Business Context and Reporting Period
Jacobs Engineering Group Inc. (now Jacobs Solutions Inc.) filed this unaudited Form 10-Q for the quarter and six months ended April 2, 2021, compared with March 27, 2020. The company operated through Critical Mission Solutions (CMS), People & Places Solutions (P&PS), and newly consolidated PA Consulting. The Energy, Chemicals and Resources business remained classified as discontinued operations.
Financial Performance and Position
| Metric | Three Months Ended April 2, 2021 | Six Months Ended April 2, 2021 |
|---|---|---|
| Revenue | $3.55 billion | $6.93 billion |
| Gross profit | $767.0 million | $1.40 billion |
| Gross margin | 21.6% | 20.2% |
| Operating income (loss) | $(41.1) million | $172.8 million |
| Income (loss) from continuing operations attributable to Jacobs | $(0.3) million | $256.8 million |
| Net earnings attributable to Jacobs | $11.0 million | $268.1 million |
| Diluted EPS | $0.08 | $2.04 |
| Operating cash flow | Not separately provided | $350.2 million |
- Quarterly revenue increased 3.5% year over year; six-month revenue increased 2.1%.
- CMS revenue increased 5.3% in the quarter and 7.4% year to date, while P&PS revenue declined 2.0% and 3.1%, respectively. PA Consulting contributed $98.3 million of revenue and $27.9 million of operating profit after its March 2, 2021 acquisition.
- Quarterly operating results included $321.5 million of restructuring, transaction and other charges, including $296.1 million related to PA Consulting. Six-month charges were $343.5 million, including $300.2 million related to PA Consulting.
- Cash and cash equivalents were $893.3 million at April 2, 2021, compared with $862.4 million at October 2, 2020. Restricted cash included $273.6 million in the PA Consulting employee benefit trust.
- Cash used in investing activities was $1.74 billion, primarily reflecting the $1.7 billion PA Consulting investment and the Buffalo Group acquisition. Financing activities provided $1.67 billion, mainly from borrowings.
- Total debt, including current and long-term portions, was approximately $3.48 billion at April 2, 2021, compared with $1.68 billion of long-term debt at October 2, 2020. The company had approximately $1.39 billion of available revolving-credit capacity and was in compliance with debt covenants.
- Remaining performance obligations were approximately $15.7 billion, with management expecting to recognize 48% within twelve months. Reported backlog was $25.6 billion.
Material Changes Versus the Prior Comparable Period
- Quarterly continuing-operations loss attributable to Jacobs improved to $(0.3) million from $(122.0) million, while six-month earnings increased to $256.8 million from $57.5 million.
- The improvement was substantially affected by acquisitions, cost reductions, and volatile investment-mark-to-market results. The prior-year quarter included a $341.0 million pretax loss related to the Worley investment and related foreign-currency items; the current quarter included $29.7 million of comparable pretax losses and $46.6 million of pretax C3 investment losses.
- Gross margin improved from 18.9% to 21.6% for the quarter and from 19.0% to 20.2% for the six-month period.
- SG&A increased 68.2% in the quarter and 26.0% year to date, primarily because of PA Consulting transaction-related compensation and other charges.
- Operating cash flow improved from cash used of $15.0 million in the prior-year six-month period to cash provided of $350.2 million, driven primarily by improved collections and accrued PA Consulting compensation.
- Discontinued-operations earnings declined to $11.3 million for the quarter and six months, versus $29.9 million and $107.5 million, respectively, primarily because the prior-year periods included larger ECR-sale gains and an insurance recovery.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative fiscal 2021 earnings or revenue guidance figure. Management expects COVID-19 effects to continue through fiscal 2021, but at a lower level than in fiscal 2020.
- Management believes liquidity and capital resources are adequate for projected needs over the next twelve months and has contingency plans for additional cost reductions if the pandemic worsens or persists longer than expected.
- COVID-19 risks include reduced demand, project delays or cancellations, client payment issues, workforce disruptions, remote-work challenges, government budget constraints, and market volatility.
- The PA Consulting transaction was funded with cash, a new term loan, and revolver borrowings. An additional $266.6 million of acquisition-related compensation was accrued but expected to be paid in the third quarter of fiscal 2021.
- PA Consulting’s 35% employee-held interest was classified as redeemable noncontrolling interest at $587.0 million at quarter-end. The preferred interests carry a cumulative compounding 12% dividend, and redemption options may become exercisable no earlier than four years after closing.
- The company recorded a $33.2 million pretax impairment of its AWE Management investment during the six-month period.
- Material contingencies include performance guarantees, $263.6 million of letters of credit, approximately $2.1 billion of surety bonds, litigation related to the Australian JKC project and the Tennessee Valley Authority Kingston matter, and an SEC information request concerning a former Morocco joint venture. Management does not expect these matters to have a material adverse effect beyond recorded reserves.
- Variable-rate debt and foreign-currency exposures remain significant. The company used interest-rate and cross-currency swaps with aggregate notional value of $929.3 million; management estimated that a 1% increase in floating rates would have increased six-month interest expense by approximately $4.3 million.
Most Important Facts for Investors to Verify
- Whether PA Consulting delivers the expected growth and margins after absorbing acquisition-related compensation and integration costs.
- The company’s post-acquisition leverage, debt repayment pace, covenant headroom, and exposure to variable interest rates.
- Whether COVID-19-related project delays and lower P&PS revenue persist beyond fiscal 2021.
- The sustainability of operating cash flow after the expected $266.6 million PA Consulting-related payment and other acquisition obligations.
- The valuation volatility and liquidity of the Worley and C3 equity investments and their effects on reported earnings.
- Potential outcomes and reserves related to the JKC arbitration, TVA litigation, SEC inquiry, government contract audits, and performance guarantees.
- The final purchase-price allocations and goodwill and intangible-asset valuation assumptions for PA Consulting and Buffalo Group.