Jacobs Engineering Group Inc. Form 10-Q Summary
Reporting period: Three months ended January 1, 2021, compared with the three months ended December 27, 2019. The filing states the company planned to change its name to Jacobs Solutions Inc. Operations comprised Critical Mission Solutions (CMS) and People & Places Solutions (P&PS); the former Energy, Chemicals and Resources business was reported as discontinued operations.
Financial performance and position
| Metric | Q1 FY2021 | Comparable period | Change |
|---|---|---|---|
| Revenue | $3.382 billion | $3.360 billion | Up 0.6% |
| Gross profit | $632.1 million | $644.6 million | Down 1.9% |
| Gross margin | 18.7% | 19.2% | Down 50 basis points |
| Operating profit | $213.9 million | $151.3 million | Up 41.3% |
| Operating margin | 6.3% | 4.5% | Improved |
| Net earnings attributable to Jacobs | $257.0 million | $257.0 million | Essentially flat |
| Continuing-operations diluted EPS | $1.96 | $1.33 | Up 47.4% |
| Total diluted EPS | $1.96 | $1.91 | Up 2.6% |
| Cash flow from operations | $112.6 million | $(137.2) million | Improved by $249.8 million |
SG&A declined 15.2% to $418.1 million, primarily because of lower Transition Services Agreement costs, cost-reduction actions and COVID-19 mitigation measures. The effective tax rate from continuing operations was 24.6%, versus 27.0% in the prior period.
At January 1, 2021, cash and cash equivalents were $837.0 million, compared with $862.4 million at October 2, 2020. Receivables and contract assets were $3.265 billion, while contract liabilities were $530.8 million. Total assets were $12.768 billion and total stockholders’ equity was $6.143 billion.
Long-term debt was $1.797 billion, up from $1.677 billion at fiscal year-end. The company had $1.98 billion of available borrowing capacity under its $2.25 billion revolving credit facility and was in compliance with debt covenants. Outstanding letters of credit totaled $252.1 million and surety bonds totaled approximately $2.1 billion.
Material changes versus the prior comparable period
- CMS revenue increased 9.5% to $1.295 billion and segment operating profit increased 21.7% to $110.1 million, supported by the Buffalo Group and John Wood Group nuclear acquisitions, U.S. government growth and favorable foreign exchange.
- P&PS revenue declined 4.2% to $2.087 billion because of lower pass-through activity and COVID-19-related client scheduling changes, particularly in transportation and advanced facilities. Segment operating profit nevertheless increased 10.1% to $196.3 million due to lower labor, travel and discretionary spending.
- Consolidated operating profit benefited from lower SG&A and reduced restructuring and transaction charges, which were $22.1 million in the operating-profit reconciliation versus $50.7 million in the prior period.
- Miscellaneous income increased to $156.4 million, including $93.1 million of pre-tax gains related primarily to the Worley investment and $82.6 million of gains on C3.ai shares, partly offset by a $27.9 million impairment of the AWE Management investment.
- Prior-year results included $77.6 million of net earnings from discontinued operations, including an ECR-sale gain, insurance recovery and related settlement items. Current-period discontinued operations were approximately breakeven.
- Cash flow from operations improved substantially due mainly to better receivables collections and lower uses of working capital. Investing cash outflows increased to $193.2 million, principally because of the Buffalo Group acquisition.
Guidance, outlook, risks and unusual items
Management did not provide a clear quantitative fiscal 2021 earnings or revenue guidance figure in the filing. The company expected COVID-19 effects to continue into the first half of fiscal 2021, although at a lesser level than in fiscal 2020, and maintained contingency plans for additional cost reductions if conditions deteriorated.
Remaining performance obligations were approximately $17.3 billion at January 1, 2021; management expected 44% to convert to revenue within twelve months and the balance thereafter. Reported backlog was $25.105 billion, comprising $9.683 billion for CMS and $15.422 billion for P&PS. Backlog and performance obligations remain subject to cancellations, scope changes, funding, deferrals and foreign exchange movements.
Jacobs completed the $212.8 million Buffalo Group acquisition during the quarter. It also agreed to acquire approximately 65% of PA Consulting Group for £1.8 billion, with closing expected in the second quarter of fiscal 2021. On January 20, 2021, the company established a delayed-draw term loan facility permitting borrowings of up to $200 million and £650 million to help fund the transaction, refinance debt and pay related costs.
Other unusual items included investment gains in Worley and C3.ai, the AWE impairment, restructuring and integration charges of $48.4 million, and tax benefits related to an energy credit, stock compensation and a change in the treatment of certain Canadian foreign earnings. The company repurchased 251,001 shares for approximately $24.8 million and had $1.033 billion remaining under its combined repurchase authorizations.
Key risks include the continuing COVID-19 pandemic, project delays or cancellations, customer credit and government budget constraints, remote-work and workforce disruption, variable-rate debt, foreign exchange exposure, contract and performance guarantees, litigation, government contract audits, tax audits and the SEC’s ongoing request for information regarding a former Morocco joint venture and possible corrupt practices. Management stated that the disclosed legal, regulatory and contract matters were not expected to have a material adverse effect beyond recorded reserves.
Important facts for investors to verify
- Whether COVID-19-related delays, pass-through reductions and client scheduling changes persist beyond the first half of fiscal 2021.
- The closing, financing, purchase accounting and leverage impact of the PA Consulting transaction.
- The sustainability of earnings excluding unrealized Worley and C3.ai investment gains and the AWE impairment.
- Conversion of the $17.3 billion of remaining performance obligations and the $25.1 billion backlog into revenue and cash flow.
- Debt covenant compliance, variable-rate exposure and available liquidity after funding acquisitions and other capital uses.
- Final purchase-price allocations for Buffalo Group and the resolution of the SEC inquiry, litigation, government investigations and other contingent liabilities.