Jacobs Engineering Group Inc. (now Jacobs Solutions Inc.) — Fiscal 2022 Q2 Form 10-Q
Reporting period: Three and six months ended April 1, 2022, compared with April 2, 2021. The filing covers the company’s Critical Mission Solutions, People & Places Solutions, and 65%-owned PA Consulting segments. Results are unaudited and interim results are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $3.834 billion | $3.548 billion | $7.215 billion | $6.930 billion |
| Gross profit | $870.4 million | $767.0 million | $1.667 billion | $1.399 billion |
| Gross margin | 22.7% | 21.6% | 23.1% | 20.2% |
| Operating profit | $166.2 million | $(41.1) million | $343.5 million | $172.8 million |
| Net earnings attributable to Jacobs | $88.8 million | $11.0 million | $222.8 million | $268.1 million |
| Diluted EPS | $0.68 | $0.08 | $1.71 | $2.04 |
| Cash flow from operations | Not separately provided | Not separately provided | $446.3 million | $350.2 million |
Q2 revenue increased 8.1%, while six-month revenue increased 4.1%. Gross profit grew faster than revenue, reflecting contributions from PA Consulting and recent acquisitions, stronger U.S. government demand, and improved mix. Six-month earnings attributable to Jacobs declined despite higher operating profit because the prior-year period included significant gains from former equity investments and other nonrecurring items.
At April 1, 2022, cash and cash equivalents were $1.235 billion, compared with $1.014 billion at October 1, 2021. Receivables and contract assets were $3.303 billion, and contract liabilities were $672.3 million. Long-term debt, including current maturities, was approximately $3.249 billion, compared with $2.893 billion at fiscal year-end. The company reported $1.50 billion of available borrowing capacity under its $2.25 billion revolving credit facility and compliance with all debt covenants.
Six-month investing cash outflows were $458.8 million, principally reflecting acquisitions. Financing cash inflows were $235.1 million, including net borrowing proceeds of approximately $387.1 million, partly offset by dividends, share repurchases, and the repurchase of redeemable noncontrolling interests. Total remaining performance obligations were approximately $15.2 billion, with management expecting 57% to convert to revenue within the next twelve months, subject to cancellations, scope changes, deferrals, and foreign exchange movements.
Material changes versus the prior comparable period
- PA Consulting contributed a full quarter in Q2 FY2022 versus approximately one month in the prior-year quarter. PA Consulting revenue increased to $297.4 million from $98.3 million, and segment operating profit increased to $68.3 million from $27.9 million.
- StreetLight Data was acquired in February 2022 for approximately $190.7 million in cash plus equity and options; BlackLynx was acquired in November 2021 for approximately $235.4 million in cash. These acquisitions increased goodwill and intangible assets and added amortization expense.
- CMS Q2 revenue increased 4.3%, while six-month revenue declined 2.9% because of large U.S. contract wind-downs. P&PS Q2 revenue increased 1.4%, while six-month revenue declined 3.0% due mainly to lower pass-through revenue. P&PS operating profit declined because of higher labor costs and investments to support growth.
- Q2 operating profit benefited from substantially lower unusual charges than the prior year. The prior-year quarter included $296.1 million of PA Consulting transaction-related costs, while the current quarter included $91.3 million related to the final Legacy CH2M settlement.
- Six-month results included $74.6 million of real estate and other long-lived asset impairment charges associated with transformation initiatives. Intangible amortization increased to $95.3 million from $53.8 million for the six-month period.
- The company repurchased $50.0 million of common stock during the six months and had $732.9 million remaining under its $1.0 billion authorization. The quarterly dividend was increased to $0.23 per share.
Outlook, risks, contingencies, and unusual items
The filing does not provide a clear quantitative fiscal 2022 earnings or revenue guidance figure. Management stated that it believed available cash, operating cash flow, borrowing capacity, and spending controls were adequate to fund projected requirements for the next twelve months.
- On April 12, 2022, after the reporting date, Jacobs paid AUD640 million, approximately $475 million, to settle the Legacy CH2M Matter. The settlement was recorded as a $91.3 million additional pre-tax charge in Q2, net of previously recorded reserves.
- Outstanding letters of credit totaled approximately $274.6 million, and surety bonds totaled approximately $2.1 billion. Management stated that guarantees, litigation, government contract audits, investigations, and tax matters were not expected to have a material adverse effect beyond amounts accrued.
- The company is cooperating with an SEC inquiry regarding a formerly owned Moroccan joint venture and possible corrupt practices. The filing states that management does not expect the matter to have a material adverse effect, but its ultimate resolution remains uncertain.
- Key operating risks include COVID-19 and variants, inflation and labor cost pressure, interest rates, foreign exchange, project delays or cancellations, government budget constraints, supply-chain and workforce disruptions, client credit risk, contract performance, integration of acquisitions, and the ability to achieve planned cost savings and synergies.
- Variable-rate debt exposure remained material. Management estimated that a 1.00% increase in floating interest rates would have increased six-month interest expense by approximately $9.9 million, after considering hedging arrangements.
Investor verification checklist
- Verify the post-quarter $475 million Legacy CH2M cash settlement and its effect on second-half cash flow and leverage.
- Assess whether PA Consulting, StreetLight, and BlackLynx deliver the expected revenue, margin, and synergy benefits relative to added debt, goodwill, and amortization.
- Monitor P&PS labor costs, CMS contract wind-downs, pass-through revenue trends, and foreign exchange effects.
- Reconcile reported earnings with underlying operating performance by adjusting for settlement costs, impairments, restructuring charges, acquisition-related amortization, and prior-year investment gains.
- Review debt maturities, variable-rate exposure, covenant headroom, available revolver capacity, and the impact of future acquisitions or shareholder returns on liquidity.
- Follow developments in the SEC inquiry, government contract audits, litigation, guarantees, and other contingencies.