Jacobs Engineering Group Inc. (now Jacobs Solutions Inc.) — Q1 FY2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended December 31, 2021, compared with the three months ended January 1, 2021. Jacobs provides technical, professional, engineering, construction, operations, digital, cyber and consulting services through Critical Mission Solutions (CMS), People & Places Solutions (P&PS) and its 65%-owned PA Consulting business.
The quarter included the November 2021 acquisition of BlackLynx. PA Consulting, acquired in March 2021, contributed a full quarter of results for the first time. The former Energy, Chemicals and Resources business remains classified as discontinued operations.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $3.381 billion | $3.382 billion | Essentially flat |
| Gross profit | $796.5 million | $632.1 million | +26.0% |
| Gross margin | 23.6% | 18.7% | +490 basis points |
| Operating profit | $177.3 million | $213.9 million | -17.1% |
| Operating margin | 5.2% | 6.3% | Down approximately 110 basis points |
| Net earnings attributable to Jacobs | $134.0 million | $257.0 million | -47.9% |
| Diluted EPS | $1.03 | $1.96 | -47.4% |
| Cash flow from operations | $321.6 million | $112.6 million | +$209.0 million |
Net earnings from continuing operations attributable to Jacobs were $134.3 million. The effective tax rate declined to 9.4% from 24.6%, primarily because of foreign tax credit releases, excess tax benefits from stock compensation and amended tax returns.
At December 31, 2021, cash and cash equivalents were $1.245 billion. Total debt comprised $53.4 million of short-term debt and $3.073 billion of long-term debt, compared with $2.840 billion of long-term debt at October 1, 2021. The company reported $1.67 billion of available capacity under its $2.25 billion revolving credit facility and was in compliance with all debt covenants.
Investing cash outflows were $249.6 million, including $229.8 million for acquisitions. Financing cash inflows were $144.4 million, primarily reflecting net borrowing proceeds, partly offset by dividends and the repurchase of PA Consulting redeemable noncontrolling interests. The company paid $41.6 million in dividends and repurchased $35.1 million of redeemable noncontrolling interests.
Material changes versus the prior comparable period
- Revenue was broadly unchanged, as incremental contributions from PA Consulting, BlackLynx and Buffalo Group offset U.S. contract wind-downs, weaker P&PS U.S. volumes, lower pass-through revenue and the absence of favorable prior-year foreign exchange effects.
- Gross margin improved materially, primarily from the higher-margin PA Consulting, BlackLynx and Buffalo Group businesses and favorable contract-margin trends.
- Operating profit and net income declined because SG&A increased 48.1% to $619.1 million. The increase included acquisition-related costs, higher personnel and corporate costs, amortization and significant transformation-related charges.
- Q1 FY2022 included approximately $72.3 million of real estate and other long-lived asset impairment charges, including $54.9 million related to lease right-of-use assets. Total restructuring, transaction and other charges were $83.6 million in the segment reconciliation.
- Q1 FY2021 benefited from approximately $93.1 million of gains related to Worley investments and related foreign currency revaluations, plus $82.6 million of gains on C3.ai investments. Those investments were sold during fiscal 2021 and did not recur.
- CMS revenue declined 10.3% to $1.163 billion, while CMS operating profit increased 1.3% to $111.5 million. P&PS revenue declined 7.6% to $1.928 billion and operating profit declined 2.3% to $191.7 million. PA Consulting generated $290.0 million of revenue and $63.1 million of operating profit.
- Backlog increased to $28.006 billion from $25.105 billion in the prior comparable period. Remaining performance obligations were approximately $13.2 billion, with 57% expected to be recognized within twelve months.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative earnings or revenue guidance target. Management stated that liquidity and capital resources were adequate for projected requirements over the next twelve months and that cash generation, borrowing capacity and spending controls should support operations.
Management continued to identify COVID-19, including new variants, as a source of uncertainty affecting demand, project timing, government budgets, customer collections, labor availability, supply chains and remote-work execution. The company also cited risks from contract cancellations or scope changes, fixed-price project performance, government contracting and audits, foreign exchange, variable interest rates, acquisitions and integration, litigation and joint-venture guarantees.
The company had approximately $273.7 million of letters of credit and $2.3 billion of surety bonds outstanding. It disclosed ongoing litigation and arbitration, including the JKC Australia dispute, and continued cooperation with an SEC inquiry concerning a previously owned Moroccan joint venture. Management stated that these matters were not expected to have a material adverse effect beyond recorded reserves.
Interest-rate swaps and a cross-currency swap had aggregate notional values of approximately $923.5 million. Management estimated that a 1% increase in floating interest rates would have increased quarterly interest expense by approximately $4.5 million. On February 4, 2022, after quarter-end, Jacobs acquired StreetLight Data for an enterprise value of approximately $209 million.
Most important facts for investors to verify
- Whether the gross-margin improvement is sustainable after excluding acquisition mix and whether SG&A, amortization and transformation charges normalize.
- The pace of CMS contract wind-downs and P&PS volume recovery, particularly in U.S. markets.
- Integration performance and profitability of PA Consulting, BlackLynx and subsequent acquisitions, including contingent consideration obligations.
- Debt reduction plans, leverage trends, variable-rate exposure and compliance with credit-facility covenants.
- The quality and conversion timing of the $28.0 billion backlog and $13.2 billion of remaining performance obligations, given cancellation, funding and scope-change risks.
- Potential cash and earnings effects from litigation, government contract audits, SEC inquiries, joint-venture guarantees and tax audits.
- COVID-19-related labor, supply-chain, customer-demand and project-delivery effects, as well as the company’s lack of quantitative fiscal-year guidance in this filing.