Business Context and Reporting Period
Jacobs Engineering Group Inc. filed this unaudited Form 10-Q for the quarter and nine months ended June 28, 2019, with comparative periods ended June 29, 2018. The continuing business consisted primarily of Aerospace, Technology and Nuclear (ATN) and Buildings, Infrastructure and Advanced Facilities (BIAF). The Energy, Chemicals and Resources (ECR) business was sold on April 26, 2019 and is presented as discontinued operations.
Jacobs completed the $902.6 million acquisition of KeyW on June 12, 2019. The company also adopted ASC 606 using the modified retrospective method, recording a cumulative after-tax reduction to retained earnings of $37.2 million.
Financial Results and Key Metrics
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Revenue | $3.170 billion | $2.934 billion | $9.345 billion | $7.588 billion |
| Gross profit | $626.1 million | $608.6 million | $1.811 billion | $1.552 billion |
| Gross margin | 19.8% | 20.7% | 19.4% | 20.5% |
| Operating profit | $90.0 million | $162.5 million | $305.8 million | $226.6 million |
| Net earnings attributable to Jacobs | $524.4 million | $150.2 million | $705.7 million | $201.0 million |
| Diluted EPS | $3.80 | $1.05 | $5.02 | $1.46 |
Continuing-operations earnings attributable to Jacobs were $89.4 million, or $0.65 per diluted share, in Q3 and $269.0 million, or $1.92 per diluted share, for the nine months. Discontinued operations contributed $435.1 million in Q3 and $436.6 million year to date, substantially reflecting the $917.7 million pretax gain on the ECR sale.
Q3 revenue increased 8.0% year over year and nine-month revenue increased 23.2%. Segment revenue and operating profit increased in both ATN and BIAF. However, consolidated operating profit declined in Q3 because restructuring, corporate and KeyW transaction costs more than offset segment growth.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $998.2 million at June 28, 2019, compared with $634.9 million at September 28, 2018.
- Operating cash flow was negative $220.3 million for the nine months, compared with $268.9 million of operating cash flow in the prior-year period. The decline primarily reflected working-capital uses, including higher receivables.
- Investing cash flow was positive $2.182 billion, principally from $2.797 billion of proceeds related to business sales, partly offset by the $575.1 million KeyW acquisition and $106.7 million of capital expenditures.
- Financing cash flow was negative $1.791 billion, including approximately $1.20 billion of net debt repayments, $524.6 million of share repurchases and $82.3 million of dividends.
- Short-term debt was $222.7 million and long-term debt was $1.025 billion at quarter-end. Total reported debt was approximately $1.248 billion.
- The company reported $2.12 billion of available borrowing capacity under its $2.25 billion New Credit Agreement and was in compliance with its debt covenants.
- Outstanding letters of credit totaled $359.0 million, and surety bonds totaled approximately $1.16 billion.
Material Changes Versus the Prior Comparable Period
- ECR sale proceeds materially strengthened cash and enabled substantial debt repayment, but the sale also makes prior-period comparisons less comparable.
- Reported earnings and EPS increased primarily because of the ECR disposal gain rather than recurring operating performance.
- Gross margin declined from 20.7% to 19.8% in Q3 and from 20.5% to 19.4% year to date, which management attributed to a higher mix of ATN reimbursable revenue and the final stages of a large BIAF advanced-facilities project.
- Restructuring and other charges were $92.4 million in Q3 and $233.6 million for the nine months, compared with $30.5 million and $122.7 million, respectively, in the prior-year continuing operations.
- KeyW contributed $23.9 million of revenue and a $15.5 million pretax loss from acquisition through quarter-end, including approximately $12.7 million of pretax transaction costs.
- Backlog increased to $22.467 billion from $19.840 billion, led by U.S. government awards, KeyW, and new awards in advanced facilities and transportation.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical full-year earnings or revenue guidance range. Management stated that it expected adequate liquidity and capital resources to fund projected cash requirements for the next twelve months. Remaining performance obligations were approximately $11.58 billion, with 53% expected to be recognized within twelve months, subject to cancellations, scope changes, foreign-exchange movements and deferrals.
- Restructuring and ECR separation activities were expected to continue into fiscal 2020; CH2M-related activities were expected to be substantially completed by the end of fiscal 2019.
- The NPMC arbitration resulted in an approximately $95.0 million award against Jacobs, plus disputed interest, costs and attorneys’ fees. Jacobs recorded approximately $147.0 million of pretax charges, retained the liability after the ECR sale, posted a $95.0 million bank guarantee, and had not recorded an insurance recovery receivable.
- A separate Australian consortium dispute involves Jacobs-related entities and claimed damages potentially exceeding $1.7 billion by the opposing party. A hearing was scheduled for February 2020; management stated that the matter was not expected to have a material adverse effect beyond existing reserves based on available information.
- The company disclosed a material weakness in disclosure controls related to accounting for income taxes and deferred-tax recoverability in business combinations. Management reported substantial remediation progress, but controls were still deemed ineffective as of June 28, 2019.
- Variable-rate borrowings create interest-rate risk. Management estimated that a one-percentage-point increase in floating rates would have increased nine-month interest expense by approximately $14.4 million.
- The 51.4 million restricted WorleyParsons shares received in the ECR sale were recorded at an estimated fair value of $531.4 million and were subject to lock-up restrictions.
Important Facts for Investors to Verify
- Separate recurring continuing-operations performance from the nonrecurring ECR disposal gain and other unusual items.
- Assess whether negative operating cash flow and working-capital consumption improve after the ECR sale and KeyW integration.
- Review the effect of restructuring, transaction and integration costs on normalized operating margins.
- Monitor KeyW’s final purchase-price allocation, acquired debt, goodwill and operating contribution.
- Track resolution, reserves and potential insurance recoveries for the NPMC arbitration and the Australian consortium dispute.
- Confirm remediation and testing of the disclosed material weakness in income-tax controls.
- Evaluate debt repayment, variable-rate exposure, letters of credit, surety bonds and remaining share-repurchase commitments.