filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 December 29, 2023 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:
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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 2023 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 2023 Form 10-K;
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The Company’s fiscal 2023 audited consolidated financial statements and notes thereto included in our 2023 Form 10-K; and
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Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Form 10-K.
In addition to historical information, this MD&A and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the United States 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,” "target," "goal" 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 financial condition and results of operations and our expectations as to our future growth, prospects, financial outlook and business strategy for fiscal year 2024 or future fiscal years, including our expectations for the timing of completion of restructuring activities and savings to be realized from such activities, as well as the ability to effectuate the Separation Transaction on the expected terms and on the projected timeline, and any assumptions underlying any of the foregoing. Although such statements are based on management’s current estimates and expectations, and/or currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain, and you should not place undue reliance on such statements as actual results may differ materially. We caution the reader that there are a variety of risks, uncertainties and other factors that could cause actual results to differ materially from what is contained, projected or implied by our forward-looking statements. Such factors include uncertainties as to the timing of the Separation Transaction, the impact of the Separation Transaction on Jacobs' and the combined company's businesses if the transaction is completed, including a possible impact on Jacobs' credit profile and a possible decrease in the trading price of Jacobs' and/or the combined company's shares, the possibility that the Separation Transaction, if completed, may not qualify for the expected tax treatment, the ability to obtain all required regulatory approvals, the possibility that closing conditions for the Separation Transaction may not be satisfied or waived, on a timely basis or otherwise, the risk that any consents or approvals required in connection with the Separation Transaction may not be received, the risk that the Separation Transaction may not be completed on the terms or in the time frame expected by the parties, uncertainties as to our and our stockholders' respective ownership percentages of the combined company and the value to be derived from the disposition of Jacobs’ stake in the combined company, unexpected costs, charges or expenses resulting from the Separation Transaction, business and management strategies and the growth expectations of the combined company, the inability of Jacobs' and the combined company to retain and hire key personnel, customers or suppliers while the Separation Transaction is pending or after it is completed, and the ability of the Company to eliminate all stranded costs, as well as other factors related to our business, such as our ability to fully execute on our three-year corporate strategy, including our ability to invest in the tools needed to 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 or to achieve them fully and to successfully integrate acquired businesses while retaining key personnel, the impact of any pandemic, 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 and potential changes to the amounts provided for, under the Infrastructure Investment and Jobs Act, as well as other legislation related to governmental spending, any changes in U.S. or foreign tax laws, statutes, rules, regulations or ordinances that may adversely impact our future financial positions or results of operations, financial market risks that may affect the Company, including by affecting the Company's access to capital, the cost of such capital and/or 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 and foreign currency exchange rates, changes in capital markets, instability in the banking industry, or the impact of a possible recession or economic downturn on our results, prospects and opportunities, and geopolitical events and conflicts, among others. The impact of such matters includes, but is not limited to, the possible reduction in demand for
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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 and 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 any future pandemics or infectious disease outbreaks 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 Item 1A, Risk Factors included in our 2023 Form 10-K and in this Quarterly Report on Form 10-Q. We undertake no obligation to release publicly any revisions or updates to any forward-looking statements. We encourage you to read carefully the risk factors, as well as the financial and business disclosures contained in this Quarterly Report on Form 10-Q and in other documents we file from time to time with the United States Securities and Exchange Commission (the "SEC").
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, turning abstract ideas into realities that transform the world for good. Leveraging a talent force of approximately 60,000, Jacobs provides a full spectrum of professional services including consulting, technical, engineering, scientific and project delivery for the government and private sector.
Over the last seven years, Jacobs has been on a transformation journey, starting with a re-emphasis on business excellence, our culture and brand, and evolving our portfolio to create an inclusive, technology-forward company producing the critical solutions of tomorrow. This transformation included acquiring a 65% stake in PA Consulting Group Limited ("PA Consulting") in fiscal 2021. Acquisitions of Buffalo Group, BlackLynx and StreetLight further positioned us as a leader in high-value government services and technology-enabled solutions.
Our Boldly Moving Forward strategy announced in March of 2022 provides Jacobs with a three-year strategy that builds on our success over the preceding three years and takes advantage of a new lens crafted from the incredible pace of change in the world and in our markets. We’re now focused on broadening our leadership in high growth sectors aligned with long-term secular trends, such as infrastructure renewal and investment, and the global transition to more sustainable ways of living. Our strategy is driven by our purpose and values and reflects our vision of becoming a company like no other. An extensive evaluation of global trends, capabilities and markets to understand the largest opportunities, projected spend and growth rates identified three growth accelerators: Climate Response, Consulting & Advisory and Data Solutions, which cut across our entire organization and markets creating connections among global market trends, the solutions we deliver and our company purpose. Our three growth accelerators are delivering significant value for our clients, positioning Jacobs for high-margin growth while advancing sustainability and social value in the communities where we serve.
Climate Response
As a purpose-led company, we know we have a pivotal role to play across the entire Climate Response value chain – focusing on end-to-end solutions in energy transition, decarbonization, adaptation and resilience, and regenerative and nature-based climate solutions. We consider this not only good business, but our duty to channel our technology-enabled expertise and capabilities toward benefiting people and the planet.
Data Solutions
As our clients navigate multifaceted challenges in a rapidly changing world, we are harnessing our data and digital capabilities, products and tools to help our clients operate more efficiently in a safe environment and capitalize on their data more than ever before. We're empowering innovation and ingenuity to unlock better outcomes. We’re investing in big data, artificial intelligence and generative design while building a technology backbone that enables us to add value in a more efficient way.
Consulting and Advisory
Together with our visionary partner, PA Consulting, we're expanding our position in high-end advisory services and deploying our collective strengths to create significant opportunities for our clients to adapt, innovate and transform.
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We're focused on broadening our leadership in sustainable, higher growth, higher value sectors. As part of our strategy, our brand promise: "Challenging today. Reinventing tomorrow." signals our transition to a global technology-forward solutions company. We began trading as “J” on the New York Stock Exchange in December 2019, and in March 2021 our Global Industry Classifications Standard code changed to Research & Consulting Services. Our Focus 2023 Transformation Office drove further innovation, delivering value-creating solutions for our clients and leveraging an integrated digital and technology strategy to improve our efficiency and effectiveness, ultimately freeing up valuable time and resources for reinvestment in our people.
In the fourth quarter fiscal 2022, Jacobs Engineering Group Inc. (the predecessor parent company) created a new holding company, Jacobs Solutions Inc., which became the new parent company of Jacobs Engineering Group Inc. As a result of the transaction, the predecessor parent company's then-current stockholders automatically became stockholders of Jacobs Solutions Inc., on a one-for-one basis, with the same number of shares and same ownership percentage of the predecessor parent company’s common stock that they held immediately prior to the transaction.
Operating Segments
The services we provide fall into the following two lines of business (LOB): Critical Mission Solutions (CMS) and People & Places Solutions (P&PS). Our LOBs, our business unit Divergent Solutions (DVS), which operates as an integrated offering to both LOBs, and a majority investment in PA Consulting (PA) constitute the Company’s reportable segments and are the foundation for how Jacobs helps create a more connected, sustainable world. For additional information regarding our segments, including information about our financial results by segment and financial results by geography, see Note 18- Segment Information and Note 5- Revenue Accounting for Contracts of Notes to Consolidated Financial Statements.
Critical Mission Solutions (CMS)
Jacobs' Critical Mission Solutions line of business provides a full spectrum of solutions for clients to address evolving challenges like information and cyber warfare, digital transformation and modernization, national security and defense, space exploration, digital asset management and the green energy transition. Our core capabilities include program management and mission operations; systems digital engineering and mission integration, research, development, test and evaluation; integration, operation, maintenance and sustainment of systems and facilities; enterprise-level IT operations and mission IT delivery, software development, and software application integration; engineering, design and construction of specialized technical facilities and systems; environmental remediation; specialized training; robotics and automation; and other highly technical consulting solutions. We deliver these capabilities for government agencies as well as commercial clients in the U.S. and international markets.
We leverage our deep experience to support clients in the Aerospace, Automotive, Space, Telecom, Intel, Defense and Energy sectors to develop lasting solutions in the communities where we live and work.
CMS is included as part of the Separation Transaction announced on November 20, 2023, which is expected to close in fiscal year 2024, subject to regulatory approvals and other customary closing conditions.
People & Places Solutions (P&PS)
Jacobs' People & Places Solutions line of business provides end-to-end solutions for our clients’ most complex challenges related to climate change, energy transition, connected mobility, integrated water management, smart cities and biopharmaceutical manufacturing. In doing so, we combine deep experience in the following markets - Infrastructure, Cities & Places, Energy & Environmental, Health & Life Sciences and Advanced Manufacturing. Our core capabilities revolve around consulting, planning, science, architecture, design and engineering, as well as infrastructure delivery services and long-term operation of facilities. Solutions may be delivered as standalone professional service engagements, comprehensive program management partnerships, and selective progressive design-build and construction management at-risk delivery services in targeted markets. Increasingly, we leverage our data science and technology-enabled expertise with our core capabilities to deliver positive and enduring solutions for the clients and communities we serve.
Our clients include national, state and local governments in the U.S., Europe, U.K., Middle East and Asia-Pacific, as well as multinational and local private sector clients throughout the world.
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Divergent Solutions (DVS)
Jacobs’ operating segment, Divergent Solutions, serves as the core foundation for developing and delivering innovative, next-generation cloud, cyber, data and digital technologies. DVS further strengthens our ability to drive value for clients of both LOBs by leveraging a full spectrum of cyber, data analytics, systems and software application integration services across Jacobs. Our core capabilities include global strategic alliances, innovation collaboration, next-generation technologies, software and data as a service and data and secure solutions. DVS clients include government agencies and commercial clients in the U.S. and international markets. The Separation Transaction announced on November 20, 2023 includes portions of DVS, including its Cyber & Intelligence business.
PA Consulting
Jacobs invested in a 65% stake in PA Consulting, the company that is bringing ingenuity to life. PA accelerates new growth ideas from concept, through design and development and to commercial success, and revitalizes organizations, building leadership, culture, systems and processes to make innovation a reality. PA Consulting's global team of approximately 4,000, which includes strategists, innovators, designers, consultants, digital experts, scientists, engineers and technologists work across seven sectors: consumer and manufacturing, defense and security, energy and utilities, financial services, government, health and life sciences, and transport to make a positive impact alongside the clients it supports.
PA has a diverse mix of private and public sector clients. Private sector clients include global household names like Unilever and Pret A Manger; and start-ups like PulPac, which is converting plant fibers into sustainable packaging, and Hydrow, with its award-winning indoor rowing machine. Public sector clients include national and local government entities like the U.K.’s Ministry of Defence and National Health Service, the Swedish Payments Authority (Utbetalningsmyndigheten), and the U.K.’s Hampshire County Council.
In a fast-moving, complex world, we’re deploying the collective strengths of Jacobs and PA to create significant opportunities for our clients to adapt, innovate and transform. Alongside Copenhagen Metro – one of the most advanced public transport systems in Europe – we’re providing strategic management and technical services to support its operations and maintenance. We’ve also been selected by the U.K. Department for Transport to provide technical and commercial advice on its portfolio of rail and other transport mode agreements, major projects and programs, and its policy and strategic work in transport.
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Results of Operations for the three months ended December 29, 2023 and December 30, 2022
(in thousands, except per share information)
| For the Three Months Ended | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Revenues | $ | 4,159,225 | $ | 3,798,668 | |||||||||||||||||||
| Direct cost of contracts | (3,308,687) | (2,983,955) | |||||||||||||||||||||
| Gross profit | 850,538 | 814,713 | |||||||||||||||||||||
| Selling, general and administrative expenses | (646,475) | (576,908) | |||||||||||||||||||||
| Operating Profit | 204,063 | 237,805 | |||||||||||||||||||||
| Other Income (Expense): | |||||||||||||||||||||||
| Interest income | 8,233 | 3,007 | |||||||||||||||||||||
| Interest expense | (43,352) | (40,077) | |||||||||||||||||||||
| Miscellaneous expense | (3,195) | (3,254) | |||||||||||||||||||||
| Total other expense, net | (38,314) | (40,324) | |||||||||||||||||||||
| Earnings from Continuing Operations Before Taxes | 165,749 | 197,481 | |||||||||||||||||||||
| Income Tax benefit (expense) from Continuing Operations | 16,279 | (50,103) | |||||||||||||||||||||
| Net Earnings of the Group from Continuing Operations | 182,028 | 147,378 | |||||||||||||||||||||
| Net Loss of the Group from Discontinued Operations | (574) | (708) | |||||||||||||||||||||
| Net Earnings of the Group | 181,454 | 146,670 | |||||||||||||||||||||
| Net Earnings Attributable to Noncontrolling Interests from Continuing Operations | (7,226) | (7,031) | |||||||||||||||||||||
| Net Earnings Attributable to Redeemable Noncontrolling interests | (2,618) | (3,992) | |||||||||||||||||||||
| Net Earnings Attributable to Jacobs from Continuing Operations | 172,184 | 136,355 | |||||||||||||||||||||
| Net Earnings Attributable to Jacobs | $ | 171,610 | $ | 135,647 | |||||||||||||||||||
| Net Earnings Per Share: | |||||||||||||||||||||||
| Basic Net Earnings from Continuing Operations Per Share | $ | 1.38 | $ | 1.08 | |||||||||||||||||||
| Basic Net Loss from Discontinued Operations Per Share | $ | — | $ | (0.01) | |||||||||||||||||||
| Basic Earnings Per Share | $ | 1.37 | $ | 1.07 | |||||||||||||||||||
| Diluted Net Earnings from Continuing Operations Per Share | $ | 1.37 | $ | 1.07 | |||||||||||||||||||
| Diluted Net Loss from Discontinued Operations Per Share | $ | — | $ | (0.01) | |||||||||||||||||||
| Diluted Earnings Per Share | $ | 1.37 | $ | 1.06 |
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Overview – Three Months Ended December 29, 2023
Net earnings attributable to the Company from continuing operations for the first fiscal quarter ended December 29, 2023 were $172.2 million (or $1.37 per diluted share), an increase of $35.8 million, from net earnings of $136.4 million (or $1.07 per diluted share) for the corresponding period last year. The current results reflected lower operating profit in the first fiscal quarter of 2024, which was impacted by $55.3 million in pre-tax Restructuring and other charges and transaction costs due primarily to expenses incurred relating to the Separation Transaction (mainly professional services and employee separation costs), compared to fiscal 2023 amounts of $39.7 million mainly associated with the Company's transformation initiatives relating to real estate, which are discussed in Note 16- Restructuring and Other Charges. This is partially offset by the 2023 first fiscal quarter net favorable impact of approximately $15.0 million in overhead cost reductions associated mainly with one-time benefit program changes, which was offset in part by higher incentive and other compensation charges and higher investments in company technology platforms. First quarter fiscal 2024 other expense, net, was $38.3 million, a decrease of $2.0 million versus first quarter fiscal 2023 amounts of $40.3 million, with the current period primarily impacted by favorable higher interest income, partly offset by unfavorable higher interest expense. Further, our reported net earnings for the current year quarter were favorably impacted by a decrease in income taxes of $66.4 million compared to the fiscal 2023 period, attributable mainly to a deferred income tax benefit of $61.6 million in Australia.
Consolidated Results of Operations
Revenues for the first fiscal quarter of 2024 were $4.16 billion, an increase of $0.36 billion, or 9.5%, from $3.80 billion for the corresponding period last year. Revenue increases for the year over year period were due mainly to the Company's P&PS business, as well as revenue increases seen across our other reporting segments. The P&PS business benefited primarily from stronger performance in its Advanced Facilities, Federal & Environmental and Energy & Power operations. Our CMS business benefited from increased volume in the nuclear remediation sector in the U.S. and United Kingdom as well as strong performance in the space, defense, and energy markets. Also, revenue was favorably impacted by foreign currency translation of $53.1 million for the three months ended December 29, 2023, across our international businesses, as compared to an unfavorable $158.5 million for the three months ended December 30, 2022.
Gross profit for the first fiscal quarter of 2024 was $850.5 million, an increase of $35.8 million, or 4.4%, from $814.7 million from the corresponding period last year, with gross profit margins of 20.4% and 21.4% for the respective periods. Our absolute increase in gross profit was attributable mainly due to favorable benefits from recent new program startups won in the prior year, with slight margins impacts from year over year mix as well as personnel cost impacts.
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 months ended December 29, 2023 were $646.5 million, compared to $576.9 million for the corresponding period last year, representing an increase of $69.6 million or 12.1%. Restructuring and other charges for the three months ended December 29, 2023 included $40.1 million in restructuring and other charges, primarily related to the Separation Transaction (mainly professional services and employee separation costs). Additionally, the three months ended December 29, 2023 included an approximate $15 million pre-tax non-cash charge associated with an inventory write down and an approximate $10 million non-cash intangibles impairment. The three months ended December 30, 2022 included $27.1 million in costs associated with the Company's transformation initiatives relating to real estate. Lastly, SG&A expenses were impacted by unfavorable foreign currency translation of $9.3 million for the three months ended December 29, 2023 as compared to favorable impacts of $27.5 million for the corresponding period last year with the remainder associated with other miscellaneous separation and transaction professional services costs from the prior year.
Net interest expense for the three months ended December 29, 2023 was $35.1 million, a decrease of $2.0 million from $37.1 million, or 5.3%, for the corresponding period last year. The decrease in net interest expense for the three month period was due primarily to higher interest rates in the current year compared to the prior year period, resulting in increases in interest income as well as interest expense. The increase in interest expense is partly offset by lower overall levels of debt compared to the corresponding period last year.
Miscellaneous expense, net for the three months ended December 29, 2023 was $(3.2) million, in comparison to $(3.3) million for the corresponding period last year. The unfavorable $0.1 million impacts compared to the prior three
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month comparable period were due primarily to comparatively unfavorable foreign exchange gains and losses in the current year period.
The Company’s effective tax rates from continuing operations for the three months ended December 29, 2023 and December 30, 2022 were (9.8)% and 25.4%, respectively. The most significant item contributing to the difference between the statutory U.S. federal corporate tax rate of 21.0% and the Company's effective tax rate for the three-month period ended December 29, 2023 relates to a discrete event associated with the election to treat an Australian subsidiary as a corporation versus a partnership for U.S. tax purposes. The election resulted in the derecognition of a deferred tax liability, resulting in a discrete income tax benefit of $61.6 million as the Company asserts that a component of the investment will be indefinitely reinvested. This benefit was partly offset by U.S. state income tax expense of $3.2 million and U.S. tax on foreign earnings of $3.2 million. These expense items are expected to have a continuing impact on the Company's effective tax rate for the remainder of the fiscal year.
The most significant items contributing to the difference between the statutory U.S. federal corporate tax rate of 21.0% and the Company's effective tax rate for the three months ended December 30, 2022, were U.S. state income tax expense of $4.6 million and U.S. tax on foreign earnings of $3.6 million.
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 as Australia, Canada, India, the Netherlands, the United Kingdom and the 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.
Restructuring and Other Charges
During fiscal 2023, the Company implemented restructuring initiatives relating to the Separation Transaction. The Company incurred approximately $19.8 million in fiscal 2023 and $10.6 million in the three months ended December 29, 2023, in pre-tax cash charges in connection with these initiatives. These actions, which are expected to be substantially completed before the end of fiscal 2025, are expected to result in estimated gross annualized pre-tax cash savings of approximately $72 million to $88 million. We will likely incur additional charges under this program through fiscal 2025, which are expected to result in additional savings in future periods.
During third quarter fiscal 2023, the Company approved a plan to improve business processes and cost structures of our PA Consulting investment by reorganizing senior management and reducing headcount. In connection with these initiatives, which are expected to be substantially complete before the end of fiscal 2024, the Company incurred approximately $14.3 million during fiscal 2023 and $1.2 million in the three months ending December 29, 2023, in pre-tax cash charges. These activities are expected to result in estimated gross annualized pre-tax cash savings of approximately $40 million to $45 million.
During fiscal 2023, the Company implemented restructuring and cost reduction initiatives relating to the formation of the reporting and operating segment, Divergent Solutions, which were substantially completed in fiscal 2023. The Company incurred approximately $7.5 million in pre-tax cash charges in connection with these initiatives during the year ended September 29, 2023. These actions are expected to result in estimated gross annualized pre-tax cash savings of approximately $20 million to $24 million.
During fiscal 2020 and continuing into fiscal 2023, the Company implemented further real estate rescaling efforts that were associated with its fiscal 2020 transformation program relating to real estate. These activities were substantially completed in fiscal 2023. In connection with these efforts, the Company has incurred $47.3 million and $72.4 million for the years ended September 29, 2023 and September 30, 2022, respectively, in pre-tax mainly non-cash charges. These actions resulted in non-cash savings related to the future amortization of lease right-of-use assets over the remaining lease terms. Additionally, the objective of these initiatives was to create a modern, flexible work platform tailored to employees’ needs due to globalization and digital advances and to create total emissions savings that will be realized as we continue to optimize our real estate footprint.
Refer to Note 16– Restructuring and Other Charges for further information regarding restructuring and integration initiatives.
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Segment Financial Information
The following tables provide selected financial information for our operating segments and includes a reconciliation of segment operating profit to total U.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 | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Revenues from External Customers: | |||||||||||||||||||||||
| Critical Mission Solutions | $ | 1,128,603 | $ | 1,075,175 | |||||||||||||||||||
| People & Places Solutions | 2,470,441 | 2,226,985 | |||||||||||||||||||||
| Divergent Solutions | 254,180 | 214,465 | |||||||||||||||||||||
| PA Consulting | 306,001 | 282,043 | |||||||||||||||||||||
| Total | $ | 4,159,225 | $ | 3,798,668 |
| Three Months Ended | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Segment Operating Profit: | |||||||||||||||||||||||
| Critical Mission Solutions | $ | 93,407 | $ | 82,220 | |||||||||||||||||||
| People & Places Solutions | 224,998 | 226,619 | |||||||||||||||||||||
| Divergent Solutions (1) | 7,581 | 11,967 | |||||||||||||||||||||
| PA Consulting | 54,455 | 51,027 | |||||||||||||||||||||
| Total Segment Operating Profit | 380,441 | 371,833 | |||||||||||||||||||||
| Other Corporate Expenses (2) | (121,060) | (93,686) | |||||||||||||||||||||
| Restructuring, Transaction and Other Charges (3) | (55,318) | (40,342) | |||||||||||||||||||||
| Total U.S. GAAP Operating Profit | 204,063 | 237,805 | |||||||||||||||||||||
| Total Other Expense, net | (38,314) | (40,324) | |||||||||||||||||||||
| Earnings Before Taxes from Continuing Operations | $ | 165,749 | $ | 197,481 |
| (1) | Includes an approximate $15 million pre-tax non-cash charge associated with an inventory write down during the fiscal 2024 period comprised of adjustments of immaterial cumulative inventory misstatements previously reported which would not have been material to any prior period financial statements nor any amounts reported in the current period. | ||||
| (2) | Other corporate expenses included intangibles amortization of $51.1 million and $49.8 million for the three months ended December 29, 2023 and December 30, 2022, respectively, along with an approximate $10 million intangibles impairment charge in the three month ended December 29, 2023 period. Additionally, the comparison of the three month period of fiscal 2024 to the corresponding 2023 period was unfavorably impacted by the one-time net favorable impacts of $41 million relating mainly to changes in employee benefits programs in the prior year, partly offset by year over year favorable department spending as well as favorable impacts of corporate functional overhead cost recovery by our lines of business. | ||||
| (3) | The three months ended December 29, 2023 included $40.1 million in restructuring and $11.0 million of transaction charges, mainly relating to the Separation Transaction (primarily professional services and employee separation costs). Included in the three months ended December 30, 2022 were mainly $27.1 million in restructuring and other charges associated mainly with real estate impairments with the remainder associated with other miscellaneous separation and transaction professional services costs from the prior year. | ||||
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Critical Mission Solutions
| Three Months Ended | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Revenue | $ | 1,128,603 | $ | 1,075,175 | |||||||||||||||||||
| Operating Profit | $ | 93,407 | $ | 82,220 |
| Critical Mission Solutions segment revenues for the three months ended December 29, 2023 were $1.13 billion, an increase of $0.05 billion, or 5.0%, from $1.08 billion for the corresponding period last year. During the three months ended December 29, 2023, revenue benefited from increased volume in the nuclear remediation sector in the U.S. and United Kingdom as well as strong performance in the space, defense, and energy markets. Our fiscal first quarter 2024 exchange rates compared to our fiscal first quarter 2023 period rates contributed approximately $13.1 million in favorable impacts on revenues for the current period quarter. In the corresponding prior year period, our fiscal first quarter 2023 exchange rates compared to the rates of our fiscal first quarter 2022 period contributed $33.1 million in unfavorable impacts on revenues. | ||
| Operating profit for the segment was $93.4 million, for the three months ended December 29, 2023, which was an increase of $11.2 million, or 13.6%, from $82.2 million for the quarter-to-date period compared to the prior year. Operating profit level trends for the year-over-year quarterly period were favorably impacted by growth in the nuclear remediation market and strong performance in U.S. government space market and international defense and energy markets. Our fiscal first quarter 2024 exchange rates compared to our fiscal first quarter 2023 period rates contributed approximately $1.8 million in favorable impacts for the current period quarter. In the corresponding prior year period, our fiscal first quarter 2023 exchange rates compared to the rates of our fiscal first quarter 2022 period contributed approximately $3.9 million in unfavorable impacts on operating profit. |
People & Places Solutions
| Three Months Ended | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Revenue | $ | 2,470,441 | $ | 2,226,985 | |||||||||||||||||||
| Operating Profit | $ | 224,998 | $ | 226,619 |
| Revenues for the People & Places Solutions segment for the three months ended December 29, 2023 was $2.47 billion, an increase of $243.5 million, or 10.9%, from $2.23 billion for the corresponding period last year. The increase in revenue for the three months ended December 29, 2023 was primarily driven by net revenue growth across all businesses as well as an increase in pass-through revenue within Advanced Facilities. Our fiscal first quarter 2024 exchange rates compared to our fiscal first quarter 2023 period rates contributed $22.9 million in favorable impacts on revenues for the current period quarter. In the corresponding prior year period, our fiscal first quarter 2023 exchange rates compared to the rates of our fiscal first quarter 2022 period contributed unfavorable impacts on revenues of $83.2 million. | ||
| Operating profit for the People & Places Solutions segment for the three month period ended December 29, 2023 was $225.0 million and approximately flat with the corresponding period last year, with higher year over year segment revenues mentioned above but with offsetting impacts from higher corporate cost allocations versus the prior year period. Our fiscal first quarter 2024 exchange rates compared to our fiscal first quarter 2023 period rates contributed $4.2 million in favorable impacts on operating profit for the current period quarter. In the corresponding prior year period, our fiscal first quarter 2023 exchange rates compared to the rates of our fiscal first quarter 2022 period contributed unfavorable impacts of $15.9 million on operating profit. |
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Divergent Solutions
| Three Months Ended | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Revenue | $ | 254,180 | $ | 214,465 | |||||||||||||||||||
| Operating Profit | $ | 7,581 | $ | 11,967 |
| Revenues for the Divergent Solutions segment for the three months ended December 29, 2023 were $254.2 million, an increase of $39.7 million, or 18.5%, from $214.5 million for the corresponding period last year. The increase in revenue for the three months ended December 29, 2023 was mainly due to the startup of new programs previously won in fiscal 2023. Foreign currency translation did not have a material impact on revenue in our Divergent Solutions segment for either period presented. | ||
| Operating profit for the segment was $7.6 million, for the three months ended December 29, 2023, a decrease of $4.4 million, or 36.7%, from $12.0 million for the corresponding period last year. Operating profit for the three month period reflected strong underlying performance in the Cyber & Intelligence business unit and the new programs previously won in fiscal 2023, although fully offset by an approximate one-time $15 million pre-tax non-cash charge associated with an inventory write down during the fiscal 2024 period as mentioned above. Foreign currency translation had an immaterial impact on operating profit in our Divergent Solutions segment for either period presented. |
PA Consulting
| Three Months Ended | |||||||||||||||||||||||
| December 29, 2023 | December 30, 2022 | ||||||||||||||||||||||
| Revenue | $ | 306,001 | $ | 282,043 | |||||||||||||||||||
| Operating Profit | $ | 54,455 | $ | 51,027 |
| Revenues for the PA Consulting segment for the three months ended December 29, 2023 were $306.0 million, an increase of $24.0 million, or 8.5%, from $282.0 million in the corresponding period last year, primarily due to growth in PA Consulting's Defence & Security, Public Sector, and Energy & Utilities businesses. Our fiscal first quarter 2024 exchange rates compared to our fiscal first quarter 2023 period rates contributed favorable impacts of $16.7 million on revenues for the current period quarter. In the corresponding prior year period, our fiscal first quarter 2023 exchange rates compared to the rates of our fiscal first quarter 2022 period contributed unfavorable impacts on revenues of $41.6 million. | ||
| Operating profit for the segment for the three months ended December 29, 2023 was $54.5 million, an increase of $3.4 million, or 6.7%, from $51.0 million in the corresponding period last year, slightly favorable versus the prior year period due mainly to impacts from the revenue growth mentioned above. |
Other Corporate Expenses
Other corporate expenses for the three months ended December 29, 2023 were $121.1 million, an increase of $27.4 million, or 29.2%, from $93.7 million for the corresponding period last year. The comparison of the three month period of fiscal 2024 to the corresponding 2023 period was unfavorably impacted by a one-time net favorable impact of $41 million relating mainly to changes in employee benefits programs in the prior year, partly offset by year over year favorable department spending as well as favorable impacts of corporate functional overhead cost recovery by our lines of business. Additionally, the fiscal 2024 period reflects approximately $10 million in non-cash intangibles impairment charges.
Included in other corporate expenses 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
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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.
Backlog Information
Backlog represents revenue we expect to realize for work to be completed by our consolidated subsidiaries and our proportionate share of work to be performed by unconsolidated joint ventures. Because of variations in the nature, size, expected duration, funding commitments, and the scope of services required by our contracts, the amount and timing of when backlog will be recognized as revenues includes significant estimates and 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 December 29, 2023 and December 30, 2022 (in millions):
| December 29, 2023 | December 30, 2022 | ||||||||||
| Critical Mission Solutions | $ | 8,311 | $ | 7,632 | |||||||
| People & Places Solutions | 17,857 | 17,243 | |||||||||
| Divergent Solutions | 3,110 | 3,077 | |||||||||
| PA Consulting | 317 | 306 | |||||||||
| Total | $ | 29,595 | $ | 28,258 |
| The increase in backlog in Critical Mission Solutions from December 30, 2022 was primarily driven by new business awards in the U.S. government space sector along with growth in the U.K. defense and nuclear remediation sectors that offset slower growth in the U.S. Defense market. | ||
| Backlog in People & Places Solutions and Divergent Solutions remained relatively consistent year-over-year. | ||
| The increase in backlog in PA Consulting from December 30, 2022 was primarily driven by strategic focus on long-term projects as well as organic year-over-year growth of the business. | ||
Consolidated backlog differs from the Company’s remaining performance obligations as defined by ASC 606 primarily because of contract change orders or new wins not yet processed and our national government contracts where our policy is to generally include in backlog the contract award, whether funded or unfunded excluding certain 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 does not include our proportionate share of backlog related to unconsolidated joint ventures in our remaining performance obligations.
Liquidity and Capital Resources
At December 29, 2023, our principal sources of liquidity consisted of $1.14 billion in cash and cash equivalents and $2.25 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.
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Cash and cash equivalents at December 29, 2023 were $1.14 billion, representing an increase of $215.6 million from $926.6 million at September 29, 2023, the reasons for which are described below.
Our net cash flow provided by operations of $418.4 million during the three months ended December 29, 2023 was favorable by $116.1 million in comparison to the cash flow provided by operations of $302.3 million for the corresponding prior year period. The year-over-year increase in cash from operations is primarily attributable to an improvement in working capital performance, partly offset by lower earnings after adjustments for non-cash items year-over-year.
Our net cash used for investing activities for the three months ended December 29, 2023 was $16.0 million, compared to cash used for investing activities of $48.7 million in the corresponding prior year period, with this change due primarily to no acquisitions in the current year, compared to PA Consulting's acquisition of The Cambridge Group in the corresponding prior period, and fewer additions to plant, property and equipment in the current year.
Our net cash used for financing activities of $208.7 million for the three months ended December 29, 2023 is driven by share repurchases of $100.0 million, $33.6 million in net repayments of borrowings, $33.4 million in dividends to shareholders, and $24.4 million in net PA Consulting related redeemable noncontrolling interests purchase and issuance activity. Cash used by financing activities in the corresponding prior year period was $246.1 million, due primarily to share repurchases of $140.5 million, $58.4 million in net PA Consulting related redeemable noncontrolling interests purchase and issuance activity, $29.8 million in dividends to shareholders, and net repayments from borrowings of $7.4 million.
At December 29, 2023, the Company had approximately $259.4 million in cash and cash equivalents held in the U.S. and $882.8 million held outside of the U.S. (primarily in the U.K., the Eurozone, Australia, India, Canada, Saudi Arabia and the United Arab Emirates), which is used primarily for funding operations in those regions. Other than the tax cost of repatriating funds to the U.S. (see Note 7- Income Taxes of Notes to Consolidated Financial Statements included in our 2023 Form 10-K), there are no material impediments to repatriating these funds to the U.S.
The Company had $311.5 million in letters of credit outstanding at December 29, 2023. Of this amount, $0.9 million was issued under the Revolving Credit Facility and $310.7 million was issued under separate, committed and uncommitted letter-of-credit facilities.
Under the Separation Transaction, Jacobs and its shareholders will own up to 63% of the combined company's common stock upon consummation of the transaction, the exact amount of which will be determined based on the achievement of certain fiscal year 2024 operating profit targets. Jacobs is also expected to receive $1 billion of cash proceeds at closing, subject to customary adjustments. Jacobs is also expected to realize additional value after closing through the disposition of its retained equity stake in the combined company within 12 months. The Company expects to use the cash received at closing to repay outstanding indebtedness.
On February 6, 2023, the Company refinanced its Revolving Credit Facility and Term Loan Facilities, and on February 16, 2023, the Company issued the 5.90% Bonds in the aggregate principal amount of $500.0 million. On August 18, 2023, the Company issued the 6.35% Bonds in the aggregate principal amount of $600.0 million. See Note 12 - Borrowings for further discussion relating to the terms of the 5.90% Bonds, the 6.35% Bonds, the Revolving Credit Facility and Term Loan Facilities following the issuances and refinancing.
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 December 29, 2023.
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Supplemental Obligor Group Financial Information
On February 16, 2023, Jacobs Engineering Group Inc., a wholly-owned subsidiary of Jacobs Solutions Inc. (together, the "Obligor Group"), completed an offering of $500 million aggregate principal amount of 5.90% Bonds, due 2033 and on August 18, 2023, completed an offering of $600 million aggregate principal amount of 6.35% Bonds, due 2028 (collectively the “Bonds”). The Bonds are fully and unconditionally guaranteed by the Company (the “Guarantees”). The Bonds and the respective Guarantees were offered pursuant to prospectus supplements, dated February 13, 2023 and August 15, 2023, respectively, to the prospectus dated February 6, 2023, that forms a part of the Company and JEGI’s automatic shelf registration statement on Form S-3ASR (File Nos. 333-269605 and 333-269605-01) previously filed with the SEC.
In accordance with SEC Regulation S-X Rule 13-01, set forth below is the summarized financial information for the Obligor Group on a combined basis after elimination of (i) intercompany transactions and balances between Jacobs and JEGI and (ii) equity in the earnings from and investments in all other subsidiaries of the Company that do not guarantee the registered securities of either Jacobs or JEG. This summarized financial information (in thousands) has been prepared and presented pursuant to Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with U.S. GAAP.
| Three Months Ended | |||||
| (in thousands) | December 29, 2023 | ||||
| Summarized Statement of Earnings Data | |||||
| Revenue | $ | 932,689 | |||
| Direct Costs | $ | 788,955 | |||
| Selling, General and Administrative Expenses | $ | 130,947 | |||
| Net earnings attributable to Guarantor Subsidiaries from continuing operations | $ | (11,325) | |||
| Noncontrolling interests | $ | 691 |
| (in thousands) | December 29, 2023 | September 29, 2023 | |||||||||
| Summarized Balance Sheet Data | |||||||||||
| Current assets, less receivables from Non-Guarantor Subsidiaries | $ | 925,256 | $ | 693,037 | |||||||
| Current receivables from Non-Guarantor Subsidiaries | $ | — | $ | — | |||||||
| Noncurrent assets, less noncurrent receivables from Non-Guarantor Subsidiaries | $ | 466,219 | $ | 459,276 | |||||||
| Noncurrent receivables from Non-Guarantor Subsidiaries | $ | 605,863 | $ | 610,900 | |||||||
| Current liabilities | $ | 696,793 | $ | 616,140 | |||||||
| Current liabilities to Non-Guarantor Subsidiaries | $ | 626,572 | $ | 387,461 | |||||||
| Long-term Debt | $ | 2,575,894 | $ | 2,561,590 | |||||||
| Other Noncurrent liabilities, less amounts payable to Non-Guarantor Subsidiaries | $ | 250,417 | $ | 248,852 | |||||||
| Noncurrent liabilities to Non-Guarantor Subsidiaries | $ | 369,949 | $ | 343,674 | |||||||
| Noncontrolling interests | $ | 827 | $ | 577 | |||||||
| Accumulated deficit | $ | (2,523,114) | $ | (2,395,081) |
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