Business Context and Reporting Period
Jacobs Engineering Group Inc. filed this Form 10-K for the fiscal year ended September 29, 2017. The filing is an annual report rather than a standalone fourth-quarter filing, although it includes fourth-quarter information. The company provided technical, professional, engineering, construction, consulting, operations and maintenance services through four reportable lines of business: Aerospace & Technology, Buildings & Infrastructure, Industrial, and Petroleum & Chemicals. Approximately 42% of fiscal 2017 revenue was generated outside the United States, and approximately 19.2% was earned directly or indirectly from U.S. federal government agencies.
The filing identifies the registrant as Jacobs Engineering Group Inc.; the supplied metadata refers to Jacobs Solutions Inc. The filing itself does not use the latter name.
Financial Results and Key Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $10.023 billion | $10.964 billion | Down 8.6% |
| Operating profit | $392.3 million | $338.6 million | Up 15.8% |
| Operating margin | 3.9% | 3.1% | Improved |
| Net earnings attributable to Jacobs | $293.7 million | $210.5 million | Up 39.6% |
| Diluted EPS | $2.42 | $1.73 | Up $0.69 |
| Cash flow from operations | $574.9 million | $680.2 million | Down $105.3 million |
| Cash and cash equivalents | $774.2 million | $655.7 million | Up $118.4 million |
| Long-term debt | $235.0 million | $385.3 million | Down $150.3 million |
| Total backlog | $19.789 billion | $18.761 billion | Up 5.5% |
Fiscal 2017 net margin was approximately 2.9% and operating margin was approximately 3.9%. Direct contract costs were 82.3% of revenue versus 83.9% in fiscal 2016. Pass-through costs included in revenue were approximately $2.539 billion, compared with $2.490 billion in the prior year.
Management presented adjusted fiscal 2017 net earnings attributable to Jacobs of approximately $392.2 million and adjusted diluted EPS of $3.24, excluding restructuring and other charges and CH2M professional fees and integration costs. These are non-GAAP measures and should not be treated as substitutes for reported results.
Segment Performance
| Segment | Fiscal 2017 Revenue | Fiscal 2017 Operating Profit | Primary Change |
|---|---|---|---|
| Aerospace & Technology | $2.361 billion | $202.6 million | Revenue down 11.2%; profit down 0.6% |
| Buildings & Infrastructure | $2.452 billion | $193.5 million | Revenue up 8.8%; profit up 10.8% |
| Industrial | $2.744 billion | $115.3 million | Revenue down 1.8%; profit up 41.8% |
| Petroleum & Chemicals | $2.466 billion | $113.9 million | Revenue down 24.3%; profit down 10.1% |
Approximately 81% of revenue was generated under cost-reimbursable contracts and 19% under fixed-price contracts. Management stated that approximately $7 billion, or 35% of backlog, was expected to convert to revenue during the next fiscal year, subject to client cancellations, funding, scope changes and other conditions.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower field-services volumes, project completions, delayed awards and weaker spending by Petroleum & Chemicals, Aerospace & Technology and Industrial customers. Buildings & Infrastructure revenue increased.
- Profitability improved despite lower revenue, reflecting better project execution, favorable business mix, lower-margin field-services reductions, restructuring savings and lower restructuring charges.
- Fiscal 2017 included $98.7 million of 2015 Restructuring charges and additional restructuring and other charges. The broader restructuring program was completed in the fourth quarter, with expected annual savings of approximately $285 million.
- Fiscal 2017 benefited from an $11 million pretax gain on the sale of the Neste Jacobs joint venture. Fiscal 2016 had included a $24.4 million loss on the sale of the French subsidiary and a $17.0 million noncash equity-investment write-off.
- Operating cash flow decreased because of a $206.1 million increase in net working capital, primarily higher accounts receivable, despite higher net earnings.
- The company initiated a quarterly dividend program, paying $0.15 per share in each of the second, third and fourth quarters. It repurchased approximately 1.75 million shares for $97.2 million during fiscal 2017.
- Goodwill was $3.010 billion at year-end. The company reported no goodwill impairment, although a prior-period foreign-goodwill translation error of $209.9 million was corrected through fiscal 2017 foreign-currency translation adjustments without affecting earnings or cash flows.
Liquidity, Debt and Capital Resources
At September 29, 2017, liquidity consisted of $774.2 million of cash, approximately $1.3 billion of available capacity under a $1.6 billion revolving credit facility, and $1.5 billion of available borrowings under a delayed-draw term loan facility. The company reported $235.0 million outstanding under the revolving facility and $262.1 million of letters of credit outstanding. It was in compliance with applicable debt covenants.
The company stated that it expected liquidity and capital resources to be adequate for operations, debt service, dividends and the acquisition strategy for the next twelve months. Approximately $650.1 million of cash was held outside the United States, primarily to fund international operations.
Guidance, Outlook, Risks and Unusual Items
- Management described new prospects and sales as strong and backlog as a record $19.8 billion, supporting a positive outlook for many markets. No specific revenue, earnings or margin guidance was provided in the filing.
- On August 1, 2017, Jacobs agreed to acquire CH2M HILL. Consideration could consist of $52.85 in cash plus 0.6677 Jacobs shares, $88.08 in cash, or 1.6693 Jacobs shares per CH2M share, subject to election and transaction terms.
- The CH2M transaction was expected to close by the end of the first fiscal quarter of 2018. Jacobs intended to use cash and debt financing, including the $1.5 billion term loan facility and additional revolver borrowings; estimated acquisition-related indebtedness was approximately $1.9 billion.
- Key merger risks included failure or delay in closing, financing availability, increased leverage and interest expense, dilution, integration costs, loss of personnel or customers, and failure to realize expected synergies.
- Major operating risks included cyclical client spending, low commodity prices, project cancellations or delays, fixed-price cost overruns, competitive pricing pressure, dependence on government funding, international and foreign-exchange exposure, subcontractor performance, safety incidents, litigation and insurance limitations.
- The company disclosed unauthorized access to certain computer systems during the 2014–2016 period. An investigation with outside counsel and technical experts was ongoing; expenses incurred to date were not material, but additional losses or expenses could not be reasonably estimated.
- A Singapore arbitration claim by Nui Phao Mining Company exceeded $167 million according to the claimant. Jacobs denied liability and stated that it did not expect a material adverse effect. The filing also disclosed other ordinary-course litigation and government audits.
- Defined benefit pension and post-retirement plans were underfunded by approximately $252.0 million at year-end, compared with $403.1 million in the prior year. Fiscal 2018 expected contributions were approximately $23.9 million.
- The company identified potential future accounting effects from adoption of the new revenue-recognition standard, particularly for combining engineering and construction performance obligations and contract modifications. The filing did not provide a clear quantified adoption impact.
Most Important Facts for Investors to Verify
- Whether the CH2M acquisition closed as planned, the final mix of cash and stock consideration, and the resulting debt, share dilution and integration costs.
- Whether the record backlog converts to revenue and profit at expected levels, particularly the estimated $7 billion expected within the next fiscal year.
- Whether Petroleum & Chemicals demand and field-services volumes recover as commodity prices and client capital spending change.
- Whether restructuring savings of approximately $285 million annually are realized and whether further restructuring or unusual charges arise.
- Post-acquisition leverage, covenant compliance, interest expense and cash-flow capacity after funding the CH2M transaction.
- Developments in the cybersecurity investigation, Nui Phao arbitration, government contract audits and other litigation or contingencies.
- Future cash conversion, receivable collections and working-capital requirements, given the decline in operating cash flow.
- The effect of new revenue-recognition and lease-accounting standards on reported revenue, earnings, assets and liabilities.