Jacobs Engineering Group Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 27, 2019; comparable period ended December 28, 2018. The filing predates the company’s planned name change to Jacobs Solutions Inc. The business operated through Critical Mission Solutions (CMS) and People & Places Solutions (P&PS); Energy, Chemicals and Resources (ECR) was reported as discontinued operations following its sale to Worley.
Business Context and Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Continuing-operations revenue | $3.360 billion | $3.084 billion | Up 9.0% |
| Gross profit | $644.6 million | $568.5 million | Up 13.4% |
| Gross margin | 19.2% | 18.4% | Up 80 bps |
| Operating profit | $151.3 million | $113.1 million | Up 33.7% |
| Income from continuing operations attributable to Jacobs | $179.4 million | $64.9 million | Up 176.5% |
| Diluted EPS from continuing operations | $1.33 | $0.45 | Up $0.88 |
| Total diluted EPS | $1.91 | $0.86 | Up $1.05 |
| Net earnings attributable to Jacobs | $257.0 million | $124.3 million | Up 106.8% |
Operating margin was approximately 4.5% versus 3.7% in the prior-year quarter. Segment operating profit increased to $268.8 million from $231.6 million, with CMS revenue up 14.2% and segment operating profit up 25.3%; P&PS revenue rose 6.3% and segment operating profit rose 11.8%.
- Cash flow: Operating cash flow was negative $137.2 million, improving from negative $224.7 million. Investing cash flow was negative $34.3 million, primarily reflecting capital expenditures and a $12.0 million contribution to an equity-method investment. Financing cash flow was positive $166.9 million, primarily from net borrowings.
- Liquidity: Cash and cash equivalents were $619.2 million at December 27, 2019, compared with $631.1 million at September 27, 2019. The company reported $1.33 billion of available capacity under its $2.25 billion revolving credit facility.
- Debt: Short-term debt was $199.9 million and long-term debt was $1.415 billion, for total reported debt of approximately $1.615 billion. The company repaid its $400 million term loan facility during the quarter and had approximately $916.8 million outstanding under the revolving facility.
- Backlog and performance obligations: Backlog was $22.67 billion, up from $20.34 billion. Remaining performance obligations were approximately $13.42 billion, with management expecting to recognize approximately 48% within the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability benefited from organic growth in both operating segments and incremental contribution from the June 2019 KeyW acquisition.
- CMS growth reflected higher U.S. government spending, KeyW revenue and a favorable closeout of a large program-management contract.
- P&PS benefited from growth in advanced facilities, water, transportation infrastructure and project-management/construction-management activities.
- Other income increased substantially because of a $99.1 million pretax unrealized gain on the company’s Worley investment and $12.0 million of transition-services income related to the ECR sale.
- Continuing-operations earnings also included approximately $39.0 million of after-tax restructuring and transaction costs, primarily associated with the pending Wood Group nuclear business acquisition.
- Discontinued operations contributed $77.6 million of net earnings, including ECR sale-related income and a $50.0 million insurance recovery related to the Nui Phao legal matter. The prior-year period still included substantial operating revenue from ECR.
- Restructuring and other charges were $52.0 million, compared with $45.1 million in continuing operations in the prior-year period. These activities were expected to be substantially completed before fiscal year-end 2020.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical full-year earnings or revenue guidance range. Management described a three-year accelerated profitable-growth strategy focused on technology-enabled solutions, government services, cybersecurity, nuclear services and digitally enabled infrastructure. The acquisition of Wood Group’s nuclear business, with an enterprise value of approximately $300 million, was expected to close by the end of the second fiscal quarter of 2020.
- The Worley investment was carried at an estimated fair value of $556.5 million and remains subject to market-price volatility.
- Remaining performance obligations and backlog may be affected by cancellations, scope changes, funding changes, foreign-exchange movements and project deferrals. Many contracts, including U.S. government contracts, may be terminated at the client’s option.
- Variable-rate borrowings create interest-rate exposure; a 1% increase in floating rates was estimated to increase quarterly interest expense by approximately $3.4 million.
- Outstanding letters of credit were approximately $271.8 million and surety bonds approximately $1.98 billion. The company also disclosed joint-venture guarantees for which the maximum potential future payment could not be estimated.
- The company retained liabilities associated with the Nui Phao matter, although the quarter included a $50.0 million insurance recovery. A separate Australian consortium dispute involved approximately $530 million of Jacobs-related affirmative claims and alleged counterclaims exceeding $1.7 billion; management did not expect an adverse resolution beyond the current reserve, but noted potential material short-term effects if liability were imposed.
- The SEC requested information concerning a formerly owned Moroccan joint venture and possible corrupt practices. Jacobs stated that it was cooperating and did not expect the matter to have a material adverse effect.
- ASC 842 lease adoption resulted in approximately $760.2 million of operating lease right-of-use assets and $981.3 million of lease liabilities at quarter-end, without a material impact on earnings or cash flows.
Investor Verification Checklist
- Separate recurring operating performance from the $99.1 million unrealized Worley gain, ECR-related income, the $50.0 million insurance recovery and other unusual items.
- Reconcile continuing-operations results with total results, particularly the discontinued ECR contribution.
- Monitor operating cash conversion, receivables and contract assets, which totaled $3.056 billion and contributed to negative quarterly operating cash flow.
- Verify post-quarter-end developments, including the Wood Group nuclear acquisition, the additional $1.0 billion repurchase authorization and the planned company name change.
- Assess leverage, refinancing needs and interest-rate exposure as the $200 million bilateral term loan matured in June 2020 and significant borrowings were variable-rate.
- Track the Australian consortium dispute, SEC inquiry, government-contract audits, guarantees and other contingent liabilities.