JACOBS SOLUTIONS INC. General
The purpose of this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is to provide a narrative analysis explaining
the reasons for material changes in the Company's (i) financial condition from
the most recent fiscal year-end to July 2, 2021 and (ii) results of operations
during the current fiscal period(s) as compared to the corresponding period(s)
of the preceding fiscal year. In order to better understand such changes,
readers of this MD&A should also read:
•The discussion of the critical and significant accounting policies used by the
Company in preparing its consolidated financial statements. The most current
discussion of our critical accounting policies appears in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations of our
2020 Form 10-K, and the most current discussion of our significant accounting
policies appears in Note 2- Significant Accounting Polices in Notes to
Consolidated Financial Statements of our 2020 Form 10-K;
•The Company's fiscal 2020 audited consolidated financial statements and notes
thereto included in our 2020 Form 10-K; and
•Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our 2020 Form 10-K.
In addition to historical information, this MD&A and other parts of this
Quarterly Report on Form 10-Q may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements that do not directly relate to any historical or
current fact. When used herein, words such as "expects," "anticipates,"
"believes," "seeks," "estimates," "plans," "intends," "future," "will," "would,"
"could," "can," "may," and similar words are intended to identify
forward-looking statements. Examples of forward-looking statements include, but
are not limited to, statements we make concerning the potential continued
effects of the COVID-19 pandemic on our business, financial condition and
results of operations and our expectations as to our future growth, prospects,
financial outlook and business strategy for fiscal 2021 or future fiscal years
and the anticipated benefits of the strategic investment in PA Consulting . You
should not place undue reliance on these forward-looking statements. Although
such statements are based on management's current estimates and expectations,
and/or currently available competitive, financial, and economic data,
forward-looking statements are inherently uncertain, and you should not place
undue reliance on such statements as actual results may differ materially. We
caution the reader that there are a variety of risks, uncertainties and other
factors that could cause actual results to differ materially from what is
contained, projected or implied by our forward-looking statements. Such factors
include the magnitude, timing, duration and ultimate impact of the COVID-19
pandemic, including the emergence and spread of variants of COVID-19, and any
resulting economic downturn on our results, prospects and opportunities; the
timeline for easing or removing "shelter-in-place", "stay-at-home", social
distancing, travel restrictions and similar orders, measures or restrictions
imposed by governments and health officials in response to the pandemic, or if
such orders, measures or restrictions are re-imposed after being lifted or
eased, including as a result of increases in cases of COVID-19; the development,
effectiveness and distribution of vaccines or treatments for COVID-19; the
timing and scope of any government stimulus programs enacted in response to the
impacts of the COVID-19 pandemic, including, but not limited to, any proposed
infrastructure-related stimulus programs. The impact of such matters includes,
but is not limited to, the possible reduction in demand for certain of our
services and the delay or abandonment of ongoing or anticipated projects due to
the financial condition of our clients and suppliers or to governmental budget
constraints or changes to governmental budgetary priorities; the inability of
our clients to meet their payment obligations in a timely manner or at all;
potential issues and risks related to a significant portion of our employees
working remotely; illness, travel restrictions and other workforce disruptions
that could negatively affect our supply chain and our ability to timely and
satisfactorily complete our clients' projects; difficulties associated with
hiring additional employees or replacing any furloughed employees; increased
volatility in the capital markets that may affect our ability to access sources
of liquidity on acceptable pricing or borrowing terms or at all; and the
inability of governments in certain of the countries in which we operate to
effectively mitigate the financial or other impacts of the COVID-19 pandemic on
their economies and workforces and our operations therein. The foregoing factors
and potential future developments are inherently uncertain, unpredictable and,
in many cases, beyond our control. For a description of these and additional
factors that may occur that could cause actual results to differ from our
forward-looking statements, see those listed and discussed in Item 1A, Risk
Factors included in our 2020 Form 10-K and our Quarterly Reports on Form 10-Q.
We undertake no obligation to release publicly any revisions or updates to any
forward-looking statements. We encourage you to read carefully the risk factors,
as well as the financial and business disclosures contained in this Quarterly
Report on Form 10-Q and in other documents we file from time to time with the
United States Securities and Exchange Commission ("SEC").
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Impact of COVID-19 on Our Business
On March 11, 2020 , the World Health Organization characterized the outbreak of
the novel coronavirus ("COVID-19") as a global pandemic and recommended certain
containment and mitigation measures. On March 13, 2020 , the United States
declared a national emergency concerning the outbreak, and the vast majority of
states and many municipalities have declared public health emergencies or taken
similar actions. Along with these declarations, there were extraordinary and
wide-ranging actions taken by international, federal, state and local public
health and governmental authorities to contain and combat outbreaks of COVID-19
in regions across the United States and around the world. These actions included
quarantines and "stay-at-home" or "shelter-in-place" orders, social distancing
measures, travel restrictions, school closures and similar mandates for many
individuals in order to substantially restrict daily activities and orders for
many businesses to curtail or cease normal operations unless their work is
critical, essential or life-sustaining. Although certain jurisdictions have
taken steps to lift or ease such restrictions to various degrees, some
jurisdictions have subsequently reversed such lifting or easing in response to
increased cases of COVID-19. In addition, governments and central banks in the
United States and other countries in which we operate have enacted fiscal and
monetary stimulus and assistance measures to counteract the economic impacts of
COVID-19.
As it became clear that the pandemic was unparalleled in the rate of community
spread, we took early, decisive action to put people first, help flatten the
curve and take care of our clients and communities. In early March 2020 , we
swiftly restricted travel and established return protocols for both
client-related and personal travel. In 10 days, we successfully transitioned
more than 85% of our employees to a remote working environment to support
physical distancing. Where the essential and mission-critical nature of our work
requires us to maintain staff at certain sites or locations, we worked closely
with our clients and established project-specific plans designed to ensure the
safety of our people and the integrity of our operations. Using technology and
optimizing our networks, we continue to offer flexible work scenarios for our
people, and to deliver business continuity for and continued collaboration with
our clients. Our Executive Leadership Team met daily for the first three months
and weekly thereafter, focusing on transparency, agile response and business
resiliency; and our global and regional crisis management teams continued to
maintain consistent messaging and direct local responses. Our regular global
Town Halls, a weekly Chair and CEO email and short, self-produced leadership
videos are intended to share open, transparent information to connect and unite
our global community.
We are a company operating in a critical infrastructure industry, as defined by
the U.S. Department of Homeland Security . Consistent with international,
federal, state and local requirements to date, we continue to materially
operate. In addition, demand for certain of our services, including those
supporting health care relief efforts relating to COVID-19, has increased, and
could continue to increase, as a result of COVID-19. Notwithstanding our
continued critical operations, COVID-19 has negatively impacted our business,
and may have further adverse impacts, on our continued operations, including
those listed and discussed in Item 1A, Risk Factors included in our 2020 Form
10-K. Accordingly, we have reduced spending broadly across the Company, only
proceeding with operating and capital spending that is critical. We also
temporarily ceased all non-essential hiring and reduced discretionary expenses,
including temporarily suspending certain employee benefits and compensation
through the end of fiscal 2020. Looking ahead, we have developed contingency
plans to reduce costs further if the situation further deteriorates or lasts
longer than current expectations. We will continue to actively monitor the
situation and may take further actions that alter our business operations as may
be necessary or appropriate for the health and safety of employees, contractors,
customers, suppliers or others or as required by international, federal, state
or local authorities.
Based on current estimates, we expect the impact of COVID-19 to continue
throughout fiscal 2021, although to a lesser degree than what was seen in fiscal
2020. Although this business disruption is expected to be temporary, significant
uncertainty exists concerning the magnitude, duration and impacts of the
COVID-19 pandemic, including with regard to the effects on our customers and
customer demand for our services. Accordingly, actual results for future fiscal
periods could differ materially versus current expectations and current results
and financial condition discussed herein may not be indicative of future
operating results and trends.
For a discussion of risks and uncertainties related to COVID-19, including the
potential impacts on our business, financial condition and results of
operations, see Item 1A - Risk Factors contained in our 2020 Form 10-K.
Business Overview
At Jacobs, we're challenging today to reinvent tomorrow by solving the world's
most critical problems for thriving cities, resilient environments,
mission-critical outcomes, operational advancement, scientific discovery and
cutting-edge manufacturing.
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We operate in three lines of business: Critical Mission Solutions, People &
Places Solutions and our new investment in PA Consulting . Our business
transformation over the last several years includes the $3.2 billion acquisition
of CH2M Hill Companies, Ltd. ("CH2M"), the $3.4 billion divestiture of the
Company's Energy, Chemicals and Resources business and the $1.7 billion
investment in PA Consulting Group Limited ("PA Consulting "). Our acquisitions of
KeyW Holding Corporation ("KeyW"), John Wood Group's nuclear business and
Buffalo Group LLC ("Buffalo Group "), further position us in high-value
government services and technology-enabled solutions.
Revenue by Type (Q3 FY2021)1
[[Image Removed: jec-20210702_g1.jpg]]
1 Due to COVID-19 and the actions taken by governmental authorities and others
related thereto, some of the information provided in this summary relating to
sources of revenue could be substantially different in the remainder of fiscal
2021.
Lines of Business
The Company's three operating segments and global lines of business ("LOBs") are
as follows: (i) Critical Mission Solutions, (ii) People & Places Solutions and
(iii) the new investment in PA Consulting .
Critical Mission Solutions (CMS)
Our Critical Mission Solutions line of business provides a full spectrum of
cyber, data analytics, systems and software application integration services and
consulting, enterprise level operations and maintenance and mission IT,
engineering and design, enterprise operations and maintenance, program
management, and other highly technical consulting solutions to government
agencies as well as commercial customers and international markets. Across
multiple businesses within CMS, we license internally developed technology such
as KeyRadar®, Ginkgo and ion©.
Our representative clients include the U.S. Department of Defense (DoD ), the
Combatant Commands, the U.S. Intelligence Community , NASA, the U.S. Department
of Energy (DoE), Ministry of Defence in the U.K. , Nuclear Decommissioning
Authority (NDA), and the Australian Department of Defence , as well as private
sector customers mainly in the aerospace, automotive, energy and telecom
sectors.
Within the nuclear sector, our customers have decades-long initiatives to
manage, upgrade, decommission and remediate existing energy infrastructure.
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The U.S. government is the world's largest buyer of technical services, and in
fiscal 2020, approximately 79% of CMS's revenue was earned from serving the DoD ,
intelligence community and federal civilian governmental entities. In fiscal
2020, approximately 8% of CMS's revenue was from various U.S. commercial
sectors, including the telecommunications sector, which anticipates a large
cellular infrastructure build-out from 4G to 5G technology. Our international
customers, which accounted for 13% of fiscal 2020 revenue, have also increased
demand for our IT and cybersecurity solutions and nuclear projects, and the U.K.
Ministry of Defence continues to focus on accelerating its strategic innovative
and technology focused initiatives.
People & Places Solutions (P&PS)
Jacobs' People & Places Solutions line of business provides end-to-end solutions
for our clients' most complex challenges - whether climate change, energy
transition, connected mobility, integrated water management, smart cities or
vaccine manufacturing. In doing so, we incorporate the full spectrum of data
science and technology-enabled toolsets within a human-centric solution
development and delivery framework that embraces inclusive engagement of
partners and stakeholders and generates enduring social equity/value as part of
consulting, planning, architecture, design and engineering project outcomes, as
well as long-term operation of facilities and infrastructure. Solutions may be
delivered as standalone engagements or through comprehensive program management
that integrates disparate workstreams to yield additional benefits and
efficiencies not attainable through project-by-project implementation. We also
provide progressive design-build and construction management at-risk delivery
solutions in targeted markets.
Our clients include national, state and local government in the U.S. , Canada ,
Europe , U.K. , Middle East , Australia , New Zealand and Asia , as well as
multinational private sector clients throughout the world.
PA Consulting
Jacobs recently invested in a 65% stake in PA Consulting . PA provides consulting
services based on its purpose: Bringing Ingenuity to Life. Its diverse teams of
experts combine innovative thinking and breakthrough use of technologies to
progress further, faster. PA's clients adapt and transform and achieve enduring
results. An innovation and transformation consultancy, PA has 3,300 specialists
in consumer and manufacturing, defense and security, energy and utilities,
financial services, government, health and life sciences, and transport. PA
people are strategists, innovators, designers, consultants, digital experts,
scientists, engineers and technologists. The team operates globally from offices
across the UK , US, Netherlands and Nordics.
Energy, Chemicals and Resources (ECR)
ECR Disposition
On April 26, 2019 , Jacobs completed the sale of its ECR business to Worley
Limited, a company incorporated in Australia ("Worley"), for a purchase price of
$3.4 billion consisting of (i) $2.8 billion in cash plus (ii) 58.2 million
ordinary shares of Worley, subject to adjustments for changes in working capital
and certain other items (the "ECR sale").
As a result of the ECR sale, substantially all ECR-related assets and
liabilities were sold (the "Disposal Group "). We determined that the disposal
group should be reported as discontinued operations in accordance with ASC
210-05, Discontinued Operations because their disposal represented a strategic
shift that had a major effect on our operations and financial results. As such,
the assets and liabilities of the ECR business were reflected as held-for-sale
in the Consolidated Balance Sheets through September 27, 2019 . As of the year
ended October 2, 2020 , all of the ECR business to be sold under the terms of the
ECR sale had been conveyed to Worley and as such, no amounts remain held for
sale. For further discussion see Note 17- Sale of Energy, Chemicals and
Resources ("ECR") Business to the consolidated financial statements.
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Results of Operations for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020
Revenues $ 3,576,436 $
3,260,057
(2,759,501) (2,631,031) (8,290,137) (8,125,554)
Gross profit 816,935 629,026 2,216,007 1,921,732
Selling, general and administrative expenses (553,189) (434,650) (1,779,435) (1,408,232)
Operating Profit 263,746 194,376 436,572 513,500
Other Income (Expense):
Interest income 1,001 1,249 2,733 3,180
Interest expense (20,011) (18,193) (52,788) (48,163)
Miscellaneous income (expense), net 38,658 126,249 138,705 (87,470)
Total other income (expense), net 19,648 109,305 88,650 (132,453)
Earnings from Continuing Operations Before
Taxes 283,394 303,681 525,222 381,047
Income Tax Expense from Continuing Operations (109,186) (67,674) (175,437) (75,041)
Net Earnings of the Group from Continuing
Operations 174,208 236,007 349,785 306,006
Net Earnings of the Group from Discontinued
Operations 384 18,043 11,690 125,511
Net Earnings of the Group 174,592 254,050 361,475 431,517
Net Earnings Attributable to Noncontrolling
Interests from Continuing Operations (9,182) (9,121) (29,366) (21,662)
Net Loss Attributable to Redeemable
Noncontrolling interests 384 - 101,776 -
Net Earnings Attributable to Jacobs from
Continuing Operations 165,410 226,886 422,195 284,344
Net Earnings Attributable to Jacobs $ 165,794 $ 244,929 $ 433,885 $ 409,855
Net Earnings Per Share:
Basic Net Earnings from Continuing Operations
Per Share $ 0.83 $ 1.74 $ 2.80 $ 2.15
Basic Net Earnings from Discontinued
Operations Per Share $ - $ 0.14 $ 0.09 $ 0.95
Basic Earnings Per Share $ 0.83 $ 1.88 $ 2.89 $ 3.11
Diluted Net Earnings from Continuing
Operations Per Share $ 0.82 $ 1.73 $ 2.78 $ 2.13
Diluted Net Earnings from Discontinued
Operations Per Share $ - $ 0.14 $ 0.09 $ 0.94
Diluted Earnings Per Share $ 0.83 $ 1.87 $ 2.87 $ 3.08
Page 44-------------------------------------------------------------------------------- Overview - Three and Nine Months EndedJuly 2, 2021 COVID-19 Pandemic. There are many risks and uncertainties regarding the COVID-19 pandemic, including the anticipated duration of the pandemic and the extent of local and worldwide social, political, and economic disruption it may cause. The Company's operations for the third fiscal quarter of 2021 were adversely impacted by COVID-19. While certain business units ofCritical Mission Solutions, People &Places Solutions and PA Consulting have experienced, and may continue to experience, an increase in demand for certain of their services regarding new projects that may arise in response to the COVID-19 pandemic, it is still expected that COVID-19 is likely to continue to have an adverse impact on each of Critical Missions Solutions, People &Places Solutions and PA Consulting continuing through the remainder of fiscal 2021 and into fiscal 2022, although to a lesser degree than what was seen in fiscal 2020. For a discussion of risks and uncertainties related to COVID-19, including the potential impacts on the Company's business, financial condition and results of operations, see "Part I - Item 1A - Risk Factors" of our 2020 Form 10-K. Net earnings attributable to the Company from continuing operations for the third fiscal quarter endedJuly 2, 2021 were$165.4 million (or$0.82 per diluted share), a decrease of$61.5 million , or 27.1%, from net earnings of$226.9 million (or$1.73 per diluted share) for the corresponding period last year. Overall favorable operating profit improvements during the current quarter compared to the last year benefited from ourPA Consulting and Buffalo investing activities in the current year as well as operating profit results in our legacy businesses. However this favorability was offset by comparatively unfavorable results in miscellaneous income (expense), net, for the quarter, with lower appreciation gains associated with our investment in Worley stock and certain foreign currency revaluations relating to the ECR sale of$29.1 million after-tax in comparison to$93.3 million in the third quarter fiscal 2020. During the current year quarter, an additional$30.8 million in additional income tax expense was recognized for a revaluation of the deferred tax asset and liabilities in connection with a statutory tax rate increase in theUK . Also, during third quarter 2021 the Company's reported earnings per share was impacted by an unfavorable$(0.44) related to an allocation update between preferred and common shares for thePA Consulting investment as required underU.S. GAAP. This per share impact had no impact to the total consideration of the transaction and had no impact on the Company's results of operations, financial position or cash flows; see Note 15 - PA Consulting Business Combination in the consolidated financial statements. Net earnings attributable to the Company from discontinued operations for the third fiscal quarter endedJuly 2, 2021 were$0.4 million (or$0.00 per diluted share), a decrease of$17.7 million , or 97.9%, from earnings of$18.0 million (or$0.14 per diluted share) for the corresponding period last year. Included in the prior year period was the recognition of the deferred gain for the delayed conveyance of the international entities and adjustments for working capital and certain other items in connection with the ECR sale. For further discussion, see Note 17- Sale of Energy, Chemicals and Resources ("ECR") Business. For the nine months endedJuly 2, 2021 , net earnings attributable to the Company from continuing operations were$422.2 million (or$2.78 per diluted share), an increase of$137.9 million , or 48.5%, from$284.3 million (or$2.13 per diluted share) for the corresponding period last year. While favorable underlying operating profit improvements for the nine month period in 2021 benefited from ourPA Consulting and Buffalo investing activities as well as from underlying operating profit improvement in our legacy businesses, this was offset by the impact of a one-time post-completion compensation expense charge associated with thePA Consulting transaction of$261 million as reported in selling, general and administrative expenses in the current year. Additionally, included in the Company's reported results in miscellaneous income (expense), net from continuing operations for the nine months endedJuly 2, 2021 were$77.6 million in after-tax unrealized appreciation gains recorded in miscellaneous income (expense), net, associated with our investment in Worley stock (net of Worley stock dividend) and certain foreign currency revaluations relating to the ECR sale, as well as after-tax realized gains associated with the sale of our investment in C3 of$37.4 million as further discussed Note 11 - Joint Ventures, VIEs and Other Investments. In comparison, miscellaneous income (expense), net for the corresponding 2020 period included$90.4 million in after-tax fair value losses associated with our investment in Worley stock (net of Worley stock dividend) and certain foreign currency revaluations relating to the ECR sale. Further, a$31.5 million after-tax other-than-temporary impairment was recorded for our AWE investment. Also, as mentioned above, the current year to date period also includes additional income tax expense attributable to the tax rate increase in theUK of$30.8 million , as well as the$(0.44) per share impact of the value allocation update between preferred and common shares for thePA Consulting investment. Page 45 -------------------------------------------------------------------------------- For the nine months endedJuly 2, 2021 , net earnings attributable to the Company from discontinued operations were$11.7 million (or$0.09 per diluted share), a decrease of$113.8 million , or 90.7%, from$125.5 million (or$0.94 per diluted share) for the corresponding period last year. Included in net earnings attributable to Jacobs from discontinued operations for the current year to date period was the pre-tax gain amount of approximately$16 million associated with the final working capital settlement with Worley in connection with the ECR sale. Also, the comparative 2020 year to date period included the settlement of the Nui Phao ("NPMC") legal matter that was reimbursed by insurance, the recognition of the deferred gain for the delayed conveyance of the international entities and for the delivery of the ECR IT assets and adjustments for working capital and certain other items in connection with the ECR sale. For further discussion, see Note 17 - Sale of Energy, Chemicals and Resources ("ECR") Business. OnMarch 2, 2021 , Jacobs completed the strategic investment of a 65% interest inPA Consulting . For further discussion, see Note 15 - PA Consulting Business Combination. OnNovember 24, 2020 , Jacobs completed the acquisition ofBuffalo Group . For further discussion, see Note 16- Other Business Combinations. Consolidated Results of Operations Revenues for the third fiscal quarter of 2021 were$3.58 billion , an increase of$316.4 million , or 9.7% from$3.26 billion for the corresponding period last year. For the nine months endedJuly 2, 2021 , revenues were$10.51 billion , an increase of$458.9 million , or 4.6%, from$10.05 billion for the corresponding period last year. The increase in revenues for the year over year periods was partly due to fiscal 2021 incremental revenues from thePA Consulting investment and theBuffalo Group and John Wood Group Nuclear business acquisitions. In addition, revenue growth benefited from favorable foreign currency translation of$100.2 million and$213.1 million for the three and nine month periods endedJuly 2, 2021 , respectively, in our international businesses, which was partially offset by market conditions and certain contract wind downs in ourU.S. businesses as compared to unfavorable impacts of$27.4 million and$63.1 million for the corresponding periods last year. Pass-through costs included in revenues for the three and nine months endedJuly 2, 2021 amounted to$612.0 million and$1.84 billion , respectively, an increase of$33.3 million and decrease of$(84.5) million , or 5.8% and (4.4)%, from$578.7 million and$1.92 billion from the corresponding periods last year. Gross profit for the third quarter of 2021 was$816.9 million , an increase of$187.9 million , or 29.9%, from$629.0 million from the corresponding period last year. Our gross profit margins were 22.8% and 19.3% for the three months endedJuly 2, 2021 andJune 26, 2020 , respectively, with these trend differences being mainly attributable to favorable margin trends from our recentPA Consulting investment, theBuffalo Group and the John Wood Group nuclear business acquisitions along with favorable foreign currency translation impact in our international businesses, offset in part by higher overhead rate impacts on revenue. Gross profit for the nine months endedJuly 2, 2021 was$2.22 billion , an increase of$294.3 million , or 15.3%, from$1.92 billion from the corresponding period to date last year. Our gross profit margins were 21.1% and 19.1% for the nine months endedJuly 2, 2021 andJune 26, 2020 , respectively, with these trend differences being mainly attributable to the recent business acquisitions mentioned above along with favorable foreign currency translation impact in our international businesses and offset in part by higher overhead rate impacts mentioned above. See Segment Financial Information discussion for further information on the Company's results of operations at the operating segment. SG&A expenses for the three and nine months endedJuly 2, 2021 were$553.2 million and$1.78 billion , respectively, an increase of$118.5 million and$371.2 million , or 27.3% and 26.4%, from$434.7 million and$1.41 billion for the corresponding periods last year. The current year's three and nine months ended results were impacted by incremental SG&A expenses from the recent business acquisitions mentioned above and higher personnel-related costs, partly offset by lower other operational overhead costs. Additionally, higher Restructuring and other charges for the nine-month period of 2021 were mainly attributable to post-completion compensation expense of$261 million in connection with the investment inPA Consulting . Incremental SG&A expenses from the above-mentioned business acquisitions have been offset in part by continued reductions in personnel-related and other overhead costs resulting from our ongoing cost reduction programs. Unfavorable impacts on SG&A expenses from foreign exchange were$19.3 million and$66.7 million , respectively, for the three and nine months endedJuly 2, 2021 as compared to favorable impacts of$5.7 million and$12.4 million for the corresponding periods last year. Net interest expense for the three and nine months endedJuly 2, 2021 was$19.0 million and$50.1 million , respectively, an increase of$2.1 million and$5.1 million from$16.9 million and$45.0 million for the corresponding Page 46 -------------------------------------------------------------------------------- periods last year. The increase in net interest expense for the three and nine month periods year over year is due to higher levels of average debt outstanding relating in part to the funding of thePA Consulting investment, partially offset by lower interest rates. Miscellaneous income (expense), net for the three and nine months endedJuly 2, 2021 was$38.7 million and$138.7 million , respectively, in comparison to$126.2 million and$(87.5) million , respectively, for the corresponding periods last year. The$87.6 million decrease from the prior year three-month period was due primarily to comparatively lower pre-tax unrealized appreciation gains on the Worley stock (net of dividends) and certain foreign currency revaluations relating to the ECR sale. For the nine-month period comparison, the$226.2 million improvement was associated mainly with higher comparative results from current year performance of the Worley investment related activities mentioned above versus the prior year and was also attributable to pre-tax realized gains of$49.6 million related to holdings of our C3 shares sold during the period, as further discussed in Note 11 - Joint Ventures, VIEs and Other Investments. These favorable impacts for the nine month period of 2021 were partially offset by an other-than-temporary impairment on its investment in AWE in the amount of$38.9 million . The Company's effective tax rates from continuing operations for the three months endedJuly 2, 2021 andJune 26, 2020 were 38.5% and 22.3%, respectively. The Company's effective tax rate from continuing operations for the three months endedJuly 2, 2021 was higher than the corresponding rate in the prior period primarily due to a tax expense of$30.8 million attributable to a revaluation of the deferred tax asset and liabilities for a tax rate increase in theUK during the current quarter, with offsetting benefits of$2.2 million for the release of uncertain tax positions due to the statute of limitations expiring and$0.9 million of Internal Revenue Code section 179D energy credit. Comparatively, for the three months endedJune 26, 2020 , the Company had a$12.6 million benefit for the release of a valuation allowance in theUK .The Company's effective tax rates from continuing operations for the nine months endedJuly 2, 2021 andJune 26, 2020 were 33.4% and 19.7%, respectively. The Company's effective tax rate from continuing operations for the nine months endedJuly 2, 2021 was higher than the corresponding rate in the prior period primarily due to the revaluations of deferred tax assets and liabilities for the tax rate increase in theUK mentioned above and$15.0 million attributable to US foreign inclusions in the current year. Also contributing to the higher year to date rate is the absence of a prior year favorable benefit of$5.8 million from amended returns for foreign tax credits and research and development credits, a$4.1 million benefit related to anIndia withholding tax rate change and$7.0 million benefit from an Internal Revenue Code section 179D energy credit for the period endingJune 26, 2020 . The current year increase was further offset by a$4.2 million excess tax benefit attributable to stock compensation and a$12.1 million benefit related to a change in the Company's assertion about indefinite reinvestment of certain foreign unremitted earnings inCanada andIndia . See Note 17 - Sale of Energy, Chemicals and Resources ("ECR") Business for further information on the Company's discontinued operations reporting for the sale of the ECR business. The amount of income taxes the Company pays is subject to ongoing audits by tax jurisdictions around the world. In the normal course of business, the Company is subject to examination by tax authorities throughout the world, including such major jurisdictions asAustralia ,Canada ,India ,the Netherlands , theUnited Kingdom andthe United States . Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. The Company believes that it has adequately provided for reasonably foreseeable outcomes related to these matters. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate. Page 47 -------------------------------------------------------------------------------- Segment Financial Information The following table provides selected financial information for our operating segments and includes a reconciliation of segment operating profit to totalU.S. GAAP operating profit from continuing operations by including certain corporate-level expenses, Restructuring and other charges and transaction and integration costs (in thousands). Three Months Ended Nine Months Ended July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020 Revenues from External Customers: Critical Mission Solutions$ 1,218,089 $
1,211,143
2,102,550 2,048,914 6,329,088 6,410,308
PA Consulting 255,797 - 354,107 -
Total $ 3,576,436 $ 3,260,057 $10,506,144 $10,047,286
Three Months Ended Nine Months Ended
July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020
Segment Operating Profit:
Critical Mission Solutions $ 108,131 $
89,608
205,324 190,453 603,654 557,864
PA Consulting 56,791 - 84,708 -
Total Segment Operating Profit 370,246 280,061 1,020,495 822,187
Other Corporate Expenses (1) (104,532) (65,213) (238,198) (193,148)
Restructuring, Transaction and Other
Charges (2) (1,968) (20,472) (345,725) (115,539)
Total U.S. GAAP Operating Profit 263,746 194,376 436,572 513,500
Total Other Income (Expense), net (3) 19,648 109,305 88,650 (132,453)
Earnings Before Taxes from Continuing
Operations $ 283,394 $
303,681
(1) Other corporate expenses also include intangibles amortization of
respectively, and
2021 and
(2) Included in the three and nine months ended
(3) The three and nine months ended
Worley stock (net of Worley stock dividend) and certain foreign currency
revaluations relating to the ECR sale,
in fair value adjustments related to our investment in C3 stock. The nine months
ended
revenues under the Company's
respectively, and
adjustments related to our investment in Worley stock (net of Worley stock dividend)
and certain foreign currency revaluations relating to the ECR sale.
Critical Mission Solutions
Three Months Ended Nine Months Ended
July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020
Revenue $ 1,218,089 $ 1,211,143 $ 3,822,949 $ 3,636,978
Operating Profit $ 108,131 $ 89,608 $ 332,133 $ 264,323
Page 48-------------------------------------------------------------------------------- Critical Mission Solutions (CMS) segment revenues for the three and nine months endedJuly 2, 2021 were$1.22 billion and$3.82 billion , respectively, an increase of$6.9 million and$186.0 million , or 0.6% and 5.1%, from$1.21 billion and$3.64 billion for the corresponding periods last year. The increase in revenue was attributable mainly to incremental revenue from theBuffalo Group acquisition for the three and nine-month periods and also the John Wood Group nuclear business acquisition for the nine month period. There was also comparable revenue growth from most elements of our legacy portfolio, driven by increased spending by customers in theU.S. government business sector and our legacy international clients, mitigated by several large contracts winding down in theU.S. Impacts on revenues from favorable foreign currency translation were approximately$26.6 million and$54.2 million for the three and nine month periods endedJuly 2, 2021 , respectively, compared to$7.0 million and$13.4 million in unfavorable impacts, respectively, in the corresponding prior year periods. Operating profit for the segment was$108.1 million and$332.1 million , respectively, for the three and nine months endedJuly 2, 2021 , an increase of$18.5 million and$67.8 million , or 20.7% and 25.7%, from$89.6 million and$264.3 million for the corresponding periods last year. The increase from the prior year was attributable to incremental operating profit from theBuffalo Group acquisition for the three and nine-month periods and also the John Wood Group nuclear business acquisition for the nine month period and the continued growth in profits from ourU.S. governmental business sector and our legacy international business. Impacts on operating profit from favorable foreign currency translation were approximately$4.3 million and$8.8 million for the three and nine months endedJuly 2, 2021 , respectively, compared to immaterial impacts in the corresponding prior year periods. People & Places Solutions Three Months Ended Nine Months Ended July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020 Revenue$ 2,102,550 $ 2,048,914 $ 6,329,088 $ 6,410,308 Operating Profit$ 205,324 $ 190,453 $ 603,654 $ 557,864 Revenues for the People & Places Solutions (P&PS) segment for the three and nine months endedJuly 2, 2021 were$2.10 billion and$6.33 billion , respectively, an increase of$53.6 million and a decrease of$(81.2) million , or 2.6% and (1.3)%, from$2.05 billion and$6.41 billion for the corresponding periods last year. The revenue growth for the three months endedJuly 2, 2021 was primarily driven by$73.6 million in favorable foreign currency translation in our international businesses which was partially offset by softer market conditions in theU.S. businesses. For the nine months endedJuly 2, 2021 , volume decreases in ourU.S. markets and our advanced facilities business were partially offset by$158.9 million in favorable foreign currency translation in our international businesses. Comparatively, unfavorable impacts on revenues from foreign currency translation were approximately$20.3 million and$49.6 million , respectively, for the three and nine month periods endedJune 26, 2020 . Operating profit for the segment for the three and nine months endedJuly 2, 2021 were$205.3 million and$603.7 million , respectively, an increase of$14.9 million and$45.8 million , or 7.8% and 8.2%, from$190.5 million and$557.9 million for the corresponding periods last year. The year-over-year increase in operating profit for the three months endedJuly 2, 2021 was driven by higher revenues which more than offset an increase in labor-related expenses as the Company moderated COVID-19 mitigation efforts from the prior year. For the nine months endedJuly 2, 2021 , operating profit increased relative to the prior year period due to lower spend on travel, real estate and discretionary expenditures. Impacts on operating profit from favorable foreign currency translation were approximately$13.9 million and$27.7 million for the three and nine month periods endedJuly 2, 2021 , compared to$4.5 million and$8.9 million in unfavorable impacts, respectively, in the corresponding prior year periods. Page 49 --------------------------------------------------------------------------------
PA Consulting Three Months Ended Nine Months Ended July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020 Revenue$ 255,797 $ -$ 354,107 $ - Operating Profit$ 56,791 $ -$ 84,708 $ - Revenues for thePA Consulting segment for the three and nine months endedJuly 2, 2021 were$255.8 million and$354.1 million . Operating profit for the segment for the three and nine months endedJuly 2, 2021 was$56.8 million and$84.7 million . There were no comparable periods in the prior year, given the transaction closed onMarch 2, 2021 . Other Corporate Expenses Other corporate expenses for the three and nine months endedJuly 2, 2021 were$104.5 million and$238.2 million an increase of$39.3 million and$45.1 million from$65.2 million and$193.1 million for the corresponding periods last year. This increase was due primarily to higher intangible amortization expense from thePA Consulting investment and theBuffalo Group and John Wood Group nuclear business acquisitions, as well as impacts from Company benefit program enhancements. These increases were partly offset by employee related and other cost reductions across the Company's corporate functions. Included in other corporate expenses in the above table are costs and expenses which relate to general corporate activities as well as corporate-managed benefit and insurance programs. Such costs and expenses include: (i) those elements of SG&A expenses relating to the business as a whole; (ii) those elements of our incentive compensation plans relating to corporate personnel whose other compensation costs are not allocated to the LOBs; (iii) the amortization of intangible assets acquired as part of business combinations; (iv) the quarterly variances between the Company's actual costs of certain of its self-insured integrated risk and employee benefit programs and amounts charged to the LOBs; and (v) certain adjustments relating to costs associated with the Company's international defined benefit pension plans. In addition, other corporate expenses may also include from time to time certain adjustments to contract margins (both positive and negative) associated with projects, as well as other items, where it has been determined that such adjustments are not indicative of the performance of the related LOB. Restructuring and Other Charges See Note 18- Restructuring and Other Charges for information on the Company's activity relating to restructuring and other charges. Backlog Information We include in backlog the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Our policy with respect to Operations & Maintenance ("O&M") contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For national government programs (other than national government O&M contracts, which are subject to the same policy applicable to all other O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, excluding option periods. Because of variations in the nature, size, expected duration, funding commitments, and the scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts. Consistent with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client, including ourU.S. government work. While management uses all information available to determine backlog, at any given time our backlog is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein. Backlog is not necessarily an indicator of future revenues. Because certain contracts (e.g., contracts relating to large Engineering, Procurement & Construction ("EPC") projects as well as national government programs) can cause large increases to backlog in the fiscal period in which we recognize the award, and because many of our contracts require us to provide services that span over several fiscal Page 50 -------------------------------------------------------------------------------- quarters (and sometimes over fiscal years), we evaluate our backlog on a year-over-year basis, rather than on a sequential, quarter-over-quarter basis. The following table summarizes our backlog atJuly 2, 2021 andJune 26, 2020 (in millions): July 2, 2021 June 26, 2020 Critical Mission Solutions$ 9,565 $ 9,066 People & Places Solutions 15,557 14,608 PA Consulting 314 - Total$ 25,436 $ 23,674 The increase in backlog in Critical Mission Solutions (CMS) fromJune 26, 2020 was primarily the result of the acquisition of theBuffalo Group and conversion of the other robust CMS pipeline. The increase in backlog in People & Places Solutions (P&PS) fromJune 26, 2020 was primarily the result of new awards in theU.S. markets. Backlog inPA Consulting as ofJuly 2, 2021 was$314.0 million .The PA Consulting transaction closed onMarch 2, 2021 . Consolidated backlog differs from the Company's remaining performance obligations as defined by ASC 606 primarily because of our national government contracts (other than national government O&M contracts). Our policy is to generally include in backlog the full contract award unless materially large, whether funded or unfunded excluding the option periods while our remaining performance obligations represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. Additionally, the Company includes our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligations. Liquidity and Capital Resources AtJuly 2, 2021 , our principal sources of liquidity consisted of$966.1 million in cash and cash equivalents and$1.73 billion of available borrowing capacity under our$2.25 billion revolving credit agreement (the "Revolving Credit Facility"). We finance much of our operations and growth through cash generated by our operations. The amount of cash and cash equivalents atJuly 2, 2021 represented an increase of$103.7 million from$862.4 million atOctober 2, 2020 , the reasons for which are described below. Our cash flow provided by operations of$523.6 million during the nine months endedJuly 2, 2021 was favorable by$149.1 million in comparison to the cash flow provided by operations of$374.5 million for the corresponding prior year period. This year-over-year increase was due mainly to improved working capital performance overall, with favorability in accounts receivable collections trends partly offset by the$261 million inPA Consulting post combination incentive payments made during the quarter. Our cash used for investing activities for the nine months ended was$1.72 billion , compared to cash used for investing activities of$392.7 million in the corresponding prior year period, with this change due primarily to the acquired investments in theBuffalo Group andPA Consulting during the current year as well as proceeds received from the Company's disposal of its investment in C3 and the final ECR sale working capital settlement. Investing activities in the nine month period of 2020 were largely associated with the acquisition of the John Wood Group's Nuclear Business for$286.5 million . Our cash provided by financing activities of$1.28 billion for the nine months endedJuly 2, 2021 resulted mainly from net proceeds from borrowings of$1.42 billion mainly in connection with thePA Consulting investment, partly offset by cash used for share repurchases of$24.9 million and$119.9 million in dividends to shareholders and noncontrolling interests. Cash provided by financing activities in the corresponding prior year period was$372.5 million , due primarily to net proceeds from borrowings of$756.5 million , offset by cash used for share repurchases of$285.8 million and$97.5 million in dividends to shareholders and noncontrolling interests. Page 51 -------------------------------------------------------------------------------- AtJuly 2, 2021 , the Company had approximately$151.3 million in cash and cash equivalents held in theU.S. and$814.8 million held outside of theU.S. (primarily in theU.K. , theEurozone ,Australia ,India ,Japan and theUnited Arab Emirates ), which is used primarily for funding operations in those regions. Other than the tax cost of repatriating funds to theU.S. (see Note 7- Income Taxes of Notes to Consolidated Financial Statements included in our 2020 Form 10-K), there are no material impediments to repatriating these funds to theU.S. The Company had$268.9 million in letters of credit outstanding atJuly 2, 2021 . Of this amount,$1.7 million was issued under the Revolving Credit Facility and$267.2 million was issued under separate, committed and uncommitted letter-of-credit facilities. OnMarch 2, 2021 , Jacobs completed the strategic investment of a 65% interest inPA Consulting , aUK -based leading innovation and transformation consulting firm. The total consideration paid by the Company was$1.7 billion , funded through cash on hand, a new term loan and draws on the Company's existing revolver. Further, in connection with the transaction, an estimated additional$267 million had not yet been distributed atApril 2, 2021 due to continuing employment requirements. Consequently, this amount represented compensation expense incurred related to the acquisition that was expensed in the second quarter, and was reflected in selling, general and administrative expense on the consolidated income statement for the six month period endedApril 2, 2021 . During the third quarter of fiscal 2021, an amount of$5.6 million of the above estimated charges was forfeited by employees that left the Company before payment, and as such, was recognized in earnings in the three month period endedJuly 2, 2021 . The updated amount of$261 million is reflected in earnings and cash from operations for the nine month period endedJuly 2, 2021 . The remaining 35% interest is held byPA Consulting employees, whose redeemable noncontrolling interests had a fair value of$582.4 million on the closing date, including subsequent purchase accounting adjustments.PA Consulting is accounted for as a consolidated subsidiary and as a separate operating segment underU.S. GAAP accounting rules. See Note 12- Borrowings for more discussion on the financing for the transaction. OnJanuary 20, 2021 , the Company entered into an unsecured delayed draw term loan facility (the "2021 Term Loan Facility") with a syndicate of financial institutions as lenders. Under the 2021 Term Loan Facility, the Company borrowed an aggregate principal amount of$200.0 million and £650.0 million. The proceeds of the term loans were used primarily to fund the investment inPA Consulting . The 2021 Term Loan Facility contains affirmative and negative covenants and events of default customary for financings of this type that are consistent with those included in the Revolving Credit Facility and the 2020 Term Loan Facility. OnNovember 24, 2020 , a subsidiary of Jacobs completed the acquisition ofBuffalo Group , a leader in advanced cyber and intelligence solutions. The Company paid total consideration of$190.1 million , which was comprised of approximately$182.4 million in cash to the former owners ofBuffalo Group and contingent consideration of$7.7 million , which is expected to be settled in fiscal 2022. During the third fiscal quarter, the Company recorded an adjustment to the contingent consideration of$3.8 million to selling, general and administrative expense, resulting in contingent consideration of$3.9 million atJuly 2, 2021 . In conjunction with the acquisition, the Company assumed theBuffalo Group's debt of approximately$7.7 million . The Company repaid all of the assumedBuffalo Group debt by the end of the first fiscal quarter of 2021. The Company has recorded its preliminary purchase price allocation associated with the acquisition, which is summarized in Note 16- Other Business Combinations. OnMarch 6, 2020 , a subsidiary of Jacobs completed the acquisition of John Wood Group's nuclear consulting, remediation and program management business for an enterprise value of £246 million, or approximately$317.9 million , less cash acquired of$24.3 million . The Company has recorded its final purchase accounting allocation associated with the acquisition, which is summarized in Note 16- Other Business Combinations. Page 52 -------------------------------------------------------------------------------- We believe we have adequate liquidity and capital resources to fund our projected cash requirements for the next twelve months based on the liquidity provided by our cash and cash equivalents on hand, our borrowing capacity and our continuing cash from operations. We further believe that our financial resources and discretionary spend controls, as well as near term benefits from government assistance programs, will allow us to continue managing the negative impacts of the COVID-19 pandemic on our business operations for the foreseeable future, which are expected to include reduced revenue from operating activities, based on current assumptions and expectations regarding the pandemic. We have taken actions to reduce spending more broadly across the Company, only proceeding with operating and capital spending that is critical. We also ceased all non-essential hiring and reduced discretionary expenses, including certain employee benefits and compensation through the end of fiscal 2020. In addition, as a precautionary measure, we temporarily suspended purchases under the share repurchase plan inMarch 2020 , with such suspension remaining in effect through the third fiscal quarter of 2020. During the fourth fiscal quarter of 2020, we resumed share repurchases on a limited basis. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates beyond or lasts longer than current assumptions and expectations. We were in compliance with all of our debt covenants atJuly 2, 2021 . Item 3. Quantitative and Qualitative Disclosures About Market Risk. We do not enter into derivative financial instruments for trading, speculation or other similar purposes that would expose the Company to market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and currency exchange rates. Interest Rate Risk Please see the Note 12- Borrowings in Notes to Consolidated Financial Statements appearing under Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for a discussion of the Revolving Credit Facility, Term Loan Facilities and Note Purchase Agreement. Our Revolving Credit Facility, Term Loan Facilities and certain other debt obligations are subject to variable rate interest which could be adversely affected by an increase in interest rates. As ofJuly 2, 2021 , we had an aggregate of$2.63 billion in outstanding borrowings under our Revolving Credit Facility and Term Loan Facilities. Interest on amounts borrowed under these agreements is subject to adjustment based on the Company's Consolidated Leverage Ratio (as defined in the credit agreements governing the Revolving Credit Facility and the Term Loan Facilities). Depending on the Company's Consolidated Leverage Ratio, borrowings under the Revolving Credit Facility and the Term Loan Facilities bear interest at a Eurocurrency rate plus a margin of between 0.875% and 1.625% or a base rate plus a margin of between 0.0% and 0.625% including applicable margins. Additionally, if our Consolidated Leverage Ratio exceeds a certain amount, the interest on the Senior Notes may increase by 75 basis points. However, as discussed in Note 19- Commitments and Contingencies and Derivative Financial Instruments, we have entered into swap agreements with an aggregate notional value of$929.7 million to convert the variable rate interest based liabilities associated with a corresponding amount of our debt into fixed interest rate liabilities, leaving$1.70 billion in principal amount subject to variable interest rate risk. For the nine months endedJuly 2, 2021 , our weighted average borrowings that are subject to floating rate exposure were approximately$1.28 billion . If floating interest rates had increased by 1.00%, our interest expense for the nine months endedJuly 2, 2021 would have increased by approximately$9.6 million . Foreign Currency Risk In situations where the Company incurs costs in currencies other than our functional currency, we sometimes enter into foreign exchange contracts to limit our exposure to fluctuating foreign currencies. We follow the provisions of ASC No. 815, Derivatives and Hedging in accounting for our derivative contracts. The Company has$498.0 million in notional value of exchange rate sensitive instruments atJuly 2, 2021 . See Note 19- Commitments and Contingencies and Derivative Financial Instruments for discussion. Page 53
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