Jacobs Solutions Inc. — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023, compared with the quarter and nine months ended July 1, 2022. Results are unaudited and reported under U.S. GAAP. Jacobs provides technical, engineering, consulting, construction, digital and professional services through Critical Mission Solutions, People & Places Solutions, Divergent Solutions and PA Consulting.
Key Financial Metrics
| Metric | Q3 FY2023 | Q3 FY2022 | 9M FY2023 | 9M FY2022 |
|---|---|---|---|---|
| Revenue | $4.187 billion | $3.827 billion | $12.064 billion | $11.042 billion |
| Gross profit | $856.7 million | $824.5 million | $2.562 billion | $2.491 billion |
| Gross margin | 20.5% | 21.5% | 21.2% | 22.6% |
| Operating profit | $269.7 million | $265.8 million | $797.4 million | $609.3 million |
| Net earnings attributable to Jacobs | $164.2 million | $196.0 million | $516.4 million | $418.8 million |
| Diluted EPS | $1.29 | $1.52 | $4.06 | $3.23 |
| Cash flow from operations | Not separately provided | Not separately provided | $755.4 million | $197.2 million |
Q3 revenue increased 9.4% year over year, while nine-month revenue increased 9.3%. Operating profit increased 1.5% in Q3 and 30.9% year to date. Net earnings attributable to Jacobs declined 16.2% in Q3 but increased 23.3% year to date. The filing does not provide a separately reported consolidated EBITDA measure.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $1.092 billion at June 30, 2023, down from $1.140 billion at September 30, 2022. Including restricted cash, ending cash was $1.094 billion.
- Total debt was approximately $3.201 billion, consisting of $55.7 million of current maturities and $3.146 billion of long-term debt. Excluding leases, gross debt exceeded cash by approximately $2.109 billion.
- Debt included $806.1 million drawn on the revolving credit facility, $1.026 billion under the 2021 term loan facility, $877.5 million under the 2020 term loan facility and $500 million of 5.9% sustainability-linked senior notes due 2033.
- The company had $1.44 billion of available borrowing capacity under its $2.25 billion revolving credit facility after $0.9 million of issued letters of credit. Total letters of credit outstanding were $326.2 million, and surety bonds outstanding were approximately $2.0 billion.
- Jacobs was in compliance with its debt covenants and stated that available liquidity and expected operating cash flow were adequate for projected needs over the next twelve months.
- Nine-month financing cash outflows were $770.3 million, including $338.6 million of net debt repayments, $265.6 million of share repurchases, $95.7 million of shareholder dividends and $55.7 million of net PA Consulting redeemable noncontrolling-interest purchases and issuances.
Material Changes Versus the Prior Comparable Period
- Revenue growth: Growth was led by People & Places Solutions, which increased revenue 11.1% in Q3 and 11.7% year to date, and Critical Mission Solutions, which increased 7.4% in both periods. Divergent Solutions revenue increased 9.8% in Q3 and 6.9% year to date. PA Consulting revenue increased 3.3% in Q3 but only 0.6% year to date.
- Profitability pressure: Gross margins declined 100 basis points in Q3 and 140 basis points year to date, primarily because of project mix, lower utilization at PA Consulting and foreign-currency effects.
- Higher interest expense: Net interest expense rose to $36.0 million in Q3 from $25.1 million and to $106.0 million year to date from $64.6 million, primarily due to higher interest rates and prior-period debt levels.
- Unusual prior-year comparators: Fiscal 2022 included a $91.3 million pre-tax settlement of the Legacy CH2M Matter, a $13.9 million investment gain and a $7.1 million lease-termination gain. These items contributed to the stronger year-to-date earnings comparison in fiscal 2023.
- Share count and capital returns: The company repurchased 2.326 million shares for $265.6 million during the first nine months and had $875.0 million remaining under its $1.0 billion 2023 authorization at June 30. The quarterly dividend was increased to $0.26 per share.
- Cash generation: Operating cash flow improved by $558.2 million year over year, mainly because the prior-year period included the cash payment for the Legacy CH2M settlement and the current period benefited from improved working capital.
Outlook, Management Commentary and Risks
- Jacobs announced its intention to separate Critical Mission Solutions into an independent publicly traded company in fiscal 2024 through a distribution intended to be tax-free to U.S. stockholders. Completion remains subject to board approval and customary conditions; the filing provides no assurance regarding timing, structure, tax treatment or completion.
- Remaining performance obligations were approximately $17.2 billion at June 30, 2023. Management expects approximately 51% to convert to revenue within twelve months and 49% thereafter, although cancellations, scope changes, deferrals and foreign-currency movements may affect timing.
- Reported backlog was $28.915 billion, up from $28.090 billion at July 1, 2022. Backlog is not necessarily an indicator of future revenue because contracts may be cancelled, modified or delayed.
- PA Consulting incurred approximately $17 million of restructuring charges in Q3 related to management reorganization and headcount reductions. Management expects annualized gross pre-tax cash savings of approximately $40 million to $50 million.
- Divergent Solutions restructuring initiatives are expected to generate approximately $20 million to $24 million of annualized gross pre-tax cash savings. Real-estate transformation activities were expected to incur approximately $6.1 million of additional fiscal 2023 costs.
- Variable-rate debt creates interest-rate exposure. Management estimated that a 1% increase in floating rates would have increased nine-month interest expense by approximately $18 million. Approximately $1.80 billion of debt principal remained subject to variable-rate risk after hedging.
- Key risks include execution and cost of the CMS separation, loss of employees, project cancellations or delays, government funding and budget changes, client credit risk, inflation, interest rates, foreign exchange, recessionary conditions, tax audits, litigation, government contract audits and guarantees.
- Management reported effective disclosure controls and procedures as of June 30, 2023, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the final structure, timing, financing, tax treatment and separation liabilities associated with the planned CMS transaction.
- Reconcile reported backlog of $28.915 billion with remaining performance obligations of $17.2 billion and assess conversion assumptions.
- Monitor gross-margin trends, PA Consulting utilization, project mix and the sustainability of segment operating-profit improvements.
- Assess refinancing needs, variable-rate exposure, covenant headroom and the effect of higher interest rates on cash flow.
- Evaluate whether projected restructuring savings offset separation, technology, personnel and other corporate costs.
- Review outstanding letters of credit, surety bonds, insurance limitations, litigation, government investigations and tax contingencies beyond recorded reserves.