What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-07 compared with 2025-02-05 · 90 added, 43 removed, 102 unchanged (57% of the section changed)

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Digital Solutions (“DS”) and Global Engineering Solutions (“GES”).

Digital Solutions provides advanced digital and data-driven solutions including intelligence analytics, space system development, cybersecurity, and next generation IT across the federal government and commercial

Global Engineering Solutions provides large-scale environmental remediation, clean energy, platform engineering, sustainment and supply chain management across all 7 continents for the U.S.

DS provides advanced digital and data-driven solutions including intelligence analytics, space system development, cybersecurity, and next generation IT across the federal government and commercial clients.

GES provides large-scale environmental remediation, clean energy, platform engineering, sustainment and supply chain management across all 7 continents for the U.S.

government and allied nations.

Budgetary Environment

Budgetary and Regulatory Environment

In fiscal year 2024, we generated approximately 90% of our revenues from contracts with the U.S.

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federal government fiscal year (“GFY”) 2025 appropriations bill was passed in March 2025.

The final bill was consistent with the Fiscal Responsibility Act of June 2023.

Defense discretionary spending saw a 3.3% increase to $886 billion, while non-defense discretionary spending remained flat at $703 billion.

The GFY 2025 budget request was submitted to Congress in March 2024 and maintained the levels set in the Fiscal Responsibility Act.

The budget request would increase defense discretionary spending from $886 billion to $895 billion and non-defense discretionary spending from $704 billion to $711 billion.

The existing continuing resolution is set to expire on March 14, 2025.

President Trump was inaugurated in January 2025 and the new administration’s GFY 2026 budget request is expected to be submitted to Congress in April 2025.

Under the Trump administration, the new Department of Government Efficiency was created to propose savings through improvements to technology and increases to productivity in the federal workforce;

The final bill provided a 1% increase for defense discretionary spending to $892 billion and a 1% increase in non-defense discretionary spending to $708 billion.

The GFY 2026 “skinny” budget request was submitted to Congress on May 2, 2025, and if enacted, would maintain defense discretionary spending at $892 billion and reduce non-defense discretionary spending by approximately 21% to $557 billion.

Additionally, the skinny budget request assumes an increase in defense spending based on the defense reconciliation legislation currently pending in Congress, which would result in total GFY 2026 defense spending of $1.01 trillion, an increase of 13% from the GFY 2025 enacted level.

Under the Trump administration, the Department of Government Efficiency (“DOGE”) was created to propose savings through improvements to technology and increases to productivity in the federal workforce;

we continue to monitor the actions of the new administration which could result in a change to budgetary priorities or impact federal government procurement timing.

Decreases in, or delays in approving, the federal government’s budget, decreases in government spending on the types of programs that we support, delays in government contract awards, and pauses on government contracts on which we are currently performing could have an adverse impact on our business.

For further information, please see Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2024.

Although a limited number of our contracts for the U.S.

Government have been affected by DOGE and other changes in budgetary priorities by the new administration, the impact has not been material to date.

currently performing could have an adverse impact on our business.

For further information, please see Part I.

Risk Factors in our Fiscal Year 2024 Form 10-K.

While we view the budget environment as constructive and believe core funding sources for our primary customer-based markets will continue to experience bipartisan tailwinds, there can be no certainty about the level of funding for any particular GFY or that appropriations bills will be passed in a timely manner.

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Depending on their scope, duration, and other factors, CRs can negatively impact our business due to delays in new program starts, delays in contract awards decisions, and other factors.

Additionally, the U.S.

Government is in the process of, or has announced its intent to, increase current tariffs, impose additional tariffs, and expand tariffs on goods imported from various countries into the United States.

The tariffs that have been enacted by the U.S.

or other countries did not materially impact our business or financial results for the three months ended March 28, 2025.

We are currently evaluating the potential future impacts of the announced tariffs on our business and financial condition.

For a discussion of risks related to tariffs and other trade policy issues, see Part II.

Risk Factors in this Report and Part I.

Risk Factors in our Fiscal Year 2024 Form 10-K.

Market Environment

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• Increased investment in advanced technologies (e.g., hypersonics, microelectronics, unmanned, electromagnetic spectrum).

Results of Operations for the Three Months Ended December 27, 2024 and December 29, 2023

Results of Operations for the Three Months Ended March 28, 2025 and March 29, 2024

The following table presents our results of operations for the periods presented:

December 27, 2024 December 29, 2023 Change

Three Months Ended

March 28, 2025 March 29, 2024 Change

(Dollars in millions) Dollars Dollars Dollars Percent

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Provision for income taxes (22) (20) (2) 10.0

Net income (loss) 21 (39) 60 (153.8)

Net income (loss) including non-controlling interests 2 (42) 44 (104.8)

net income attributable to non-controlling interests 2 1 1 100.0

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Cost of revenues — The increase in cost of revenues was primarily attributable to the increased revenues volume from the merger with CMS.

As a percentage of revenues, cost of revenues was 89.4% for the three months ended December 27, 2024 compared to 90.2% for the three months ended December 29, 2023, respectively.

As a percentage of revenues, cost of revenues was 89.5% for the three months ended March 28, 2025 compared to 90.2% for the three months ended March 29, 2024.

Selling, general, and administrative expenses (“SG&A”) — The increase in SG&A was primarily attributable to the merger with CMS.

SG&A as a percentage of revenues increased to 3.8% for the three months ended December 27, 2024 from 3.4% for the three months ended December 29, 2023 primarily due to the merger with CMS.

SG&A as a percentage of revenues increased to 4.2% for the three months ended March 28, 2025 from 3.5% for the three months ended March 29, 2024 primarily due to the merger with CMS and an increase in acquisition, transaction and integration costs.

Amortization of intangibles — Amortization of intangibles primarily relates to the amortization of our backlog and customer relationship intangible assets, which increased due to the merger with CMS.

Interest expense and other, net — The decrease in interest expense and other, net was primarily due to the reduction to our term loan principal balance as compared to the three months ended December 29, 2023 combined with a decrease in interest rates, partially offset by the interest incurred on our Senior Notes during the three months ended December 27, 2024.

Provision for income taxes — The effective tax rate for the three months ended December 27, 2024 was 53.3%, as compared to (56.0)% for the three months ended December 29, 2023.

Equity earnings of non-consolidated subsidiaries — Equity earnings of non-consolidated subsidiaries include our proportionate share of the income from equity method investments and increased due to non-consolidated subsidiaries obtained in the merger with CMS, partially offset by the utilization of fair market value adjustments assigned to certain equity method investments based on the remaining period of performance for the related contract.

Interest expense and other, net — The decrease in interest expense and other, net was primarily due to the reduction to our term loan principal balance as compared to the three months ended March 29, 2024 combined with a decrease in interest rates, partially offset by the interest incurred on our Senior Notes during the three months ended March 28, 2025.

Provision for income taxes — The effective tax rate for the three months ended March 28, 2025 was 91.7%, as compared to (90.9)% for the three months ended March 29, 2024.

The change in the effective tax rate was primarily due to the recognition of a valuation allowance against a disallowed interest expense deferred tax asset relative to income (loss) before income taxes in the respective period.

Segment Results for the Three Months Ended December 27, 2024 and December 29, 2023

Net income (loss) attributable to non-controlling interests — Net income (loss) attributable to non-controlling interests includes the utilization of fair market value adjustments assigned to certain non-controlling interests based on the remaining period of performance for the related contract partially offset by the minority interests in our consolidated joint ventures that are not wholly-owned.

Results of Operations for the Six Months Ended March 28, 2025 and March 29, 2024

The following table presents our results of operations for the periods presented:

Six Months Ended

March 28, 2025 March 29, 2024 Change

(Dollars in millions) Dollars Dollars Dollars Percent

Revenues $ 6,907 $ 4,034 $ 2,873 71.2 %

Cost of revenues (6,179) (3,640) (2,539) 69.8

Selling, general, and administrative expenses (275) (139) (136) 97.8

Amortization of intangibles (240) (114) (126) 110.5

Equity earnings of non-consolidated subsidiaries 29 34 (5) (14.7)

Operating income 242 175 67 38.3

Interest expense and other, net (173) (222) 49 (22.1)

Income (loss) before income taxes 69 (47) 116 (246.8)

Provision for income taxes (46) (34) (12) 35.3

Net income (loss) including non-controlling interests 23 (81) 104 (128.4)

net loss attributable to non-controlling interests (7) (1) (6) 600.0

Net income (loss) attributable to common shareholders $ 16 $ (82) $ 98 (119.5)

Revenues — The increase in revenues was primarily attributable to revenues from the merger with CMS.

Cost of revenues — The increase in cost of revenues was primarily attributable to the increased revenues volume from the merger with CMS.

As a percentage of revenues, cost of revenues was 89.5% for the six months ended March 28, 2025 compared to 90.2% for the six months ended March 29, 2024.

Selling, general, and administrative expenses (“SG&A”) — The increase in SG&A was primarily attributable to the merger with CMS.

SG&A as a percentage of revenues increased to 4.0% for the six months ended March 28, 2025 from 3.4% for the

six months ended March 29, 2024 primarily due to the merger with CMS and an increase in acquisition, transaction and integration costs.

Interest expense and other, net — The decrease in interest expense and other, net was primarily due to the reduction to our term loan principal balance as compared to the six months ended March 29, 2024 combined with a decrease in interest rates, partially offset by the interest incurred on our Senior Notes during the six months ended March 28, 2025.

Provision for income taxes — The effective tax rate for the six months ended March 28, 2025 was 66.7%, as compared to (72.3)% for the six months ended March 29, 2024.

Net income (loss) attributable to non-controlling interests — Net income (loss) attributable to non-controlling interests include the minority interests in our consolidated joint ventures that are not wholly-owned partially offset by the utilization of fair market value adjustments assigned to certain non-controlling interests based on the remaining period of performance for the related contract.

Segment Results for the Three and Six Months Ended March 28, 2025 and March 29, 2024

The primary financial performance measures we use to manage our reportable segments and monitor results of operations are revenues and Adjusted EBITDA.

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Digital Solutions

Three Months Ended

(Dollars in millions) December 27, 2024 December 29, 2023 Dollar change Percent change

Three Months Ended Six Months Ended

March 28, 2025 March 29, 2024 Change March 28, 2025 March 29, 2024 Change

(Dollars in millions) Dollars Dollars Dollars Percent Dollars Dollars Dollars Percent

Revenues $ 1,340 $ 471 $ 869 185 % $ 2,626 $ 930 $ 1,696 182 %

Adjusted EBITDA 107 40 67 168 % 207 78 129 165 %

The increase in revenues for the three months ended December 27, 2024, as compared to the three months ended December 29, 2023, was primarily attributable to revenues from the merger with CMS and the ramp up of new contract awards.

The increase in Adjusted EBITDA for the three months ended December 27, 2024, as compared to the three months ended December 29, 2023, was primarily attributable to contributions from the merger with CMS and the revenue growth factors described above.

The increase in revenues for the three and six months ended March 28, 2025, as compared to the three and six months ended March 29, 2024, was primarily attributable to revenues from the merger with CMS and higher volume from new contract awards, partially offset by the expected ramp-down of other historical programs.

The increase in Adjusted EBITDA for the three and six months ended March 28, 2025, as compared to the three and six months ended March 29, 2024, was primarily attributable to the revenue growth factors described above.

Global Engineering Solutions

Three Months Ended

(Dollars in millions) December 27, 2024 December 29, 2023 Dollar change Percent change

Three Months Ended Six Months Ended

March 28, 2025 March 29, 2024 Change March 28, 2025 March 29, 2024 Change

(Dollars in millions) Dollars Dollars Dollars Percent Dollars Dollars Dollars Percent

Revenues $ 2,151 $ 1,580 $ 571 36 % $ 4,281 $ 3,104 $ 1,177 38 %

Adjusted EBITDA 161 116 45 39 % 323 232 91 39 %

The increase in revenues for the three and six months ended March 28, 2025, as compared to the three and six months ended March 29, 2024, was primarily attributable to revenues from the merger with CMS, the ramp up of new contract awards and growth on existing programs, partially offset by the expected ramp-down of other historical programs.

Revenues by Contract Type

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The following table summarizes revenues by contract type, as a percentage of revenues, for the periods presented:

Three Months Ended

December 27, 2024 December 29, 2023

Three Months Ended Six Months Ended

March 28, 2025 March 29, 2024 March 28, 2025 March 29, 2024

Cost-plus-fee 64 % 62 % 64 % 63 %

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• Unfunded backlog represents estimated values that have the potential to be recognized as revenues from negotiated contracts for which funding has not been appropriated and from unexercised contract options.

As of December 27, 2024, the Company had total backlog of $45.2 billion, compared with $27.3 billion as of December 29, 2023, an increase of $17.9 billion primarily due to the merger with CMS.

Funded backlog as of December 27, 2024 was $6.6 billion.

As of March 28, 2025, the Company had total backlog of $44.8 billion, compared with $27.2 billion as of March 29, 2024, an increase of $17.6 billion primarily due to the merger with CMS.

Funded backlog as of March 28, 2025 was $5.8 billion.

There is no assurance that all backlog will result in future revenues being recognized, and the backlog balance is subject to increases or decreases based on the execution of new contracts, contract modifications or extensions, deobligations, early terminations, and other factors.

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Given the nature of our operations and contract type mix, we expect the impact of inflation on our business may be limited for some of our contracts.

During the three months ended December 27, 2024, 64% of our revenues was generated under cost-plus-fee type contracts that have limited inflation risk as they include provisions that adjust revenues to cover costs affected by inflation.

During the six months ended March 28, 2025, 64% of our revenues was generated under cost-plus-fee type contracts that have limited inflation risk as they include provisions that adjust revenues to cover costs affected by inflation.

The remainder of our revenues was generated under time-and-materials or fixed-price type contracts which we have historically been able to price in a manner that accommodates inflation and cost increases over the period of performance but changes in our expectations with respect to inflation rates or in the overall mix of our contract types could cause future results to differ substantially.

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The Revolver and the Term Loan mature on September 27, 2029 and September 27, 2031, respectively.

The Term Loan requires quarterly principal amortization payments of $9 million commencing March 31, 2025 with the remainder of the principal thereunder being due at maturity.

The Term Loan requires quarterly principal amortization payments of $9 million commencing March 31, 2025 with the remainder of the principal

thereunder being due at maturity.

In August 2024, the Company also completed an offering of $1,000 million in aggregate principal amount of 7.250% senior notes due August 1, 2032 (the “Senior Notes”).

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Each of the credit agreement and indenture requires us to comply with certain representations and warranties, customary affirmative and negative covenants and, in the case of the Revolver, under certain circumstances, a financial covenant.

We were in compliance with all covenants as of December 27, 2024.

We were in compliance with all covenants as of March 28, 2025.

We believe that the combination of internally generated funds, available bank borrowings, and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund on-going operations, capital expenditures, scheduled principal and interest payments on our debt obligations, scheduled lease payments, and other working capital requirements over at least the next twelve months.

On April 23, 2025, we entered into a definitive agreement to sell our hardware and product business, Rapid Solutions, to Lockheed Martin for a purchase price of $360 million in cash, subject to regulatory approvals and customary closing conditions.

Certain proceeds from the planned sale of the Rapid Solutions business are expected to be used to accelerate our debt reduction objectives.

Over the longer term, our ability to generate sufficient cash flows from operations necessary to fulfill the obligations under the Credit Facility, Senior Notes and any other indebtedness we may incur will depend on our future financial performance which could be affected by factors outside of our control, including worldwide economic and financial market conditions.

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Cash Flow Information

Three Months Ended

(Amounts in millions) December 27, 2024 December 29, 2023

Six Months Ended

(Amounts in millions) March 28, 2025 March 29, 2024

Net cash provided by (used in) operating activities $ 167 $ (78)

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Effect of exchange rate changes on cash and cash equivalents (6) 4

Net increase (decrease) in cash and cash equivalents $ 70 $ (94)

Net cash provided by operating activities increased by $193 million for the three months ended December 27, 2024 when compared to the three months ended December 29, 2023 as a result of a $110 million increase in cash earnings due to contributions from the merger with CMS and from $83 million in favorable changes in operating assets and liabilities driven by the timing of interest payments.

Net cash used in investing activities increased by $5 million for the three months ended December 27, 2024 when compared to the three months ended December 29, 2023 as a result of increased capital expenditures due to the merger with CMS.

Net cash used in financing activities increased by $2 million for the three months ended December 27, 2024 when compared to the three months ended December 29, 2023 primarily as a result of distributions to non-controlling interests and the absence of quarterly principal amortization payments on our Term Loan, which commence in March 2025.

Net change in cash and cash equivalents $ 94 $ (108)

Net cash provided by operating activities increased by $245 million for the six months ended March 28, 2025 when compared to the six months ended March 29, 2024 as a result of a $235 million increase in cash earnings due to contributions from the merger with CMS and from $10 million in favorable changes in operating assets and liabilities driven by reduced interest payments.

Net cash used in investing activities increased by $33 million for the six months ended March 28, 2025 when compared to the six months ended March 29, 2024 as a result of increased contributions to equity method investments.

Net cash used in financing activities for the six months ended March 28, 2025 remained consistent when compared to the six months ended March 29, 2024 primarily as a result of distributions to non-controlling interests and the absence of quarterly principal amortization payments on our Term Loan, which commence in the third quarter of fiscal year 2025.

Divestiture of Rapid Solutions

The planned sale of the Rapid Solutions business is not classified as discontinued operations as it does not represent a strategic shift in our business.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis