Over the past decade, Jacobs has devoted significant attention and resources to building its government services business and, in doing so, shedding its long-standing engineering and construction identity.
With Jacobs' board of directors approving the spin-off plan, the company is poised to become the next publicly traded independent company in the government services market. Jacobs now calls the government services business Critical Mission Solutions.
Jacobs, headquartered in Dallas, expects the separation to be completed in the second half of fiscal year 2024, which ends October 31, 2024. Jacobs' fiscal year runs concurrently with the federal fiscal year.
It will take a lot of time in the coming months to learn more about what Critical Mission Solutions will look like on its own, including its name and strategy. Jacobs said president Steve Arnett will continue to lead the business, starting in the spring of 2022.
But after years of investing and working to become a major government service provider, including acquisitions and winning several take-home contracts from other companies, Jacobs explains why he is taking this path. Let's listen.
Where are the two companies headed?
During Jacobs' fiscal second-quarter earnings call on Tuesday, CEO Bob Pragada told investors that the company is increasing its focus on critical infrastructure, sustainability, and an advanced portfolio. He said he is aiming to put it there.
Pragada cited data, technology and consulting as core service lines where Jacobs wants to be a leader in its customer set.
These include Mr. Pragada and other members of Jacobs' management team laying out the company's current three-year strategy in both the March 2022 overview for investors and the fiscal fourth quarter earnings call in November. These are some of the main themes mentioned in the formulation.
Jacobs' idea behind the separation was to provide both his company and the new Critical Mission Solutions company with the separate capital investment and allocation models needed to pursue growth and profitability in ways that are more difficult today. It is to be.
However, analysts on the call explained why Jacobs decided now was the time to do this, given the immediate feeling since Jacobs rolled out his current strategy in the Critical Mission Solutions business. (And they asked) That's part of it.
“We are constantly looking at our portfolio and evaluating how we are doing business with our customers externally and how that is helping us advance our strategy,” Pragada said. ” “Looking back at where we were before, I don't think we did anything different than what we stated in our strategy, so I'm confident in the decisions we made today.”
Let's take a look under the hood of both
The Critical Mission Solutions business generated $4.4 billion in revenue and an 8% operating margin in Jacobs' most recent fiscal year. After the spin-off, Jacobs expects to have annual sales of $10.5 billion and an operating margin of 12% in fiscal 2022. Jacobs has more than 60,000 employees and Critical Mission Solutions has 16,000 employees.
It's worth noting that, based on numbers from Jacobs' 2022 fiscal year annual report, the company will continue to have some of its U.S. government business after the separation.
Approximately 31% of the company's overall fiscal 2022 revenue came from U.S. federal agencies, which was approximately $4.6 billion. CMS earned about 73% of its revenue, or about $3.7 billion, from U.S. federal government agencies during the same period. CMS also works with international government customers.
Critical Mission Solutions' backlog stood at $8.1 billion at the end of the March 31 quarter. Jacobs' latest 10th quarter filing touted new business wins from its space and nuclear remediation programs as offsetting slower growth at the defense agency.
Jacobs will maintain its Diversified Solutions division, which it launched in March 2022. The company established the division as a hub for developing digital technologies and other solutions for government and infrastructure customers.
In February, John Karabias, the division's vice president of strategy, joined the WT 360 podcast to discuss how teams work across the company and their role in the overall vision. .
What's next?
Pragada said Jacobs will maintain a relationship with the Critical Mission Solutions business after the spin-off, including “the ability to work together, collaborate and partner for the benefit of our customers.” Stated. Pragada added that Jacobs has done something similar with other businesses it previously sold.
Regarding the decision to spin off Critical Mission Solutions and find a buyer, Chief Financial Officer Kevin Berryman said Jacobs considered several options, but chose a more tax-efficient option to free up the rights of major shareholders. He said he decided that separation was the best course of action because it was an expensive method. value.
However, Jacobs is a publicly traded company, and Critical Mission Solutions is poised to become a publicly traded company as this plan moves forward. Both facts mean that Jacobs cannot ignore potential inbound interest from other parties for large, strategic deals involving its Critical Mission Solutions business.
“As we move forward through the process and determine whether additional facts or circumstances become available that may change the situation, we will consider that because ultimately we are interested in ensuring that we maximize shareholder value.” '' Berryman said.
