Business Context and Reporting Period
Jacobs Engineering Group Inc. filed this Form 10-K for the fiscal year ended September 27, 2019. The filing describes the company as a global professional-services provider with approximately 52,000 employees, operating through Critical Mission Solutions (CMS) and People & Places Solutions (PPS). The company was pursuing a strategy to become a more technology-focused solutions provider and planned to change its name to Jacobs Solutions Inc. The filing includes fourth-quarter information but reports primarily on the full fiscal year.
Financial Performance and Position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue from continuing operations | $12.74 billion | $10.58 billion | Up 20.4% |
| Gross profit | $2.48 billion | $2.16 billion | Up 14.8% |
| Gross margin | 19.4% | 20.4% | Down 1.0 percentage point |
| Operating profit | $404.9 million | $387.4 million | Up 4.5% |
| Net earnings attributable to Jacobs | $848.0 million | $163.4 million | Up substantially |
| Continuing-operations diluted EPS | $2.09 | $(0.03) | Improved |
| Continuing-operations effective tax rate | 10.5% | 98.4% | Improved |
- Discontinued operations generated $559.2 million of net earnings, including a $935.1 million pretax gain from the sale of the Energy, Chemicals and Resources (ECR) business.
- CMS revenue was $4.55 billion and segment operating profit was $310.0 million. PPS revenue was $8.19 billion and segment operating profit was $714.4 million.
- Cash flow from operations was negative $366.4 million, compared with positive $481.2 million in fiscal 2018, primarily because of working-capital uses and taxes related to the ECR sale.
- Investing activities provided $2.15 billion, principally from $2.80 billion of cash proceeds from the ECR sale, partly offset by the KeyW acquisition and capital expenditures of $136.0 million.
- Financing activities used $1.97 billion, including approximately $1.0 billion of net debt repayments, $853.7 million of share repurchases and $106.4 million of dividends paid to shareholders and noncontrolling interests.
- At year-end, cash was $631.1 million, working capital was $1.04 billion and the current ratio was 1.34 to 1.
- Debt consisted of $199.9 million of short-term debt and $1.20 billion of long-term debt. The company reported $1.94 billion of available capacity under its $2.25 billion revolving credit agreement and compliance with debt covenants.
- Backlog was $22.6 billion, up from $20.0 billion. Remaining performance obligations under ASC 606 were approximately $13.4 billion, with 48% expected to be recognized within twelve months.
Material Changes Versus the Prior Comparable Period
- Jacobs completed the $3.4 billion ECR divestiture on April 26, 2019, receiving $2.8 billion in cash and 58.2 million Worley shares. ECR is presented as discontinued operations.
- Jacobs acquired KeyW on June 12, 2019, for total consideration of approximately $902.6 million, including assumed debt that was subsequently repaid. KeyW contributed $136.3 million of revenue and a $17.7 million pretax loss from acquisition through year-end.
- CH2M contributed to a full year of fiscal 2019 results, compared with only part of fiscal 2018, supporting revenue and segment-profit growth.
- Restructuring and other charges increased to $311.5 million from $153.6 million, while transaction costs declined to $18.2 million from $80.4 million.
- The company adopted ASC 606 using the modified retrospective method, recording a cumulative after-tax reduction to retained earnings of $37.2 million. The adoption increased fiscal 2019 reported revenue by $23.2 million and net earnings by $23.3 million compared with the previous guidance.
- Fiscal 2018 included $259.2 million of continuing-operations tax charges related to U.S. tax reform, making the year-over-year earnings comparison unusually favorable for 2019.
- Share repurchases totaled $853.7 million, reducing year-end shares outstanding to 132.9 million from 142.2 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management reported strong prospects and sales activity and a positive outlook across many customer sectors, but the filing does not provide a clear quantitative fiscal 2020 earnings or revenue forecast. The company expected to close the acquisition of John Wood Group’s nuclear consulting, remediation and program-management business by the end of fiscal 2020 second quarter for approximately $300 million of enterprise value.
- Material unusual items included the ECR disposal gain, fair-value losses and dividend income related to Worley shares, restructuring costs, acquisition and integration costs, the $130.0 million Nui Phao legal settlement, a $35.0 million CH2M retiree-medical settlement gain and a $25.0 million PPS project charge.
- Jacobs retained certain ECR-related obligations and transition-services responsibilities. Approximately 51.4 million Worley shares were subject to a lock-up expected to expire in December 2019.
- Significant risks include fixed-price contract cost overruns, project execution and safety exposures, delays or cancellations of awards, government funding and contract termination risk, dependence on U.S. federal customers, cybersecurity and data-security incidents, international and foreign-exchange risk, acquisition integration, litigation, environmental liabilities and pension funding.
- Approximately 27% of fiscal 2019 revenue was earned directly or indirectly from U.S. federal agencies, and approximately 29% was earned from clients outside the United States.
- Approximately 24% of revenue was from fixed-price contracts and 76% from cost-reimbursable contracts. Backlog is subject to cancellation, suspension, scope changes and funding risk.
- Goodwill was $5.43 billion, or 47.4% of total assets. Management reported that fiscal 2019 impairment testing identified no goodwill impairment.
- Underfunded defined-benefit pension and postretirement plans totaled approximately $399.8 million at year-end, compared with $339.3 million in the prior year.
- Contingencies included the JKC Australia LNG dispute, with alleged damages exceeding $1.7 billion, and other personal-injury and environmental litigation. Management stated that recorded and disclosed matters were not expected to have a material adverse effect beyond accrued amounts, but outcomes remain uncertain.
Most Important Facts for Investors to Verify
- Separate recurring continuing-operations profitability from the ECR disposal gain and other unusual items.
- Reconcile reported earnings with $243.7 million of after-tax restructuring and other charges, $16.1 million of transaction costs, intangible amortization and Worley-related fair-value effects.
- Assess the sustainability of the 2019 margin profile, given the decline in gross margin to 19.4% and significant pass-through revenue.
- Review cash conversion and working-capital requirements, particularly the negative fiscal 2019 operating cash flow.
- Confirm debt maturities, variable-rate exposure, covenant headroom and liquidity after the KeyW acquisition and planned Wood nuclear acquisition.
- Evaluate the realizability and margin quality of the $22.6 billion backlog and $13.4 billion of remaining performance obligations.
- Monitor the value and monetization restrictions of the retained Worley shares and the completion of remaining ECR transfers and transition services.
- Review the JKC, Nui Phao and other legal matters, insurance recoveries and potential exposure beyond recorded reserves.
- Note that internal-control assessments excluded KeyW, which represented approximately 9% of total assets and 1% of fiscal 2019 revenue.