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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2023-02-03 · 172 added, 137 removed, 286 unchanged (52% of the section changed)

28 unchanged sentences

We provide services to a diverse base of U.S.

state and local government, U.S.

federal government, U.S.

state and local government, U.S.

commercial and international clients.

The following table presents the percentage of our revenue by client sector:

Three Months Ended

2023 January 2,

Three Months Ended Six Months Ended

2023 April 3,

2022 April 2,

2023 April 3,

Client Sector

state and local government 17.1 % 18.5 %

federal government (1)

33.0 % 29.7 % 32.1 % 30.4 %

state and local government 12.8 18.3 14.7 18.4

commercial 18.0 20.1 19.8 20.4

International (2)

36.2 31.9 33.4 30.8

Total 100.0 % 100.0 % 100.0 % 100.0 %

1 unchanged sentence

federal government contracts performed outside the United States.

(2) Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom, and revenue generated from non-U.S.

(2) Includes revenue generated from non-U.S.

clien ts, primarily in Canada, Australia and the United Kingdom.

We manage our operations under two reportable segments.

1 unchanged sentence

government clients (federal, state and local) and all activities with development agencies worldwide.

Our Commercial/International Services Group ("CIG") reportable segment primarily includes activities with U.S.

Our Commercial/International Group ("CIG") reportable segment primarily includes activities with U.S.

commercial clients and international clients other than development agencies.

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GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom and Australia.

Commercial/International Services Group ( “ CIG ” ).

Commercial/International Group ( “ CIG ” ).

CIG primarily provides high-end consulting and engineering services to U.S.

3 unchanged sentences

The following table presents the percentage of our revenue by reportable segment:

Three Months Ended

2023 January 2,

Three Months Ended Six Months Ended

2023 April 3,

2022 April 2,

2023 April 3,

Reportable Segment

6 unchanged sentences

The following table presents the percentage of our revenue by contract type:

Three Months Ended

2023 January 2,

Three Months Ended Six Months Ended

2023 April 3,

2022 April 2,

2023 April 3,

Contract Type

33 unchanged sentences

Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not have a material adverse effect on our financial position, results of operations or cash flows.

acquisitions require the approval of our Board of Directors.

All acquisitions require the approval of our Board of Directors.

On January 23, 2023, we completed the acquisition of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange in an all cash transaction totaling $784 million.

We funded the RPS acquisition with debt, net of $109 million in proceeds from a foreign exchange forward contract that we entered into at the same time we made the formal offer to acquire RPS on September 23, 2022.

RPS employs approximately 5,000 associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions, especially in energy transformation, water and program management for government and commercial clients.

In the second quarter of fiscal 2023, RPS contributed revenue of $169.5 million to our consolidated results.

RPS contributed no material operating income to our results in the second quarter of fiscal 2023, as it was offset by $7.7 million of intangible amortization.

Substantially all of RPS is included in our CIG segment.

In the second quarter of fiscal 2023, we also acquired Amyx, Inc.

(“Amyx”), an enterprise technology services, cybersecurity and management consulting firm.

Based in Reston, Virginia, Amyx, with over 500 employees, provides application modernization, cybersecurity, systems engineering, financial management and program management support on over 30 Federal Government programs.

Amyx is included in our GSG segment.

For detailed information regarding acquisitions, see Note 4, “Acquisitions” of the “Notes to Consolidated Financial Statements”.

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OVERVIEW OF RESULTS AND BUSINESS TRENDS

In the first quarter of fiscal 2023, revenue increased 4.2% compared to the prior-year quarter.

This year-over-year growth reflects increased activity in all of our client sectors.

In the first half of fiscal 2023, revenue increased 20.0% compared to the prior-year period.

This year-over-year growth reflects increased activity in all of our client sectors and the aforementioned RPS acquisition.

Excluding RPS, our revenue increased 10.1% in the first half of fiscal 2023 compared to the year-ago period.

Federal Government.

federal government revenue increased 3.5% in the first quarter of fiscal 2023 compared to the same quarter last year.

This increase was primarily due to more international development and environmental activities.

federal government revenue increased 26.6% in the first half of fiscal 2023 compared to the same quarter last year.

This increase was primarily due to more international development and broad-based increases in our water and environmental programs.

During periods of economic volatility, our U.S.

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State and Local Government.

state and local government revenue decreased 3.7% in the first quarter of fiscal 2023 compared to the same quarter last year due to lower disaster response activity.

Excluding disaster response, our state and local government revenue increased approximately 10% in the first quarter of fiscal 2023 compared to last year's first quarter.

state and local government revenue decreased 4.5% in the first half of fiscal 2023 compared to the same quarter last year due to lower disaster response activity.

Excluding disaster response, our state and local government revenue incre ased 20.2% in the first half of fiscal 2023 compared to the same period last year.

The increase reflects continued broad-based growth in our U.S.

state and local government infrastructure business, particularly with increased revenue from municipal water infrastructure work, including digital water projects.

state a nd local government infrastructure business, particularly with increased revenue from municipal water infrastructure work, including digital water projects.

Most of our work for the U.S.

state and local governments relates to critical water and environmental programs, which we expect to continue to grow in the remainder of fiscal 2023.

commercial revenue increased 12.5% in the first quarter of fiscal 2023 compared to the same quarter last year.

This increase was primarily due to more activity on environmental and renewable energy programs, including meeting net zero carbon goals and designing high performance buildings.

commercial revenue increased 16.9% in the first half of fiscal 2023 compared to the same quarter last year.

Excluding the contribution from RPS, our U.S.

commercial revenue increased 11.0% in the first half of fiscal 2023 compared to the first half of fiscal 2022.

This increase was primarily due to more activity on renewable energy and environmental programs, including meeting net zero carbon goals and designing high performance buildings.

We expect growth in our U.S.

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International.

Our international revenue increased 4.2% in the first quarter of fiscal 2023 compared to the same quarter last year despite the adverse impact of a stronger U.S.

Our international revenue increased 30.1% in the first half of fiscal 2023 compared to the same quarter last year.

Excluding the contribution from RPS, our international revenue increased approximately 3% despite a stronger U.S.

dollar and the adverse impact on our foreign currency translation year-over-year.

On a constant currency basis, our international revenue increased approximately 14% in the first quarter of fiscal 2023 compared to the first quarter of 2022.

This revenue growth reflec ts government stimulus spending on infrastructure and commercial activities related to an increased focus on sustainability.

On a constant currency basis, our international revenue, excluding RPS, increased approximately 12% in the first half of fiscal 2023 compared to the first six month of last year.

This revenue growth reflects government stimulus spending on infrastructure and commercial activities related to an increased focus on sustainability.

We expect growth in our international work to continue in the remainder of fiscal 2023.

Subsequent Events.

O n January 3, 2023, we acquired Amyx, Inc.

(“Amyx”), an enterprise technology services, cybersecurity and management consulting firm.

Based in Reston, Virginia, Amyx, with over 500 employees, provides application modernization, cybersecurity, systems engineering, financial management, and program management support on over 30 Federal Government programs.

Amyx will be included in our GSG segment.

On September 23, 2022, we made an all cash offer to acquire all the outstanding shares of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange for 222 pence per share, through a scheme of arrangement, which was unanimously recommended by RPS's Board of Directors.

On November 3, 2022, RPS's shareholders approved the scheme of arrangement.

On January 19, 2023, the court sanctioned scheme of arrangement to purchase RPS was approved, and we completed the acquisition on January 23, 202 3.

The total purchase price including assumed debt and transactions costs was approximately GBP 714 million.

Substantially all of RPS will be included in our CIG segment.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Three Months Ended

2023 January 2,

Three Months Ended Six Months Ended

2023 April 3,

2022 Change April 2, 2023 April 3, 2022 Change

($ in thousands, except per share data)

6 unchanged sentences

Selling, general and administrative expenses (82,347) (60,480) (21,867) (36.2) (138,848) (113,001) (25,847) (22.9)

Acquisition and integration expenses (3,761) — (3,761) NM

Contingent consideration - fair value adjustments (933) — (933) NM

Acquisition and integration expenses (19,944) — (19,944) NM (23,705) — (23,705) NM

Contingent consideration - fair value adjustments (7,544) (173) (7,371) NM (8,477) (199) (8,278) NM

Income from operations 61,011 74,520 (13,509) (18.1) 153,061 161,740 (8,679) (5.4)

Interest expense (13,323) (3,144) (10,179) (323.8) (18,695) (6,048) (12,647) (209.1)

Other non-operating income 67,995 — 67,995 NM

Other non-operating income 21,407 — 21,407 NM 89,402 — 89,402 NM

Income before income tax expense 69,095 71,376 (2,281) (3.2) 223,768 155,692 68,076 43.7

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Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers.

In the first quarter of fiscal 2023, revenue and revenue, net of subcontractor costs, increased $36.3 million, or 4.2%, and $57.2 million, or 8.4%, respectively, compared to the same period in fiscal 2022.

On a constant currency basis, our revenue, and revenue, net of subcontractor costs, increased approximately 7% and 12%, respectively, in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

The aforementioned adverse year-over-year foreign exchange rates primarily impacted our CIG segment.

Our GSG segment's revenue and revenue, net of subcontractor costs, increased $15.0 million, or 3.3%, and $26.0 million, or 7.9%, respectively, in the first quarter of fiscal 2023 compared to last year's first quarter.

Our CIG segment's revenue increased $23.3 million, or 5.6%, and revenue, net of subcontractor costs, increased $31.3 million, or 8.9% in the first quarter of fiscal 2023 compared to the year-ago quarter.

The first quarter fiscal 2023 results for GSG and CIG segments are described below under "Government Services Group" and "Commercial/International Services Group", respectively.

In the second quarter of fiscal 2023, revenue and revenue, net of subcontractor costs, increased $305.5 million, or 35.8%, and $269.9 million, or 38.6%, respectively, compared to the second quarter of fiscal 2022.

Excluding the contribution from RPS, our revenue increased 15.9% in the second quarter of fiscal 2023 compared to the year-ago quarter.

Our GSG segment's revenue and revenue, net of subcontractor costs, increased $114.3 million, or 25.5%, and $98.1 million, or 29.1%, respectively, in the second quarter of fiscal 2023 compared to the same quarter last year.

Our CIG segment's revenue increased $193.4 million, or 46.4%, and revenue, net of subcontractor costs, increased $171.8 million, or 47.5% in the second quarter of fiscal 2023 compared to the year-ago quarter.

Excluding the contribution from RPS, our CIG segment's revenue increased approximately 7% in the second quarter of fiscal 2023 compared to the same period in fiscal 2022 (11% on a constant currency basis).

In the first half of fiscal 2023, revenue and revenue, net of subcontractor costs, increased $341.7 million, or 20.0%, and $327.2 million, or 23.7%, respectively, compared to the same period in fiscal 2022.

Excluding the contribution from RPS, our revenue increased 10.1% in the first half of fiscal 2023 compared to the year-ago first half.

Our GSG segment's revenue and revenue, net of subcontractor costs, increased $129.3 million, or 14.3%, and $124.0 million, or 18.7%, respectively, in the first half of fiscal 2023 compared to the same period last year.

Our CIG segment's revenue increased $216.7 million, or 26.0%, and revenue, net of subcontractor costs, increased $203.1 million, or 28.4% in the first half of fiscal 2023 compared to the year-ago first half.

Excluding the contribution from RPS, our CIG segment's revenue increased approximately 6% in the first half of this fiscal year compared to the same period in fiscal 2022 (11% on a constant currency basis).

Our quarterly and first half results for our GSG and CIG segments are described below under "Government Services Group" and "Commercial/International Group", respectively.

The following table reconciles our reported results to non-U.S.

GAAP adjusted results, which exclude acquisition expenses related to the RPS acquisition and losses from adjustments to contingent consideration liabilities in the first quarter of fiscal 2023 and a non-operating benefit from Employee Retention Credits ("ERC's") received in the first quarter of fiscal 2022.

Our adjusted earnings per share ("EPS") for the first quarter fiscal 2023 also excludes a non-operating $68.0 million unrealized gain on a foreign exchange contract and the write-off of previously deferred debt origination fees both related to our planned acquisition of RPS.

This gain is reported as "Other non-operating income" in our Consolidated Statement of Income for the first quarter of fiscal 2023.

GAAP adjusted results, which exclude acquisition expenses related to the RPS acquisition and losses from adjustments to contingent consideration liabilities in the second quarter and first half of fiscal 2023 and a non-operating benefit from Employee Retention Credits ("ERC's") received in the first quarter of fiscal 2022.

Our adjusted earnings per share ("EPS") for the second quarter and first half of fiscal 2023 also excludes non-operating gains on a foreign exchange contract of $21.4 million and $89.4 million, respectively.

This gain is reported as "Other non-operating income" in our consolidated statements of income.

Further, our adjusted EPS excludes acquisition costs and the write-off of previously deferred debt origination fees reflected as additional interest expense, of $21.0 million in the second quarter and $27.5 million in the first half of fiscal 2023 related to the RPS acquisition.

The effective tax rates applied to the adjustments to EPS to arrive at adjusted EPS average 26% for both fiscal 2023 and 2022.

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Both EPS and adjusted EPS were calculated using diluted weighted-average common shares outstanding for the respective periods as reflected in our consolidated statements of income.

Three Months Ended

2023 January 2,

Three Months Ended Six Months Ended

2023 April 3,

2022 Change April 2,

2023 April 3,

($ in thousands, except per share data)

Income from operations $ 61,011 $ 74,520 $ (13,509) (18.1)% $ 153,061 $ 161,740 $ (8,679) (5.4)%

COVID-19 Credits — (4,451) 4,451 NM

Acquisition & integration expenses 3,761 — 3,761 NM

Earn-Out adjustments 933 — 933 NM

COVID-19 Credits — — — NM — (4,451) 4,451 NM

Acquisition & integration expenses 19,944 — 19,944 NM 23,705 — 23,705 NM

Earn-Out adjustments 7,544 — 7,544 NM 8,477 — 8,477 NM

Adjusted income from operations (1)

1 unchanged sentence

EPS $ 0.80 $ 0.98 $ (0.18) (18.4)% $ 2.98 $ 2.23 $ 0.75 33.6%

COVID-19 Credits — (0.06) 0.06 NM

Acquisition & integration expenses 0.05 — 0.05 NM

Earn-out adjustments 0.01 — 0.01 NM

Debt origination cost 0.04 — 0.04 NM

Foreign exchange forward contract gain (0.94) — (0.94) NM

COVID-19 Credits — — — NM — (0.06) 0.06 NM

Acquisition & integration expenses 0.43 — 0.43 NM 0.52 — 0.52 NM

Earn-out adjustments 0.12 — 0.12 NM 0.13 — 0.13 NM

Foreign exchange forward contract gain (0.29) — (0.29) NM (1.23) — (1.23) NM

Adjusted EPS (1)

2 unchanged sentences

(1) Non-GAAP financial measure

Operating income increased $4.8 million, or 5.5%, in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

The first quarter fiscal 2023 results include $3.8 million of acquisition expenses (primarily legal-related) for the RPS acquisition and losses of $0.9 million related to changes in the estimated fair value of contingent earn-out liabilities.

The first quarter fiscal 2022 results included the benefit of ERC's totaling $4.5 million, which represents reimbursement from the U.S.

Operating income decreased $13.5 million, or 18.1%, in the second quarter of fiscal 2023 compared to the second quarter of last year.

In the first half of fiscal 2023, operating income decreased $8.7 million, or 5.4%, compared to the first half of fiscal 2022.

The second quarter and first half of fiscal 2023 results include $19.9 million and $23.7 million of acquisition and integration expenses (primarily legal and other professional fees), respectively, for the RPS acquisition.

The second quarter and first half of fiscal 2023 results also include losses of $7.5 million and $8.5 million, respectively, related to changes in the estimated fair value of contingent earn-out liabilities.

The first half of fiscal 2022 results (all in the first quarter) included the benefit of ERC's totaling $4.5 million, which represents reimbursement from the U.S.

federal government under the Coronavirus Aid, Relief and Economic Security Act for the costs that we incurred during the second quarter of fiscal 2020 to address the COVID-19 pandemic.

1 unchanged sentence

These amounts were primarily reflected as a reduction to "Other costs of revenue" in our consolidated statement of income and an increase to "Net cash provided by operating activities" in our consolidated statement of cash flows for fiscal 2022, consistent with the presentation of the related costs recognized in the second quarter of fiscal 2020.

Excluding the acquisition expenses, earn-out losses and the ERC's our adjusted operating income increased $14.0 million, or 16.9% in the first quarter of fiscal 2023 compared to the same quarter last year.

These increases reflect improved results in both GSG and CIG segments, which are described below under "Government Services Group" and "Commercial/International Services Group", respectively.

Our net interest expense was $5.4 million in the first quarter of fiscal 2023 compared to $2.9 million in the prior-year quarter.

Net interest expense in the first quarter of fiscal 2023 includes $2.7 million of additional expense for the write-off of previously deferred debt origination fees due to the cancellation of the bridge loan facility we entered into to support our offer to acquire RPS, which was replaced with an amendment to our existing debt facility.

Other non-operating income of $68.0 million in the first quarter of fiscal 2023 reflects an unrealized gain on a foreign exchange forward contract integrated with the acquisition of RPS.

Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract does not qualify for hedge accounting.

As a result, the forward contract is marked-to-market with changes in fair value recogni zed in earnings each period.

We expect to incur additional integration expenses related to the RPS acquisition, primarily for information technology systems integration and real estate consolidation, in the second half of fiscal 2023.

These costs may be material to our consolidated financial results.

Excluding the acquisition expenses, earn-out losses and the ERC's our adjusted operating income increased $14.0 million, or 18.8% in the second quarter and $28.0 million, or 17.8%, in the first half of fiscal 2023 compared to the same periods last year.

These increases reflect improved results in both GSG and CIG segments, which are described below under "Government Services Group" and "Commercial/International Group", respectively.

Our net interest expense was $13.3 million in the second quarter and $18.7 million in the first half of fiscal 2023 compared to $3.1 million and $6.0 million, respectively, in the same periods of last year.

Net interest expense in the first quarter of fiscal 2023 included $2.7 million of additional expense for the write-off of previously deferred debt origination fees due to the cancellation of the bridge loan facility that we entered to support our offer to acquire RPS, which was replaced with an amendment to our existing debt facility.

Net interest expense in the second quarter of fiscal 2023 included $1.1 million of additional expense for the write-off of previously deferred debt origination fees due to the repayment and cancellation of RPS' debt facilities.

Excluding these write-offs, our interest expense increased $9.1 million in the second quarter and $8.9 million in the first half of fiscal 2023 compared to the same periods last year primarily due to the additional borrowings to fund the RPS acquisition.

Other non-operating income of $21.4 million and $89.4 million in the second quarter and first half of fiscal 2023, respectively, reflect gains on a foreign exchange forward contract integrated with the RPS acquisition.

Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract did not qualify for hedge accounting.

As a result, the forward contract was marked-to-market with changes in fair value recognized in earnings each period.

The forward contract was settled on January 23, 2023, together with the closing of the RPS acquisition, with a cumulative gain of approximately $109 million.

The effective tax rates for the first quarters of fiscal 2023 and 2022 were 24.5% and 18.8%, respectively.

Income tax expense was reduced by $1.7 million and $4.5 million of excess tax benefits on share-based payments in the first quarters of fiscal 2023 and 2022, respectively.

Excluding the impact of the excess tax benefits on share-based payments, our effective tax rates in the first quarters of fiscal 2023 and 2022 were 25.7 % an d 24.1%, respectively .

Our EPS was $2.18 in the first quarter of fiscal 2023 compared to $1.25 in the first quarter of fiscal 2022.

Excluding the aforementioned non-operating and non-recurring items, our adjusted EPS was $1.34 in the first quarter of fiscal 2023 compared to $1.19 in the year-ago quarter, an increase of 12.6%.

The effective tax rates for the first halves of fiscal 2023 and 2022 were 28.7% and 21.9%, respectively.

Income tax expense was reduced by $1.8 million and $4.8 million of excess tax benefits on share-based payments in the first halves of fiscal 2023 and 2022, respectively.

In addition, income tax expense in the first half of fiscal 2023 (all in the second quarter) included non-operating income tax expenses of $6.7 million to recognize the tax liability for foreign earnings, primarily in the U.K.

and Australia, that are no longer indefinitely reinvested and to increase the liability for an uncertain tax position.

Excluding the impact of the excess tax benefits on share-based payments and the non-operating tax expenses in the second quarter of fiscal 2023, our effective tax rates in the first halves of fiscal 2023 and 2022 were 26.5% and 25.0%, respectively.

Our EPS was $0.80 and $2.98 in the second quarter and first half of fiscal 2023 compared to $0.98 and $2.23 in the prior-year periods.

Excluding the aforementioned non-operating and non-recurring items, our adjusted EPS was $1.06 in the second quarter of fiscal 2023 compared to $0.98 in the year-ago quarter, an increase of 8.2%.

On the same basis, our first half adjusted EPS was $2.40 in fiscal 2023 compared to $2.17 last year, an increase of 10.6%.

We estimate that RPS was $0.03 dilutive to our adjusted EPS in the second quarter and first half of fiscal 2023 before intangible amortization, which reduced our EPS by an additional $0.11 .

Excluding RPS, our adjusted EPS was $1.20 in the second quarter and $2.54 in the first half of fiscal 2023 representing increases of 22.4% and 17.1%, respectively, compared to the same periods in fiscal 2022.

Segment Results of Operations

Government Services Group

Three Months Ended

2023 January 2,

Three Months Ended Six Months Ended

2023 April 3,

2022 Change April 2, 2023 April 3, 2022 Change

($ in thousands)

3 unchanged sentences

Income from operations $ 52,210 $ 50,344 $ 1,866 3.7% $ 112,557 $ 101,524 $ 11,033 10.9%

Revenue and revenue, net of subcontractor costs, increased $15.0 million, or 3.3%, and increased $26.0 million, or 7.9%, respectively, in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

The increases primarily reflect higher U.S.

Revenue increased $114.3 million, or 25.5%, and revenue, net of subcontractor costs, increased $98.1 million, or 29.1%, in the second quarter of fiscal 2023 compared to the year-ago quarter.

For the first half of fiscal 2023, revenue increased $129.3 million.

or 14.3%, and revenue, net of subcontractor costs, increased $124.0 million, or 18.7%, compared to the first half of last year.

These increases include approximately $70 million in revenue in the second quarter of fiscal 2023 related to international development funded energy programs in Ukraine.

In addition, the increases reflect higher U.S.

state and local government activities related to digital water and federal programs for civilian agencies, partially offset by lower disaster response revenue.

Operating income increased $9.2 million, or 17.9%, in the first quarter of fiscal 2023 compared to last year's first quarter.

The fiscal 2023 results included favorable operating income adjustments for several projects upon their completion.

Last year's first quarter results included $3.1 million of the aforementioned ERC's.

Our operating margin, based on revenue, net of subcontractor costs, improved to 17.1% in the first quarter of fiscal 2023 compared to 15.6% in the first quarter of fiscal 2022.

Excluding the favorable project adjustments in the first quarter of this year and last year's ERC's, our operating margin was 15.0% in the first quarter of fiscal 2023 compared to 14.7% in the same period last year.

The improved operating margin in fiscal 2023 was primarily due to our increased focus on high-end consulting services, including digital water.

Commercial/International Services Group

Three Months Ended

2023 January 2,

Operating income increased $1.9 million and $11.0 million in the second quarter and first half of fiscal 2023, respectively, compared to the prior-year periods.

Operating income in the second quarter of fiscal 2023 from the aforementioned work in Ukraine was more than offset by lower operating income on disaster response projects.

In addition, last year's first quarter and first half results included $3.1 million of the aforementioned ERC's.

Our operating margin, based on revenue, net of subcontractor costs, declined to 14.3% in the first half of fiscal 2023 compared to 15.3% in the first half of fiscal 2022.

Excluding last year's ERC's, our operating margin was 14.9% in the first half of fiscal 2022.

The lower operating margin in fiscal 2023 was due to a higher proportion of international development revenue in the first half of fiscal 2023 compared to the same period last year.

Our international development revenue, including the activity in Ukraine this year, tends to have a lower operating margin than the rest of our revenue in the GSG segment.

Commercial/International Group

Three Months Ended Six Months Ended

2023 April 3,

2022 Change April 2, 2023 April 3, 2022 Change

($ in thousands)

3 unchanged sentences

Income from operations $ 52,518 $ 40,485 $ 12,033 29.7% $ 102,626 $ 85,792 $ 16,834 19.6 %

Revenue and revenue, net of subcontractor costs, increased $23.3 million, or 5.6%, and increased $31.3 million, or 8.9%, respectively, in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

On a constant currency basis, revenue and revenue, net of subcontractor costs, increased 10.9% and 14.8%, respectively, in the first quarter of fiscal 2023 compared to the same period last year.

The revenue growth primarily reflects increased activity on high performance buildings and renewable energy.

Operating income increased $4.8 million, or 10.6%, in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

Revenue increased $193.4 million, or 46.4%, and revenue, net of subcontractor costs, increased $171.9 million, or 47.5%, in the second quarter of fiscal 2023 compared to last year's second quarter.

For the first half of fiscal 2023, revenue increased $216.7 million, or 26.0%, and revenue, net of subcontractor costs, increases $203.1 million, or 28.4%, compared to

the first half of fiscal 2022.

The RPS acquisition contributed approximately $170 million to revenue growth in the second quarter and first half of fiscal 2023.

The remaining revenue growth in both the second quarter and first half of fiscal 2023 primarily reflects increased activity on high performance buildings and renewable energy.

Operating income increased $12.0 million and $16.8 million, in the second quarter and first half of fiscal 2023, respectively, compared to the same periods last year.

The RPS acquisition contributed approximately $7 million to operating income in the second quarter and first half of fiscal 2023.

The fiscal 2022 operating income included $1.4 million of the aforementioned ERC's.

Excluding this benefit, operating income increased 14.0% in the first quarter of fiscal 2023 compared to last year's first quarter.

Our operating margin, based on revenue, net of subcontractor costs, improved to 13.1% in the first quarter of fiscal 2023 compared to 12.9% in the first quarter of fiscal 2022.

Excluding the ERC's, our operating margin was 12.5% in the first quarter of fiscal 2022.

improved operating margin was primarily due to our increased focus on high-end consulting services, project execution and labor utilization.

Our operating margin, based on revenue, net of subcontractor costs, was 11.2% in the first half of fiscal 2023 compared to 12.0% in the prior-year period.

Excluding RPS and the ERC's, our operating margin was 12.3% in the first half of fiscal 2023 compared to 11.8%% in the first half of fiscal 2022.

The improved operating margin was primarily due to our increased focus on high-end consulting services, project execution and labor utilization.

Backlog generally represents the dollar amount of revenues we expect to realize in the future when we perform the work.

2 unchanged sentences

The contract term and thus remaining performance obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 day s).

At January 1, 2023 and October 2, 2022, the differences between our backlog and RUPO of $3.8 billion for each period were immaterial.

At April 2, 2023 and October 2, 2022, the differences between our backlog and RUPO of $4.2 billion for each period were immaterial.

Financial Condition, Liquidity and Capital Resources

Capital Requirements.

At January 1, 2023, we h ad $164.4 million of cash and cash equivalents and access to an additional $1.30 billion of borrowings available under our amended credit facility described below.

D uring the first three months of fiscal 2023, we generated $25.2 million of cash from operations.

At April 2, 2023, we h ad $231.4 million of cash and cash equivalents and access to an additional $459.3 million of borrowings available under our amended credit facility described below.

During the first half of fiscal 2023, we generated $113.1 million of cash from operations.

Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities.

Our primary uses of cash are to fund working capital, stock repurchases, cash dividends, capital expenditures and repayment of debt, as well as to fund acquisitions and earn-out obligations from prior acquisitions.

We believe that our existing cash and cash equivalents, operating cash flows and borrowing capacity under our credit agreement as amended in the anticipation of our planned acquisition of RPS in the second quarter of fiscal 2023, as described below, will be sufficient to meet our capital requirements for at least the next 12 months.

Our primary uses of cash are to fund working capital, cash dividends, capital expenditures and repayment of debt, as well as to fund acquisitions and earn-out obligations from prior acquisitions.

We believe that our existing cash and cash equivalents, operating cash flows and borrowing capacity under our credit agreement as amended for the RPS acquisition in the second quarter of fiscal 2023, as described below, will be sufficient to meet our capital requirements for at least the next 12 months.

We use a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed.

We currently have no need or plans to repatriate undistributed foreign earnings, other than from Canada, in the foreseeable future;

however, this could change due to varied economic circumstances.

We plan to repatriate undistributed foreign earnings as they become available to supplement our liquidity in the United States including to pay down the borrowings used to fund the RPS acquisition.

On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock.

In the first quarter of fiscal 2023, we did not repurchase any shares of our common stock.

At January 1, 2023, we had a remaining balance of $347.8 million under our stock repurchase program.

In the first half of fiscal 2023, we did not repurchase any shares of our common stock.

At April 2, 2023, we had a remaining balance of $347.8 million under our stock repurchase program.

On November 7, 2022, our Board of Directors declared a quarterly cash dividend of $0.23 per share payable on December 9, 2022 to stockholders of record as of the close of business on November 21, 2022.

Subsequent Event.

On January 30, 2023, our Board of Directors declared a quarterly cash dividend of $0.23 per share payable on February 24, 2023 to stockholders of record as of the close of business on February 13, 2023.

Cash Equivalents and Restricted Cash.

At January 1, 2023, our cash equivalents and restricted cash w ere $172.2 million, a decrease of $13.3 million compared to the fiscal 2022 year-end.

The decrease was primarily due to payments on dividends and taxes on vested restricted stock, partially offset by cash provided by operating activities.

Subsequent Event.

On May 8, 2023, our Board of Directors declared a quarterly cash dividend of $0.26 per share payable on June 6, 2023 to stockholders of record as of the close of business on May 24, 2023.

Cash and Cash Equivalents..

At April 2, 2023, our cash and cash equivalents were $231.4 million, an increase of $46.3 million compared to the fiscal 2022 year-end.

The increase was primarily due to cash provided by operating activities and cash obtained in the RPS acquisition.

Operating Activities .

For the first quarter of fiscal 2023, net cash provided by operating activities was $25.2 million, a decrease of $57.2 million compared to the prior-year period.

For the first half of fiscal 2023, net cash provided by operating activities was $113.1 million, a decrease of $64.4 million compared t o the prior-year period.

The decrease was primarily due to the timing of payments to our vendors and employees.

Investing Activities .

For the first quarter of fiscal 2023, net cash used in investing activities was $4.9 million, a decrease of $1.9 million compared to the prior-year period.

The decrease was due to a payment related to an acquisition in the first quarter of fiscal 2022.

For the first half of fiscal 2023, net cash used in investing activities was $755.2 million, an increase of $719.7 million compared to the year-ago period.

The increase was primarily due to the RPS acquisition in the second quarter of fiscal 2023.

Financing Activities .

For the first quarter of fiscal 2023, net cash used in financing activities was $42.3 million, an increase of $5.9 million compared to fiscal 2022 quarter.

The financing activities in the first quarter of fiscal 2023 primarily consisted of payments on dividends and taxes on vested restricted stock, and a net repayment of debt.

For the first half of fiscal 2023, net cash provided by financing activities was $680.5 million, compared to net cash used in financing activities of $115.8 million in the prior-year period .

The financing activities in the first half of fiscal 2023 primarily consisted of additional borrowings to fund the RPS acquisition.

Debt Financing.

On October 26, 2022, we entered into a Third Amended and Restated Credit Agreement that provides for an additional $500 million senior secured term loan facility (the "New Term Loan Facility") increasing our total borrowing capacity to $1.55 billion.

Subsequent Event.

We drew the entire amount of the New Term Loan Facility to partially finance the acquisition of RPS in January 2023.

The remaining cash payments for the initial purchase price for RPS, including transaction fees and the retirement of RPS's existing debt, and Amyx, which totaled approximately $380 million, was financed with borrowings under

the existing Amended Revolving Credit Facility.

On January 23, 2023, we drew the entire amount of the New Term Loan Facility to partially finance the RPS acquisition.

The New Term Loan Facility is not subject to any amortization payments of principal and matures on the third anniversary of the RPS acquisition closing date.

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The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations.

At January 1, 2023, we had $240.6 million.

in outstanding borrowings under the Amended Credit Agreement, which was comprised of $240.6 million under the Amended Term Loan Facility and no borrowings under the Amended Revolving Credit Facility.

The year-to-date weighted-average interest rate of the outstanding borrowings during January 1, 2023 is 4.87%.

At April 2, 2023, we had $1.08 billion in outstanding borrowings under the Amended Credit Agreement, which was comprised of $237.5 million under the Amended Term Loan Facility, $500 million under the New Term Loan Facility, and $340 million under the Amended Revolving Credit Facility.

The year-to-date weighted-average interest rate of the outstanding borrowings during April 2, 2023 is 5.46%.

In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement.

Our year-to-date weighted-average interest rate on borrowings outstanding under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 15, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”, was 5.03%.

At January 1, 2023, we had $499.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.

At April 2, 2023, we had $159.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.

The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default.

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Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers.

At January 1, 2023, we were in compliance with these covenants with a consolidated leverage ratio of 0.71x and a consolidated interest coverage ratio of 24.57x.

At April 2, 2023, we were in compliance with these covenants with a consolidated leverage ratio of 2.44x and a consolidated interest coverage ratio of 14.24x.

In addition to the Amended Credit Agreement, we maintain other credit facilities, which may be used for short-term cash advances and bank guarantees.

At January 1, 2023, there were $5.9 million under these facilities, and the aggregate amount of standby letters of credit outstanding was $45.8 million.

At January 1, 2023, we had no bank overdrafts related to our disbursement bank accounts.

At April 2, 2023, there were no borrowings under these facilities, and the aggregate amount of standby letters of credit outstanding was $56.5 million.

At April 2, 2023, we had no bank overdrafts related to our disbursement bank accounts.

We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin.

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November 7, 2022 $ 0.23 November 21, 2022 $ 12,186 December 9, 2022

January 30, 2023 $ 0.23 February 13, 2023 N/A February 24, 2023

January 30, 2023 $ 0.23 February 13, 2023 $ 12,242 February 24, 2023

May 8, 2023 $ 0.26 May 24, 2023 N/A June 6, 2023

We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjust the allowance, if necessary.

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Based on projected future operating results in certain jurisdictions, it is unlikely that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months.

At January 1, 2023 and October 2, 2022, the liability for income taxes associated with uncertain tax positions was $10.8 million and $10.6 million, respectively.

At April 2, 2023 and October 2, 2022, the liability for income taxes associated with uncertain tax positions was $42.4 million an d $10.6 million, respectively.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions may significantly decrease within the next 12 months.

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If we default on the Amended Credit Agreement or additional credit facilities, our inability to issue or renew standby letters of credit and bank guarantees would impair our ability to maintain normal operations.

At January 1, 2023, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $45.8 million in standby letters of credit outstanding under our additional letter of credit facilities.

At April 2, 2023, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $56.5 million i n standby letters of credit outstanding under our additional letter of credit facilities.

• From time to time, we provide guarantees and indemnifications related to our services.

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The potential payment amount of an outstanding performance guarantee is typically the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts.

However, we are not able to estimate other amounts that may be required to be paid in excess of estimated costs to complete contracts and, accordingly, the total potential payment amount under our outstanding performance guarantees cannot be estimated.

For cost-plus contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract.

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Remaining billable amounts could be greater or less than the cost to complete.

cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims.

In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims.

• In the ordinary course of business, our clients may request that we obtain surety bonds in connection with contract performance obligations that are not required to be recorded in our consolidated balance sheets.

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The Facility matures on February 18, 2027.

At January 1, 2023, we had $240.6 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $240.6 million under the Amended Term Loan Facility and no borrowings under the Amended Revolving Credit Facility.

The year-to-date weighted-average interest rate of the outstanding borrowings during fiscal 2023 was 5.46%.

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The objective of these interest rate swaps was to eliminate the variability of our cash flows on the amount of interest expense we pay under our Credit Agreement.

At January 1, 2023, the notional principal of our outstanding interest swap agreements was $196.9 million ($39.4 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effects of interest rate swap agreements, at January 1, 2023, was 4.19%.

At April 2, 2023, the notional principal of our outstanding interest swap agreements was $193.8 million ($38.8 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effects of interest rate swap agreements, at April 2, 2023, was 5.03%.

For more information, see Note 15, “Derivative Financial Instruments ” of the “Notes to Consolidated Financial Statements”.

Most of our transactions are in U.S.

The majority of our transactions are in U.S.

however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian and Australian dollar, and British Pound.

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We report our foreign currency gains and losses in “Selling, general and administrative expenses” on our consolidated statements of income.

The impact of the foreign currency was immaterial for the first quarters of fiscal 2023 and 2022.

W e have foreign currency exchange rate exposure in our results of operations and equity primarily because of the currency translation related to our foreign subsidiaries where the local currency is the functional currency.

The impact of the foreign currency gains and losses was immaterial for the first halves of fiscal 2023 and 2022.

We have foreign currency exchange rate exposure in our results of operations and equity primarily because of the currency translation related to our foreign subsidiaries where the local currency is the functional currency.

To the extent the U.S.

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dollar weakens against foreign currencies.

For the first quarters of fiscal 2023 and 2022, 29.8% and

29.8% of our consolidated revenue, respectively, was generated by our international business.

For the first quarter of fiscal 2023, the effect of foreign exchange rate translation on the consolidated balance sheets was an increase in our equity by $33.1 million compared to a decrease in equity of $0.7 million in the first quarter of fiscal 2022.

For the first halves of fiscal 2023 and 2022, 33.4% and 30.8% of our consolidated revenue, respectively, was generated by our international business.

For the first half of fiscal 2023, the effect of foreign exchange rate translation on the consolidated balance sheets was an increase in our equity by $25.0 million compared to an increase in equity of $2.1 million in the first half of fiscal 2022.

These amounts were recognized as adjustments to equity through other comprehensive income.

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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