Shares of Jacobs Solutions (NYSE: J) were down 8% as of 12:30 p.m. ET Tuesday after the professional services firm announced mixed fiscal fourth-quarter results. Jacobs also announced a spinoff of two of its business segments into a new publicly traded company.
On the former, Jacobs’ quarterly revenue grew 10.5% year over year (7.3% at constant currency) to $4.29 billion, while adjusted earnings from continuing operations increased 5.6% to $1.90 per share. Most analysts were expecting higher earnings of $2.02 per share, but on lower revenue of $4.21 billion.
Delving deeper into Jacobs’ results, Critical Missions Solutions segment revenue grew 26.4% year over year to $102.9 million, while its People & Places Solutions segment sales rose 11.7% to $256.2 million. Meanwhile, revenue from Jacobs’ smaller Divergent Solutions segment climbed around 58% to $24.1 million, and its PA Consulting business grew 20.5% to $59.5 million.
Following what the company described as a “robust evaluation of all alternatives” previously announced in May 2023, Jacobs also revealed plans to spin off and combine its Critical Missions Solutions segment and its Cyber & Intelligence business (which is currently part of the Divergent Solutions segment). The two businesses will be merged with Amentum, a leading global engineering and technology solutions provider, creating a new publicly traded company focused on the government services sector.
Jacobs CEO Bob Pragada explained the spinoffs “will streamline our business portfolio and transform into a more focused, higher-margin company more closely aligned with key global megatrends.”
To be clear, the separation is still subject to regulatory approval, but it does not require the approval of Jacobs’ shareholders (mild backlash from which could explain some of today’s decline). Assuming all goes as planned, the transaction is expected to close in the second half of fiscal year 2024 through a tax-efficient Reverse Morris Trust transaction, including a $1 billion cash dividend payment to Jacobs.
Jacobs and its shareholders will also own up to 63% of the combined company’s common shares, consisting of 51% Jacobs’ shareholders ownership, with Jacobs retaining 7.5% to 12%. The exact amount of Jacobs’ retained stake will be determined based on certain fiscal-year 2024 operating profit targets.
In the end, this might well be the best course of action for Jacobs to hone the focus of its core business and maximize long-term profitability. But for now, the market obviously isn’t convinced by a combination of its mixed quarter and the somewhat complicated nature of the spinoff — not to mention its lack of a need for receiving shareholder approval. Jacobs Solutions’ stock is responding in kind today.
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