Business Context and Reporting Period
Jacobs Solutions Inc. filed this unaudited Form 10-Q for the three months ended December 30, 2022, the first quarter of fiscal 2023. Jacobs provides consulting, engineering, technical, scientific, construction, operations and maintenance, digital and technology services to government and commercial clients. Reportable segments were Critical Mission Solutions, People & Places Solutions, the newly formed Divergent Solutions segment, and PA Consulting.
The company reported approximately $17.2 billion of remaining performance obligations at December 30, 2022, with approximately 46% expected to be recognized as revenue within the next 12 months. Total backlog was $28.3 billion, compared with $28.0 billion at December 31, 2021.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $3.799 billion | $3.381 billion | 12.4% increase |
| Gross profit | $814.7 million | $796.5 million | 2.3% increase |
| Gross margin | 21.4% | 23.6% | Down 220 bps |
| Operating profit | $237.8 million | $177.3 million | 34.1% increase |
| Operating margin | 6.3% | 5.2% | Up approximately 100 bps |
| Net earnings attributable to Jacobs | $135.6 million | $134.0 million | 1.2% increase |
| Diluted EPS | $1.06 | $1.03 | 2.9% increase |
| Cash flow from operations | $302.3 million | $321.6 million | 6.0% decrease |
Net earnings from continuing operations attributable to Jacobs were $136.4 million, or $1.07 per diluted share. Discontinued operations produced a $0.7 million net loss.
Segment revenue and operating profit were: People & Places Solutions revenue of $2.227 billion and operating profit of $226.6 million; Critical Mission Solutions revenue of $1.075 billion and operating profit of $82.2 million; Divergent Solutions revenue of $214.5 million and operating profit of $12.0 million; and PA Consulting revenue of $282.0 million and operating profit of $51.0 million.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $1.211 billion at December 30, 2022, compared with $1.140 billion at September 30, 2022.
- Operating cash flow was $302.3 million. Investing activities used $48.7 million, including $32.2 million of capital expenditures and $16.9 million for acquisitions. Financing activities used $246.1 million.
- Financing outflows included $140.5 million of common-stock repurchases, $58.4 million to repurchase redeemable PA Consulting noncontrolling interests, and $29.8 million of shareholder dividends.
- Long-term debt, including current maturities and net of deferred financing fees, was $3.434 billion at December 30, 2022, up from $3.357 billion at September 30, 2022. The company repurchased the remaining $500 million of senior notes during the quarter, funding the repurchases primarily with revolving-credit borrowings.
- The company reported $637.9 million of available borrowing capacity under its $2.25 billion revolving credit facility and $292.5 million of outstanding letters of credit. It also had approximately $2.0 billion of surety bonds outstanding.
- Jacobs stated that it was in compliance with all debt covenants and had adequate liquidity for projected requirements over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by People & Places Solutions and Critical Mission Solutions, including increased U.S. government spending and new Department of Energy nuclear-remediation awards. StreetLight Data contributed incremental revenue to Divergent Solutions.
- Gross margin declined to 21.4% from 23.6%, mainly due to lower PA Consulting utilization, project mix in Critical Mission Solutions, and unfavorable foreign-currency translation.
- Operating profit improved partly because restructuring and other charges declined to approximately $34.4 million from $69.4 million. Real-estate impairment charges declined to $27.1 million from $72.3 million.
- Net interest expense increased to approximately $37.1 million from $17.9 million because of higher debt levels and interest rates.
- The effective tax rate increased to 25.4% from 9.4%. The prior-year rate benefited from a $15.7 million release of previously reserved foreign tax credit assets and other favorable tax items that did not recur.
- Critical Mission Solutions operating profit declined 9.9%, Divergent Solutions operating profit declined 48.2%, and PA Consulting operating profit declined 19.1%. People & Places Solutions operating profit increased 20.0%.
- Jacobs established Divergent Solutions as a new operating and reporting segment during the quarter, reallocating portions of the legacy businesses to support a technology-focused strategy.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear quantitative fiscal 2023 revenue, earnings or cash-flow guidance figure. Management described growth opportunities in government services, infrastructure, environmental work, advanced facilities, digital, cyber and technology-enabled solutions, while noting that interim results are not necessarily indicative of full-year performance.
- Transformation and restructuring initiatives are continuing, including real-estate rescaling and integration activities. These initiatives generated $34.4 million of charges in the quarter, and related activities are expected to continue through fiscal 2023 or, for certain PA Consulting initiatives, through fiscal 2025.
- Foreign-currency translation reduced quarterly revenue by approximately $158.5 million and adversely affected operating profit in several international businesses.
- Variable-rate debt creates interest-rate exposure. Management estimated that a 1% increase in floating rates would have increased quarterly interest expense by approximately $7.0 million. Derivatives hedged a portion of the exposure.
- Key risks include project cancellations or delays, government funding and budget changes, client payment risk, inflation, recession, interest rates, foreign currency movements, competition, acquisition integration, employee retention, cybersecurity and the ability to achieve planned cost savings.
- The company is subject to litigation, government contract audits and investigations, tax audits, performance guarantees, surety bonds and insurance-related claims. Management stated that known matters, including the Kingston coal-ash litigation, are not expected to have a material adverse effect beyond amounts accrued.
- The company entered into a refinancing on February 6, 2023. The refinancing extended the revolving facility maturity to February 2028, extended certain term-loan maturities, increased the consolidated leverage covenant to 3.50:1.00 subject to specified temporary increases, and eliminated the net-worth covenant.
- On January 25, 2023, the board authorized a new $1.0 billion share-repurchase program expiring January 25, 2026. No repurchases had occurred under the new authorization as of the filing.
Most Important Facts for Investors to Verify
- Whether revenue growth converts into sustainable margin improvement, particularly in PA Consulting, Divergent Solutions and Critical Mission Solutions.
- The effect of higher interest rates and the February 2023 refinancing on future interest expense, leverage and covenant headroom.
- Progress and remaining costs of real-estate, restructuring and integration initiatives.
- The quality, funding and timing of the $28.3 billion backlog and $17.2 billion of remaining performance obligations, including cancellation, scope-change and deferral risks.
- Whether cash generation remains sufficient to fund debt reduction, dividends, share repurchases, PA Consulting noncontrolling-interest repurchases and acquisitions.
- The sustainability of the 25.4% effective tax rate and potential tax-audit adjustments, including up to $44.2 million of possible reductions in unrecognized tax benefits over the following 12 months.
- Exposure to foreign-currency movements, variable-rate borrowings, performance guarantees, surety bonds and unresolved litigation or government-contract matters.