Jacobs Engineering Group Inc. (now identified in metadata as Jacobs Solutions Inc.) — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended July 2, 2021, compared with the periods ended June 26, 2020, and the balance sheet date of October 2, 2020. The company operated through Critical Mission Solutions, People & Places Solutions, and PA Consulting, following its March 2, 2021 acquisition of a 65% interest in PA Consulting. The former Energy, Chemicals and Resources business remains classified as discontinued operations.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $3.576 billion | $3.260 billion | $10.506 billion | $10.047 billion |
| Gross profit | $816.9 million | $629.0 million | $2.216 billion | $1.922 billion |
| Gross margin | 22.8% | 19.3% | 21.1% | 19.1% |
| Operating profit | $263.7 million | $194.4 million | $436.6 million | $513.5 million |
| Operating margin | 7.4% | 6.0% | 4.2% | 5.1% |
| Net earnings attributable to Jacobs | $165.8 million | $244.9 million | $433.9 million | $409.9 million |
| Diluted EPS | $0.83 | $1.87 | $2.87 | $3.08 |
| Cash flow from operations | Not separately provided | Not separately provided | $523.6 million | $374.5 million |
Q3 continuing-operations earnings attributable to Jacobs were $165.4 million, or $0.82 diluted EPS, versus $226.9 million, or $1.73, in the prior-year quarter. Nine-month continuing-operations earnings were $422.2 million, or $2.78 diluted EPS, versus $284.3 million, or $2.13.
Cash and cash equivalents were $966.1 million at July 2, 2021, up from $862.4 million at October 2, 2020. Total debt was approximately $3.12 billion, consisting of $53.8 million of short-term debt and $3.07 billion of long-term debt, compared with $1.68 billion of long-term debt at fiscal year-end. The company had $1.73 billion of available capacity under its $2.25 billion revolving credit facility and was in compliance with debt covenants.
Material changes versus the prior comparable periods
- Q3 revenue increased 9.7%; nine-month revenue increased 4.6%. Growth reflected PA Consulting and Buffalo Group contributions, the John Wood Group nuclear business, and favorable foreign-currency translation.
- Q3 gross profit increased 29.9%, with gross margin expanding 350 basis points. Nine-month gross profit increased 15.3%, with gross margin expanding 200 basis points.
- Q3 operating profit increased 35.7%, but nine-month operating profit declined 15.0% because of acquisition-related and other corporate charges, particularly the PA Consulting post-completion compensation charge.
- Q3 net earnings attributable to Jacobs declined 32.3%, primarily because prior-year miscellaneous income included substantially larger gains on Worley shares and related foreign-currency items, while current-quarter tax expense included a $30.8 million U.K. deferred-tax revaluation.
- Nine-month continuing-operations earnings increased 48.5%, despite a $261 million PA Consulting post-completion compensation charge. The prior-year period included significant losses on the Worley investment and current-year results included gains on Worley and C3 investments.
- PA Consulting contributed $255.8 million of Q3 revenue and $56.8 million of segment operating profit; nine-month contributions were $354.1 million and $84.7 million, respectively.
- Remaining performance obligations were approximately $13.8 billion at July 2, 2021, with management expecting 46% to convert to revenue within twelve months. Reported backlog was $25.436 billion, up from $23.674 billion a year earlier.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative fiscal 2021 earnings or revenue guidance figure. Management expected COVID-19 to continue affecting operations through fiscal 2021, and potentially into fiscal 2022, although less severely than in fiscal 2020. Management stated that liquidity and capital resources were adequate for projected requirements over the next twelve months and maintained contingency plans for additional cost reductions if conditions deteriorate.
- COVID-19 may reduce demand, delay or cancel projects, impair customer collections, disrupt employees and suppliers, and restrict travel or operations.
- The PA Consulting transaction increased leverage and created $601.2 million of redeemable noncontrolling interests at July 2, 2021. The preferred interests carry a cumulative compounding 12% dividend and may become redeemable no earlier than five years after closing, subject to specified conditions.
- Q3 diluted EPS included a $0.44 unfavorable allocation adjustment related to PA Consulting preferred and common interests. The filing states that this adjustment did not affect total consideration, operating results, financial position, or cash flows.
- Material unusual items included the $261 million PA Consulting compensation charge, $38.9 million of impairment on the AWE Management investment, $49.6 million of realized C3 investment gains, and fair-value gains on Worley shares and related currency items.
- Outstanding commitments included approximately $268.9 million of letters of credit and $2.1 billion of surety bonds. The company also faces litigation, government contract audits, tax examinations, and performance-guarantee exposure.
- A substantial arbitration involving the JKC Australia LNG project seeks approximately $530 million from the consortium, while the counterparty seeks damages exceeding $1.7 billion. The company expects no material adverse effect beyond existing reserves, but proceedings were deferred and a decision was not expected before late 2022 or 2023.
- The SEC is investigating information related to a formerly owned Moroccan joint venture and possible corrupt practices. The company is cooperating and does not expect a material adverse effect.
Important facts for investors to verify
- Reconcile reported GAAP earnings with the substantial PA Consulting compensation, transaction, restructuring, amortization, investment-gain, impairment, and tax items.
- Assess post-acquisition leverage, variable-rate exposure, debt maturities, covenant headroom, and the potential cost of the PA Consulting redeemable interests.
- Evaluate the sustainability of revenue and margin growth after adjusting for acquisitions, foreign-currency translation, pass-through costs, backlog conversion, and contract wind-downs.
- Monitor the market value and earnings volatility of the remaining Worley investment and other equity securities.
- Review COVID-19 developments, contract cancellations or deferrals, government spending, customer collections, and the timing of the JKC arbitration and SEC inquiry.
- Confirm the final purchase-price allocations for PA Consulting and Buffalo Group, which remained subject to adjustment at the filing date.