Jacobs Engineering Group Inc. Fiscal 2020 Form 10-K Summary
Business context and reporting period
Jacobs Engineering Group Inc. reported its fiscal year ended October 2, 2020. The filing is an annual Form 10-K, although the request metadata identifies the period as 2020 Q4. Jacobs provides technology-enabled consulting, engineering, scientific, project delivery, operations and maintenance services through two reportable segments: Critical Mission Solutions (CMS) and People & Places Solutions (P&PS). Fiscal 2020 included an extra week of activity.
The company continued its portfolio transformation following the sale of its Energy, Chemicals and Resources business to Worley in April 2019. The ECR business is presented as discontinued operations for all periods. Jacobs employed approximately 55,000 people worldwide and had approximately $23.8 billion of backlog at year-end.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $13.57 billion | $12.74 billion | Up 6.5% |
| Gross profit | $2.59 billion | $2.48 billion | Up 4.4% |
| Gross margin | 19.1% | 19.4% | Down 0.3 percentage points |
| Operating profit | $536.0 million | $404.9 million | Up 32.4% |
| Net earnings attributable to Jacobs from continuing operations | $353.9 million | $291.0 million | Up 21.6% |
| Diluted EPS from continuing operations | $2.67 | $2.09 | Up 27.8% |
| Total net earnings attributable to Jacobs | $491.8 million | $848.0 million | Down 42.0% |
| Diluted EPS, including discontinued operations | $3.71 | $6.08 | Down 39.0% |
| Cash flow from operations | $806.8 million | $(366.4) million | Improved by $1.17 billion |
| Cash and cash equivalents | $862.4 million | $631.1 million | Up $231.4 million |
| Long-term debt | $1.68 billion | $1.20 billion | Up $475.7 million |
| Working capital | $1.60 billion | $1.04 billion | Up $559.9 million |
CMS revenue was $4.97 billion, up 9.1%, and segment operating profit was $372.1 million, up 20.0%. P&PS revenue was $8.60 billion, up 5.1%, and segment operating profit was $740.7 million, up 3.7%.
Approximately 33% of fiscal 2020 revenue was earned directly or indirectly from U.S. federal government agencies. Contract mix was 76% cost-reimbursable, 17% fixed-price limited-risk and 7% fixed-price at-risk. Pass-through revenue was approximately $2.61 billion.
Liquidity, debt and capital allocation
- Liquidity consisted of $862.4 million of cash and approximately $2.09 billion of available capacity under the $2.25 billion revolving credit facility.
- Jacobs entered into a new $1.0 billion term loan facility in March 2020. Year-end long-term debt included approximately $1.03 billion under the 2020 Term Loan Facility, $152.8 million under the revolving facility and $500 million of fixed-rate senior notes.
- The company was in compliance with its debt covenants at October 2, 2020.
- Fiscal 2020 financing uses included $337.3 million of share repurchases and $144.0 million of dividends to shareholders and noncontrolling interests.
- Share repurchases were suspended from March through the third fiscal quarter as a COVID-19 precaution and resumed on a limited basis in the fourth quarter. Approximately $57.9 million remained under the 2019 authorization; no shares had been repurchased under the separate 2020 authorization.
- Outstanding letters of credit totaled approximately $263.0 million, and outstanding surety bonds totaled approximately $2.3 billion.
Material changes versus the prior comparable period
- Revenue and continuing-operations earnings increased despite COVID-19 disruption, aided by a full year of KeyW revenue, the March 2020 acquisition of John Wood Group’s nuclear business, legacy P&PS growth and an additional fiscal week.
- Operating profit benefited from acquisition contributions, cost reductions, COVID-19 mitigation efforts and the favorable closeout of a large CMS program management contract.
- Gross margin declined modestly because of portfolio mix and lower overhead reimbursement rates, partially offset by stronger margins from KeyW and the Wood Group nuclear business.
- Net cash from operations improved substantially from an outflow in fiscal 2019, reflecting stronger earnings, working-capital benefits, deferred payments and COVID-19-related government assistance.
- Total earnings declined because fiscal 2019 included a significant ECR sale gain. Fiscal 2020 discontinued operations included $138.0 million of earnings and a $110.2 million pretax ECR-related gain, compared with $557.0 million of discontinued-operation earnings and a $935.1 million pretax gain in fiscal 2019.
- Fiscal 2020 included $324.2 million of restructuring and other charges, $68.3 million of after-tax intangible amortization and $56.9 million of after-tax fair-value losses related principally to the Worley investment and foreign-currency revaluations.
- Jacobs recorded a $162 million fourth-quarter impairment charge related primarily to abandoned or subleased office space and associated property and leasehold improvements.
Guidance, outlook, commentary and risks
Management expected COVID-19 impacts to continue into the first half of fiscal 2021, although at a lower level than in fiscal 2020. Jacobs reported strong new prospects and sales and a positive outlook across several end markets, including government services, advanced facilities, water and transportation infrastructure. Management stated that available cash, borrowing capacity, operating cash flow, spending controls and government assistance were expected to provide adequate liquidity for the following twelve months.
The company transitioned more than 85% of employees to remote work within 10 days of the initial pandemic response. It reduced discretionary spending, ceased nonessential hiring, reduced certain benefits and compensation, and developed additional contingency plans if the pandemic deteriorated or lasted longer than expected.
- COVID-19 may reduce demand, delay or cancel projects, impair collections, disrupt suppliers and subcontractors, increase costs and create cybersecurity and workforce risks.
- Backlog is not a guarantee of future revenue or profit because contracts may be canceled, suspended, repriced or modified. Approximately $7.48 billion, or 31.4% of backlog, was expected to convert to revenue within the next fiscal year.
- Government contracts represented a material concentration of revenue and are subject to annual funding, audits, compliance requirements, termination rights, possible stop-work orders and debarment risks.
- Fixed-price contracts expose Jacobs to cost overruns, schedule delays, inflation, materials pricing and subcontractor-performance risks.
- Goodwill totaled $5.64 billion, or 45.6% of total assets. Management concluded that reporting-unit fair values substantially exceeded carrying values and recorded no goodwill impairment, but future impairment remains a risk.
- Defined benefit plans were underfunded by approximately $400.4 million, creating potential future cash contribution requirements.
- Jacobs disclosed significant legal and regulatory contingencies, including the JKC Australia LNG arbitration, Kingston ash-pond litigation, government contract audits and an SEC request for information concerning a divested Moroccan joint venture and possible corrupt practices. Management did not expect these matters to have a material adverse effect beyond recorded reserves.
- Subsequent to year-end, the U.K. Ministry of Defence announced plans to change operating agreements with AWE Management Ltd., potentially resulting in early termination in 2021. Jacobs was evaluating the impact on its approximately $38 million equity-method investment.
Important facts for investors to verify
- Reconcile continuing-operations performance with total reported earnings, recognizing the substantial impact of ECR discontinued operations and prior-year sale gains.
- Assess the sustainability of operating improvement after removing restructuring benefits, acquisition contributions, the extra fiscal week and favorable contract closeout.
- Review COVID-19 effects on project awards, backlog conversion, collections, utilization, margins and fiscal 2021 demand.
- Evaluate leverage, variable-rate debt exposure, covenant headroom and the adequacy of liquidity after acquisitions, dividends and repurchases.
- Examine fixed-price project estimates, claims and change orders, including the revenue-recognition judgments identified as a critical audit matter.
- Monitor the JKC arbitration, SEC inquiry, government-contract compliance matters, AWE contract developments and other litigation or guarantee exposures.
- Consider the valuation risk associated with $5.64 billion of goodwill, the $347.5 million Worley equity investment and the underfunded pension obligations.