Jacobs Engineering Group Inc. Fiscal 2018 Form 10-K Summary
Business context and reporting period
Jacobs Engineering Group Inc. reported results for the fiscal year ended September 28, 2018. The company provides global engineering, technical, professional, construction, consulting, and operations and maintenance services through three reporting segments: Aerospace, Technology, Environmental and Nuclear; Buildings, Infrastructure and Advanced Facilities; and Energy, Chemicals and Resources.
Fiscal 2018 included the December 15, 2017 acquisition of CH2M HILL. CH2M contributed approximately $3.8 billion of revenue from the acquisition date through year-end and materially increased Jacobs' scale, goodwill, debt, and operating complexity.
Key financial metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $14.985 billion | $10.023 billion | +49.5% |
| Gross profit | $2.828 billion | $1.772 billion | +59.6% |
| Gross margin | 18.9% | 17.7% | +120 bps |
| Operating profit | $648.0 million | $392.3 million | +65.2% |
| Net earnings attributable to Jacobs | $163.4 million | $293.7 million | -44.4% |
| Diluted EPS | $1.17 | $2.42 | -51.7% |
| Operating cash flow | $481.2 million | $574.9 million | -16.3% |
| Cash and equivalents | $793.4 million | $774.2 million | +$19.2 million |
| Long-term debt | $2.147 billion | $235.0 million | Material increase |
| Backlog | $27.299 billion | $19.789 billion | +37.9% |
The reported 2018 effective tax rate was approximately 68.8%, compared with 26.9% in 2017. Fiscal 2018 included $259.2 million of after-tax tax-reform-related benefits as presented in the selected financial data, while the final income tax expense also included approximately $15.0 million of deferred tax adjustments associated with CH2M foreign tax credits. The filing states that the final tax adjustments reduced GAAP EPS by approximately $0.10 in the fourth quarter and $0.11 for the full year.
At September 28, 2018, the current ratio was 1.45 to 1 and working capital was $1.411 billion. Available liquidity consisted of $793.4 million of cash, approximately $1.448 billion of available borrowing capacity under the revolving credit facility, and operating cash flow. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- CH2M increased fiscal 2018 revenue by approximately $3.81 billion and contributed to significant increases in all three segment revenues.
- ATEN revenue increased 77.4% to $4.372 billion; BIAF revenue increased 61.5% to $6.185 billion; and ECR revenue increased 18.8% to $4.428 billion.
- Total segment operating profit increased to $1.012 billion from $625.2 million, led by BIAF operating profit of $482.3 million.
- Fiscal 2018 included approximately $190.8 million of pre-tax restructuring and integration charges, $77.7 million of CH2M transaction costs, and a $21.0 million loss on the sale of the Guimar joint venture investment.
- SG&A increased 58.0% to $2.180 billion, primarily because of CH2M-related expenses, higher personnel costs, transaction and restructuring charges, and a $15.0 million legal matter.
- Net interest expense increased to $67.8 million from $3.3 million because of debt incurred to finance the CH2M acquisition.
- Receivables increased to $3.555 billion from $2.103 billion, contributing to lower operating cash flow.
- Goodwill increased to $6.104 billion from $3.010 billion, largely from CH2M. The company reported no goodwill impairment, with reporting-unit fair values exceeding carrying values by 31% to 132%.
Guidance, outlook, risks and unusual items
Management described new prospects and sales as strong and maintained a positive outlook for many industries and markets, but the filing does not provide quantified fiscal 2019 revenue, EPS, margin, or cash-flow guidance. Approximately $9.9 billion, or 36%, of backlog was expected to convert to revenue in the next fiscal year. Backlog is not a defined measure, methodologies were still being harmonized with CH2M, and substantially all contracts may be canceled or terminated by clients.
On October 21, 2018, after fiscal year-end, Jacobs agreed to sell its ECR business to WorleyParsons for approximately $3.3 billion, consisting of $2.6 billion in cash and approximately $700 million in WorleyParsons shares, subject to adjustments. Closing was expected in the first half of calendar 2019 and remained subject to regulatory and other conditions. The transaction could materially change Jacobs' business mix, leverage, liquidity, and future reported results.
- Management identified, and the auditors issued an adverse opinion regarding, a material weakness in internal control over financial reporting related to income-tax accounting for the CH2M acquisition. Disclosure controls were also determined to be ineffective as of September 28, 2018. CH2M represented approximately 42% of total assets, 25% of revenue, and 30% of operating profit, although management stated the weakness did not cause material misstatements in the reported financial statements.
- Key operating risks include project cost overruns, fixed-price contract exposure, contract claims, government funding and audit risks, safety incidents, subcontractor performance, labor availability, geopolitical and foreign-exchange risks, and cyclical client capital spending.
- U.S. federal government agencies represented approximately 23% of fiscal 2018 revenue, and work for those agencies represented approximately 24.9% of year-end backlog.
- Defined benefit plans were underfunded by approximately $339.3 million at year-end, up from $252.0 million in 2017.
- Material contingencies include the Nui Phao arbitration, with claims exceeding $167 million, and the JKC Australia dispute, involving consortium claims of approximately $665.5 million and JKC claims exceeding $1.7 billion. The company stated that it did not expect material adverse effects, but acknowledged that the JKC matter could be material if the consortium were found liable.
- The company had approximately $446.6 million of letters of credit and $870.3 million of surety bonds outstanding at year-end.
- The company expects fiscal 2019 adoption of the new revenue-recognition standard to reduce retained earnings because of changes in timing for certain engineering and construction contracts; the amount was not quantified.
Most important facts for an investor to verify
- Progress and final economics of the ECR sale, including closing conditions, cash proceeds, share consideration, indemnification obligations, and use of proceeds.
- Remediation and auditor assessment of the material weakness in tax controls, particularly controls covering acquired businesses and deferred-tax recoverability.
- Post-CH2M organic revenue growth, operating margins, integration savings, remaining restructuring charges, and the final purchase-price allocation.
- Debt reduction, leverage ratios, variable-rate exposure, covenant headroom, and available liquidity after the ECR transaction.
- Conversion and profitability of the $27.3 billion backlog, including the approximately $6.8 billion tied to U.S. federal government work.
- Resolution and potential cash exposure from significant litigation, arbitration, guarantees, pension obligations, and other contingencies.
- Effects of revenue-recognition and lease-accounting standards adopted or expected to be adopted after fiscal 2018.