Jacobs Engineering Group Inc. (now Jacobs Solutions) — Fiscal 2019 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 29, 2019, compared with March 30, 2018. The filing presents continuing operations primarily through Aerospace, Technology and Nuclear (ATN) and Buildings, Infrastructure and Advanced Facilities (BIAF). The Energy, Chemicals and Resources (ECR) business was classified as held for sale and discontinued operations.
Financial performance and position
| Metric | Three months ended March 29, 2019 | Year-over-year change | Six months ended March 29, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $3.092 billion | Up 7.7% | $6.175 billion | Up 32.7% |
| Gross profit | $616.8 million | Up 2.5% | $1.185 billion | Up 25.6% |
| Gross margin | 20.0% | Down from 21.0% | 19.2% | Down from 20.3% |
| Operating profit | $102.7 million | Up from $68.8 million | $215.8 million | Up from $64.1 million |
| Net earnings attributable to Jacobs | $56.9 million | Up from $48.6 million | $181.2 million | Up from $50.8 million |
| Diluted EPS | $0.41 | Up from $0.34 | $1.28 | Up from $0.38 |
- Continuing-operations diluted EPS was $0.82 for the quarter and $1.27 year to date, versus $(0.04) and $(0.30), respectively, in the prior-year periods.
- Discontinued operations produced a $(57.8) million quarterly loss attributable to Jacobs and $1.6 million of year-to-date income, compared with $54.9 million and $91.3 million of income in the prior-year periods.
- Operating results included substantial restructuring and other charges: approximately $97.3 million in SG&A for the quarter and $141.7 million year to date. A $32.4 million CH2M retiree medical-plan settlement gain partially offset current-period charges.
- Six-month net cash used in operating activities was $55.2 million, compared with $54.2 million provided in the prior-year period. Working-capital investment, particularly receivables, was a principal use of cash.
- Six-month investing cash outflow was $59.3 million, including $61.5 million of capital expenditures; the prior year included approximately $1.485 billion of net cash used for the CH2M acquisition.
- Six-month financing cash inflow was $152.6 million, including net borrowing proceeds, offset by $488.4 million of share repurchases and $56.4 million of dividends.
- Cash and cash equivalents were $674.5 million at March 29, 2019, excluding $176.1 million classified within discontinued operations. Total long-term debt was $2.842 billion, compared with $2.144 billion at September 28, 2018.
- The company reported $1.40 billion of available borrowing capacity under its $2.25 billion New Credit Agreement and compliance with applicable debt covenants. It had $450.5 million of outstanding letters of credit.
Material changes versus the prior comparable periods
- Revenue and segment profit benefited from the full-period contribution of CH2M, acquired in December 2017, and continued growth in the legacy ATN and BIAF businesses.
- ATN quarterly revenue increased 14.7% and operating profit increased 40.7%; BIAF quarterly revenue increased 4.4% and operating profit increased 19.3%.
- Margins declined because of higher pass-through costs and other mix effects, despite higher gross profit.
- Interest expense increased because of higher debt balances used to finance the CH2M acquisition.
- The company adopted ASC 606 using the modified retrospective method, recording a $37.2 million cumulative after-tax reduction to retained earnings. Adoption increased reported quarterly and year-to-date revenue by $7.7 million and $14.0 million, respectively.
- The ECR sale to WorleyParsons closed on April 26, 2019, after the reporting date. The transaction had an announced purchase price of approximately $3.3 billion, consisting of $2.6 billion in cash and 58.2 million WorleyParsons shares. The company reported approximately $2.6 billion of net cash receipts at closing.
Backlog, outlook, risks and unusual items
- Remaining performance obligations were approximately $12.07 billion at March 29, 2019; management expected 52% to be recognized within 12 months. Reported backlog was $20.713 billion, up from $19.262 billion a year earlier.
- Management stated that liquidity and capital resources were adequate for projected requirements over the next 12 months. No specific full-year financial guidance is provided in the filing text.
- The company recorded a $147.0 million pretax charge in discontinued operations for the Nui Phao arbitration matter, including the approximately $95.0 million award, estimated interest, costs and attorneys’ fees. Jacobs retained liability after the ECR sale and expects potential insurance recovery but had not recorded an insurance receivable.
- A separate JKC Australia dispute involved approximately $530 million of Jacobs-related affirmative claims and approximately $1.7 billion of claims asserted by JKC. Management said an adverse outcome could materially affect the company, although it did not expect resolution to exceed the existing reserve based on information then available.
- Restructuring and ECR separation activities were expected to continue through fiscal 2019 and, for ECR-related activities, into fiscal 2020.
- On April 21, 2019, Jacobs agreed to acquire KeyW Holding Corporation for $11.25 per share in cash, subject to customary conditions and regulatory approval. The transaction was expected to close by August 31, 2019 and was to be financed with cash and existing credit capacity.
- Management reported a material weakness in disclosure controls relating to income-tax accounting for business combinations, particularly deferred-tax completeness, accuracy and recoverability associated with CH2M. Remediation changes had been completed, but operating effectiveness could not yet be fully tested through a future acquisition.
- Interest-rate sensitivity was material: a 1% increase in floating rates was estimated to increase six-month interest expense by approximately $11.0 million.
Most important facts for investors to verify
- Final ECR sale proceeds, working-capital adjustments, value and liquidity of the received WorleyParsons shares, and the use of sale proceeds to repay debt.
- The ultimate cost and cash impact of the Nui Phao arbitration, including insurance recoveries and retained post-sale liabilities.
- Progress and financial impact of the KeyW acquisition, including financing, regulatory approval, integration costs and expected synergies.
- Conversion of backlog and remaining performance obligations into revenue and cash flow, particularly given client cancellation, scope, funding and deferral provisions.
- Working-capital trends and the company’s ability to restore positive operating cash flow.
- Remediation and independent testing of the material weakness in tax-related financial reporting controls.
- Ongoing restructuring, CH2M integration, pension, tax-audit and other contingent liabilities.