Jacobs Solutions Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 31, 2023, compared with April 1, 2022. The filing presents unaudited interim consolidated results. Jacobs provides technical, professional, engineering, construction, consulting, digital and government services through Critical Mission Solutions, People & Places Solutions, Divergent Solutions and PA Consulting.
Financial Performance and Position
| Metric | Three months ended March 31, 2023 | Year-over-year change | Six months ended March 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $4.08 billion | 6.4% increase | $7.88 billion | 9.2% increase |
| Gross profit | $890.3 million | 2.3% increase | $1.71 billion | 2.3% increase |
| Gross margin | 21.8% | Down from 22.7% | 21.6% | Down from 23.1% |
| Operating profit | $289.9 million | Up from $166.2 million | $527.7 million | Up from $343.5 million |
| Net earnings attributable to Jacobs | $216.5 million | Up from $88.8 million | $352.2 million | Up from $222.8 million |
| Diluted EPS | $1.70 | Up from $0.68 | $2.76 | Up from $1.71 |
| Cash flow from operations | Not separately provided | — | $434.3 million | Down from $446.3 million |
- Operating performance benefited from higher revenue, lower restructuring and other charges, and the absence of the prior-year $91.3 million Legacy CH2M settlement charge.
- Net earnings were also favorably affected by a 7.6% quarterly effective tax rate, compared with 29.7% in the prior-year quarter. The current-year rate included a $40.2 million benefit from effectively settled U.S. uncertain tax positions and an $8.6 million foreign tax credit benefit.
- Net interest expense increased to $33.0 million for the quarter and $70.1 million year to date, reflecting higher interest rates and higher average debt levels.
- Cash and cash equivalents were $1.22 billion at March 31, 2023, compared with $1.14 billion at September 30, 2022. Total current assets were $4.91 billion and total current liabilities were $3.21 billion.
- Long-term debt, including current maturities and net of deferred financing fees, was $3.40 billion, compared with $3.36 billion at fiscal year-end.
- The company reported $1.17 billion of available borrowing capacity under its $2.25 billion revolving credit facility and stated that it was in compliance with all debt covenants.
Segment Results and Material Changes
- People & Places Solutions: Revenue increased 8.4% for the quarter and 12.0% year to date; operating profit increased 20.5% and 20.3%, respectively. Growth was led by advanced facilities and U.S. operations.
- Critical Mission Solutions: Revenue increased 5.0% for the quarter and 7.3% year to date, supported by U.S. government awards, including nuclear remediation. Operating profit was essentially flat for the quarter and declined 5.2% year to date due partly to contract wind-downs and foreign exchange.
- Divergent Solutions: Revenue increased 0.8% for the quarter and 5.4% year to date. Quarterly operating profit rose 45.8%, but year-to-date operating profit declined 8.3% due primarily to first-quarter overhead billing-rate differences.
- PA Consulting: Revenue increased 1.2% for the quarter but declined 0.7% year to date in reported dollars because of foreign exchange. Local-currency revenue increased approximately 10%; operating profit declined 4.0% for the quarter and 11.2% year to date due to foreign exchange, higher labor costs and lower utilization.
- Reported revenue was negatively affected by foreign-currency translation by approximately $109 million in the quarter and $267 million year to date.
- Backlog was $29.0 billion at March 31, 2023, compared with $27.8 billion at April 1, 2022. Remaining performance obligations were approximately $16.7 billion, with 48% expected to be recognized within twelve months, subject to cancellations, scope changes and deferrals.
- Restructuring, transaction and other charges were $19.2 million in the quarter and $59.5 million year to date, versus $117.3 million and $200.8 million in the comparable periods. The prior-year amounts included the Legacy CH2M settlement and higher real-estate-related charges.
Cash Flow, Capital Allocation and Debt
- Operating cash flow was $434.3 million for the first six months, while investing activities used $76.7 million, substantially less than the prior-year $458.8 million primarily because the prior year included the StreetLight and BlackLynx acquisitions.
- Financing activities used $336.0 million, including $140.5 million of common-stock repurchases, $58.4 million of PA Consulting redeemable noncontrolling-interest repurchases, $62.8 million of shareholder dividends and $53.8 million of net long-term debt repayments.
- In February 2023, Jacobs amended and extended its revolving credit and term-loan facilities and issued $500 million of 5.9% sustainability-linked senior notes due 2033.
- Approximately $2.96 billion of revolving-credit and term-loan borrowings remained subject to variable rates, partially offset by $899.5 million of interest-rate and cross-currency swap notional amounts. Management estimated that a 1% increase in floating rates would have increased first-half interest expense by approximately $13.1 million.
- The board authorized a new $1.0 billion share-repurchase program in January 2023, expiring January 25, 2026. No repurchases had occurred under the new authorization through the filing date.
Outlook, Unusual Items and Risks
- On May 9, 2023, Jacobs announced its intention to spin off the CMS business into a separately traded public company, targeted for the second half of fiscal 2024. Completion remains subject to board approval, tax rulings and opinions, regulatory filings, other customary conditions and execution risks.
- Management stated that existing cash, borrowing capacity and operating cash flow should be adequate to fund projected requirements for the next twelve months.
- Key risks include execution and cost of the proposed separation, potential loss of employees or customers, increased standalone costs and dis-synergies, interest-rate and foreign-exchange exposure, inflation, recession, government funding and budget changes, project cancellations or delays, labor constraints, acquisition integration, tax audits and government contract investigations.
- The company had approximately $322.4 million of letters of credit and $2.0 billion of surety bonds outstanding at March 31, 2023. Management stated that guarantees, litigation, audits and investigations were not expected to have a material adverse effect beyond amounts accrued.
- The filing states that the remaining Kingston coal-ash litigation plaintiffs were settled during the second quarter; the settlement amount was not material.
Important Facts for Investors to Verify
- Whether the proposed CMS spin-off receives required approvals and tax support and remains on the targeted fiscal 2024 timetable.
- The sustainability-linked debt terms, variable-rate exposure, covenant headroom and effect of future interest-rate changes.
- Whether lower gross margins, PA Consulting utilization and foreign-exchange impacts persist.
- The conversion of backlog and remaining performance obligations into revenue and cash, including potential cancellations, deferrals and scope changes.
- The sustainability of the unusually low quarterly effective tax rate after the discrete uncertain-tax-position benefits.
- Future restructuring, real-estate impairment, separation and standalone operating costs.