JACOBS SOLUTIONS INC. Critical Accounting Policies and Estimates
In order to better understand the changes that occur to key elements of our financial condition, results of operations and cash flows, a reader of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be aware of the critical accounting policies we apply in preparing our consolidated financial statements.
The consolidated financial statements contained in this report were prepared in accordance withU.S. GAAP. The preparation of our consolidated financial statements and the financial statements of any business performing long-term professional services, engineering and construction-type contracts requires management to make certain estimates and judgments that affect both the entity's results of operations and the carrying values of its assets and liabilities. Although our significant accounting policies are described in Note 2- Significant Accounting Policies of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K, the following discussion is intended to highlight and describe those accounting policies that are especially critical to the preparation of our consolidated financial statements.
Revenue Accounting for Contracts
The Company recognizes engineering, procurement, and construction contract
revenue over time, as performance obligations are satisfied, due to the
continuous transfer of control to the customer in accordance with ASC 606,
Revenue from Contracts with Customers. Contracts that include engineering,
procurement and construction services are generally accounted for as a single
deliverable (a single performance obligation). In some instances, the Company's
services associated with a construction activity are limited only to specific
tasks such as customer support, consulting or supervisory services. In these
instances, the services are typically identified as separate performance
obligations.
The Company recognizes revenue using the percentage-of-completion method, based
primarily on contract costs incurred to date compared to total estimated
contract costs. Estimated contract costs include the Company's latest estimates
using judgments with respect to labor hours and costs, materials, and
subcontractor costs. The percentage-of-completion method (an input method) is
the most representative depiction of the Company's performance because it
directly measures the value of the services transferred to the customer.
Subcontractor materials, labor and equipment and, in certain cases,
customer-furnished materials and labor and equipment are included in revenue and
cost of revenue when management believes that the company is acting as a
principal rather than as an agent (e.g., the company integrates the materials,
labor and equipment into the deliverables promised to the customer or is
otherwise primarily responsible for fulfillment and acceptability of the
materials, labor and/or equipment). Under the typical payment terms of our
engineering, procurement and construction contracts, amounts are billed as work
progresses in accordance with agreed-upon contractual terms at periodic
intervals (e.g., biweekly or monthly) and customer payments are typically due
within 30 to 60 days of billing, depending on the contract.
For service contracts, the Company recognizes revenue over time using the
cost-to-cost percentage-of-completion method. In some instances where the
Company is standing ready to provide services, the Company recognizes revenue
ratably over the service period. Under the typical payment terms of our service
contracts, amounts are billed as work progresses in accordance with agreed-upon
contractual terms, and customer payments are typically due within 30 to 60 days
of billing, depending on the contract.
Direct costs of contracts include all costs incurred in connection with and
directly for the benefit of client contracts, including depreciation and
amortization relating to assets used in providing the services required by the
related projects. The level of direct costs of contracts may fluctuate between
reporting periods due to a variety of factors, including the amount of pass
through costs we incur during a period. On those projects where we are acting as
principal for subcontract labor or third-party materials and equipment, we
reflect the amounts of such items in both revenues and costs (and we refer to
such costs as "pass through costs").
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--------------------------------------------------------------------------------Accounting for Pension Plans
The accounting for pension plans requires the use of assumptions and estimates
in order to calculate periodic pension cost and the value of the plans' assets
and liabilities. These assumptions include discount rates, investment returns
and projected salary increases, among others. The actuarial assumptions used in
determining the funded statuses of the plans are provided in Note 13- Pension
and Other Postretirement Benefit Plans of Notes to Consolidated Financial
Statements beginning on page F-1 of this Annual Report on Form 10-K.
The expected rates of return on plan assets ranged from 2% to 7% for fiscal 2022
and range from 3.3% to 7.5% fiscal 2023. We believe the range of rates selected
for fiscal 2023 reflects the long-term returns expected on the plans' assets,
considering recent market conditions, projected rates of inflation, the
diversification of the plans' assets, and the expected real rates of market
returns. The discount rates used to compute plan liabilities ranged from 2.4% to
7.4% in fiscal 2022 and range from 2.4% to 7.4% in fiscal 2023. These
assumptions represent the Company's best estimate of the rates at which its
pension obligations could be effectively settled.
Changes in the actuarial assumptions often have a material effect on the values
assigned to plan assets and liabilities, and the associated pension expense. For
example, if the discount rate used to value the net pension benefit obligation
("PBO") at September 30, 2022 was lower or higher by 1.0%, the PBO would have
been higher or lower, respectively, at that date by approximately $156.8 million
for non-U.S. plans, and by approximately $23.7 million for U.S. plans. If the
expected return on plan assets was lower or higher by 1.0%, the net periodic
pension cost for fiscal 2022 would be higher or lower, respectively, by
approximately $21.2 million for non-U.S. plans, and by approximately $3.4
million for U.S. plans. Differences between actuarial assumptions and actual
performance (i.e., actuarial gains and losses) that are not recognized as a
component of net periodic pension cost in the period in which such differences
arise are recorded to accumulated other comprehensive income (loss) and are
recognized as part of net periodic pension cost in future periods in accordance
with U.S. GAAP. Management monitors trends in the marketplace within which our
pension plans operate in an effort to assure the reasonableness of the actuarial
assumptions used.
Redeemable Noncontrolling Interests
In connection with thePA Consulting investment, the Company recorded redeemable noncontrolling interests, representing the interest holders' 35% equity interest in the form of preferred and common shares ofPA Consulting . The preferred shares are entitled to a cumulative annual compounding 12% dividend based on the outstanding preferred share subscription price. These interest holders have certain option rights to put the preferred and common share interests back to the Company at a value based on the fair value ofPA Consulting (the redemption values). The primary inputs and assumptions impacting the fair value ofPA Consulting include projections of revenue and earnings before interest, taxes, depreciation and amortization and discount rates applied thereto. Additionally, the Company has an option to call the interests for certain individual shareholders in certain circumstances. Because the interests are redeemable at the option of the holders and not solely within the control of the Company, the Company classified the interests in redeemable noncontrolling interests within its Consolidated Balance Sheet at their redemption values. The optional redemption features may become exercisable no earlier than five years from theMarch 2, 2021 closing date, or upon the occurrence of certain other events. The Company has deemed these interests probable of becoming redeemable in the future and requiring their measurement at the greater of (i) the redemption amount that would be paid if settlement occurred at the balance sheet date, or (ii) the historical value resulting from the original acquisition date fair value plus the impact of any earnings or loss attribution amounts, including dividends. The fair value of thePA Consulting redeemable noncontrolling interest is determined using a combination of the income and market approaches. Under the income approach, fair value is determined by using the projected discounted cash flows ofPA Consulting . Under the market approach, the fair value is determined by reference to guideline companies that are reasonably comparable toPA Consulting ; the fair value is estimated based on the valuation multiples of earnings before interest, taxes, depreciation and amortization.
Litigation, Investigations, and Insurance
In the normal course of business, we make contractual commitments, and on
occasion we are a party in litigation or arbitration proceedings. The litigation
in which we are involved primarily includes personal injury claims, professional
liability claims, and breach of contract claims. We are also routinely subject
to investigations and audits.
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We maintain insurance coverage for most insurable aspects of our business and
operations. Our insurance programs have varying coverage limits depending upon
the type of insurance, and include certain conditions and exclusions which
insurance companies may raise in response to any claim that the Company brings.
We have also elected to retain a portion of certain losses, claims and
liabilities that occur through the use of various deductibles, limits, and
retentions under our insurance programs and utilize a number of internal
financing mechanisms for these self insurance arrangements including the
operation of certain captive insurance entities. As a result, we may be subject
to a future liability for which we are only partially insured or completely
uninsured. We intend to mitigate any such future liability by continuing to
exercise prudent business judgment in negotiating the terms and conditions of
the contracts which the Company enters with its clients. Our insurers are also
subject to business risk and, as a result, one or more of them may be unable to
fulfill their insurance obligations due to insolvency or otherwise.
Our Consolidated Balance Sheets include amounts representing our probable estimated liability relating to such claims, litigation, audits, and investigations. Our estimates of probable liabilities require us to make assumptions related to potential losses regarding our determination of amounts considered probable and estimable.
The Company believes, after consultation with counsel, that such litigation,U.S. government contract-related audits, investigations and claims, and income tax audits and investigations should not have a material adverse effect on our consolidated financial statements, beyond amounts currently accrued.
Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. We recognize purchased intangible assets in connection with our business acquisitions at fair value on the acquisition date. The goodwill carried on our Consolidated Balance Sheets is tested annually for possible impairment, and on an interim basis if indicators of possible impairment exist. For purposes of impairment testing, goodwill is assigned to the applicable reporting units based on the current reporting structure. In performing the annual impairment test, we evaluate our goodwill at the reporting unit level. The Company performs the annual goodwill impairment test for the reporting units at the beginning of the fourth quarter of its fiscal year. We evaluate impairment of goodwill either by assessing qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, or by performing a quantitative assessment. Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and circumstances affecting the reporting unit. If we choose to perform a qualitative assessment and after considering the totality of events or circumstances, we determine it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we would perform a quantitative fair value test.U.S. GAAP does not prescribe a specific valuation method for estimating the fair value of reporting units. Any valuation technique used to estimate the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. We use income and market approaches to test our goodwill for possible impairment which requires us to make estimates and judgments. Under the income approach, fair value is determined by using the discounted cash flows of our reporting units. The Company's discount rate reflects a weighted average cost of capital ("WACC") for a peer group of companies representative of the Company's respective reporting units. Under the market approach, the fair values of our reporting units are determined by reference to guideline companies that are reasonably comparable to our reporting units; the fair values are estimated based on the valuation multiples of the invested capital associated with the guideline companies. In assessing whether there is an indication that the carrying value of goodwill has been impaired, we utilize the results of both valuation techniques and consider the range of fair values indicated. It is possible that changes in facts and circumstances, judgments and assumptions used in estimating the fair value, including with respect to market conditions and the economy, could change, resulting in possible impairment of goodwill in the future. The fair values resulting from the valuation techniques used are not necessarily representative of the values we might obtain in a sale of the reporting units to willing third parties. Page 54 -------------------------------------------------------------------------------- For the 2022 fiscal year, we have determined that the fair value of our reporting units substantially exceeded their respective carrying values for the Consolidated Balance Sheets presented and any analysis beyond the qualitative level was not considered necessary. Intangible assets with finite lives that arise from business acquisitions are amortized based on the period over which the contractual or economic benefit of the intangible assets are expected to be realized or on a straight-line basis over the useful lives of the underlying assets. These primarily consist of customer relationships, contracts and backlog, developed technology and trade names. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss. Page 55 -------------------------------------------------------------------------------- JACOBS SOLUTIONS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Fiscal Years EndedSeptember 30, 2022 ,October 1, 2021 and October 2, 2020 (In thousands, except per share information) September 30, 2022 October 1, 2021 October 2, 2020 Revenues$ 14,922,825 $ 14,092,632 $ 13,566,975 Direct cost of contracts (11,595,785) (11,048,860) (10,980,307) Gross profit 3,327,040 3,043,772 2,586,668 Selling, general and administrative expenses (2,409,190) (2,355,683) (2,050,695) Operating Profit 917,850 688,089 535,973 Other Income (Expense): Interest income 4,489 3,503 4,729 Interest expense (100,246) (72,714) (62,206) Miscellaneous income (expense), net 54,254 76,724 (37,293) Total other (expense) income, net (41,503) 7,513 (94,770) Earnings from Continuing Operations Before Taxes 876,347 695,602 441,203 Income Tax Expense for Continuing Operations (160,903) (274,781) (55,320) Net Earnings of the Group from Continuing Operations 715,444 420,821 385,883 Net (Loss) Earnings of the Group from Discontinued Operations (32) 10,008 137,984 Net Earnings of the Group 715,412 430,829 523,867 Net Earnings Attributable to Noncontrolling Interests from Continuing Operations (36,788) (39,213) (32,022) Net (Earnings) Loss Attributable to Redeemable Noncontrolling Interests (34,585) 85,414 - Net Earnings Attributable to Jacobs from Continuing Operations 644,071 467,022 353,861 Net Earnings Attributable to Jacobs$ 644,039 $ 477,030 $ 491,845 Net Earnings Per Share: Basic Net Earnings from Continuing Operations Per Share$ 5.01 $ 3.15 $ 2.69 Basic Net Earnings from Discontinued Operations Per Share $ - $ 0.08 $ 1.05 Basic Earnings Per Share$ 5.01 $ 3.22 $ 3.74 Diluted Net Earnings from Continuing Operations Per Share$ 4.98 $ 3.12 $ 2.67 Diluted Net Earnings from Discontinued Operations Per Share $ - $ 0.08 $ 1.04 Diluted Earnings Per Share$ 4.98 $ 3.20 $ 3.71 Page 56
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2022 Overview
Net earnings attributable to the Company from continuing operations for fiscal 2022 were$644.1 million (or$4.98 per diluted share), an increase of$177.0 million , or 37.9%, from$467.0 million (or$3.12 per diluted share) for the prior year. The current year results reflected higher year-over-year operating profit of$229.8 million , which benefited from the full-year operating results impact of the Company'sPA Consulting investment acquired onMarch 2, 2021 , the absence of one-time deal and related other charges in the 2021 fiscal period associated with this investment of approximately$297 million , including one-time compensation charges of$261 million and favorable year over year operating results for the remaining Jacobs businesses, primarily in P&PS, as discussed below in the Segment Financial Information section. These favorable operating profit impacts were offset in part by higher year-over-year Restructuring and other charges and transaction costs (excluding the above mentioned one-time deal and relatedPA Consulting investment costs) in the current year, including pre-tax settlement charges associated with the Legacy CH2M Matter (as defined in Note 19 - Contractual Guarantees, Litigation, Investigations and Insurance) of$91.3 million , approximately$27 million in third party recoveries was recorded as receivables reducing selling, general & administrative expense (SG&A),$78.4 million associated with the Company's transformation initiatives relating to real estate rescaling (see Note 17 - Restructuring and Other Charges) and year-over-year increases in intangibles amortization costs of$48.8 million which was due mainly to full year impacts of acquired intangible assets from thePA Consulting investment. Other income (expense), net was unfavorable$(49.0) million for the current year 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) which was sold in the fourth quarter of fiscal 2021, and C3 (as defined in Note 8- Joint ventures, VIEs and other investments) of$34.7 million and$49.6 million , respectively, as well as higher interest expense of$27.5 million in the current year compared to the prior year due to higher outstanding levels of debt outstanding and higher interest rates. Additionally, current year fiscal 2022 other income (expense) benefited from the absence of the prior year$38.6 million impairment charges of our investment inAWE Management Ltd. ("AWE ML") as well as a$13.9 million gain on sale of a cost investment and other favorable items during the current fiscal 2022 year-to-date period. Income taxes were lower in the current year by$(113.9) million due primarily to the absence of fiscal 2021 income taxes attributable to certain nondeductible compensation related charges associated with the Company'sPA Consulting investment, and fiscal 2021$25.6 million in tax law changes enacted in theUnited Kingdom and the prior year change in valuation allowance of$38.9 million and other miscellaneous favorable tax items combined with current year-to-date tax benefits of$33.1 million for a change in the realizability of foreign tax credits due to a change in theU.S. foreign tax credit regulations and$26.0 million for a change in judgment on the realizability of domestic deferred tax assets which are capital in nature. Finally, unfavorable year-over-year net earnings impacts associated with redeemable noncontrolling interests of$120.0 million were attributable mainly to the absence of the 2021 period redeemable noncontrolling interests in connection with the non-controlling interest portion of the one-time compensation charges incurred in thePA Consulting investment mentioned above of approximately$91 million , as well as the impact of the full year-to-date effects of the redeemable noncontrolling interests share ofPA Consulting's operating results in fiscal 2022. Fiscal 2021 earnings per share was impacted by the$(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.
On
Backlog atSeptember 30, 2022 was$27.9 billion , up$1.2 billion , from$26.6 billion for the prior year. New prospects and new sales remain strong, and the Company continues to have a positive outlook for many of the industry groups and sectors in which our clients operate. The Company continues to evaluate its leased office space for possible abandonment or sublease options and believes that further programs associated with these activities may be entered into in fiscal 2023, which could result in future significant right of use asset impairment charges and lease related property, equipment & improvements. Page 57 --------------------------------------------------------------------------------
Results of Operations
Fiscal 2022 Compared to Fiscal 2021
Revenues for the year endedSeptember 30, 2022 were$14.92 billion , an increase of$830.2 million , or 5.9%, from$14.09 billion for the prior year. The increase in revenues was due mainly to fiscal 2022 incremental revenues from thePA Consulting investment completed inMarch 2021 , theBuffalo Group acquisition inNovember 2020 , and the StreetLight and BlackLynx acquisitions in fiscal year 2022, as well as revenue benefits from increased spending in ourU.S. government business sector client base. These increases in revenues for the current year were partially offset by declines in pass through revenues in our P&PS advanced facilities business. Additionally, the current fiscal year was unfavorably impacted by (1) certain large contract wind downs in theU.S and (2) foreign currency translation of$346.3 million in our international businesses, as compared to favorable impacts of$238.6 million for the corresponding period last year. Pass through costs included in revenues for the year endedSeptember 30, 2022 were$2.32 billion , in comparison to$2.38 billion in the prior year. In general, pass through costs are more significant on projects that have a higher content of field services activities. Pass through costs are generally incurred at specific points during the life cycle of a project and are highly dependent on the needs of our individual clients and the nature of the clients' projects. However, because we have hundreds of projects that start at various times within a fiscal year, the effect of pass through costs on the level of direct costs of contracts can vary between fiscal years without there being a fundamental or significant change to the underlying business. Gross profit for the year endedSeptember 30, 2022 was$3.33 billion , up$283.3 million , or 9.3%, from$3.04 billion for the prior year. Our gross profit margins were 22.3% and 21.6% for the years endedSeptember 30, 2022 andOctober 1, 2021 , respectively. The increase in our gross profit and gross profit margins were mainly attributable to the current year impacts of the recent business acquisitions mentioned above and favorable impacts from the business results of ourPA Consulting investment on a year-to-date basis along with revenue benefits from increased spending in theU.S. government business sector noted above. The increases in gross profit during the current year 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 level.
Selling, general & administrative expenses for the year endedSeptember 30, 2022 were$2.41 billion , an increase of$53.5 million , or 2.3%, from$2.36 billion for the prior year. The current year's results were impacted by incremental SG&A expenses from the business acquisitions mentioned above (mainlyPA Consulting ) of$150.0 million (including$48.9 million in additional amortization expense for acquired intangibles and excluding the compensation related charge discussed below) due to the prior comparable period including activity related to the acquired businesses and investment inPA Consulting only for the partial periods subsequent to the applicable acquisition date. Additionally, Restructuring and other charges for fiscal 2022 included$91.3 million pre-tax attributable to the final settlement of the Legacy CH2M Matter, approximately$27 million in third party recoveries was recorded as receivables reducing SG&A, which is further discussed in Note 19- Contractual Guarantees, Litigation, Investigations and Insurance) and$78.3 million in costs associated in part with the Company's transformation initiatives relating to real estate. Also, fiscal 2022 SG&A expenses were impacted by higher personnel costs associated with investments in advance of expected growth anticipated in late 2022 and 2023. As noted above, the prior year 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$76.4 million for the year endedSeptember 30, 2022 as compared to unfavorable impacts of$75.9 million for fiscal 2021. Net interest expense for the year endedSeptember 30, 2022 was$95.8 million , an increase of$26.5 million from$69.2 million for the prior year. The increase in net interest expense year over year is primarily due to the 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 year, in addition to higher interest rates. Additionally, the increase is also impacted by higher levels of average debt outstanding related to the funding of thePA Consulting investment in March of fiscal 2021. Page 58 -------------------------------------------------------------------------------- Miscellaneous income (expense), net for the year endedSeptember 30, 2022 was income of$54.3 million , a decrease of$22.5 million as compared to$76.7 million in income for the prior year. The$22.5 million decrease from fiscal 2021 was due primarily to impacts in the prior year periods of pre-tax unrealized gains of$34.7 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 and$49.6 million in the Company's investment holding in C3, as further discussed in Note 11 - Joint Ventures, VIEs and Other Investments, respectively. Offsetting these favorable items in the prior year was an other-than-temporary impairment charge on our investment in AWE ML of$38.6 million . Fiscal 2022 benefited primarily from a$13.9 million pre-tax gain related to a cost method investment sold during the period. The following table reconciles total income tax expense on continuing operations using the statutoryU.S. federal income tax rate to the consolidated income tax expense on continuing operations shown in the accompanying Consolidated Statements of Earnings for the years endedSeptember 30, 2022 ,October 1, 2021 andOctober 2, 2020 (dollars in thousands): For the Years Ended September 30, October 1, October 2, 2022 % 2021 % 2020 % Statutory amount$ 184,033 21.0 %$ 146,078 21.0 %$ 92,652 21.0 % State taxes, net of the federal benefit 19,316 2.2 % 14,564 2.1 % 7,254 1.6 %
Exclusion of tax on non-controlling interests (7,533) (0.9) %
(7,999) (1.1) % (6,622) (1.5) %
Foreign:
Difference in tax rates of foreign operations (2,516) (0.3) %
3,684 0.5 % (6,267) (1.4) %
Expense/(benefit) from foreign valuation
allowance change 2,982 0.3 % 2,148 0.3 % (16,861) (3.8) %
Nondeductible compensation - - % 48,727 7.0 % - - %
U.S. tax cost (benefit) of foreign operations 48,843 5.6 % 35,228 5.1 % 42,992 9.7 %
Tax differential on foreign earnings 49,309 5.6 % 89,787 12.9 % 19,864 4.5 %
Foreign tax credits (33,734) (3.8) % (25,230) (3.6) % (26,471) (6.0) %
Tax Rate Change 3,210 0.4 % 25,588 3.7 % (6,811) - %
Valuation allowance (59,121) (6.7) % 38,928 5.6 % - - %
Uncertain tax positions (1,439) (0.2) % 978 0.1 % (11,338) (2.6) %
Other items:
Energy efficient commercial buildings
deduction (2,681) (0.3) % (3,760) (0.5) % (7,267) (1.6) %
Disallowed officer compensation 6,034 0.7 % 6,689 1.0 % 5,081 1.2 %
Stock compensation (2,168) (0.2) % (9,946) (1.4) % (10,234) (2.3) %
Other items - net 5,677 0.6 % (896) (0.1) % (788) (0.2) %
Total other items 6,862 0.8 % (7,913) (1.1) % (13,208) (3.0) %
Taxes on income from continuing operations $ 160,903 18.4 % $ 274,781 39.5 % $ 55,320 12.5 %
The Company's consolidated effective income tax rate for the year ended
September 30, 2022 decreased to 18.4% from 39.5% for fiscal 2021. Key drivers
for the year-over-year decrease in the effective tax rate include current year
benefits of $33.1 million for a change in the realizability of foreign tax
credits due to a change in the U.S. foreign tax credit regulations and
$26.0 million for a change in judgment on the realizability of domestic deferred
tax assets which are capital in nature, as compared to prior year unfavorable
impacts from valuation allowances of $38.9 million . The prior year effective tax
rate was also impacted by $261 million in nondeductible compensation relating to
the PA investment post-completion compensation expense and $25.6 million related
to tax rate changes in the United Kingdom .
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--------------------------------------------------------------------------------Segment Financial Information
The following tables present total revenues and segment operating profit for each reportable segment (in thousands) and includes a reconciliation of segment operating profit to totalU.S. GAAP operating profit by including certain corporate-level expenses and expenses relating to the Restructuring other charges (as defined in Note 17- Restructuring and Other Charges) and transaction costs (in thousands). For the Years Ended September 30, 2022 October 1, 2021 October 2, 2020 Revenues from External Customers: Critical Mission Solutions$ 5,233,629 $ 5,087,052 $ 4,965,952 People & Places Solutions 8,569,900 8,378,179 8,601,023 PA Consulting 1,119,296 627,401 - Total$ 14,922,825 $ 14,092,632 $ 13,566,975 For the Years Ended September 30, 2022 October 1, 2021 October 2, 2020 Segment Operating Profit: Critical Mission Solutions $ 424,385$ 447,161 $ 372,070 People & Places Solutions (1) 823,564 780,380 740,707 PA Consulting 232,225 151,071 - Total Segment Operating Profit 1,480,174 1,378,612 1,112,777 Other Corporate Expenses (2) (364,440) (340,129) (249,391) Restructuring, Transaction and Other Charges (3) (197,884) (350,394) (327,413) Total U.S. GAAP Operating Profit 917,850 688,089 535,973 Total Other (Expense) Income, net (4) (41,503) 7,513 (94,770) Earnings from Continuing Operations Before Taxes $ 876,347$ 695,602 $ 441,203
(1) Includes
ended October 1, 2021 .
(2) Other corporate expenses include intangibles amortization of
$149.8 million and$90.6 million for the years ended September
30, 2022,
October 1, 2021 andOctober 2, 2020 , respectively, with the
comparative increase
mainly attributable to higher amortization from the PA
Consulting investment.
(3) Included in the year ended
the final settlement of the Legacy CH2M Matter, net of previously recorded
reserves, approximately $27 million in third party recoveries was recorded as
receivables reducing SG&A and $78.3 million of real estateimpairment charges.
Included in the year ended October 1, 2021 is $297.8 million of costs incurred in
connection with the investment in PA Consulting , in part classified as
compensation costs. Included in the years ended October 1, 2021 and
2020 were $2.4 million and $161.4 million in charges associated mainly with real
estate impairments.
(4) The year ended
method investment sold during the period and a gain of $8.7 million related to
lease terminations. The years ended October 1, 2021 and October 2, 2020 include
$34.7 million and$(74.3) million in fair value adjustments
related to our
investment in Worley stock (net of Worley stock dividends) and certain foreign
currency revaluations relating to ECR sale proceeds, respectively. The year ended
October 1, 2021 includes$(38.5) million related to impairment
of our AWE
Management Ltd. investment and$49.6 million in fair value
adjustments related to
our investment in C3 stock. The investments in Worley and C3 were sold in fiscal
2021 and therefore there are no comparable amounts in thecurrent fiscal year.
Additionally, the increase in net interest expense year over year is primarily due
to the 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 year, in addition to higher interest
rates.
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In evaluating the Company's performance by operating segment, the CODM reviews
various metrics and statistical data for each Line of Business ("LOB") and PA
Consulting , but focuses primarily on revenues and operating profit. As discussed
above, segment operating profit includes not only local SG&A expenses but the
SG&A expenses of the Company's support groups that have been allocated to the
segments. In addition, the Company attributes each segment's specific incentive
compensation plan costs to the segments. The revenues of the People & Places
Solutions LOB are more affected by pass through revenues than the Critical
Mission Solutions LOB or the PA Consulting segment. The methods for recognizing
revenue, incentive fees, project losses and change orders are consistent among
the segments.
In the first quarter of fiscal 2023, the Company will begin reporting an additional operating segment, Divergent Solutions (DVS), in addition to the current operating segments.
Critical Mission Solutions
For the Years Ended
September 30, 2022 October 1, 2021 October 2, 2020
Revenue $ 5,233,629 $ 5,087,052 $ 4,965,952
Operating Profit $ 424,385 $ 447,161 $ 372,070
Critical Mission Solutions (CMS) segment revenues for the year ended
September 30, 2022 were $5.23 billion , up $146.6 million , or 2.9%, from $5.09
billion for the prior year. Our increase in revenue was primarily attributable
to recent acquisitions in addition to recent contract awards including the
Department of Energy Nuclear remediation program, offset in part by several
large U.S. Cyber and Intelligence contracts winding down in the U.S. Impacts on
revenues from unfavorable foreign currency translation were approximately $69.1
million for the year ended September 30, 2022 , compared to $61.8 million in
favorable impacts in the corresponding prior year.
Operating profit for the segment was $424.4 million for the year ended
September 30, 2022 , down $22.8 million , or 5.1%, from $447.2 million for the
prior year. The year-over-year decrease in operating profit was unfavorably
impacted by the larger contract wind downs mentioned above, which carried higher
profit margins. This is partly offset by new business and U.S. government
contract awards during fiscal year 2022. Impacts on operating profit from
unfavorable foreign currency translation were approximately $8.4 million for the
year ended September 30, 2022 , compared to $9.7 million in favorable impacts in
the corresponding prior year.
People & Places Solutions
For the Years Ended
September 30, 2022 October 1, 2021 October 2, 2020
Revenue $ 8,569,900 $ 8,378,179 $ 8,601,023
Operating Profit $ 823,564 $ 780,380 $ 740,707
Revenues for the People & Places Solutions (P&PS) segment for the year ended
September 30, 2022 were $8.57 billion , up $191.7 million , or 2.3%, from $8.38
billion for the prior year. The increase in revenues from fiscal 2021 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 an unfavorable impact of $195.0 million on our
international business for the year ended September 30, 2022 , compared to $176.8
million in favorable impacts in the corresponding prior year.
Operating profit for the segment for the year ended September 30, 2022 was
$823.6 million , an increase of $43.2 million , or 5.5%, from $780.4 million for
the comparative period in fiscal 2021. The year-over-year increase 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
2023. In addition, fiscal 2021 operating profit was impacted by $19.5 million in
net charges related to a legal settlement. Impacts on operating profit from
unfavorable foreign currency translation were approximately $33.9 million for
the year ended September 30, 2022 , compared to $30.9 million in favorable
impacts in the corresponding prior year.
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--------------------------------------------------------------------------------PA Consulting For the Years Ended September 30, 2022 October 1, 2021 October 2, 2020 Revenue $ 1,119,296$ 627,401 $ - Operating Profit $ 232,225$ 151,071 $ - Revenues for thePA Consulting segment for the year endedSeptember 30, 2022 were$1.12 billion , up$491.9 million , or 78.4%, from$627.4 million for the prior year. The increase in revenue was due primarily to the full year-to-date impact of revenues from ourMarch 2, 2021 investment inPA Consulting and was also due to growth in theU.K. business. Foreign currency translation had a$82.2 million unfavorable impact on revenues in our international businesses for the year endedSeptember 30, 2022 , compared to a favorable impact of$50.9 million for the corresponding prior year. Operating profit for the segment for the year endedSeptember 30, 2022 was$232.2 million , an increase of$81.2 million , or 53.7%, from$151.1 million , for the prior year. The increase in operating profit from the prior year was due mainly to the full year-to-date impact of operating profit from ourMarch 2, 2021 investment inPA Consulting , offset in part byPA Consulting normalization of utilization rates during the second half of fiscal year 2022. Foreign currency translation had a$17.1 million unfavorable impact on operating profit in our international businesses for the year endedSeptember 30, 2022 and a favorable impact of$11.8 million for the corresponding prior year.
Other Corporate Expenses
Other corporate expenses were$364.4 million ,$340.1 million and$249.4 million for the years endedSeptember 30, 2022 ,October 1, 2021 andOctober 2, 2020 , respectively. The increase from fiscal 2021 to fiscal 2022 was due primarily 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, partially offset by lower legal costs and reduced employee related expenses in the fourth quarter. Included in other corporate expenses in the above table are costs and expenses that 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
For discussion regarding Restructuring and other charges, see Note 17- Restructuring and Other Charges to the Consolidated Financial Statements.
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.
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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 it
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 evaluate our backlog generally on a year-over-year basis, but also on
a sequential, quarter-over-quarter basis, where appropriate.
Please refer to Item 1A- Risk Factors, above, for a discussion of other factors that may cause backlog to ultimately convert into revenues at different amounts.
The following table summarizes our backlog for the years ended
September 30, 2022 October 1, 2021 October 2, 2020
Critical Mission Solutions $ 10,561 $ 10,589 $ 9,104
People & Places Solutions 17,032 15,738 14,714
PA Consulting 269 304 -
Total $ 27,862 $ 26,631 $ 23,818
Critical Mission Solutions backlog was generally consistent and in line with the
prior year comparable period backlog. Critical Mission Solutions has been
awarded a number of key opportunities in the U.S. government space for the years
presented.
The increase in backlog in People & Places Solutions for the years presented was primarily driven by new business awards in our advanced facilities business.
Backlog relating to work to be performed either directly or indirectly for theU.S. federal government and its agencies totaled approximately$10.9 billion (or 39.1% of total backlog),$10.8 billion (or 40.5% of total backlog) and$8.5 billion (or 35.7% of total backlog) atSeptember 30, 2022 ,October 1, 2021 andOctober 2, 2020 , respectively. Most of our federal government contracts require that services be provided beyond one year. In general, these contracts must be funded annually (i.e., the amounts to be spent under the contract must be appropriated by theU.S. Congress to the procuring agency, and then the agency must allot these sums to the specific contracts).
We estimate that approximately
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 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. For a discussion on the year endedOctober 1, 2021 compared to the year endedOctober 2, 2020 , please refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedOctober 1, 2021 . Page 63 --------------------------------------------------------------------------------
Liquidity and Capital Resources
AtSeptember 30, 2022 , our principal sources of liquidity consisted of$1.14 billion in cash and cash equivalents and$1.14 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 atSeptember 30, 2022 represented an increase of$126.2 million from$1.01 billion atOctober 1, 2021 , the reasons for which are described below. Our cash flow provided by operations of$474.7 million during fiscal 2022 was comparatively lower than the$726.3 million in cash flow provided by operations for the prior year. This change was due primarily to the Legacy CH2M Matter cash settlement paid in the current fiscal year and the impact of thePA Consulting post-completion compensation payments made during the prior fiscal year, with the absence of these two items resulting in near-flat year-over-year cash flow from operations. Our cash used for investing activities for fiscal 2022 of$538.42 million was comparatively lower than the$1.38 billion cash used for investing activities for the prior year. The decrease was due primarily to the acquisitions of StreetLight and BlackLynx in the current year compared to the considerably larger prior year investment inPA Consulting and theBuffalo Group acquisition, partially offset by proceeds received from the Company's disposal of the Worley and C3 investments and the final ECR sale working capital settlement in fiscal 2021. Our cash provided by financing activities for the fiscal year ended 2022 of$320.2 million resulted mainly from net proceeds from borrowings of$719.0 million primarily in connection with the StreetLight and BlackLynx acquisitions and funding of the Legacy CH2M Matter cash settlement, offset by cash used for share repurchases of$281.9 million and$115.9 million in dividends to shareholders. Cash provided by financing activities was$799.0 million in fiscal 2021 and resulted mainly from net proceeds from borrowings of$1.22 billion , partially offset by common stock repurchases of$274.9 million and dividend payments to shareholders of$107.2 million . AtSeptember 30, 2022 , the Company had approximately$230.5 million in cash and cash equivalents held in theU.S. and$909.9 million held outside of theU.S. (primarily in theU.K. , theEurozone ,Australia ,India ,Japan ,Israel ,Canada 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 beginning on page F-1 of this Annual Report on Form 10-K), there are no material impediments to repatriating these funds to theU.S. In connection with the Company's implementation of a new holding company structure, which was completed inAugust 2022 , the Company launched an offer to repurchase its outstanding Senior Notes, as defined in Note 9, Borrowings, at par plus accrued and unpaid interest, and without any make-whole premium. OnOctober 7, 2022 , the Company repaid$481 million of Senior Notes held by holders who accepted the offer with proceeds from our long-term Revolving Credit Facility. OnApril 12, 2022 , the Company paid cash of AUD640 million, or approximately$475 million usingmid-April 2022 exchange rates, which represented the final settlement of Legacy CH2M Matter. For more information, refer to Note 19- Contractual Guarantees, Litigation, Investigations and Insurance. OnFebruary 4, 2022 , the Company acquiredStreetLight Data, Inc. ("StreetLight"). StreetLight is a pioneer of mobility analytics who 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$190.7 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. Page 64 -------------------------------------------------------------------------------- OnNovember 19, 2021 , Jacobs acquired 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, a new term loan and draws on the Company's existing revolver. The remaining 35% interest is held byPA Consulting employees. See Note 14- PA Consulting Business Combination for more discussion on the investment and Note 9- 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 Company's unsecured term loan facility datedMarch 25, 2020 (the "2020 Term Loan Facility"). The 2020 Term Loan Facility and the 2021 Term Loan Facility are together referred to as the "Term Loan Facilities". 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 which was expected to be settled in fiscal 2022. See Note 15- Other Business Combinations for further discussion. The Company had$280.5 million in letters of credit outstanding atSeptember 30, 2022 . Of this amount,$1.3 million was issued under the Revolving Credit Facility and$279.2 million was issued under separate, committed and uncommitted letter-of-credit facilities. 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 were in compliance with all of our debt covenants at
New Accounting Pronouncements
ASU 2020-04, Reference Rate Reform, (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting is intended to provide relief for entities impacted by reference rate reform and contains provisions and optional expedients designed to simplify requirements around designation of hedging relationships, probability assessments of hedged forecasted transactions and accounting for modifications of contracts that refer to LIBOR or other rates affected by reference rate reform. The guidance is elective and is effective on the date of issuance. ASU 2020-04 is applied prospectively to contract modifications and as of the effective date for existing and new eligible hedging relationships. The guidance is temporary and will generally not be applicable to contract modifications which occur afterDecember 31, 2022 . The adoption of the new guidance in the first quarter of fiscal 2022 allowed the Company to continue its British pound denominated interest rate hedge relationships which previously defined LIBOR as the benchmark interest rate and inDecember 2021 were amended to replace LIBOR with the Sterling Overnight Index Average rate ("SONIA"). ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, is effective for fiscal years beginning afterDecember 15, 2022 , with early adoption permitted. ASU 2021-08 requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The Company adopted the new guidance in the first quarter of fiscal 2022 and the adoption had no impact on the Company's financial position, results of operations or cash flows. Page 65
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