the facts and circumstances that Bob has highlighted, we’re excited about the announcement of the spin. But as circumstances change or anything comes to light, we would certainly have to consider that because we are interested in maximizing shareholder value.
Jamie Cook — Credit Suisse — Analyst
And then I guess just my — my others just sort of — now that we’re sort of splitting the businesses, is there any way you could sort of frame how you think about longer-term or medium-term organic growth or margin targets associated with the different businesses as they sit today? Thank you.
Bob Pragada — Chief Executive Officer
Yes, maybe I’ll answer the first part of that and then you talk about margin targets, Kevin. So as far — as as far as our growth expectations for the business, they’re very strong and in line with what we articulated in our ’22 strategy for the segment reporting. So we feel the pipeline as well as the opportunities in front of us with the platform that we have looks very-very bright for the [Indecipherable]. Kevin, you want to add anything?
Kevin Berryman — President and Chief Financial Officer
Yeah, look, as we — as we’ve talked in the in the prepared remarks. As we look at the two businesses and we talk about 2022 kind of pro-forma, if we had done something, we had a 12% margin for the people and places business operating profit margin and about 8% for CMS. We think that our stand will ultimately allow the two incremental individual companies to focus on their respective opportunities and in a manner that allows for, if anything, an acceleration in growth. I do would like to say that in the event that the spin is able to be executed, we are — we do realize that there will be some incremental CMS public company costs that would have to be incurred, but we will think we will be to offset NIM and then some with our opportunities to streamline our two organizations.
Jamie Cook — Credit Suisse — Analyst
Okay, that’s very helpful. Thank you.
Operator
Thank you. We’ll go next now to Andy Kaplowitz at Citi.
Andy Kaplowitz — Citigroup — Analyst
Good morning, everyone.
Bob Pragada — Chief Executive Officer
Hi Andy.
Andy Kaplowitz — Citigroup — Analyst
Congrats on the announcement. Backlog continues to rise in P&PS, obviously there is some cross-currency given concerns around private spend, but state level governments I think continue to spend and you’ve talked about funding ramping from the fiscal Bill. So do you see backlog growth continuing there sequentially over-time? And can you sustain that 10% year-over-year constant-currency growth that you have in the segment?
Bob Pragada — Chief Executive Officer
Let me answer the backlog growth. Right now the way our pipeline is linked — is lining up, Andy, the answer is yes. We do see consistent opportunity to increase our backlog and grow the business. The 10% constant-currency growth on the topline, I think that’s going to be dependent on the phasing of the jobs, how these jobs come out specifically on the infrastructure side as well as in our private sector business. Those early phases of the job tend to be more study and higher-end consulting work. And then as we move through subsequent phases kind of where the larger revenue — the revenue opportunities are. So I wouldn’t — wouldn’t want to to go and say that that’s going to be a consistent quarterly topic, but definitely a target if you were to aggregate over a period of time.
Andy Kaplowitz — Citigroup — Analyst
Maybe a similar question with CMS. You’ve got — you did get a backlog uplift from Kennedy, and I think you mentioned that the pipeline is up double-digits, but how are you thinking about backlog in CMS moving forward? What is the risk that the debt ceiling debate could slow down bookings a bit for a couple of quarters?
Bob Pragada — Chief Executive Officer
Actually, we see we see the backlog potential in CMS being strong. The pipeline of work that we have and not just the rebid, but the new work that’s coming down the pipe, they provide some real opportunity for us to continue that backlog growth. So we feel — we feel confident about that.
Andy Kaplowitz — Citigroup — Analyst
Great. Thanks, Bob.
Operator
Thank you. We’ll go next now to Michael Dudas at Vertical Research Partners.
Michael Dudas — Vertical Research — Analyst
Good morning, gentlemen, and Claudia.
Claudia Jaramillo — Executive Vice President, Strategy & Corporate Development
Good morning.
Bob Pragada — Chief Executive Officer
Good morning.
Michael Dudas — Vertical Research — Analyst
So with regard to the spin and is there any of the businesses in CMS, I guess you’ve highlighted 5G maybe staying with the business, the automotive side, anything from CMS that may stay with Jacobs and maybe vice-versa, given some of the demands for security and issues that have been leveraged from CMS to your customer base on the P&PS side?
Bob Pragada — Chief Executive Officer
Yes, Michael, just to clarify one point, we didn’t — actually 5G and automotive are part of the CMS segment and that’s actually what we were reporting today. So I just wanted to clarify that point. I would say as far as what stage what goes, we’re early in that process and so to be direct and to provide clarity, it is the CMS segment today.
Michael Dudas — Vertical Research — Analyst
Got it, but could you still debating whether things could adjust between now and [Indecipherable] So that’s what understand?
Bob Pragada — Chief Executive Officer
No, we’re not. We’re not and so I just want to provide clarity on that.
Michael Dudas — Vertical Research — Analyst
Got it, terrific. Second question is, you — it seems like again in the last couple of quarters your new projects and new contracts in the backlog have come in at better margin rates than prior. I assume you anticipate that going-forward in both in all the segments and how do you see the execution of getting that margin from the backlog to the bottom line? Is that something that we can see more acceleration as we maybe track into fiscal year 2024?
Bob Pragada — Chief Executive Officer
Yeah, so on the on the margins themselves, I mean I think clearly it’s been a part of our strategy for not just ’22, but ’19 as well. We are in — we continue to going up the value chain for our clients and as we do that and we’re getting more into the higher-end consultancy work, we’re seeing the incremental effect on our our booked margin. As far as how that’s dropping into the bottom line I thinks two parts, Michael, that you’re highlighting. One is that kind of excellence in project delivery which has been a part of our DNA for decades. That continues to be high on our list on delivering only to our clients’ expectation, but within our financial expectations as we’re booking these jobs.
As far as the last part of your question on the timing of that dropping to the bottom line, we’re seeing a nice pace in the marketplace and this kind of goes to all segments of our business. After a period of time I think in the beginning of Q1 and maybe in back-half of last year, that was having an effect on our topline and some of our actuals to forecast back, that is reconciled back and intends to the performance this quarter. And so all indications that we’re getting from our clients is that that’s going to continue.
Michael Dudas — Vertical Research — Analyst
Excellent. Thanks, Bob.
Operator
We’ll go next now to Sean Eastman of KeyBanc Capital Markets.
Sean Eastman — KeyBanc Capital Markets — Analyst
Hi everyone. Thanks for taking my questions. First one is kind of high-level. Just rewinding to the Strategy Day from last year, we kind of got a vibe from that update that you guys were kind of embarking on a deeper integration of the business units with the Divergent Solutions segment kind of being a bridge. And today we’re kind of talking about it a more exciting outlook as separate entities. So I’m just curious what changed there? I hope that’s a fair question?
Bob Pragada — Chief Executive Officer
Yeah, Sean, we’re constantly looking at our portfolio and doing an evaluation on how we’re executing externally with our clients and the effect that that is having on advancing our strategy. So to reflect back on what we where we were before, I don’t think we’re doing anything that’s different from what we articulated in our strategy. And so we feel confident in the decision that we made today.
Sean Eastman — KeyBanc Capital Markets — Analyst
Okay, understood. And then relative to the divergent solutions dynamic between investing in growth and kind of releasing margins, any update post the review you guys did on how you’re balancing those two things?
Kevin Berryman — President and Chief Financial Officer
Well, look I think that we are continuing to invest in what we think is a great opportunity to enable divergent, actually people in places and PA to benefit for some of the overall investments being made and digital data capabilities for the total Jacobs. And so those investments continue, because we believe there is strong rationale for a very large return relative to that. So we’re not making any choices relative to those investments. We continue to make them and we’re confident in the ability that the scale is growing as it did in the quarter and how we communicated a sequential growth in terms of the topline, which will translate into a growth leverage factor that translates into margin improvement as we highlighted in our prepared remarks. Nothing has changed. We feel good about that. We see visibility forward to be able to do that. So investments continue and our growth is going to allow for us to get to the margin profile that we’ve communicated.
Sean Eastman — KeyBanc Capital Markets — Analyst
Understood. Appreciate. I’ll turn it over.
Operator
Thank you. We’ll next now to Bert Subin at Stifel.
Bert Subin — Stifel — Analyst
Hey, good morning. So your updated earnings guidance range is everything to contemplate maybe a slight above. Maybe a slightly more tempered growth path in the second-half of this fiscal year. Can you just walk us through what you see as the potential positive drivers that could get you a little closer to the high-end of $7.45 EPS? And then maybe highlight where your visibility is a little bit weaker.
Bob Pragada — Chief Executive Officer
Kevin, why don’t you start-off from a market standpoint, I’ll talk to that.
Kevin Berryman — President and Chief Financial Officer
Yeah, look, clearly as we look going-forward, I think there’s a couple of things to highlight. Certainly, got inflationary pressure on the medical costs. Now, ultimately we’re going to be able to pass that along to our clients. But in the short-term, certainly we’re seeing some some pressure in that. We saw in first-quarter. First-quarter is as you know, the last year of our medical plan. So we wanted to get a better read on our second-quarter, which now is in the next plan year. We continue to see that occurring in Q2. So we’re projecting that that’s going to continue through the full-year. So, assuming that that doesn’t happen, that obviously would be a positive. But right now that’s what our expectations are.
Our interest rates obviously are higher year-over-year and we think we’re at hopefully the top-end of kind of what the interest rate scenarios are going to look like in that, if anything, we’re going to be able to trend down. If that happens, we’re not counting on it, but certainly that would allow for us to be able to have some incremental performance in our EPS figures as well.
I think the underlying business is actually quite strong. And so absent some of these dynamics, I think putting it into context, we don’t really see a situation where our business is slowing.
Bob Pragada — Chief Executive Officer
Well said. I’m not going to add anything.
Bert Subin — Stifel — Analyst
Okay, great. And maybe just a follow-up to the CMS announcement. Now that you’re doing that portfolio rationalization, how should we think about capital allocation maybe over the next four quarters? Does the transaction now taking place for another year leads to maybe a more of a conservative view toward M&A and buybacks? Or you go full steam ahead here now that you have the plan underway?
Bob Pragada — Chief Executive Officer
Go ahead, Kevin, yeah go ahead.
Kevin Berryman — President and Chief Financial Officer
Somewhat, I think that clearly we have in front of us a lot of execution that is a really imperative for us to do well against, whether that be on our business, OSP, the actual execution of the spin of CMS. So that is clearly job number-one. Number two is because of that, certainly I think there is a elliptically a high bar right now from a financial, people, gross margin perspective as it relates to actually deploying additional capital in the M&A. Never say never, but we think the bar is pretty high at this particular moment.
So having said all of that, there certainly is opportunities to invest back in our shares as appropriate, and I think that you might want to think about that potentially happening over the course of the next several months.
Bob Pragada — Chief Executive Officer
Yeah I just want to add is, we really like what we got.
Bert Subin — Stifel — Analyst
Awesome. Thanks so much Bob and Kevin.
Operator
Well that’s now to Steven Fisher of UBS.
Steven Fisher — UBS — Analyst
Thanks, good morning. How should we think about the second-half ’24 timing for this spin. I think that’s within the normal range for these types of transactions, but still seems like it’s a bit long-dated. Is there any potential to accelerate that if it stays a spin and what are the factors there? Just curious if the debt ceiling discussions and continuing resolutions and federal budget, is that all a factor or is it more just the internal process?
Kevin Berryman — President and Chief Financial Officer
No, look. It is certainly a process both internal, but also external. So as you as you may be aware, the process of putting in place a structure in an organization that facilitates an ability on day-one to execute and manage a publicly-traded company is not inconsequential and so we’re not going to rush that process. And I think a 12 months to 18 months is actually a fairly aggressive stance in some respects. So I don’t think we’re going to be able if in fact it continues to be oriented around the spin, but do much better than that. But of course, we will do whatever we can to accelerate, for sure.
Steven Fisher — UBS — Analyst
Okay, thanks. And then P&PS is going to really be the biggest contributor to profits post-spin, so there’s going to be a lot of focus on that and particularly the margin, so just looking at the sequential margins this quarter were down in P&PS, but up 150 basis points year-over-year. It sounds like you think we should focus on the year-over-year there, but I’m curious about how we should think about mix within P&PS and how might that affect margins on a quarter-to-quarter basis.
Bob Pragada — Chief Executive Officer
Yes, Steve, a couple of things. One is that we were pretty clear last quarter that on a quarter-to-quarter, at least Q1 that had some — some project incentive releases that were one-time. Another way of saying, we need to really take a look at the year-over-year comparisons and then for all of us to be aware that we put margin targets out at our Strategy Day. And just to do kind of a mid term report on that, we are actually a year ahead of where we said we were going to be on our margin profile. So that’s a — look at it over a over the period of time, we’re up. So I hope that clarifies that.
Steven Fisher — UBS — Analyst
Okay. Thanks a lot, Bob.
Kevin Berryman — President and Chief Financial Officer
So one thing just just to crystallize and make sure that you caught it correctly. Our margins in CMS Q1 [Speech Overlap]
Bob Pragada — Chief Executive Officer
And as far as that continuing, Steve. I missed one part of your question. As far as that continuing, we evaluate based on our clients and trends that we’re seeing in the marketplace. And as we said in the script, those have been very-very strong in P&PS world. So we continue to have confidence in our business.
Steven Fisher — UBS — Analyst
Great, thank you.
Operator
Thank you. We’ll do next now to Chad Dillard of Alliance Bernstein.
Chad Dillard — Alliance Bernstein — Analyst
Hi, good morning guys. Just wanted to dig into the spin a little bit more. With the remaining Jacobs business, can you talk about like what the cash conversion profile looks like and how you think about capital allocation once the spin is done and if there is any potential gas that need to be filled on the capability side once it’s complete?
Kevin Berryman — President and Chief Financial Officer
So we’re early in our process, Chad. We do know that people and places and CMS both have good cash- low characteristics. Actually, people and places has a lower DSO level than the current CMS organization. So we’re working through all of that. We’ll provide incremental details relative to when we get to that space to really give greater clarity, but I think you’re going to see both businesses being robust in terms of their cash flow capabilities longer-term.
Bob Pragada — Chief Executive Officer
Yeah, and Chad on the second part that you asked about the capability. We feel strong that we’ve got a — we’ve got a strong — we feel strongly that we’ve got a really solid platform today. In areas where we continue to to innovate is around our digital platforms and our digital enablement and the partnership that we have with Palantir and with others, that is a — those are strong platforms in order to grow without making huge investments. So we’re really comfortable where we sit today.
Chad Dillard — Alliance Bernstein — Analyst
That’s helpful. And then second question on PA with respect to the margin, now you guys talked about operating margins getting to like the 20% range in the second-half. But maybe thinking a little bit longer-term, like to understand what’s the path to bringing it back to, I guess what your target range would be?
Kevin Berryman — President and Chief Financial Officer
I would say that we’re thinking longer-term that there is no cap ultimately at the 20% level. So our work to continue to drive with the management team and our ability to get back to margins that are north of 20% longer-term.
Chad Dillard — Alliance Bernstein — Analyst
Thanks.
Operator
And we’ll go next now to Michael Feniger of Bank of America.
Michael Feniger — Bank of America — Analyst
Hey guys, thanks for taking my question. I’m just curious, there is obviously headline that has someone brought up the government shutdown, but there’s also headlines with the House Bill potentially trying to repeal the IRA clean-energy tax incentives. Many thing that’s not likely, but I’m just curious on-the-ground through the channel on fieldwork. Are any of these headlines starting to slow part of the activity as these headlines pick-up, does it maybe push something out to the right in the near-term that we should be aware of?
Bob Pragada — Chief Executive Officer
So Michael, the short answer is no. IIJA, it’s where we made specific commentary about that in the script, has really started to incrementalize in our business and we can see it, not only in our pipeline but in our bookings. And it’s realizing itself in that would — that’s why we specifically called out P&PS Americas on the 30% year-over-year growth. So we’re not seeing that at all. And just one other just a clarifying point on IIJA it’s law, right? So as far as it being repealed, they would have to be significant — there have to be a new law and so we feel confident about that.
On some of these other items, those were actually in the early stages and we have not even — we have not seen the effects of those in our pipeline or n our work. So the fact that there is a debate about those now, it’s not really having that material effect on the business.
Michael Feniger — Bank of America — Analyst
Good to know. And just lastly, there was a comment about Europe. It seems that there’s some mixed signals, some positive, some negatives. What do you kind of seeing in Europe when we think of like the PA the P&PS business?
Bob Pragada — Chief Executive Officer
Yeah, interesting, are kind of separated between PA and P&PS. Our PA business in the UK specifically is actually growing and it’s been really-really strong and it’s kind of a testament to no different than Jacobs historically. Real strong capabilities in those areas of global priority and national priorities and it’s around the defense sector that PA has a strong relationship with MOD, as well as in energy and utilities, which in fact is turning into a security issue in broader Europe. So that’s really driving the PA business. What’s driving the PA and the P&PS business is the energy security issue in the broader continental Europe, as well as in Scandinavia and I’ll give you just one statistic.
A year-ago, two years ago of our UK platform which is really-really strong, about 90% of our folks that were based in the UK worked UK business. Today that that’s about 60/ 40 is where we have globe. We have our talent from the UK working on programs and projects and engagements all throughout Europe, as well as globally. And that goes into — Kevin and I have been really vocal about that over the course of the last three or four years about tying that global talent. So it doesn’t totally dampen the effect of some of the economic headwinds in Europe, but our diversity is helping in that front.
Michael Feniger — Bank of America — Analyst
Thank you.
Operator
Thank you. We’ll go next now to Gautam Khanna at Cowen.
Gautam Khanna — Cowen — Analyst
Yes, thank you, good morning, and congrats Kevin and Claudia.
Claudia Jaramillo — Executive Vice President, Strategy & Corporate Development
Thank you.
Kevin Berryman — President and Chief Financial Officer
Thank you.
Gautam Khanna — Cowen — Analyst
Yeah, I just wanted to go back to, I think it was the first question, in the Q&A on any sort of dis-synergies and I don’t mean quantitative necessarily, but are there any linkages that the CMS and PA or CMS and P&PS were able to just be more competitive on bids because you could the broader qualifications of the entire enterprise that might be lost and I was also thinking just when PA was acquired, I felt one of thrust was to bring them outside of the UK, which you just talked about, but into the US and into some of the government customers and does that potential opportunity maybe look less optimistic if CMS was not under the same roof. Thanks.
Bob Pragada — Chief Executive Officer
Yes, so, Gautam, it’s Bob. One of the things that — we looked at this really-really hard. And as far as the dis-synergies go, we we feel pretty confident that that’s not going to be of any materiality at all. Now that said, similar to what we’ve done in the past, our relationship post-spin with CMS is going to continue to be very strong. And so our ability to work together, collaborate and partner for the benefit of our client is going to continue to be there. So that’s always going to be there. In fact, we’ve demonstrated that in our history with previous divestiture that we did and that relationship continues to this day to be very-very strong.
On the PA outside of — outside of the UK, really that entrance into the US, which were in real-time and having success on, was around the private sector in the US, not that the government sector, and more specifically around energy and utilities and health and life sciences. And those those opportunities have continued to. In fact, today in the US we have probably 50 active pursuits with a lot of cases, bids in play with PA and we’re growing referring very confident about that.
Gautam Khanna — Cowen — Analyst
Thank you. If I might follow-up just on the decision to spin versus an outright sale, can you talk a little bit about what the tax basis of CMS would because presumably when you announce something like this that potential suitors would also be interested I would imagine. So what is the tax basis of the enterprise CMS?
Kevin Berryman — President and Chief Financial Officer
So we’ve we’ve evaluated all of the opportunities and depending upon if you were to do some type of other structure, will ultimately determine what the tax base basis is, but clearly if we did sometimes of other transaction there would be some tax implications that would occur. So the fact that we’ve centered around executing against spend is a tax-efficient way of addressing the opportunity to create two separate very strong companies. And so look, I think that’s how we’re executing. That’s our plan at this particular point in time. It takes a little bit of time given some of the discussions that we’ve had in the past, but that’s one of the reasons that we consider the spin to be a highly-attractive option. But as we go through the process and determine if we get any additional facts or circumstances that could change that, we’ll consider that because we are ultimately interested in ensuring that we maximize shareholder value.
Gautam Khanna — Cowen — Analyst
Thanks, guys.
Operator
Thank you. And we’ll take our final question this morning from Andy Wittmann of Baird.
Andy Wittmann — Baird — Analyst
Yeah. Great, thanks. So I was going to ask here on some of the capitalization, I guess, of new co and some of the cash cost to spin-off. So could you Kevin comment on what do you think a realistic range for cash costs to effectuate the spin would be, as well as your thoughts on where the debt was set? I would guess that you’d keep them rotable or similar leverage based on the relative EBITDAs. But I guess from a practical standpoint, I guess new co probably gets spun out with no debt and then would borrow and then pay like a cash dividend back to RemainCo to achieve the capitalization, so kind of a lot in here. But I guess, there is another aspect to it, which is as you range in new debt in today’s debt markets, what’s the what’s the net impact on interest expense from having to recapitalize new company.
Kevin Berryman — President and Chief Financial Officer
So the, I’ll make my first comment in response to your detailed questions is we remain committed to the Jacobs RemainCo, that it’s going to be investment-grade rating, so I think that gives you a a ground post that you can certainly evaluate what the potential options may or may not look like. The second thing I would say is, we’re a little bit too early in the process. We have kept this to a very small group of executives and team members up into this point in time and now we are as we publicly announced, we’re going to go through a very detailed thoughtful, disciplined process — I’ll answer all of these questions.
I do think that, that the way we would characterize the leverage factors, they’re going to be appropriate relative to the businesses in which they are. So I think I’ll just leave it there and I think you can interpret what that may or may not mean, but we think ultimately that there is an ability to have a standalone organization that is now CMS, which is going to have an ability to be quite successful longer-term and people and places PA and divergent, as well as the RemainCo Jacobs.
Andy Wittmann — Baird — Analyst
Got it and then I guess just for my follow-up. I think I’ve heard on your revenue outlook for divergence that you’re expecting good acceleration, maybe I missed it. But did you have a comment on the second-half revenue performance that you’re expecting for CMS? I think previously this business also was expected to see an acceleration. I just wanted to make sure I heard your latest on that one.
Kevin Berryman — President and Chief Financial Officer
Well, we didn’t really comment about CMS, although I think what I would focus on in CMS is really more about the margin, sequential improvement, which we think is really important as we get the business back to that level of 8% for the full-year, which is what we characterize. And so perhaps I’ll leave it there because we didn’t really talk about CMS numbers.
Andy Wittmann — Baird — Analyst
Okay, thanks.
Kevin Berryman — President and Chief Financial Officer
Still growing.
Bob Pragada — Chief Executive Officer
Very much growing.
Operator
Thank you. And Mr. Pragada, I’d like to turn things back to you, sir, for any closing comments this morning.
Bob Pragada — Chief Executive Officer
Yes, thank you. Its exciting — exciting times ahead. We’re really looking forward to what the future brings. Thank you everyone for joining the call and will be very pretty close to the market as things continue to develop and in progress. Thank you, everyone.
Operator
[Operator Closing Remarks]