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 1, 2022 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
2021 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 2021 Form 10-K;
•The Company's fiscal 2021 audited consolidated financial statements and notes thereto included in our 2021 Form 10-K; and
•Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 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 2022 or future fiscal years, the anticipated benefits of acquisitions and the strategic investment inPA Consulting , and our plans to implement a new holding company structure in the fourth fiscal quarter of 2022. You should not place undue reliance on these forward-looking statements. Although such statements are based on management's current estimates and/or expectations, and 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 our ability to execute on our newly-announced three-year corporate strategy, including our ability to invest in the tools needed to fully implement our strategy, competition from existing and future competitors in our target markets, our ability to achieve the cost-savings and synergies contemplated by our recent acquisitions within the expected time frames and to successfully integrate acquired businesses while retaining key personnel, the 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, measures or restrictions imposed by governments and health officials in response to the pandemic, the timing of the award of projects and funding under theInfrastructure Investment and Jobs Act, financial market risks that may affect the Company's funding obligations under defined benefit pension and postretirement plans, as well as general economic conditions, including inflation and the actions taken by monetary authorities in response to inflation, changes in interest rates, foreign currency exchange rates, changes in capital markets, and geopolitical events and conflicts, among others. The impact of such matters includes, but is not limited to, the possible reduction in demand for certain of our product solutions and 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 have and could continue to negatively affect our supply chain and our ability to timely and satisfactorily complete our clients' projects; difficulties associated with retaining key employees or hiring additional employees; 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 2021 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 theUnited States Securities and Exchange Commission ("theSEC "). Page 40 --------------------------------------------------------------------------------
Impact of COVID-19 on Our Business
OnMarch 11, 2020 , theWorld Health Organization characterized the outbreak of the novel coronavirus ("COVID-19") as a global pandemic and recommended certain containment and mitigation measures. OnMarch 13, 2020 ,the United States declared a national emergency concerning the outbreak, and the vast majority of states and many municipalities declared public health emergencies or took 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 acrossthe 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 most jurisdictions in which we operate have lifted or eased such restrictions to various degrees, some jurisdictions have subsequently reimposed restrictions to varying degrees in response to increased cases caused by variants of COVID-19. In addition, governments and central banks inthe United States and other countries in which we operate have periodically 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. We successfully transitioned the vast majority 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. Notwithstanding our continued critical operations, COVID-19 negatively impacted our business, and may have further adverse impacts, on our operations, including those listed and discussed in Item 1A, Risk Factors included in our 2021 Form 10-K. Accordingly, at the height of the pandemic, we temporarily reduced spending broadly across the Company, only proceeding with operating and capital spending that was critical. We had 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. Subsequently, we have adjusted our response according to the circumstances and local laws in the jurisdictions in which we operate, including the emergence and spread of variants, such as the omicron variant. Looking ahead, we have developed contingency plans 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. The impacts of the COVID-19 pandemic continue to be felt in our operating results as compared to business levels pre-pandemic, although not significantly impacting the current fiscal quarter as compared to the corresponding quarter of the 2021 fiscal year. Further, for future periods, significant uncertainty continues to exist concerning the magnitude, duration and impacts of the COVID-19 pandemic, including with regard to the effects on our customers, customer demand for our services, disruptions to supply chains and labor forces and increasing inflationary pressures. 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 2021 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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Revenue by Type (Q3 FY2022)
[[Image Removed: jec-20220701_g1.jpg]]
In the fourth quarter fiscal 2022, the Company intends to create a new holding
company, Jacobs Solutions Inc. , which will become the new parent company of the
Company. This will more closely align our public identity with a global
technology-forward solutions company. Once completed, the Company's current
stockholders will automatically become stockholders of Jacobs Solutions Inc. , on
a one-for-one basis, with the same number of shares and same ownership
percentage of the Company's common stock that they held immediately prior to the
transaction.
Lines of Business
The services we provide fall into the following two lines of business (LOB):
Critical Mission Solutions (CMS) and People & Places Solutions (P&PS). The LOBs
and a majority investment in PA Consulting (PA) constitute the Company's
reportable segments. For additional information regarding our segments,
including information about our financial results by segment and financial
results by geography, see Note 5 - Revenue Accounting for Contracts of Notes to
Consolidated Financial Statements.
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. 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), U.K. Ministry of Defence , 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.
The U.S. government is the world's largest buyer of technical services, and in
fiscal 2021, approximately 74% of CMS's revenue was earned from serving the DoD ,
intelligence community and Federal Civilian governmental entities. Our
international customers, which accounted for 18% of fiscal 2021 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.
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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. We embrace inclusive engagement of partners
and stakeholders and generate enduring social equity/value through 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 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
PA Consulting In fiscal 2021, Jacobs invested in a 65% stake inPA Consulting , the consultancy that is Bringing Ingenuity to Life. Its diverse teams of experts combine innovative thinking and breakthrough use of technologies to progress further, faster.PA Consulting's clients adapt and transform and achieve enduring results. An innovation and transformation consultancy, PA's roughly 3,300 employees work across seven sectors: consumer and manufacturing, defense and security, energy and utilities, financial services, government, health and life sciences, and transport.PA Consulting people are strategists, innovators, designers, consultants, digital experts, scientists, engineers and technologists. The team operates globally from offices across theU.K. ,U.S. , Nordics andthe Netherlands .PA Consulting offers end-to-end innovation, accelerating new growth ideas from concept, through design, development, and to commercial success, and revitalizing organizations, building the leadership, culture, systems and processes to make innovation a reality.PA Consulting has a diverse mix of private and public sector clients, from global household names to start-ups, to national and local public services. Page 43
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Results of Operations for the three and nine months ended
(in thousands, except per share information)
For the Three Months Ended For the Nine Months Ended
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
Revenues $ 3,827,093 $
3,576,436
(3,002,618) (2,759,501) (8,550,418) (8,290,137)
Gross profit 824,475 816,935 2,491,359 2,216,007
Selling, general and administrative expenses (558,713) (553,189) (1,882,049) (1,779,435)
Operating Profit 265,762 263,746 609,310 436,572
Other Income (Expense):
Interest income 1,042 1,001 2,924 2,733
Interest expense (26,129) (20,011) (67,551) (52,788)
Miscellaneous income, net 31,440 38,658 51,802 138,705
Total other income (expense), net 6,353 19,648 (12,825) 88,650
Earnings from Continuing Operations Before
Taxes 272,115 283,394 596,485 525,222
Income Tax Expense from Continuing Operations (59,491) (109,186) (121,545) (175,437)
Net Earnings of the Group from Continuing
Operations 212,624 174,208 474,940 349,785
Net (Loss) Earnings of the Group from
Discontinued Operations (343) 384 (576) 11,690
Net Earnings of the Group 212,281 174,592 474,364 361,475
Net Earnings Attributable to Noncontrolling
Interests from Continuing Operations (8,773) (9,182) (28,286) (29,366)
Net (Earnings) Loss Attributable to
Redeemable Noncontrolling interests (7,525) 384 (27,246) 101,776
Net Earnings Attributable to Jacobs from
Continuing Operations 196,326 165,410 419,408 422,195
Net Earnings Attributable to Jacobs $ 195,983 $ 165,794 $ 418,832 $ 433,885
Net Earnings Per Share:
Basic Net Earnings from Continuing Operations
Per Share $ 1.53 $ 0.83 $ 3.25 $ 2.80
Basic Net Earnings from Discontinued
Operations Per Share $ - $ - $ - $ 0.09
Basic Earnings Per Share $ 1.53 $ 0.83 $ 3.25 $ 2.89
Diluted Net Earnings from Continuing
Operations Per Share $ 1.52 $ 0.82 $ 3.23 $ 2.78
Diluted Net Earnings from Discontinued
Operations Per Share $ - $ - $ - $ 0.09
Diluted Earnings Per Share $ 1.52 $ 0.83 $ 3.23 $ 2.87
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Overview - Three and Nine Month Periods Ended
Net earnings attributable to the Company from continuing operations for the third fiscal quarter endedJuly 1, 2022 were$196.3 million (or$1.52 per diluted share), an increase of$30.9 million , from net earnings of$165.4 million (or$0.82 per diluted share) for the corresponding period last year. While operating profit levels were consistent for the respective three-month periods of fiscal 2022 and 2021, third quarter fiscal 2022 Other income (expense), net, of$6.4 million was lower by$13.2 million versus third quarter fiscal 2021 amounts of$19.6 million . Third quarter fiscal 2022 amounts benefited from a$13.9 million pre-tax gain related to a cost method investment sold during the period, approximately$8 million in higher foreign exchange gains, as well as other miscellaneous income items quarter over quarter, partly offset by unfavorable impacts of higher net interest expense and lower pension income compared to the prior year quarter. Third quarter fiscal 2021 amounts included$38.7 million in pre-tax fair value gains, related currency revaluations and dividends recorded in miscellaneous income (expense), net, associated with our former investment in Worley stock, the sale of which was completed in fourth quarter 2021. Our reported net earnings for the current year quarter also benefited from lower income taxes of$49.6 million compared to the fiscal 2021 period, with lower effective tax rates in the current quarter due mainly to the absence of fiscal 2021 income tax charges of$30.8 million associated with a statutory tax rate increase in theUK and certain nondeductible compensation related charges associated with the Company'sPA Consulting investment, as well as benefiting from other favorable tax impacts during the current quarter. Additionally, redeemable noncontrolling interests was$7.1 million higher in the current quarter due to favorable net earnings results in ourPA Consulting investment compared to the prior year quarter. The Company's reported earnings per share for the third quarter fiscal 2021 was impacted unfavorably by$(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. For the nine months endedJuly 1, 2022 , net earnings attributable to the Company from continuing operations were$419.4 million (or$3.23 per diluted share) and overall consistent in comparison to$422.2 million (or$2.78 per diluted share) for the corresponding period last year. The current year results reflected higher year-over-year operating profit of$172.7 million , which benefited from the full year-to-date impact of the Company'sPA Consulting investment acquired onMarch 2, 2021 and the absence of one-time deal and related other charges associated with this investment of approximately$297 million , including one-time compensation charges of$261 million in the 2021 fiscal period. These favorable operating profit items were offset in part by higher year-over-year Restructuring and other charges and transaction costs in the current year, including pre-tax settlement charges associated with the Legacy CH2M Matter of$91.3 million and$74.6 million associated with the Company's transformation initiatives relating to real estate rescaling (see Note 18 - Restructuring and Other Charges) and increases in intangibles amortization costs of$43.6 million , due mainly to full year impacts of acquired intangible assets from thePA Consulting investment. Other income (expense), net was unfavorable$101.5 million for the current year-to-date period compared to corresponding fiscal 2021 amounts, due mainly to pre-tax fair value gains associated with our former investments in Worley stock (net of Worley stock dividend and related foreign exchange items) and C3 of$102.1 million and$49.6 million , respectively, as well as higher interest expense of$14.8 million in the current year compared to the prior year. Current year-to-date fiscal 2022 other income (expense) results benefited from the absence of the prior year$38.9 million impairment of our investment inAWE Management Ltd. ("AWE ML") as well as the$13.9 million gain on sale of a cost investment and other favorable items during the current fiscal 2022 year-to-date period. Income taxes were lower in the current year by$53.9 million , benefiting from lower effective tax rates in fiscal 2022, due primarily to the absence of fiscal 2021 additional income taxes attributable to the tax rate increase in theUK of$30.8 million and certain nondeductible compensation related charges associated with the Company'sPA Consulting investment combined with current year-to-date tax benefits of$15.4 million related to the release of valuation allowance on foreign tax credits and$9.1 million related to the removal of intercompany withholding tax. Finally, unfavorable year-over-year net earnings impacts associated with redeemable noncontrolling interests of$129 million were attributable mainly to the absence of the 2021 period redeemable noncontrolling interests share of$101.8 million in connection with the one-time compensation charges incurred in thePA Consulting investment mentioned above, offset in part by the full year-to-date effects of the redeemable noncontrolling interests share ofPA Consulting's operating results in fiscal 2022. Fiscal 2021 earnings per share was impacted by the$(0.44) per share impact of the value allocation update between preferred and common shares for thePA Consulting investment.
For discussion of discontinued operations, see Note 17 - Sale of Energy, Chemicals and Resources ("ECR") Business.
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On
On
On
Consolidated Results of Operations
Revenues for the third fiscal quarter of 2022 were$3.83 billion , an increase of$250.7 million , or 7.0%, from$3.58 billion for the corresponding period last year. For the nine months endedJuly 1, 2022 , revenues were$11.04 billion , an increase of$535.6 million , or 5.1%, from$10.51 billion for the corresponding period last year. Revenue increases for the year over year periods were due mainly to fiscal 2022 incremental revenues from thePA Consulting investment and the StreetLight and BlackLynx acquisitions, as well as benefits from increased spending in ourU.S. government business sector client base. These increases in revenues for the current year-to-date period were partially offset by declines in pass-through revenues in our P&PS advanced facilities business. Additionally, the nine months endedJuly 1, 2022 was unfavorably impacted by certain large contract wind downs in theU.S. Also, revenue was unfavorably impacted by foreign currency translation of$130.1 million and$176.8 million for the three and nine months endedJuly 1, 2022 , respectively, in our international businesses as compared to favorable impacts of$100.2 million and$213.1 million in the corresponding periods last year.
Pass-through costs included in revenues for the three and nine months ended
Gross profit for the third quarter of 2022 was$824.5 million , an increase of$7.5 million , or 0.9%, from$816.9 million from the corresponding period last year. Our gross profit margins were 21.5% and 22.8% for the three months endedJuly 1, 2022 andJuly 2, 2021 , respectively, with these margin differences being mainly attributable to lower utilization trends mainly in ourPA Consulting business, partly offset by favorable impacts from our recent StreetLight and BlackLynx acquisitions as well as benefits from increased spending by customers in theU.S. government business sector for the current quarter period. Gross profit for the nine months endedJuly 1, 2022 was$2.49 billion , an increase of$275.4 million , or 12.4%, from$2.22 billion from the corresponding period last year, due in part to incremental gross profit from recent business acquisitions (mainly the full year results ofPA Consulting ). Our gross profit margins were 22.6% and 21.1% for the nine months endedJuly 1, 2022 andJuly 2, 2021 , respectively, with benefits from the similar favorable margins from recent acquisitions mentioned above and favorable impacts from the business results of our recentPA Consulting investment on a year-to-date basis and increased spending in theU.S. government business sector noted above. The increases in gross profit during the three and nine months endedJuly 1, 2022 were partially offset by the impacts from the recent large contract wind downs in theU.S. mentioned above, as well as increases in labor costs associated with moderation of COVID-19 mitigation efforts and a competitive labor market along with inflation impacts and incremental investments to support projected top-line growth.
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 1, 2022 were$558.7 million and$1.88 billion , respectively, increases of$5.5 million and$102.6 million , or 1.0% and 5.8%, from$553.2 million and$1.78 billion for the corresponding periods last year. While the three month periods' results were comparatively consistent, the nine months ended results for fiscal 2022 were impacted by incremental SG&A expenses from recent business acquisitions (mainlyPA Consulting ) of$150.0 million (including$43.6 million in additional amortization expense for acquired intangibles and excluding the compensation related charge discussed below), respectively, due to the prior comparable periods includingPA Consulting activity only for the partial periods subsequent to theMarch 2, 2021 investment date. Additionally, Restructuring and other charges and transaction costs for the year-to-date period of 2022 included$91.3 million attributable to the final pre-tax settlement of the Legacy CH2M Matter, which is further discussed in Note 19- Commitments and Contingencies and Derivative Financial Instruments and$74.6 million in costs associated in part with the Company's transformation initiatives relating to real estate. Also, the current 2022 periods SG&A expenses were impacted by higher personnel costs associated with investments in advance of expected growth anticipated in late 2022 Page 46 -------------------------------------------------------------------------------- and 2023. As noted above, the prior year-to-date period included Restructuring and other charges of$261 million for pre-tax costs incurred in connection with the investment inPA Consulting , in part classified as compensation costs reported in selling, general and administrative expenses. Lastly, SG&A expenses benefited from favorable foreign exchange impacts of$26.4 million and$36.8 million , respectively, for the three and nine months endedJuly 1, 2022 as compared to unfavorable impacts of$19.3 million and$66.7 million for the corresponding periods last year. Net interest expense for the three and nine months endedJuly 1, 2022 was$25.1 million and$64.6 million , respectively, an increase of$6.1 million and$14.6 million from$19.0 million and$50.1 million for the corresponding periods last year. The increase in net interest expense for the three and nine month periods was due to higher levels of debt outstanding due to the funding of the StreetLight and BlackLynx acquisitions and increased borrowings associated with the payment of the Legacy CH2M Matter settlement in the current fiscal quarter, in addition to higher interest rates. Additionally, the nine month period year over year is also impacted by higher levels of average debt outstanding related to the funding of thePA Consulting investment. Miscellaneous income (expense), net for the three and nine months endedJuly 1, 2022 was$31.4 million and$51.8 million , respectively, in comparison to$38.7 million and$138.7 million for the corresponding periods last year. The$7.2 million decrease from the prior three-month comparable period was due primarily to impacts in the prior year periods of pre-tax unrealized gains of$38.7 million associated with our former investment in Worley stock (including the Worley stock dividend) and certain foreign currency revaluations relating to the ECR sale, which was sold during fiscal year 2021. The decrease of$86.9 million from the prior year-to-date comparable period is attributable to nine months of pre-tax fair value gains of$102.2 million and$49.6 million in the Company's previously mentioned investment holdings in Worley (including the Worley stock dividend) which includes impacts of certain foreign currency revaluations related to the ECR sale and C3, respectively. The three and nine month fiscal 2022 periods benefited primarily from a$13.9 million pre-tax gain related to a cost method investment sold during the period. Additionally, the corresponding prior year periods included other-than-temporary impairment charges on our investment in AWE ML of$5.7 million and$38.9 million , respectively. The Company's effective tax rates from continuing operations for the three months endedJuly 1, 2022 andJuly 2, 2021 were 21.9% and 38.5%, respectively, with the decrease primarily due to the absence of a$30.8 million expense related to a change in tax rate applied to deferred tax assets in theUnited Kingdom and certain nondeductible compensation related charges associated with the Company'sPA Consulting investment in the three months endedJuly 2, 2021 , as well as a current period benefit of$9.1 million the Company recognized due to the reversal of a withholding tax accrual on certain intercompany loans, partly offset by increases in permanent book/tax adjustments, state taxes, and foreign inclusions for the three month period in fiscal 2022. Additionally, a$15.6 million payment was made during the current quarter related to an amendment of anAustralia tax return, which resulted in the removal of the associated uncertain tax position from the Consolidated Balance Sheet. This payment had no impact on the current quarter income tax provision or effective tax rate. The Company's effective tax rates from continuing operations for the nine months endedJuly 1, 2022 andJuly 2, 2021 were 20.4% and 33.4%, respectively, with the decrease primarily due to a current year tax benefit of$15.4 million related to the release of valuation allowance on foreign tax credits and$9.1 million related to the reversal of intercompany withholding tax noted above, as well as the absence of prior year expenses related to theUnited Kingdom's change in tax rate mentioned above and certain non-deductible pre-tax compensation charges associated with our investment inPA Consulting , partly offset by the absence of the benefit from the change in the Company's assertion about indefinite reinvestment of certain foreign unremitted earnings inIndia in fiscal 2021. 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 EndedJuly 1, 2022 July
2, 2021
$ 1,317,109 $
1,218,089
2,232,404 2,102,550 6,330,906 6,329,088
PA Consulting 277,580 255,797 864,944 354,107
Total $ 3,827,093 $ 3,576,436 $ 11,041,777 $ 10,506,144
Three Months Ended Nine Months Ended
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
Segment Operating Profit:
Critical Mission Solutions $ 104,305 $
108,131
210,046 205,324 592,883 603,654
PA Consulting 51,448 56,791 182,850 84,708
Total Segment Operating Profit 365,799 370,246 1,104,775 1,020,495
Other Corporate Expenses (1) (89,887) (104,532) (284,479) (238,198)
Restructuring, Transaction and Other Charges
(2) (10,150) (1,968) (210,986) (345,725)
Total U.S. GAAP Operating Profit 265,762 263,746 609,310 436,572
Total Other Income (Expense), net (3) 6,353 19,648 (12,825) 88,650
Earnings Before Taxes from Continuing
Operations $ 272,115 $
283,394
(1) Other corporate expenses also included intangibles amortization of
respectively, and
period increase mainly attributable to higher amortization from the
investment.
(2) Included in the nine months ended
to the final pre-tax settlement of the Legacy CH2M Matter, net of previously
recorded reserves and
transformation initiatives. Included in the nine months ended
in part classified as compensation costs.
(3) The three and nine months ended
to a cost method investment sold during the period. The nine months ended
2022 included a gain of
nine months ended
respectively, in fair value adjustments related to our investment in Worley stock
(including Worley stock dividends) and certain foreign currency revaluations
relating to the ECR sale and
value adjustments related to our investment in C3 stock, with both of these
investments sold in fiscal 2021. The nine months ended
$38.9 million related to impairment of our AWE ML investment.
Critical Mission Solutions
Three Months Ended Nine Months Ended
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
Revenue $ 1,317,109 $ 1,218,089 $ 3,845,927 $ 3,822,949
Operating Profit $ 104,305 $ 108,131 $ 329,042 $ 332,133
Page 48-------------------------------------------------------------------------------- Critical Mission Solutions (CMS) segment revenues for the three and nine months endedJuly 1, 2022 were$1.32 billion and$3.85 billion , respectively, an increase of$99.0 million and$23.0 million , or 8.1% and 0.6%, from$1.22 billion and$3.82 billion for the corresponding periods last year. During the three and nine months endedJuly 1, 2022 , revenue benefited from incremental revenue from recent acquisitions in addition to recent contract awards including theDepartment of Energy Nuclear remediation program. Revenue during the nine months endedJuly 1, 2022 was impacted by several large contracts winding down in theU.S and labor supply challenges. Also, impacts on revenues from unfavorable foreign currency translation were approximately$26.9 million and$34.9 million for the three and nine-month periods endedJuly 1, 2022 , respectively, compared to$26.6 million and$54.2 million in favorable impacts in the corresponding prior year periods. Operating profit for the segment was$104.3 million and$329.0 million , respectively, for the three and nine months endedJuly 1, 2022 , representing slight decreases of$3.8 million and$3.1 million , or (3.5)% and (0.9)%, from$108.1 million and$332.1 million for the corresponding periods last year. Operating profit levels were generally consistent with prior year comparable periods presented, with recentU.S. government contract awards benefiting from higher margins and offsetting impacts from the large contract wind downs mentioned above. Impacts on operating profit from unfavorable foreign currency translation were approximately$3.9 million and$5.0 million for the three and nine months endedJuly 1, 2022 , compared to favorable impacts of approximately$4.3 million and$8.8 million in the corresponding prior year periods. People & Places Solutions Three Months Ended Nine Months Ended July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021 Revenue$ 2,232,404 $ 2,102,550 $ 6,330,906 $ 6,329,088 Operating Profit$ 210,046 $ 205,324 $ 592,883 $ 603,654 Revenues for the People & Places Solutions (P&PS) segment for the three months endedJuly 1, 2022 was$2.23 billion and$6.33 billion , respectively, an increase of$129.9 million and$1.8 million , or 6.2% and -%, from$2.10 billion and$6.33 billion for the corresponding periods last year. The increase in revenue for the three months endedJuly 1, 2022 was primarily driven by growth in our advanced facilities business as compared to the prior year corresponding period. The increase in revenue for the nine months endedJuly 1, 2022 was primarily due to higher fee-based revenue from our advanced facilities and international businesses offset in part by lower pass through revenues across the business as compared to the prior year corresponding period. Foreign currency translation had a$69.2 million and$103.8 million unfavorable impact on revenues in our international businesses for the three and nine-month periods endedJuly 1, 2022 , respectively as compared to favorable impacts of$73.6 million and$158.9 million in the corresponding prior year periods. Operating profit for the segment for the three and nine month periods endedJuly 1, 2022 was$210.0 million and$592.9 million , respectively, an increase of$4.7 million for the three-month period and a decrease of$10.8 million for the nine-month period, or 2.3% and (1.8)% from$205.3 million and$603.7 million for the corresponding periods last year. The year-over-year increase in operating profit for the three months endedJuly 1, 2022 was driven by the revenue growth mentioned above but partially offset by higher personnel costs associated with investments in advance of expected growth anticipated in late 2022 and 2023. For the nine months endedJuly 1, 2022 , operating profit decreased year-over-year due mainly to similar cost increases mentioned above in the first half of the year. Foreign currency translation had a$11.8 million and$18.7 million unfavorable impact on operating profit in our international businesses for the three and nine-month periods endedJuly 1, 2022 , respectively as compared to favorable impacts of$13.9 million and$27.7 million in the corresponding prior year periods. Page 49 --------------------------------------------------------------------------------
PA Consulting Three Months Ended Nine Months Ended July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021 Revenue$ 277,580 $ 255,797 $ 864,944 $ 354,107 Operating Profit$ 51,448 $ 56,791 $ 182,850 $ 84,708 Revenues for thePA Consulting segment for the three and nine months endedJuly 1, 2022 were$277.6 million and$864.9 million , respectively, an increase of$21.8 million and$510.8 million , or 8.5% and 144.3%, from$255.8 million and$354.1 million for the corresponding periods last year. The increase in revenue for the three months endedJuly 1, 2022 was primarily driven by growth in theU.K. business. The increase in revenue for the year-to-date period in the current year was due mainly to the full year-to-date impact of revenues from ourMarch 2, 2021 investment inPA Consulting . Foreign currency translation had a$34.0 million and$38.1 million unfavorable impact on revenues in our international businesses for the three and nine months endedJuly 1, 2022 , respectively and a favorable impact of$29.3 million for the corresponding prior year quarter and year-to-date periods. Operating profit for the segment for the three and nine months endedJuly 2, 2021 was$51.4 million and$182.9 million , respectively, a decrease of$5.3 million and an increase of$98.1 million , or (9.4)% and 115.9%, from$56.8 million and$84.7 million , respectively, for the corresponding periods last year. The decrease in operating profit for the three months endedJuly 1, 2022 was driven by normalization of utilization rates during the quarter. The increase in operating profit for the year-to-date period was also due mainly to the full year-to-date impact of operating profit from ourMarch 2, 2021 investment inPA Consulting . Foreign currency translation had a$6.7 million and$8.1 million unfavorable impact on operating profit in our international businesses for the three and nine months endedJuly 1, 2022 and a favorable impact of$6.4 million for the corresponding prior quarter and year-to-date periods.
Other Corporate Expenses
Other corporate expenses for the three and nine months endedJuly 1, 2022 were$89.9 million and$284.5 million , respectively, a decrease of$14.6 million and an increase of$46.3 million from$104.5 million and$238.2 million for the corresponding periods last year. This decrease during the three month period was due to decreases in real estate related costs, as well as other department spend decreases due in part to the Company's transformation initiatives. The increase during the current year-to-date period was primarily due to higher intangible amortization expense from the StreetLight and BlackLynx acquisitions and thePA Consulting investment, as well as impacts from higher Company benefit program costs. 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.
Page 50
--------------------------------------------------------------------------------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
our U.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 quarters (and sometimes over fiscal
years), we have presented our backlog on a year-over-year basis, rather than on
a sequential, quarter-over-quarter basis.
The following table summarizes our backlog at July 1, 2022 and July 2, 2021 (in
millions):
July 1, 2022 July 2, 2021
Critical Mission Solutions $ 10,222 $ 9,565
People & Places Solutions 17,542 15,557
PA Consulting 326 314
Total $ 28,090 $ 25,436
The increase in backlog in Critical Mission Solutions (CMS) from July 2, 2021
was primarily driven by success in closing on a number of key opportunities in
the U.S government space.
The increase in backlog in People & Places Solutions (P&PS) from
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, 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 1, 2022 , our principal sources of liquidity consisted of$1.10 billion in cash and cash equivalents and$1.08 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 1, 2022 represented an increase of$88.0 million from$1.01 billion atOctober 1, 2021 , the reasons for which are described below. Page 51 -------------------------------------------------------------------------------- Our net cash flow provided by operations of$197.2 million during the nine months endedJuly 1, 2022 was unfavorable by$326.4 million in comparison to the cash flow provided by operations of$523.6 million for the corresponding prior year period. The year-over-year decrease in cash from operations is primarily attributable to the Legacy CH2M Matter cash settlement paid in the current fiscal quarter. Our net cash used for investing activities for the nine months ended was$491.2 million , compared to cash used for investing activities of$1.72 billion in the corresponding prior year period, with this change due primarily to the acquisitions of StreetLight and BlackLynx in the current year and our investment inPA Consulting and acquisition ofBuffalo Group in the prior year. Our net cash provided by financing activities of$461.8 million for the nine months endedJuly 1, 2022 resulted mainly from net proceeds from borrowings of$799.2 million primarily in connection with the StreetLight and BlackLynx acquisitions, partly offset by cash used for share repurchases of$250.7 million and$86.6 million in dividends to shareholders and$16.1 million in dividends to noncontrolling interest holders. Cash provided by financing activities in the corresponding prior year period was$1.28 billion , due primarily to net proceeds from borrowings of$1.42 billion , offset by cash used for share repurchases of$24.9 million and$79.8 million in dividends to shareholders and$40.1 million in net dividends to (contributions from) noncontrolling interest holders. AtJuly 1, 2022 , the Company had approximately$220.5 million in cash and cash equivalents held in theU.S. and$881.8 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 2021 Form 10-K), there are no material impediments to repatriating these funds to theU.S. The Company had$286.9 million in letters of credit outstanding atJuly 1, 2022 . Of this amount,$1.3 million was issued under the Revolving Credit Facility and$285.6 million was issued under separate, committed and uncommitted letter-of-credit facilities. OnApril 12, 2022 , the Company paid cash of AUD640 million, or approximately$475 million usingmid-April 2022 exchange rates, which represents the final pre-tax settlement of Legacy CH2M Matter. For more information please refer to Note 19 - Commitments and Contingencies and Derivative Financial Instruments. Page 52
-------------------------------------------------------------------------------- OnFebruary 4, 2022 , the Company acquiredStreetLight Data, Inc. ("StreetLight"). StreetLight is a pioneer of mobility analyticswho uses its data and machine learning resources to shed light on mobility and enable users to solve complex transportation problems. The Company paid total base consideration of approximately$190.8 million in cash, and issued$0.9 million in equity and$5.2 million in in-the-money stock options to the former owners of StreetLight. The Company also paid off StreetLight's debt of approximately$1.0 million simultaneously with the consummation of the acquisition. OnNovember 19, 2021 , a subsidiary of Jacobs acquired all outstanding shares of common stock of BlackLynx, a provider of high-performance software, to complement Jacobs' portfolio of cyber, intelligence and digital solutions. The Company paid total base consideration of approximately$235.4 million in cash to the former owners of BlackLynx. In conjunction with the acquisition, the Company also paid off BlackLynx's debt of approximately$5.3 million simultaneously with the consummation of the acquisition. 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, proceeds from a new term loan and draws on the Company's existing revolving credit facility. Further, in connection with the transaction, an additional$261 million in investment proceeds had not yet been distributed at the investment date due to continuing employment requirements of associated management owners. Consequently, this amount represented compensation expense incurred related to the investment that was expensed subsequent to the acquisition date, and was reflected in selling, general and administrative expense and cash from operations for the fiscal year endedOctober 1, 2021 . The remaining 35% interest was acquired 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. 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, which allows Jacobs to further expand its cyber and intelligence solutions offerings to government clients. 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 , The contingent consideration was subsequently recognized as an offset to selling, general and administrative expense when it was determined no amounts would be paid. 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 final purchase price allocation associated with the acquisition, which is summarized in Note 16- Other Business Combinations. 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 will allow us to continue managing the negative impacts of the COVID-19 pandemic on our business operations for the foreseeable future. We continue to evaluate the impact of the pandemic on our business and reassess accordingly.
We were in compliance with all of our debt covenants at
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