Jacobs Engineering Group Inc. Form 10-Q Summary
Business context and reporting period
Filed May 6, 2020 for the quarter and six months ended March 27, 2020. The registrant was then named Jacobs Engineering Group Inc.; management stated that the company planned to change its name to Jacobs Solutions Inc. The business operated through Critical Mission Solutions (CMS) and People & Places Solutions (P&PS). The former Energy, Chemicals and Resources (ECR) business is reported as discontinued operations following its sale to Worley.
Jacobs reported approximately 55,000 employees and continued to operate materially as a critical-infrastructure provider during the initial COVID-19 disruption. The quarter was not materially affected by COVID-19, but management expected the principal effects to begin in the third fiscal quarter and potentially continue thereafter.
Financial performance and key metrics
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Continuing-operations revenue | $3.427 billion | $3.092 billion | $6.787 billion | $6.175 billion |
| Gross profit | $648.1 million | $616.8 million | $1.293 billion | $1.185 billion |
| Gross margin | 18.9% | 20.0% | 19.0% | 19.2% |
| Operating profit | $167.8 million | $102.7 million | $319.1 million | $215.8 million |
| Net income attributable to Jacobs from continuing operations | $(122.0) million | $114.8 million | $57.5 million | $179.6 million |
| Net income attributable to Jacobs, including discontinued operations | $(92.1) million | $56.9 million | $164.9 million | $181.2 million |
| Diluted EPS | $(0.69) | $0.41 | $1.23 | $1.28 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $15.0 million | $(55.2) million |
Q2 revenue increased 10.9%, while six-month revenue increased 9.9%. Operating profit increased 63.4% in the quarter and 47.9% year to date. Segment operating profit increased to $273.4 million in the quarter from $246.5 million, and to $542.1 million year to date from $478.1 million.
- CMS revenue increased 17.4% in Q2 and 15.8% year to date, supported by KeyW and John Wood Group nuclear acquisitions, U.S. government demand and legacy portfolio growth. CMS operating profit increased 14.2% in Q2 and 19.7% year to date.
- P&PS revenue increased 7.5% in Q2 and 6.9% year to date. P&PS operating profit increased 9.5% in Q2 and 10.6% year to date.
- Net miscellaneous expense was $330.4 million in Q2 and $213.7 million year to date, primarily reflecting pre-tax fair-value losses on the Worley share investment and related foreign-currency revaluations.
- Q2 continuing-operations results included approximately $258.6 million of after-tax Worley investment losses and $32.8 million of after-tax restructuring and transaction costs.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $1.656 billion at March 27, 2020, compared with $631.1 million at September 27, 2019.
- Long-term debt was $3.099 billion, compared with $1.201 billion at fiscal year-end; short-term debt declined to zero from $199.9 million.
- The company entered into a $1.0 billion 2020 Term Loan Facility, used $200 million to repay short-term debt and retained the remaining proceeds to preserve liquidity during COVID-19 uncertainty.
- The $2.25 billion revolving facility had $679.4 million of available borrowing capacity after $2.3 million of issued letters of credit. Total outstanding letters of credit were $262.8 million; surety bonds were approximately $1.97 billion.
- Management stated that all debt covenants were satisfied and that available liquidity and expected operating cash flow were adequate for projected needs over the next twelve months.
- Investing cash use was $365.3 million, including $286.5 million for acquisitions and approximately $61.3 million for property and equipment. Financing cash flow was $1.354 billion, primarily from borrowings.
- The company repurchased $285.8 million of common stock during the six months before temporarily suspending repurchases in March 2020. Approximately $107.9 million remained under the 2019 authorization; a separate $1.0 billion authorization had no repurchases as of quarter-end.
- Remaining performance obligations were approximately $13.0 billion, with management expecting 49% to convert to revenue within twelve months. Reported backlog was $23.291 billion, including $9.135 billion for CMS and $14.156 billion for P&PS.
Material changes versus the prior comparable period
- Revenue and operating profit improved due to organic growth, the KeyW acquisition completed in June 2019, and the John Wood Group nuclear business acquisition completed March 6, 2020.
- Gross margin declined from 20.0% to 18.9% in Q2, primarily due to project mix, lower overhead reimbursement rates and COVID-19 cost-mitigation actions.
- Continuing-operations earnings reversed from a $114.8 million profit to a $122.0 million attributable loss, mainly because of Worley investment losses and other unusual charges rather than deterioration in segment operating performance.
- Discontinued operations contributed $29.9 million in Q2 and $107.5 million year to date, compared with a $57.8 million loss and $1.6 million of income, respectively, in the prior-year periods. The current-year amounts included deferred ECR-sale gains and, year to date, a $50.0 million insurance recovery related to the Nui Phao matter.
- Cash flow from operations improved to $15.0 million year to date from cash use of $55.2 million, although working-capital requirements remained a cash use.
- Cash increased substantially, but this was accompanied by materially higher long-term borrowings raised as a precaution during the pandemic.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative fiscal 2020 earnings or revenue outlook. Management expected COVID-19 to adversely affect both operating segments beginning primarily in Q3 FY2020, potentially continuing into Q4 or beyond. The company reduced discretionary spending, halted non-essential hiring, furloughed certain employees and developed additional cost-reduction contingency plans.
- Key COVID-19 risks include project delays or cancellations, reduced customer demand, client payment problems, supplier and subcontractor disruption, remote-work inefficiencies and cybersecurity exposure, workforce shortages, travel restrictions and reduced access to capital markets.
- Government-contract recovery under the CARES Act and similar programs was uncertain; management expected to recover a significant portion of qualifying costs on U.S. government work but could not assure recovery of all fees or costs.
- The company held 51.4 million Worley shares valued at $180.9 million at quarter-end. The investment generated $375.5 million of Q2 pre-tax losses and $270.2 million year-to-date losses, plus dividends.
- The John Wood Group nuclear acquisition generated preliminary goodwill of $205.8 million and identifiable intangible assets of $81.0 million. The purchase-price allocation remained subject to adjustment.
- Material contingencies include the JKC/INPEX-related Australian arbitration, with Jacobs’ consortium seeking approximately $530 million and facing alleged damages exceeding $1.7 billion. The hearing was postponed because of COVID-19; no decision was expected before late 2021.
- The SEC requested information concerning a formerly owned Moroccan joint venture and possible corrupt practices. Jacobs stated that it was cooperating and did not expect a material adverse effect.
- Other legal matters include Tennessee Valley Authority fly-ash litigation and retained liability related to the Nui Phao matter. Management did not expect these matters to have a material adverse effect beyond recorded reserves.
Important facts for investors to verify
- Whether COVID-19 effects in Q3 and later periods materially reduce revenue, margins, backlog conversion and operating cash flow.
- The valuation and future volatility of the Worley share investment, including whether additional fair-value losses occur.
- Leverage, interest-rate exposure and covenant compliance after the March 2020 term borrowing; approximately $2.6 billion of borrowings were subject to variable rates.
- The final purchase-price allocation and integration performance of the John Wood Group nuclear business and KeyW.
- The collectability of $3.179 billion of receivables and contract assets and the timing of conversion of the $13.0 billion remaining performance obligation balance.
- Potential outcomes and reserve adequacy for the JKC arbitration, TVA litigation and the SEC inquiry.
- The extent to which discontinued ECR gains, insurance recoveries and other unusual items distort reported earnings relative to recurring continuing operations.