Jacobs Solutions (J) FY2025 Earnings Quality Report

Grade: F — Post-Separation Noise Obscures a Decent Operating Year

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2025-11-20, Fiscal Year ended September 26, 2025) + Yahoo Finance

Auditor: KPMG LLP — Unqualified opinion (1 critical audit matter: revenue recognition on fixed-price contracts)

One-line verdict: The headline Jacobs numbers look terrible — net earnings attributable to Jacobs from continuing operations fell 48.9% from $612.8M to $313.3M. Diluted EPS from continuing operations fell from $4.79 to $2.58. But the collapse is almost entirely a mark-to-market swing on the company's residual investment in Amentum (the spin-off entity) — $227.3M in losses in FY2025 vs. $186.9M in gains in FY2024, a $414.2M year-over-year swing. Excluding that, underlying gross profit grew $152.2M (+5.4%) on revenue of $12.03B (+4.6%), with the Infrastructure & Advanced Facilities segment delivering operating profit growth of 13.2% to $903.5M. The 48.9% decline is therefore substantially non-operating noise. PA Consulting (the UK consulting arm) is the second growth engine. The backlog grew to $23.1B from $21.8B. Three screening flags are all structural consequences of Jacobs being a services firm that has just restructured through the Amentum separation: goodwill+intangibles $5.5B at 151% of equity (D1 fail), cash $1.2B covers only 46% of debt $2.7B (C4 fail), and AR has outpaced revenue for two consecutive years (A2 fail).

A Consulting/Engineering Firm Reshaped by the Amentum Spin

Jacobs completed the separation of its critical mission solutions business (now Amentum Holdings) on September 27, 2024 — the first day of fiscal 2025. Jacobs retained a passive equity interest in Amentum, which subsequently became subject to mark-to-market accounting. The residual Amentum stake — and its fluctuating fair value — is the single largest non-operating item in the FY2025 financials.

Jacobs now operates two segments:

Financial Performance: Operating Strength vs. Mark-to-Market Mess

From the MD&A 2025 Overview and Results of Operations:

From the MD&A: "Net earnings attributable to the Company from continuing operations for fiscal 2025 were $313.3 million (or $2.58 per diluted share), a decrease of $299.5 million, or 48.9%, from $612.8 million (or $4.79 per diluted share) for the prior year."

The Amentum Mark-to-Market Story

From the MD&A: "Our reported net earnings for the current year were favorably impacted by higher gross profit of $152.2 million compared to the prior year, primarily driven by stronger performance in our Infrastructure & Advanced Facilities (I&AF) operating segment, specifically in the Advanced Facilities, Europe and Asia, Pacific and Middle East (APME) businesses, as well as growth in our PA Consulting operating segment, as discussed below in the Segment Financial Information section. While current year results reflected higher year-over-year underlying gross profit, the Company's results from continuing operations for fiscal 2025 were unfavorably impacted by an increase in miscellaneous expense of $409.1 million primarily as a result of $227.3 million in mark-to-market losses relating to our investment in Amentum stock in connection with the Separation Transaction compared to $186.9 million in gains relating to the same investment in the prior year."

Decomposing the year-over-year change in net income:

The $414.2M Amentum swing is by far the single largest driver. Strip it out and FY2025 net income would have been roughly flat with FY2024.

The Equity-for-Debt Transaction

From the MD&A: "$20.5 million in discounts and expenses recorded to Loss on extinguishment of debt associated with our Equity-for-Debt Transaction on March 13, 2025, where the Company exchanged shares of our investment in Amentum Holdings, Inc. for a principal amount of term loans under the 2021 Term Loan Facility, which term loans were immediately extinguished."

Jacobs exchanged Amentum shares for debt principal in March 2025 — meaning the residual Amentum stake is smaller at year-end than at the start of FY2025, but the retained portion still had to be marked to market.

Segment Performance

From the MD&A: "Operating profit for the I&AF segment for the year ended September 26, 2025 was $903.5 million, an increase of $105.2 million, or 13.2%, from $798.4 million for the comparative period in fiscal 2024."

I&AF grew operating profit 13.2% — genuine underlying strength. PA Consulting is separately reported but the MD&A confirms it grew too. Together these two segments represent the entire forward Jacobs business model, and both are growing.

Backlog

"Backlog at September 26, 2025 was $23.1 billion, up $1.2 billion, from $21.8 billion in the prior year. New prospects and new sales remain strong, and the Company continues to have a positive outlook for many of the industry groups and sectors in which our clients operate."

Cash Flow

CFFO declined 34.9% year-over-year from $1,054.7M to $686.7M. This is worth examining. Part of the decline is working capital changes associated with the post-separation Jacobs; part could reflect delayed billings on fixed-price contracts (which is exactly what the auditor's CAM flags).

CFFO/NI of 2.37 is mechanically inflated because net income is depressed by the Amentum MTM non-cash charge. On a normalized basis (excluding the ~$414M Amentum swing), cash conversion would be closer to 1.0x.

Balance Sheet

Equity fell from $4,549M to $3,641M — a $908M decrease. This reflects:

The $754.1M in buybacks against equity of $3,641M means roughly 20% of opening equity was returned via buybacks in a single year.

C4 Cash vs Debt: FAIL. Cash $1.2B covers 46% of debt $2.7B — the highest cash coverage among the screen's failing tickers.

D1 Goodwill + Intangibles: FAIL. $5.5B = 151% of equity. Jacobs' goodwill reflects more than a decade of consulting/engineering acquisitions (CH2M, Aquenta, KeyW, BlackLynx, and many smaller deals).

The 18-Point Screening

Revenue Quality

A2 is consistent with the pattern of several other industrial tickers. For a services firm, AR growth reflects the lag between contract work-in-progress and billing. If fixed-price contract estimates are slipping, unbilled AR accumulates — which is exactly what the auditor's CAM focuses on.

Expense Quality

B3 on watch. A services firm has fundamentally different cost structure than a manufacturer — most costs are labor, so SG&A-to-gross-profit is naturally high. 71.1% is above the framework threshold but not alarming for a consulting/engineering business.

Cash Flow Quality

Note: the CFFO/NI ratio of 2.37 looks exceptional but is mechanical — net income is depressed by the $227M Amentum MTM non-cash charge. On normalized net income, the ratio would be closer to 1.0x (and in FY2024 it was 1.31). CFFO itself declined significantly, which is the more important metric.

Balance Sheet

D3 warrants investigation. Other assets growing 21.4% vs revenue growth of 4.6% could reflect capitalized contract costs (mobilization, ramp-up), long-term contract receivables, or other deferred items. For a services firm this is worth flagging.

Acquisition Risk

Manipulation Score

Key Risks from the 10-K

1. Fixed-Price Contract Revenue — Critical Audit Matter

KPMG identified revenue recognition on fixed-price contracts as the critical audit matter: "As described in Note 2 to the consolidated financial statements, the Company recognizes contract revenue over time, as performance obligations are satisfied, using the percentage-of-completion method (an input method) based primarily on contract costs incurred to date compared to total estimated contract costs. Revenue recognition under this method is judgmental, as it requires the Company to prepare estimates of total contract revenue and total contract costs, including costs to complete in-process contracts. Auditing the Company's estimates of total contract revenue and costs used to recognize revenue on certain fixed-price contracts which are larger in size involved significant auditor judgment, as it required the evaluation of subjective factors, such as assumptions related to estimated labor, material and subcontractor costs. These assumptions involved significant management judgment, which affects the measurement of revenue recognized by the Company."

This is the same percentage-of-completion risk that every engineering/construction services firm faces. Cost overruns on large fixed-price projects translate directly to reversed revenue and margin compression.

2. Acquisition Integration — The Core Growth Strategy

From Item 1A: "If our leadership is unable to successfully integrate acquired companies or implement our growth strategy with respect to acquisitions and/or strategic investments, our operating results could be harmed. Moreover, we cannot assure that we will continue to successfully expand or that growth or expansion will result in profitability."

Jacobs' growth history is essentially an M&A history. The 151% goodwill-to-equity ratio reflects this accumulated deal history.

3. Divestiture Execution Risk

Item 1A: "In addition, we may periodically divest or plan to divest businesses, including businesses that are no longer a part of our ongoing strategic plan. Divesting businesses involves risks and uncertainties, such as the difficulty separating assets related to such businesses from the businesses we retain, employee distraction, and the need to obtain regulatory approvals and other third-party consents, which could potentially disrupt customer and vendor relationships. These Divestitures may require a significant investment of our time and resources and may disrupt our business, distract our management from other responsibilities and may result in losses on disposal or continued financial involvement in the divested business, including through indemnification, guarantee or other financial arrangements, for a period of time following the divestment, which could adversely affect our business, financial condition or results of operations."

This risk is currently live: the 2024 Amentum spin is still producing $227M of mark-to-market losses on the residual stake, plus a $30.8M indemnity reserve "during the year ended September 26, 2025 as an indemnity reserve in respect of an ongoing non-U.S. tax matter related to an entity that was part of the separated SpinCo Business." Divestiture aftershocks are still flowing through the income statement.

4. Transition Services Agreement and Stranded Costs

The MD&A references "TSA-related income" continuing through fiscal 2025. Post-separation, Jacobs provides transition services to Amentum for a fee. When the TSA expires, Jacobs loses that income and must absorb or reduce the supporting cost base.

5. Government Customer Concentration

Jacobs is a large U.S. federal contractor. While the 10-K doesn't quote a specific revenue concentration risk factor in the extracted text, U.S. government customers drive a material portion of I&AF revenue. Budget cycles, continuing resolutions, and sequestration risks apply here as they do at HII.

6. Amentum Mark-to-Market Volatility

The residual Amentum investment is subject to continued mark-to-market accounting until the shares are sold or exchanged. Every quarterly report will include a non-operating gain or loss driven by AMTM stock price movement. This creates persistent earnings volatility that has nothing to do with Jacobs' operating performance.

Summary

Grade: F. The 48.9% EPS decline is a non-operating artifact. The underlying business grew, but the F grade reflects three structural balance sheet flags.

Jacobs Solutions had a genuinely decent operating year obscured by post-separation accounting noise. Revenue grew 4.6%, gross profit grew 5.4%, I&AF operating profit grew 13.2%, and backlog grew from $21.8B to $23.1B. These are not the numbers of a company in trouble.

The headline decline is almost entirely driven by the Amentum mark-to-market swing of $414.2M year-over-year. This is a non-cash, non-operating accounting charge tied to the spin-off transaction and will continue to introduce volatility until the residual Amentum stake is fully divested.

The F grade reflects three structural issues:

Things to watch in fiscal 2026:

Jacobs is probably the most misleading F grade in the screening set. An investor reading only the -48.9% net earnings number would conclude the company is in decline; reading the MD&A walk shows that the underlying business grew while a single mark-to-market line item dominated the reported number.

**Disclaimer**: This report is based on Jacobs Solutions' FY2025 10-K filed with SEC EDGAR on November 20, 2025. This is NOT investment advice.

Data: SEC EDGAR 10-K (Accession 0001628280-25-053316) + Yahoo Finance

Auditor: KPMG LLP (Unqualified opinion, 1 critical audit matter — revenue recognition on certain fixed-price contracts)

Fiscal year ended: September 26, 2025