Jacobs Engineering Group Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended July 1, 2022, covering the third quarter and first nine months of fiscal 2022. The company provides engineering, consulting, construction, operations and maintenance, digital, cyber, scientific and technical services through Critical Mission Solutions (CMS), People & Places Solutions (P&PS), and its 65%-owned PA Consulting business. Management planned to establish Jacobs Solutions Inc. as the new holding company in the fourth fiscal quarter of 2022, with a one-for-one exchange of existing shares.
Key financial metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Revenue | $3.827 billion | $3.576 billion | $11.042 billion | $10.506 billion |
| Gross profit | $824.5 million | $816.9 million | $2.491 billion | $2.216 billion |
| Gross margin | 21.5% | 22.8% | 22.6% | 21.1% |
| Operating profit | $265.8 million | $263.7 million | $609.3 million | $436.6 million |
| Net earnings attributable to Jacobs | $196.0 million | $165.8 million | $418.8 million | $433.9 million |
| Diluted EPS | $1.52 | $0.83 | $3.23 | $2.87 |
| Cash flow from operations | Not separately provided | Not separately provided | $197.2 million | $523.6 million |
Q3 operating margin was approximately 6.9% and nine-month operating margin was approximately 5.5%. Q3 net margin attributable to Jacobs was approximately 5.1%; nine-month net margin was approximately 3.8%.
- Cash and cash equivalents were $1.102 billion at July 1, 2022, compared with $1.014 billion at October 1, 2021.
- Total long-term debt, net, was $3.520 billion, compared with $2.840 billion at fiscal year-end; current maturities were $51.6 million.
- The company had approximately $1.08 billion of available borrowing capacity under its $2.25 billion revolving credit facility and was in compliance with debt covenants.
- Remaining performance obligations were approximately $14.4 billion, with management expecting 53% to convert to revenue within twelve months. Reported backlog was $28.09 billion, versus $25.44 billion a year earlier.
- Receivables and contract assets increased to $3.303 billion from $3.101 billion at October 1, 2021; current contract liabilities were $661.6 million.
Material changes versus the prior comparable period
- Q3 revenue increased 7.0%, while nine-month revenue increased 5.1%. Growth reflected the full-period contribution from PA Consulting, the StreetLight and BlackLynx acquisitions, and higher U.S. government spending, partly offset by contract wind-downs, lower pass-through revenue and foreign-exchange headwinds.
- Q3 gross profit increased only 0.9% and gross margin declined 130 basis points, primarily because of lower utilization at PA Consulting. Nine-month gross margin improved 150 basis points due mainly to acquired businesses and favorable U.S. government work.
- Q3 operating profit was broadly stable. Nine-month operating profit increased 39.5%, benefiting from the full-period PA Consulting contribution and the absence of approximately $297 million of prior-year PA Consulting transaction and compensation charges.
- Nine-month net earnings attributable to Jacobs declined 3.5%, despite higher operating profit, because the prior-year period included substantial fair-value gains on Worley and C3 investments and because of higher interest expense and noncontrolling-interest effects.
- Operating cash flow fell $326.4 million year over year, primarily because of the cash payment related to the Legacy CH2M Matter settlement and unfavorable working-capital movements.
- The company repurchased $250.7 million of common stock during the first nine months and had $532.2 million remaining under its repurchase authorization at July 1, 2022. The quarterly dividend was increased to $0.23 per share.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantified fiscal 2022 earnings or revenue guidance figure. Management described expected growth in late 2022 and 2023, continued investment in personnel and a new corporate strategy, but cautioned that actual results may differ materially from expectations.
- On April 12, 2022, the company paid approximately $475 million to settle the Legacy CH2M Matter and recorded an additional $91.3 million of pretax charges. The settlement released related claims between the parties.
- The company recorded $74.6 million of real-estate and other long-lived-asset impairment charges and $24.5 million of transformation and other charges during the first nine months.
- Interest-rate exposure remained material: approximately $2.18 billion of debt was subject to floating-rate exposure after hedging. A 1 percentage-point increase in floating rates would have increased nine-month interest expense by approximately $16.4 million.
- Interest-rate and cross-currency swaps had aggregate notional values of approximately $894.5 million; foreign-exchange contracts had $186.1 million of notional value.
- Key risks include inflation and labor-cost pressure, higher interest rates, foreign-currency movements, COVID-19 disruptions, project delays or cancellations, government budget and funding changes, contract performance, acquisition integration, retention of key personnel, pension funding, litigation, guarantees and government or tax audits.
- The company had approximately $286.9 million of letters of credit and $2.2 billion of surety bonds outstanding. Management stated that guarantees, litigation, government contract matters and tax audits were not expected to have a material adverse effect beyond recorded accruals.
- The SEC investigation concerning a former Morocco joint venture was terminated in July 2022, with SEC staff stating that it did not intend to recommend enforcement action against the company.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported backlog of $28.09 billion with the $14.4 billion remaining-performance-obligation measure, including differences in government contract and joint-venture treatment.
- Assess the sustainability of margins, particularly the Q3 decline at PA Consulting and the effects of labor inflation, utilization and contract wind-downs.
- Monitor leverage, floating-rate exposure, refinancing needs and covenant headroom as debt increased substantially from fiscal year-end.
- Evaluate recurring operating cash generation after the Legacy CH2M settlement and working-capital changes.
- Review the integration and final purchase-price allocations for StreetLight and BlackLynx, and the amortization burden from acquired intangible assets.
- Confirm implementation details and financial or governance effects of the planned Jacobs Solutions Inc. holding-company reorganization.