Jacobs Solutions Inc. — Fiscal 2024 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 29, 2024, compared with March 31, 2023. The filing is unaudited. Jacobs provides engineering, consulting, technical, scientific, construction, operations and digital services through Critical Mission Solutions, People & Places Solutions, Divergent Solutions and PA Consulting. The company had approximately 60,000 employees.
Key Financial Metrics
| Metric | Three months ended March 29, 2024 | Year-over-year change | Six months ended March 29, 2024 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $4.269 billion | Up 4.7% | $8.428 billion | Up 7.0% |
| Gross profit | $904.6 million | Up 1.6% | $1.755 billion | Up 2.9% |
| Gross margin | 21.2% | Down from 21.8% | 20.8% | Down from 21.6% |
| Operating profit | $281.0 million | Down 3.1% | $485.1 million | Down 8.1% |
| Net earnings attributable to Jacobs | $162.1 million | Down 25.1% | $333.7 million | Down 5.2% |
| Diluted EPS | $1.28 | Down from $1.70 | $2.65 | Down from $2.76 |
| Operating cash flow | Not separately provided for the quarter | — | $375.5 million | Down from $434.3 million |
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1.034 billion at March 29, 2024, up $106.9 million from September 29, 2023. Approximately $250.1 million was held in the United States and $783.4 million outside the United States.
- Total debt was approximately $3.002 billion, consisting of $837.3 million classified as current and $2.1648 billion classified as long-term. The $837.3 million current amount primarily reflects the March 2025 maturity of the 2020 Term Loan Facility.
- The company had $2.11 billion of available capacity under its $2.25 billion revolving credit facility and was in compliance with debt covenants.
- Six-month investing cash outflow was $57.3 million, including $45.1 million of capital expenditures. Financing cash outflow was $230.8 million, including $195.5 million of share repurchases and $70.1 million of shareholder dividends.
- Outstanding letters of credit totaled $289.7 million, and outstanding surety bonds totaled approximately $2.2 billion.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by People & Places Solutions, which increased six-month revenue 9.2%, and Critical Mission Solutions, which increased 4.0%. Divergent Solutions revenue rose 4.9% for six months but declined 7.1% in the second quarter after a national government program ended earlier than expected. PA Consulting revenue increased 2.9% for six months but declined 2.3% in the quarter.
- Segment operating profit increased 8.1% in the quarter and 5.4% for six months, but consolidated U.S. GAAP operating profit declined because of higher corporate expenses and restructuring and transaction costs.
- Second-quarter restructuring, transaction and other charges were $52.3 million, compared with $19.2 million in the prior-year quarter. Six-month charges were $107.6 million, compared with $59.5 million. Most current-period charges related to the planned Separation Transaction.
- Current-quarter income tax expense increased substantially because the prior-year quarter benefited from a $40.2 million release related to uncertain tax positions. The current-quarter effective tax rate was 27.9%, compared with 7.6% in the prior-year quarter.
- The six-month effective tax rate was 12.6%, including a $61.6 million deferred tax benefit related to an Australian subsidiary tax election. The filing states that state taxes and U.S. tax on foreign earnings are expected to continue affecting the rate.
- Gross margin declined despite higher revenue, reflecting mix and personnel-cost pressures. Six-month operating cash flow also declined, primarily because of higher tax payments and increases in receivables.
- Jacobs repurchased 1.428 million shares for approximately $195.5 million during the first six months. Approximately $679.4 million remained under the $1.0 billion authorization at March 29, 2024.
Outlook, Management Commentary and Unusual Items
- Jacobs entered into an agreement to spin off and combine Critical Mission Solutions and portions of Divergent Solutions, including Cyber & Intelligence, with Amentum. Closing is expected in fiscal 2024 but remains subject to regulatory approvals and customary conditions.
- Jacobs expects to own up to 63% of the combined company, with the exact percentage dependent on fiscal 2024 operating-profit targets. The company expects approximately $1 billion of cash proceeds at closing, subject to customary adjustments, and expects to use the proceeds to repay debt. No clear consolidated earnings guidance value is provided in the filing.
- Separation-related restructuring activities are expected to continue through fiscal 2025 and are expected to generate estimated gross annualized pre-tax cash savings of approximately $94 million to $115 million. PA Consulting restructuring is expected to be substantially complete by the end of fiscal 2024 and is expected to generate approximately $45 million to $60 million of annualized pre-tax cash savings.
- Remaining performance obligations were approximately $17.5 billion at March 29, 2024; management expects 56% to convert to revenue within twelve months and the remainder thereafter. Consolidated backlog was $29.408 billion, up from $28.974 billion a year earlier.
- The six-month results included an approximate $15 million pre-tax non-cash inventory write-down in Divergent Solutions and approximately $11 million of non-cash intangible-asset impairment charges at the corporate level.
- Interest-rate exposure remains material. The company estimates that a 1.00% increase in floating rates would have increased six-month interest expense by approximately $6.7 million. Interest-rate swaps hedged $745.9 million of notional debt, leaving approximately $1.17 billion subject to variable-rate risk.
- Risks include execution and timing of the Separation Transaction, regulatory and tax approval, potential stranded costs, debt refinancing, interest-rate and foreign-currency volatility, government funding and contract changes, client payment risk, litigation, government contract audits, tax audits and partially uninsured claims. Management reported no material changes to the risk factors in the 2023 Form 10-K.
- Management concluded that disclosure controls and procedures were effective as of March 29, 2024, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the Separation Transaction closes on schedule, receives all required approvals and produces the expected ownership percentage, cash proceeds and tax treatment.
- The timing and amount of the $837.3 million current debt maturity, and whether expected separation proceeds will be sufficient to reduce refinancing and leverage risk.
- Whether revenue growth converts into improved gross and operating margins after separation-related costs, corporate-cost changes and restructuring savings.
- Progress toward the stated $94 million to $115 million Jacobs separation savings target and the $45 million to $60 million PA Consulting savings target, including remaining implementation costs.
- Performance and funding trends in the Divergent Solutions government programs and the impact of the program ending earlier than expected.
- Conversion of the $17.5 billion remaining performance obligations and $29.4 billion backlog into revenue, considering cancellations, scope changes, funding limitations and timing deferrals.
- Future effective tax rates, particularly the recurrence or reversal of discrete tax benefits and ongoing tax audits.