Business Context and Reporting Period
Jacobs Solutions Inc. filed its fiscal 2022 Form 10-K for the year ended September 30, 2022. The company is a global professional services provider with approximately 60,000 employees, delivering consulting, engineering, scientific, technical, construction-management and project-delivery services to government and commercial clients.
Fiscal 2022 reportable segments were Critical Mission Solutions, People & Places Solutions and PA Consulting, in which Jacobs owns a 65% interest. Jacobs launched its new three-year strategy focused on Climate Response, Consulting & Advisory and Data Solutions, and plans to report Divergent Solutions as an additional operating segment beginning in fiscal 2023. On August 29, 2022, Jacobs Engineering Group Inc. implemented a holding-company structure under Jacobs Solutions Inc.; the transaction did not change shareholders' proportional ownership.
Financial Performance and Key Metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Revenue | $14.923 billion | $14.093 billion | Up 5.9% |
| Gross profit | $3.327 billion | $3.044 billion | Up 9.3% |
| Gross margin | 22.3% | 21.6% | Up 70 basis points |
| Operating profit | $917.9 million | $688.1 million | Up $229.8 million |
| Continuing-operations earnings attributable to Jacobs | $644.1 million | $467.0 million | Up 37.9% |
| Diluted EPS from continuing operations | $4.98 | $3.12 | Up 59.6% |
| Net earnings attributable to Jacobs | $644.0 million | $477.0 million | Down 2.5% |
| Cash flow from operations | $474.7 million | $726.3 million | Down $251.6 million |
Fiscal 2022 consolidated net earnings included essentially no contribution from discontinued operations, compared with $10.0 million in fiscal 2021. The prior year also included approximately $297 million of one-time costs associated with the PA Consulting investment, including $261 million of compensation expense, making year-over-year comparisons less representative.
- Segment revenue and operating profit: CMS revenue was $5.234 billion and operating profit was $424.4 million, down 5.1% in profit because of high-margin contract wind-downs. P&PS revenue was $8.570 billion and operating profit was $823.6 million, up 5.5%. PA Consulting revenue was $1.119 billion and operating profit was $232.2 million, reflecting a full year of ownership.
- Backlog and performance obligations: Backlog increased to $27.9 billion from $26.6 billion. Approximately $9.4 billion, or 33.7%, of backlog was expected to convert to revenue in fiscal 2023. Remaining performance obligations were approximately $15.0 billion, with 52% expected to be recognized within 12 months.
- Balance sheet: Cash and cash equivalents were $1.140 billion, up from $1.014 billion. Total assets were $14.660 billion and total Group equity was $6.104 billion. Goodwill was $7.185 billion, or 49.0% of total assets; management concluded that no goodwill impairment was required for fiscal 2022.
- Debt and liquidity: Current and long-term debt totaled approximately $3.408 billion, compared with $2.893 billion at the prior year-end. Jacobs had $1.14 billion of available capacity under its $2.25 billion revolving credit facility, $280.5 million of letters of credit outstanding and was in compliance with debt covenants.
- Cash deployment: Investing cash outflow was $538.4 million, including acquisitions. Financing cash inflow was $320.2 million, including $719.0 million of net borrowing proceeds, offset by $281.9 million of share repurchases, $115.9 million of common dividends and other financing uses.
- Shareholder returns: Quarterly dividends increased from $0.21 to $0.23 per share during fiscal 2022. The company repurchased approximately 2.47 million shares for $281.9 million and had $501.0 million remaining under its repurchase authorization at year-end.
- Interest-rate exposure: Approximately $2.9 billion of borrowings were outstanding under the revolving and term-loan facilities. After hedging, approximately $2.0 billion remained subject to variable-rate risk; a 1-percentage-point increase in floating rates would have increased fiscal 2022 interest expense by approximately $22.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected a full year of PA Consulting results, contributions from Buffalo Group, BlackLynx and StreetLight, and higher U.S. government spending. These benefits were partly offset by contract wind-downs, lower pass-through revenue and $346.3 million of unfavorable foreign-currency translation.
- Gross margin improved despite higher labor costs, inflation and investments to support growth.
- Operating profit benefited from the absence of the prior-year PA Consulting transaction-related compensation and deal costs, but fiscal 2022 included $91.3 million of additional charges for the Legacy CH2M Matter and $78.3 million of real-estate impairment charges.
- Net interest expense increased to $95.8 million from $69.2 million because of higher debt balances and interest rates, including borrowings used for acquisitions and the Legacy CH2M settlement.
- Cash flow from operations declined primarily because of the approximately $475 million cash settlement of the Legacy CH2M Matter. Fiscal 2021 also included PA Consulting post-completion compensation payments.
- The effective tax rate declined to 18.4% from 39.5%, primarily because fiscal 2021 included nondeductible PA Consulting compensation, U.K. tax-rate changes and valuation-allowance charges. Fiscal 2022 benefited from changes in the realizability of foreign tax credits and domestic deferred tax assets.
- Foreign currency translation reduced other comprehensive income and equity; accumulated other comprehensive loss increased to $975.1 million from $794.4 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management reported strong new prospects and sales and a positive outlook across many served markets, including infrastructure modernization, climate response, nuclear services, cybersecurity, digital transformation, transportation, water and advanced manufacturing. The company expected no further material COVID-19-related business disruption in fiscal 2023 based on its estimates. Management also anticipated additional real-estate rescaling activity that could produce further right-of-use asset and lease-related impairment charges.
- Government exposure is significant: approximately 31% of total revenue and 39.1% of backlog related directly or indirectly to U.S. federal agencies. Government contracts may be annually funded, audited, modified, suspended or terminated.
- Approximately 74% of revenue was generated under cost-reimbursable contracts and 26% under fixed-price contracts. Fixed-price work exposes Jacobs to inflation, labor, supply-chain, schedule and cost-overrun risk.
- Backlog is not a guarantee of future revenue or profit because contracts may be canceled, deferred, repriced or reduced in scope.
- Key risks include inflation, rising interest rates, foreign-exchange volatility, recessionary conditions, geopolitical events, cybersecurity incidents, talent shortages, remote-work risks, government funding changes, litigation, environmental liabilities, professional liability and performance-bond availability.
- The Legacy CH2M Matter was settled in April 2022 through a cash payment of approximately AUD640 million, or about $475 million. The company recorded $91.3 million of additional pre-tax charges beyond previously recorded reserves.
- 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 Jacobs.
- Defined benefit plans were underfunded by $81.2 million at September 30, 2022, down from $191.4 million. The company expected approximately $26.7 million of fiscal 2023 contributions to non-U.S. plans.
- PA Consulting redeemable noncontrolling interests were $632.5 million at year-end. The interests include a preferred instrument with a cumulative annual compounding 12% dividend and future put rights, creating valuation and cash-flow considerations.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters involved revenue recognition for certain fixed-price contracts and valuation of PA Consulting redeemable noncontrolling interests.
Important Facts for Investors to Verify
- Assess the sustainability of earnings growth after excluding the prior-year PA Consulting transaction charges and considering fiscal 2022 settlement, impairment and restructuring items.
- Reconcile reported backlog of $27.9 billion with remaining performance obligations of $15.0 billion and verify the expected timing, funding and profitability of conversion.
- Monitor leverage, variable-rate debt, refinancing needs and the October 2022 repayment of $481 million of Senior Notes using the revolving facility.
- Evaluate CMS contract wind-downs, P&PS margin trends, PA Consulting utilization and the planned fiscal 2023 reporting of Divergent Solutions.
- Review exposure to U.S. federal funding, government contract audits, termination rights, security-clearance requirements and debarment risk.
- Track additional real-estate impairments, acquisition integration costs, PA Consulting redemption obligations and other restructuring charges.
- Confirm the status and collectability of the approximately $27 million expected third-party recovery recorded in the fourth quarter.
- Evaluate sensitivity to foreign-exchange movements, inflation, interest rates, labor availability, fixed-price project performance and cybersecurity events.