Business Context and Reporting Period
Registrant: Jacobs Engineering Group Inc. and subsidiaries, the company identified in the filing metadata as Jacobs Solutions Inc. This unaudited Form 10-Q covers the three and nine months ended June 29, 2018, compared with June 30, 2017; fiscal year-end was September 29, 2017.
Jacobs provides technical professional and field services, including engineering, construction, operations and maintenance, and consulting. Reporting was reorganized into three lines of business: Aerospace, Technology, Environmental and Nuclear; Buildings, Infrastructure and Advanced Facilities; and Energy, Chemicals and Resources.
The results include CH2M, acquired December 15, 2017. Jacobs paid approximately $1.8 billion in cash, issued approximately $1.4 billion of common stock, and assumed approximately $700 million of debt that was subsequently repaid.
Financial Highlights
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Revenue | $4.157 billion | $2.515 billion | $10.842 billion | $7.369 billion |
| Gross profit | $776.4 million | $459.4 million | $2.037 billion | $1.298 billion |
| Gross margin | 18.7% | 18.3% | 18.8% | 17.6% |
| Operating profit | $212.7 million | $128.5 million | $406.7 million | $285.3 million |
| Net earnings attributable to Jacobs | $150.2 million | $89.0 million | $201.0 million | $199.6 million |
| Diluted EPS | $1.05 | $0.74 | $1.46 | $1.64 |
| Effective tax rate | 22.2% | 30.4% | 42.7% | 29.2% |
- Q3 revenue increased 65.3%, gross profit increased 69.0%, operating profit increased 65.6%, and net earnings attributable to Jacobs increased 68.7% year over year.
- Nine-month revenue increased 47.1%, while nine-month net earnings attributable to Jacobs increased only 0.7%; diluted EPS declined from $1.64 to $1.46, primarily reflecting acquisition-related, restructuring, tax, and other unusual costs.
- CH2M contributed approximately $1.22 billion of Q3 revenue and $2.53 billion of nine-month revenue. Since acquisition, CH2M contributed approximately $2.5 billion of revenue and $87.9 million of pretax income, including approximately $93.3 million of pretax restructuring and transaction costs.
- Backlog was $27.188 billion at June 29, 2018, up from $18.556 billion at June 30, 2017. Backlog comprised $8.923 billion in ATEN, $11.265 billion in BIAF, and $7.000 billion in ECR.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $824.4 million at June 29, 2018, compared with $774.2 million at September 29, 2017.
- Nine-month operating cash flow was $269.0 million, down from $380.6 million in the prior-year period, primarily because of higher receivables and post-acquisition, opening-balance-sheet, and restructuring payments.
- Investing cash outflow was $1.541 billion, including $1.489 billion for business acquisitions, net of cash acquired. Financing cash inflow was $1.340 billion.
- Total receivables increased to $3.464 billion from $2.103 billion at fiscal 2017 year-end, including $1.845 billion of unbilled receivables and other amounts.
- Long-term debt increased to $2.336 billion from $235.0 million, reflecting CH2M acquisition financing. Debt included a $1.500 billion term loan, $338.8 million drawn on the revolving facility, and $500.0 million of fixed-rate senior notes, net of deferred financing fees.
- The company reported $1.259 billion of available borrowing capacity under its $1.6 billion revolving credit facility and stated that it was in compliance with all debt covenants.
- Outstanding letters of credit totaled $449.2 million, and surety bonds totaled $875.3 million at June 29, 2018.
- Dividends paid during the first nine months totaled $65.2 million, including dividends to noncontrolling interests. The board declared an additional $0.15 per share dividend payable August 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the CH2M acquisition and higher volumes in the legacy businesses. Segment revenue increased 100.0% in ATEN, 72.9% in BIAF, and 34.0% in ECR during Q3.
- Gross margins improved year over year, reflecting higher volumes, CH2M contributions, portfolio realignment toward higher-margin businesses, and improved project execution.
- Interest expense increased to $23.8 million in Q3 from $4.1 million, and to $50.1 million for nine months from $11.3 million, due mainly to higher acquisition-related debt.
- Nine-month results included $100.6 million of after-tax restructuring and other charges, $58.7 million of after-tax CH2M transaction costs, and $74.7 million of income tax charges associated with the Tax Cuts and Jobs Act.
- The nine-month effective tax rate increased to 42.7%, primarily because of a $52.5 million valuation allowance charge and a $14.0 million provisional deferred-tax remeasurement charge, partially offset by a $5.7 million federal hurricane credit.
- Accumulated other comprehensive loss increased to $728.2 million from $653.5 million, primarily due to foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- Management is continuing CH2M restructuring and integration activities through fiscal 2019 and is targeting annual cost savings of $175.0 million upon completion. Q3 included $46.5 million of pretax restructuring and other charges; nine-month charges were $135.2 million. The activities are not expected to exit service types or client end-markets.
- The company stated that it expects adequate liquidity to fund operations, debt service, dividends, share repurchases, and its ongoing acquisition strategy for the next 12 months. No formal earnings guidance is provided in the filing text.
- Adoption of the new revenue recognition standard is expected to produce a downward adjustment to retained earnings because certain engineering and construction contracts will be accounted for as a single performance obligation. The magnitude was not finalized.
- The company continues to evaluate the impact of new lease accounting and other accounting standards.
- Material contingencies include the Nui Phao arbitration, with a claim exceeding $167 million; the Blaydin Point consortium dispute, involving the company’s share of bonds of approximately $26 million and opposing claims of $665.5 million and approximately $1.7 billion; government contract audits; tax audits; litigation; guarantees; and insurance exposures. Management does not currently expect these matters to have a material adverse effect, although the Blaydin Point matter could be material if the consortium is found liable.
- CH2M represented approximately 42.1% of total assets at the evaluation date and 23.4% of nine-month revenue. Management had not fully assessed CH2M’s internal control over financial reporting and was testing newly designed controls.
- A 1.00% increase in floating interest rates would have increased nine-month interest expense by approximately $15.4 million, based on the filing’s sensitivity analysis.
Investor Verification Checklist
- Verify the final purchase price allocation for CH2M, including goodwill, intangible assets, pension obligations, deferred taxes, and contingent liabilities.
- Track realization of the targeted $175.0 million of annual integration savings and the remaining restructuring cash payments through fiscal 2019.
- Assess conversion of the substantial unbilled receivables balance into billed receivables and cash, and monitor operating cash flow.
- Review leverage, variable-rate debt exposure, covenant headroom, letters of credit, and surety bonds following the CH2M acquisition.
- Evaluate the effect of revenue recognition adoption on retained earnings, contract timing, margins, and comparability.
- Monitor the Blaydin Point arbitration, Nui Phao arbitration, government contract matters, tax audits, and other contingencies.
- Confirm remediation and testing of CH2M-related internal controls over long-term contract cost estimates.