JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March
31, 2017Basis of Presentation
30, 2018
Unless the context otherwise requires:
References herein to “Jacobs” are to Jacobs Engineering Group Inc. and its predecessors;
References herein to the “Company”, “we”, “us” or “our” are to Jacobs Engineering Group Inc. and its consolidated subsidiaries; and
References herein to the “Group” are to the combined economic interests and activities of the Company and the persons and entities holding noncontrolling interests in our consolidated subsidiaries.
The accompanying consolidated financial statements and financial information included herein have been prepared pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. Readers of this Quarterly Report on Form 10-Q should also read our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September
30, 201629, 2017 (“
20162017 Form 10-K”)
, as well as Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2016 Form 10-K..
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of our consolidated financial statements at March
31, 2017,30, 2018, and for the three and six month periods ended March
31, 2017.30, 2018.
Our interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.
Please refer to Note 17—17 Definitions of Notes to Consolidated Financial Statements included in our 20162017 Form 10-K for the definitions of certain terms used herein.
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| 2. | Use of Estimates and Assumptions |
The preparation of financial statements in conformity with U.S. GAAP requires us to employ estimates and make assumptions that affect the reported amounts of certain assets and liabilities, the revenues and expenses reported for the periods covered by the accompanying consolidated financial statements, and certain amounts disclosed in these Notes to the Consolidated Financial Statements. Although such estimates and assumptions are based on management’s most recent assessment of the underlying facts and circumstances utilizing the most current information available and past experience, actual results could differ significantly from those estimates and assumptions. Our estimates, judgments, and assumptions are evaluated periodically and adjusted accordingly. Please refer to Note 2 Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2017 Form 10-K for a discussion of the significant estimates and assumptions affecting our consolidated financial statements.
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| 3. | Fair Value and Fair Value Measurements |
Certain amounts included in the accompanying consolidated financial statements are presented at “fair value.” Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants as of the date fair value is determined (the “measurement date”). When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider only those assumptions we believe a typical market participant would consider when pricing an asset or liability. In measuring fair value, we use the following inputs in the order of priority indicated:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets included in Level 1, such as (i) quoted prices for similar assets or liabilities; (ii) quoted prices in markets that have insufficient volume or infrequent transactions (e.g., less active markets); and (iii) model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Please refer to Note 2 Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2017 Form 10-K for a more complete discussion of the various items within the consolidated financial statements measured at fair value and the methods used to determine fair value.
The net carrying amounts of cash and cash equivalents, trade receivables and payables, and notes payable approximate fair value due to the short-term nature of these instruments. Similarly, we believe the carrying value of long-term debt also approximates fair value based on the interest rates and scheduled maturities applicable to the outstanding borrowings.
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| 4. | New Accounting Pronouncements |
From time to time, the Financial Accounting Standards Board (“FASB”) issues accounting standards updates (each being an “ASU”) to its Accounting Standards Codification (“ASC”), which constitutes the primary source of U.S. GAAP. The Company regularly monitors ASUs as they are issued and considers their applicability to its business. All ASUs applicable to the Company are adopted by their effective dates and in the manner prescribed by the FASB.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. The new guidance provided by ASU 2014-09 is intended to remove inconsistencies and perceived weaknesses in the existing revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability, provide more useful information and simplify the preparation of financial statements. The effective date for ASU 2014-09 is for annual reporting periods beginning after December 15, 2017 and interim periods therein.
The Company’s adoption activities are being performed over three phases: (i) assessment, (ii) design, and (iii) implementation. Our assessment and design phases are substantially complete. We have established a cross-functional team to implement ASU 2014-09. Additionally, we have identified selected changes to our systems, processes and internal controls and are in the process of designing updates for each to meet the standard’s revised reporting and disclosure requirements. The Company continues to evaluate the impact of ASU 2014-09 to the CH2M business and we are largely complete with the assessment phase. We expect to update CH2M’s accounting policies, processes and controls to align with the policies, processes and controls being implemented across the Company. We are in the process of implementing the changes discovered during the assessment and design phases. The following are the potential significant differences identified to date:
Performance Obligations
Under current U.S. GAAP, the Company typically segments contracts among service types, such as engineering and construction services, for purposes of revenue recognition. Under ASU 2014-09, the Company has determined, in most instances, it is likely that engineering and construction services will be required to be combined into a single performance obligation. In these instances, this will likely change the timing and pattern of revenue recognition.
Contract Modifications
In many instances, the Company enters into contracts for construction services subsequent to entering into engineering services contracts (“Phased Projects”). Under ASU 2014-09, the construction services contract may be deemed to modify the engineering contract, or may be required to be combined with the engineering contract. This modification or combination of contracts may result in a cumulative catchup adjustment, which will have an immediate impact on the Company’s results of operations in the period the contract combination or modification occurs. In addition, it will change the timing and pattern of revenue recognition after the period the contracts have been combined or modified. The Company analyzed its current Phased Projects and concluded that a significant number of these arrangements would be combined under ASU 2014-09.
The Company currently intends to adopt the new standard using the Modified Retrospective application. This standard could have a significant impact on the Company’s Consolidated Financial Statements and an administrative impact on its operations and will depend on the magnitude of the items discussed above. The Company will continue to evaluate the impact through the implementation phase.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02 Leases. ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The new guidance currently requires a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. In January 2018, the FASB released an exposure draft that, if issued in its current form, would provide us with the option to adopt the provisions of the new guidance prospectively, without adjusting the comparative periods presented. The Company is evaluating the impact of the new guidance on its consolidated financial statements. This standard could have a significant administrative impact on its operations, and the Company will further assess the impact through its implementation program.
Other Pronouncements
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accountingfor Hedging Activities. ASU 2017-12 provides financial reporting improvements related to hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. Additionally, ASU No. 2017-12 makes certain targeted improvements to simplify the application of the hedge accounting guidance. The revised guidance becomes effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements. It is not expected that the updated guidance will have a significant impact on the Company’s consolidated financial statements.
ASU 2017-04, Simplifying the Test for Goodwill Impairment, is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. An entity will now recognize a goodwill impairment charge for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. Management does not expect the adoption of ASU 2017-04 to have any impact on the Company's financial position, results of operations or cash flows.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the impact that the adoption of ASU 2018-02 will have on the Company's financial position, results of operations and cash flows.
On December 15, 2017, the Company completed the acquisition of CH2M HILL Companies, Ltd. (CH2M), an international provider of engineering, construction, and technical services, by acquiring 100% of the outstanding shares of CH2M common stock and preferred stock. The purpose of the acquisition was to further diversify the Company’s presence in the water, nuclear and environmental remediation sectors and to further the Company’s profitable growth strategy. The Company paid total consideration of approximately $1.8 billion in cash (excluding $315.2 million of cash acquired) and issued approximately $1.4 billion of Jacobs’ common stock, or 20.7 million shares, to the former stockholders and certain equity award holders of CH2M. In connection with the acquisition, the Company also assumed CH2M’s revolving credit facility and second lien notes, including a $20.0 million prepayment penalty, which totaled approximately $700 million of long-term debt. Immediately following the effective time of the acquisition, the Company repaid CH2M’s revolving credit facility and second lien notes including the related prepayment penalty.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following summarizes the estimated fair values of CH2M assets acquired and liabilities assumed as of the acquisition date (in millions):
|
| | | |
| Assets | |
| Cash and cash equivalents | $ | 315.2 |
|
| Receivables | 1,184.1 |
|
| Prepaid expenses and other | 72.7 |
|
| Property, equipment and improvements, net | 175.1 |
|
| Goodwill | 2,874.9 |
|
| Identifiable intangible assets: | |
| Customer relationships, contracts and backlog | 450.0 |
|
| Lease intangible assets | 4.4 |
|
| Total identifiable intangible assets | 454.4 |
|
| Miscellaneous | 354.2 |
|
| Total Assets | $ | 5,430.6 |
|
| | |
| Liabilities | |
| Notes payable | $ | 2.2 |
|
| Accounts payable | 309.6 |
|
| Accrued liabilities | 696.6 |
|
| Billings in excess of costs | 265.8 |
|
| Identifiable intangible liabilities: | |
| Lease intangible liabilities | 9.6 |
|
| Long-term debt | 702.3 |
|
| Other deferred liabilities | 381.6 |
|
| Total Liabilities | 2,367.7 |
|
| Noncontrolling interests | (38.2 | ) |
| Net assets acquired | $ | 3,024.7 |
|
The purchase price allocation is based upon preliminary information and is subject to change when additional information is obtained. Goodwill recognized largely results from a substantial assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. None of the goodwill recognized is expected to be deductible for tax purposes. The Company has not completed its final assessment of the fair values of purchased receivables, intangible assets and liabilities, property, equipment and improvements, tax balances, contingent liabilities, long-term leases or acquired contracts. The final purchase price allocation will result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill. See Note 18, Commitments and Contingencies, relating to CH2M contingencies.
During the three months ended March 30, 2018, the Company updated certain provisional amounts reflected in the preliminary purchase price allocation, as summarized in the estimated fair values of CH2M assets acquired and liabilities assumed above. Specifically, the carrying amount of the intangible assets discussed above were decreased by $148.5 million and the carrying amount of property, equipment and improvements decreased by $50.5 million. These measurement period adjustments are recognized in the reporting period in which the adjustments are determined and calculated as if the accounting had been completed at the acquisition date. As a result, the Company recognized measurement period adjustments decreasing expense by $1.5 million during the three months ended March 30, 2018.
Customer relationships, contracts and backlog represent the fair value of existing contracts, the underlying customer relationships and backlog of consolidated subsidiaries and have lives ranging from 10 to 12 years (weighted average life of approximately 11 years). Other intangible assets and liabilities primarily consist of the fair value of office leases and have a weighted average life of approximately 10 years.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Estimated fair value measurements relating to the CH2M acquisition are made using Level 3 inputs including discounted cash flow techniques. Fair value is estimated using inputs primarily from the income approach, which include the use of both the multiple period excess earnings method and the relief from royalties method. The significant assumptions used in estimating fair value include (i) the estimated life the asset will contribute to cash flows, such as attrition rate of customers or remaining contractual terms, (ii) profitability and (iii) the estimated discount rate that reflect the level of risk associated with receiving future cash flows. The estimated fair value of land has been determined using the market approach, which arrives at an indication of value by comparing the site being valued to sites that have been recently acquired in arm’s-length transactions. Personal property assets with an active and identifiable secondary market are valued using the market approach. Buildings and land improvements are valued using the cost approach using a direct cost model built on estimates of replacement cost. Other personal property assets such as furniture, fixtures and equipment are valued using the cost approach which is based on replacement or reproduction costs of the asset less depreciation.
Other deferred liabilities were comprised primarily of pensions and other long-term employee related liabilities totaling approximately $291.0 million.
From the acquisition date of December 15, 2017 through the end of the second fiscal quarter of 2017, the Company restructured certain employee welfare trust plans benefitting certain of its employees within its India operations by moving these plans under the legal ownership2018, CH2M contributed approximately $1.3 billion in revenue and operation of the Company’s legal entity structure$6.5 million in pretax loss included in the region. Historically, the Company structured these plans as separate, stand-alone entities outside of the Company’s consolidated legal entity framework. As a result of these changes, the Company has recorded a one-time, non-cash benefit of $9.9 million reported in Selling, general and administrative expense in itsaccompanying consolidated statement of incomeearnings. Included in these results were approximately $78.0 million in pre-tax restructuring and transaction costs.
Transaction costs associated with the CH2M acquisition in the accompanying consolidated statements of earnings for the three and six month periodmonths ended March 30, 2018 are comprised of the following (in millions):
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| | | | | | | |
| | Three Months Ended March 30, 2018 | | Six Months Ended March 30, 2018 |
| | | | |
| Personnel costs | $ | 4.7 |
| | $ | 45.9 |
|
| Professional services and other expenses | 0.2 |
| | 26.9 |
|
| Total | $ | 4.9 |
| | $ | 72.8 |
|
Personnel costs above include change of control payments and related severance costs. The following presents summarized unaudited pro forma operating results assuming that the Company had acquired CH2M at October 1, 2016. These pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the related events occurred (in millions):
|
| | | | | | | | |
| | | Six Months Ended |
| | | March 30,
2018 | | March 31,
2017 |
| | | | | |
| Revenues | | $ | 7,713.1 |
| | $ | 7,043.4 |
|
| Net earnings | | 77.7 |
| | 10.6 |
|
| Net earnings (loss) attributable to Jacobs | | 71.8 |
| | (2.8 | ) |
| Net earnings (loss) attributable to Jacobs per share: | |
| |
|
| Basic earnings (loss) per share | | $ | 0.50 |
| | $ | (0.02 | ) |
| Diluted earnings (loss) per share | | $ | 0.50 |
| | $ | (0.02 | ) |
Included in the unaudited pro forma operating results are charges relating to transaction expenses, severance expense and other items that are removed from the six months ended March 30, 2018 and are reflected in the six months ended March 31, 2017 with corresponding assetsdue to the assumed timing of the transaction. Also, income tax expense (benefit) for the six month pro forma periods ended March 30, 2018 and March 31, 2017 was $137.7 million and ($61.9) million, respectively.
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| 6. | Goodwill and Intangibles |
As a result of the segment realignment this quarter (See Note 7, Segment Information), the historical carrying value of goodwill has been allocated to the three remaining reportable segments to present balances on a comparable basis. The carrying value
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
of goodwill appearing in the
plans associated with restricted investments of $7.7 million and employee loans receivable of $2.2 million and both recorded in Other non-current assets in our consolidated balance sheetaccompanying Consolidated Balance Sheets at March
31, 2017.30, 2018 and September 29, 2017 was as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Aerospace, Technology, Environmental and Nuclear | | Buildings, Infrastructure and Advanced
Facilities | | Energy,
Chemicals and Resources | | Total |
| Balance September 29, 2017 | $ | 1,038.2 |
| | $ | 1,048.8 |
| | $ | 922.8 |
| | $ | 3,009.8 |
|
| Acquired | 945.2 |
| | 1,417.9 |
| | 335.7 |
| | 2,698.8 |
|
| Post-Acquisition Adjustments | 106.7 |
| | 40.2 |
| | 32.1 |
| | 179.0 |
|
| Foreign Exchange Impact | 10.0 |
| | 10.2 |
| | 9.0 |
| | 29.2 |
|
| Balance March 30, 2018 | $ | 2,100.1 |
| | $ | 2,517.1 |
| | $ | 1,299.6 |
| | $ | 5,916.8 |
|
During the preparation of
theour Quarterly Report on Form 10-Q for the first fiscal quarter of 2017, the Company determined that its prior financial statements contained immaterial misstatements related to incorrect translation of the Company’s non-U.S. goodwill balances from local currency to the U.S. Dollar reporting currency. It was determined that the Company had incorrectly used historical translation rates for the U.S. Dollar in place at the time of the Company’s recording of its foreign goodwill balances rather than using current translation rates at each balance sheet date in accordance with U.S. GAAP. The error dated back to the time of our initial reporting of non-US goodwill balances in the late 1990s and affected our historical quarterly and annual reporting periods through the first fiscal quarter of 2017.
Goodwill and accumulated other comprehensive income in the Company’s September 30, 2016 consolidated balance sheet (which have not been adjusted) were each overstated by $209.9 million and was corrected in the first fiscal quarter of 2017 foreign currency translation adjustment. Consequently, the correction was a direct component of the overall translation adjustment amount of $287.5 million that was reported for the three months ended December 31,30, 2016. These adjustments had no impact on the Company’s Consolidated Statements of Earnings or Cash Flows. Also,
The following table provides certain information related to the Company’s acquired intangibles in our first fiscal quarterthe accompanying Consolidated Balance Sheets at March 30, 2018 and September 29, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Customer Relationships, Contracts, and Backlog | | Developed Technology | | Trade Names | | Patents | | Lease
Intangible
Assets | | Other | | Total |
| Balances September 29, 2017 | | $ | 301,468 |
| | $ | 14,462 |
| | $ | 6,699 |
| | $ | 10,180 |
| | $ | — |
| | $ | 111 |
| | $ | 332,920 |
|
| Acquisitions | | 557,000 |
| | 237 |
| | 40,000 |
| | — |
| | 5,951 |
| | — |
| | 603,188 |
|
| Post-Acquisition Adjustments | | (106,800 | ) | | (1,921 | ) | | (41,700 | ) | | — |
| | (1,536 | ) | | — |
| | (151,957 | ) |
| Amortization | | (33,310 | ) | | (767 | ) | | (1,530 | ) | | (208 | ) | | (208 | ) | | (25 | ) | | (36,048 | ) |
| Foreign currency translation | | (1,805 | ) | | — |
| | (7 | ) | | (344 | ) | | — |
| | — |
| | (2,156 | ) |
| Balances March 30, 2018 | | $ | 716,553 |
| | $ | 12,011 |
| | $ | 3,462 |
| | $ | 9,628 |
| | $ | 4,207 |
| | $ | 86 |
| | $ | 745,947 |
|
In addition, we acquired $9.6 million in lease intangible liabilities in connection with the CH2M acquisition, of 2016 other comprehensive income was overstated by $18.4which $9.3 million as a resultremain unamortized at March 30, 2018.
The following table presents estimated amortization expense of
these misstatements.Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to employ estimates and make assumptions that affect the reported amounts of certainintangible assets and liabilities, the revenues and expenses reported for the periods covered byremainder of fiscal 2018 and for the
Page 7
succeeding years. The amounts below include preliminary amortization estimates for the CH2M opening balance sheet fair values that are still preliminary and are subject to change.
|
| | | | |
| Fiscal Year | | (in millions) |
| 2018 (six months remaining) | | $ | 44.6 |
|
| 2019 | | 86.7 |
|
| 2020 | | 84.6 |
|
| 2021 | | 81.0 |
|
| 2022 | | 79.8 |
|
| Thereafter | | 359.9 |
|
| Total | | $ | 736.6 |
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
accompanying consolidated financial statements, and certain amounts disclosed in these Notes to the Consolidated Financial Statements. Although such estimates and assumptions are based on management’s most recent assessment of the underlying facts and circumstances utilizing the most current information available and past experience, actual results could differ significantly from those estimates and assumptions. Our estimates, judgments, and assumptions are evaluated periodically and adjusted accordingly. Please refer to Note 2—Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2016 Form 10-K for a discussion of the significant estimates and assumptions affecting our consolidated financial statements.Fair Value and Fair Value Measurements
Certain amounts included in the accompanying consolidated financial statements are presented at “fair value.” Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants as of the date fair value is determined (the “measurement date”). When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider only those assumptions we believe a typical market participant would consider when pricing an asset or liability. In measuring fair value, we use the following inputs in the order of priority indicated:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets included in Level 1, such as (i) quoted prices for similar assets or liabilities; (ii) quoted prices in markets that have insufficient volume or infrequent transactions (e.g., less active markets); and (iii) model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement.
Please refer to Note 2—Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2016 Form 10-K for a more complete discussion of the various items within the consolidated financial statements measured at fair value and the methods used to determine fair value.
New Accounting Standards
From time to time, the Financial Accounting Standards Board (“FASB”) issues accounting standards updates (each being an “ASU”) to its Accounting Standards Codification (“ASC”), which constitutes the primary source of U.S. GAAP. The Company regularly monitors ASUs as they are issued and considers their applicability to its business. All ASUs applicable to the Company are adopted by the due date and in the manner prescribed by the FASB.
In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The new guidance provided by ASU 2014-09 is intended to remove inconsistencies and perceived weaknesses in the existing revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability, provide more useful information and simplify the preparation of financial statements. ASU 2014-09 was initially effective for annual and interim reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB approved a one-year deferral of the effective date of this standard. The revised effective date for the standard is for annual reporting periods beginning after December 15, 2017 and interim periods therein. The FASB also approved changes allowing for early adoption of the standard as of the original effective date. The Company has completed its initial assessment of the new standard and is in the process of assessing its contracts with customers. The Company currently intends to adopt the new standard using the Modified Retrospective application. This standard could have a significant impact on the Company’s Consolidated Financial Statements and an administrative impact on its operations. The Company will further assess the impact through its implementation program.
In February 2016, the FASB issued ASU 2016-02—Leases. ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The guidance must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is evaluating the impact of the new guidance on its consolidated financial statements. This standard could have a significant administrative impact on its operations, and the Company will further assess the impact through its implementation program.
Page 8
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
In March 2016, the FASB issued ASU 2016-09—Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period for which financial statements have not been issued or made available for issuance. If an entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is evaluating the impact of the new guidance on its consolidated financial statements and does not plan to early adopt this pronouncement.
Segment Information
During the second fiscal quarter of 2016,fiscal 2018, we reorganized our operationsoperating and reporting structure around four globalthree lines of business (“LOB”LOBs”), which also serve as the Company’s operating segments. This reorganization occurred in conjunction with the integration of CH2M into the Company's legacy businesses, and is intended to better serve our global clients, leverage our workforce, help streamline operations, and provide enhanced growth opportunities. The three global LOBs are as follows: Aerospace, Technology, Environmental and Nuclear ("ATEN"); Buildings, Infrastructure and Advanced Facilities ("BIAF"); and Energy, Chemicals and Resources ("ECR"). Previously, the Company operated its business around four operating segments: Petroleum & Chemicals, Buildings & Infrastructure, Aerospace & Technology, and Industrial. We determined that this new organization would better supportBeginning in the needssecond quarter of managing each unique setfiscal 2018, management no longer views or manages our Industrial line of customers that fallbusiness as a separate, distinct operating segment. Therefore, the elements of our former Industrial business are now presented within each segment. As a result of the new organization, we subsequently realigned ourthree current operating segments as appropriate. The Company’s LOB leadership and internal reporting structures report to enable ourthe Chief Executive Officer, who is also ourthe Chief Operating Decision Maker (“CODM”), and enable the CODM to evaluate the performance of each of these segments and make appropriate resource allocations among each of the segments. For purposes of ourthe Company’s goodwill impairment testing, we haveit has been determined that ourthe Company’s operating segments are also ourits reporting units based on management’s conclusion that the components comprisingeach of ourits operating segments share similar economic characteristics and meet the aggregation criteria for reporting units in accordance with ASC 350,Intangibles-Goodwill and Other.
Under the
currentnew organization, each LOB has a president that reports directly to the
Company's Chairman and CEO or CODM.
In addition, theThe sales function
which had been managed centrally for many years, is
now managed on an LOB basis, and accordingly, the associated cost is
now embedded in the new segments and reported to the respective LOB presidents. In addition, a portion of the costs of other support functions (e.g., finance, legal, human resources, and information technology)
areis allocated to each LOB using methodologies which, we believe, effectively attribute the cost of these support functions to the
revenue-generatingrevenue generating activities of the Company on a rational basis. The cost of the Company’s cash incentive plan, the Management Incentive Plan (“MIP”) and the expense associated with the Jacobs Engineering Group Inc. 1999 Stock Incentive Plan (“1999 SIP”) have likewise been charged to the LOBs except for those amounts determined to relate to the business as a whole (which amounts remain in
corporate’s results of operations)other corporate expenses).
Financial information for each LOB is reviewed by the CODM to assess performance and make decisions regarding the allocation of resources. The Company generally does not track assets by LOB, nor does it provide such information to the CODM.
The CODM evaluates the operating performance of our LOBs using
segment operating profit, which is defined as margin less “corporate charges” (e.g., the allocated amounts described above). The Company incurs certain
selling, generalSelling, General and
administrativeAdministrative costs (“SG&A”)
costs whichthat relate to its business as a whole which are not allocated to the LOBs.
On December 15, 2017, the Company completed the acquisition of CH2M. For purposes of the Company’s second quarter fiscal 2018 segment reporting, the operating financial information of CH2M has been categorized within the Company’s new LOB business structure, with its sales and operating profit results for the time period during which CH2M has been under the ownership of the Company being allocated to the Company’s ATEN, BIAF and ECR lines of business under a transitional business organization structure. The Company has not completed its final assessment of the CH2M purchase price allocation, including the fair value estimates of assets acquired and liabilities assumed.
The following tables present total revenues and
segment operating profit for each reportable
segment.segment (in thousands) and includes a reconciliation of segment operating profit to total U.S. GAAP operating profit by including certain corporate-level expenses and expenses relating to the Restructuring and other charges and CH2M transaction and integration costs (in thousands). Prior period information has been
restatedrecast to reflect the current period
presentation (in thousands).presentation. | For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Revenues from External Customers: | | | | | | | | | | | | | | | |
Aerospace & Technology | $ | 577,040 | | | $ | 669,464 | | | $ | 1,154,476 | | | $ | 1,339,655 | |
Buildings & Infrastructure | | 585,242 | | | | 579,128 | | | | 1,165,859 | | | | 1,142,458 | |
Industrial | | 582,458 | | | | 666,556 | | | | 1,334,196 | | | | 1,338,656 | |
Petroleum & Chemicals | | 557,827 | | | | 866,615 | | | | 1,199,640 | | | | 1,808,928 | |
Total | $ | 2,302,567 | | | $ | 2,781,763 | | | $ | 4,854,171 | | | $ | 5,629,697 | |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Revenues from External Customers: | | | | | | | |
| Aerospace, Technology, Environmental and Nuclear | $ | 1,105,673 |
| | $ | 602,043 |
| | $ | 1,851,594 |
| | $ | 1,205,228 |
|
| Buildings, Infrastructure and Advanced Facilities | 1,758,412 |
| | 897,829 |
| | 2,790,177 |
| | 1,836,723 |
|
| Energy, Chemicals and Resources | 1,070,943 |
| | 802,695 |
| | 2,043,567 |
| | 1,812,220 |
|
| Total | $ | 3,935,028 |
| | $ | 2,302,567 |
| | $ | 6,685,338 |
| | $ | 4,854,171 |
|
Page 9
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Operating Profit: | | | | | | | | | | | | | | | |
Aerospace & Technology | $ | 45,057 | | | $ | 55,121 | | | $ | 96,144 | | | $ | 103,120 | |
Buildings & Infrastructure | | 43,987 | | | | 42,463 | | | | 82,784 | | | | 82,915 | |
Industrial | | 24,073 | | | | 12,417 | | | | 49,202 | | | | 39,772 | |
Petroleum & Chemicals | | 35,619 | | | | 30,945 | | | | 59,271 | | | | 62,548 | |
Total Segment Operating Profit | | 148,736 | | | | 140,946 | | | | 287,401 | | | | 288,355 | |
Other Corporate Expenses | | (8,338 | ) | | | (18,797 | ) | | | (26,634 | ) | | | (38,373 | ) |
Restructuring and Other Charges | | (72,225 | ) | | | (35,368 | ) | | | (103,966 | ) | | | (103,751 | ) |
Total Operating Profit | | 68,173 | | | | 86,781 | | | | 156,801 | | | | 146,231 | |
Total Other (Expense) income | | (6,449 | ) | | | 3,675 | | | | (9,197 | ) | | | 2,012 | |
Total Other (Expense) income - Restructuring | | (1,233 | ) | | | - | | | | (1,233 | ) | | | - | |
Earnings Before Taxes | $ | 60,491 | | | $ | 90,456 | | | $ | 146,371 | | | $ | 148,243 | |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Segment Operating Profit: | | | | | | | |
| Aerospace, Technology, Environmental and Nuclear (1) | $ | 61,338 |
| | $ | 44,341 |
| | $ | 127,669 |
| | $ | 94,397 |
|
| Buildings, Infrastructure and Advanced Facilities (2) | 138,017 |
| | 63,342 |
| | 201,986 |
| | 118,690 |
|
| Energy, Chemicals and Resources | 56,328 |
| | 41,053 |
| | 102,790 |
| | 74,314 |
|
| Total Segment Operating Profit | 255,683 |
| | 148,736 |
| | 432,445 |
| | 287,401 |
|
| Other Corporate Expenses | (35,660 | ) | | (8,338 | ) | | (77,789 | ) | | (26,634 | ) |
| Restructuring and Other Charges | (68,885 | ) | | (72,225 | ) | | (88,234 | ) | | (103,966 | ) |
| CH2M Transaction Costs | (4,852 | ) | | — |
| | (72,493 | ) | | — |
|
| Total U.S. GAAP Operating Profit | 146,286 |
| | 68,173 |
| | 193,929 |
| | 156,801 |
|
| Total Other (Expense) Income, net (3) | (24,119 | ) | | (7,682 | ) | | (29,846 | ) | | (10,430 | ) |
| Earnings Before Taxes | $ | 122,167 |
| | $ | 60,491 |
| | $ | 164,083 |
| | $ | 146,371 |
|
| |
| (1) | Includes $17.3 million in charges during the three and six month periods ended March 30, 2018 associated with a legal matter. |
| |
| (2) | Excludes $22.6 million in restructuring and other charges for the three and six months ended March 31, 2017. See Note 10, Restructuring and Other Charges. |
| |
| (3) | Includes amortization of deferred financing fees related to the CH2M acquisition of $466.0 thousand and $722.0 thousand for the three and six months ended March 30, 2018, respectively. |
Included in
“Other Corporate Expenses”“other corporate expenses” in the above table are costs and expenses which relate to general corporate activities as well as corporate-managed benefit and insurance programs. Such costs and expenses include: (i) those elements of SG&A expenses relating to the business as a whole; (ii) those elements of
our incentive compensation plansthe Management Incentive Plan and the 1999 SIP relating to corporate personnel whose other compensation costs are not allocated to the LOBs; (iii) the amortization of intangible assets acquired as part of purchased business combinations; (iv) the quarterly variances between the Company’s actual costs of certain of its self-insured integrated risk and employee benefit programs and amounts charged to the LOBs; and (v) certain adjustments relating to costs associated with the Company’s international defined benefit pension plans. In addition,
“Other Corporate Expenses” may also include from time to time certain“other corporate expenses” includes adjustments to contract margins (both positive and negative) associated with projects where it has been determined, in the opinion of management, that such adjustments are not indicative of the performance of the related LOB and therefore should not be attributed to the LOB.
We provide a broad range of technical, professional, and construction services including engineering, design, and architectural services; construction and construction management services; operations and maintenance services; and process, scientific, and systems consulting services. We provide our services through offices and subsidiaries located primarily in North America, South America, Europe, the Middle East, India, Australia, Africa, and Asia. We provide our services under cost-reimbursable and fixed-price contracts.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following tables present total services revenues for each reportable segment for the three
months and six months ended March
30, 2018 and March 31, 2017
and April 1, 2016 (in
millions)thousands).
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31, 2017 | | | March 31, 2017 | |
| Aerospace & Technology | | | | | Buildings & Infrastructure | | | | | Industrial | | | | | Petroleum & Chemicals | | | Total | | | Aerospace & Technology | | | Buildings & Infrastructure | | | Industrial | | | Petroleum & Chemicals | | | Total | |
Technical Professional Services Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Project Services | $ | 265.1 | | | | | $ | 532.0 | | | | | $ | 166.9 | | | | | $ | 339.8 | | | $ | 1,303.8 | | | $ | 482.5 | | | $ | 1,046.0 | | | $ | 383.3 | | | $ | 712.6 | | | $ | 2,624.4 | |
Process, Scientific, and Systems Consulting | | 184.9 | | | | | | - | | | | | | - | | | | | | 9.5 | | | | 194.4 | | | | 384.8 | | | | - | | | | - | | | | 16.4 | | | | 401.2 | |
Total Technical Professional Services Revenues | | 450.0 | | | | | | 532.0 | | | | | | 166.9 | | | | | | 349.3 | | | | 1,498.2 | | | | 867.3 | | | | 1,046.0 | | | | 383.3 | | | | 729.0 | | | | 3,025.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Field Services Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | 10.3 | | | | | | 49.6 | | | | | | 326.2 | | | | | | 208.5 | | | | 594.6 | | | | 54.8 | | | | 112.5 | | | | 766.7 | | | | 470.5 | | | | 1,404.5 | |
Operations and Maintenance ("O&M") | | 116.7 | | | | | | 3.6 | | | | | | 89.4 | | | | | | 0.0 | | | | 209.7 | | | | 232.4 | | | | 7.4 | | | | 184.2 | | | | 0.1 | | | | 424.1 | |
Total Field Services Revenues | | 127.0 | | | | | | 53.2 | | | | | | 415.6 | | | | | | 208.5 | | | | 804.3 | | | | 287.2 | | | | 119.9 | | | | 950.9 | | | | 470.6 | | | | 1,828.6 | |
Total Revenues | $ | 577.0 | | | | | $ | 585.2 | | | | | $ | 582.5 | | | | | $ | 557.8 | | | $ | 2,302.6 | | | $ | 1,154.5 | | | $ | 1,165.9 | | | $ | 1,334.2 | | | $ | 1,199.6 | | | $ | 4,854.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | March 30, 2018 | | March 30, 2018 |
| | Aerospace, Technology, Environmental and Nuclear | | Buildings, Infrastructure and Advanced Facilities | | Energy, Chemicals
and
Resources | | Total | | Aerospace, Technology,
Environmental
and Nuclear | | Buildings, Infrastructure and Advanced Facilities | | Energy, Chemicals
and
Resources | | Total |
| Technical Professional Services Revenues | | | | | | | | | | | | | | | |
| Project Services | $ | 313,937 |
| | $ | 1,356,998 |
| | $ | 257,615 |
| | $ | 1,928,550 |
| | $ | 573,332 |
| | $ | 2,151,562 |
| | $ | 562,676 |
| | $ | 3,287,570 |
|
| Process, Scientific, and Systems Consulting | 507,229 |
| | 2,975 |
| | 6,069 |
| | 516,273 |
| | 751,358 |
| | 4,471 |
| | 11,517 |
| | 767,346 |
|
| Total Technical Professional Services Revenues | 821,166 |
| | 1,359,973 |
| | 263,684 |
| | 2,444,823 |
| | 1,324,690 |
| | 2,156,033 |
| | 574,193 |
| | 4,054,916 |
|
| Field Services Revenues | | | | | | | | | | | | | | | |
| Construction | 79,473 |
| | 397,487 |
| | 507,937 |
| | 984,897 |
| | 223,113 |
| | 632,609 |
| | 1,002,744 |
| | 1,858,466 |
|
| Operations and Maintenance ("O&M") | 205,034 |
| | 952 |
| | 299,322 |
| | 505,308 |
| | 303,791 |
| | 1,535 |
| | 466,630 |
| | 771,956 |
|
| Total Field Services Revenues | 284,507 |
| | 398,439 |
| | 807,259 |
| | 1,490,205 |
| | 526,904 |
| | 634,144 |
| | 1,469,374 |
| | 2,630,422 |
|
| $ | 1,105,673 |
| | $ | 1,758,412 |
| | $ | 1,070,943 |
| | $ | 3,935,028 |
| | $ | 1,851,594 |
| | $ | 2,790,177 |
| | $ | 2,043,567 |
| | $ | 6,685,338 |
|
Page 10
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | March 31, 2017 | | March 31, 2017 |
| | Aerospace, Technology, Environmental and Nuclear | | Buildings, Infrastructure and Advanced Facilities | | Energy, Chemicals
and
Resources | | Total | | Aerospace, Technology,
Environmental
and Nuclear | | Buildings, Infrastructure and Advanced Facilities | | Energy, Chemicals
and
Resources | | Total |
| Technical Professional Services Revenues | | | | | | | | | | | | | | | |
| Project Services | $ | 215,009 |
| | $ | 636,698 |
| | $ | 309,620 |
| | $ | 1,161,327 |
| | $ | 386,861 |
| | $ | 1,287,949 |
| | $ | 544,708 |
| | $ | 2,219,518 |
|
| Process, Scientific, and Systems Consulting | 184,944 |
| | 4,618 |
| | 4,887 |
| | 194,449 |
| | 384,773 |
| | 6,331 |
| | 10,091 |
| | 401,195 |
|
| Total Technical Professional Services Revenues | 399,953 |
| | 641,316 |
| | 314,507 |
| | 1,355,776 |
| | 771,634 |
| | 1,294,280 |
| | 554,799 |
| | 2,620,713 |
|
| Field Services Revenues | | | | | | | | | | | | | | | |
| Construction | 65,648 |
| | 254,216 |
| | 402,605 |
| | 722,469 |
| | 172,210 |
| | 535,397 |
| | 961,809 |
| | 1,669,416 |
|
| Operations and Maintenance ("O&M") | 136,442 |
| | 2,297 |
| | 85,583 |
| | 224,322 |
| | 261,384 |
| | 7,046 |
| | 295,612 |
| | 564,042 |
|
| Total Field Services Revenues | 202,090 |
| | 256,513 |
| | 488,188 |
| | 946,791 |
| | 433,594 |
| | 542,443 |
| | 1,257,421 |
| | 2,233,458 |
|
| $ | 602,043 |
| | $ | 897,829 |
| | $ | 802,695 |
| | $ | 2,302,567 |
| | $ | 1,205,228 |
| | $ | 1,836,723 |
| | $ | 1,812,220 |
| | $ | 4,854,171 |
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
| For the Three Months Ended | | | For the Six Months Ended | |
| April 1, 2016 | | | April 1, 2016 | |
| Aerospace & Technology | | | | | Buildings & Infrastructure | | | | | Industrial | | | | | Petroleum & Chemicals | | | | | Total | | | Aerospace & Technology | | | Buildings & Infrastructure | | | Industrial | | | Petroleum & Chemicals | | | Total | |
Technical Professional Services Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Project Services | $ | 264.2 | | | | | $ | 542.6 | | | | | $ | 218.1 | | | | | $ | 509.1 | | | | | $ | 1,534.0 | | | $ | 466.8 | | | $ | 1,066.8 | | | $ | 424.3 | | | $ | 972.4 | | | $ | 2,930.3 | |
Process, Scientific, and Systems Consulting | | 140.0 | | | | | | - | | | | | | - | | | | | | 16.5 | | | | | | 156.5 | | | | 382.9 | | | | - | | | | - | | | | 32.5 | | | | 415.4 | |
Total Technical Professional Services Revenues | | 404.2 | | | | | | 542.6 | | | | | | 218.1 | | | | | | 525.7 | | | | | | 1,690.5 | | | | 849.7 | | | | 1,066.8 | | | | 424.3 | | | | 1,004.9 | | | | 3,345.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Field Services Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | 79.4 | | | | | | 24.4 | | | | | | 363.0 | | | | | | 340.4 | | | | | | 807.2 | | | | 105.8 | | | | 50.9 | | | | 736.0 | | | | 802.9 | | | | 1,695.6 | |
Operations and Maintenance ("O&M") | | 185.9 | | | | | | 12.2 | | | | | | 85.4 | | | | | | 0.6 | | | | | | 284.1 | | | | 384.1 | | | | 24.8 | | | | 178.4 | | | | 1.2 | | | | 588.4 | |
Total Field Services Revenues | | 265.3 | | | | | | 36.6 | | | | | | 448.4 | | | | | | 341.0 | | | | | | 1,091.3 | | | | 489.9 | | | | 75.7 | | | | 914.4 | | | | 804.0 | | | | 2,284.0 | |
Total Revenues | $ | 669.5 | | | | | $ | 579.2 | | | | | $ | 666.6 | | | | | $ | 866.6 | | | | | $ | 2,781.8 | | | $ | 1,339.7 | | | $ | 1,142.5 | | | $ | 1,338.7 | | | $ | 1,808.9 | | | $ | 5,629.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Business Combinations
During the second fiscal quarter of 2017, the Company acquired Aquenta Consulting (NZ) Limited. During the first fiscal quarter of 2016, the Company acquired J.L. Patterson & Associates. These acquisitions were not material to the Company’s consolidated results for the first six months of fiscal 2017 or 2016.
Receivables
The following table presents the components of receivables appearing in the accompanying Consolidated Balance Sheets at March
31, 201730, 2018 and September
30, 2016,29, 2017, as well as certain other related information (in thousands):
| | March 31, 2017 | | | September 30, 2016 | |
Components of receivables: | | | | | | | | |
Amounts billed | | $ | 927,500 | | | $ | 1,110,042 | |
Unbilled receivables and other | | | 1,090,918 | | | | 937,552 | |
Retentions receivable | | | 39,587 | | | | 68,069 | |
Total receivables, net | | $ | 2,058,005 | | | $ | 2,115,663 | |
Other information about receivables: | | | | | | | | |
Amounts due from the United States federal government, included above, net of advanced billings | | $ | 212,969 | | | $ | 235,203 | |
Claims receivable | | $ | 26,169 | | | $ | 26,061 | |
“
|
| | | | | | | |
| | March 30, 2018 | | September 29, 2017 |
| Components of receivables: | | | |
| Amounts billed, net | $ | 1,587,362 |
| | $ | 949,060 |
|
| Unbilled receivables and other | 1,808,890 |
| | 1,118,144 |
|
| Retentions receivable | 24,978 |
| | 35,339 |
|
| Total receivables, net | $ | 3,421,230 |
| | $ | 2,102,543 |
|
| Other information about receivables: | | | |
Amounts due from the United States federal
government, included above, net of advanced
billings | $ | 392,600 |
| | $ | 226,236 |
|
| Claims receivable | $ | 4,600 |
| | $ | 4,600 |
|
Amounts
billed”billed, net consist of amounts invoiced to clients in accordance with the terms of our client contracts and are shown net of an allowance for doubtful accounts. We anticipate that substantially all of such billed amounts will be collected over the next twelve months.
“
Unbilled receivables and
other”other and
“Retentions receivable”Retentions receivable generally represent reimbursable costs,
in some cases profit and amounts earned and reimbursable under contracts in progress,
or in some cases completed, as of the respective balance sheet dates. Such amounts become billable according to the contract terms, which usually provide that such amounts become billable upon the passage of time, achievement of certain milestones, or completion of the project. We anticipate that substantially all of such unbilled amounts will be billed and collected over the next twelve months.
Page 11
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
“
Claims
receivable”receivable are included in receivables in the accompanying Consolidated Balance Sheets and represent certain costs incurred on contracts to the extent it is probable that such claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated.
Property, Equipment and Improvements, Net
| |
9. | Property, Equipment and Improvements, Net |
Property, Equipment and Improvements, Net in the accompanying Consolidated Balance Sheets at March
31, 201730, 2018 and September
30, 201629, 2017 consist of the following (in thousands):
| | March 31,
2017 | | | September 30,
2016 | |
Land | | $ | 16,643 | | | $ | 16,680 | |
Buildings | | | 90,942 | | | | 91,194 | |
Equipment | | | 557,572 | | | | 531,539 | |
Leasehold improvements | | | 214,113 | | | | 221,437 | |
Construction in progress | | | 29,426 | | | | 36,764 | |
| | | 908,696 | | | | 897,614 | |
Accumulated depreciation and amortization | | | (592,619 | ) | | | (577,941 | ) |
| | $ | 316,077 | | | $ | 319,673 | |
Restructuring and Other Charges
|
| | | | | | | |
| | March 30, 2018 | | September 29, 2017 |
| Land | $ | 20,341 |
| | $ | 17,197 |
|
| Buildings | 131,314 |
| | 93,313 |
|
| Equipment | 749,109 |
| | 627,609 |
|
| Leasehold improvements | 268,947 |
| | 220,295 |
|
| Construction in progress | 19,428 |
| | 21,300 |
|
| | 1,189,139 |
| | 979,714 |
|
| Accumulated depreciation and amortization | (684,727 | ) | | (629,803 | ) |
| | $ | 504,412 |
| | $ | 349,911 |
|
| |
| 10. | Restructuring and Other Charges |
During the
second fiscal quarter of 2015, the Company began implementing a series of initiatives intended to improve operational efficiency, reduce costs, and better position itself to drive growth of the business in the future. We refer to these initiatives, in the aggregate, as the "2015 Restructuring". These activities evolved and developed over time as management identified and evaluated opportunities for changes in the Company’s operations (and related areas of potential cost savings), as economic conditions changed and as the realignment of the Company’s operations into its four global lines of business was implemented. Actions related to the 2015 Restructuring include involuntary terminations, the abandonment of certain leased offices, combining operational organizations, and the co-location of employees into other existing offices. We are not exiting any service types or client end-markets in connection with the 2015 Restructuring. The 2015 Restructuring was substantially completed as of the end of the secondfourth fiscal quarter of 2017,
with future expenses not expected to exceed $15 million. The majority of the Company implemented certain restructuring activities (primarily severance and lease abandonment costs associated with co-locating Jacobs and CH2M offices) and integration activities (primarily professional fees for outside services and personnel related costs) associated with the 2015 Restructuring are included in SG&A expense inCompany’s acquisition of CH2M. Following the Consolidated Statements of Earnings. The following table summarizes the impactclosing of the 2015 Restructuring onCH2M acquisition, these activities have continued into the Company's reportable segments forfirst half of 2018 and include restructuring activities amounting to approximately $55.2 million and $60.7 million in pre-tax charges during the three and six month periods ended March 31, 2017 and April 1, 2016 (in thousands):
30, 2018, | Three Months Ended | | | Six Months Ended | |
| March 31, 2017 | | | April 1, 2016 | | | March 31, 2017 | | | April 1, 2016 | |
Aerospace & Technology | $ | 834 | | | $ | 239 | | | $ | 1,004 | | | $ | 2,435 | |
Buildings & Infrastructure | | 8,315 | | | | 601 | | | | 16,223 | | | | 15,567 | |
Industrial | | 6,964 | | | | 2,316 | | | | 9,488 | | | | 19,893 | |
Petroleum & Chemicals | | 15,791 | | | | 29,039 | | | | 29,375 | | | | 53,015 | |
Corporate | | 20,362 | | | | 3,173 | | | | 27,917 | | | | 12,841 | |
Total | $ | 52,266 | | | $ | 35,368 | | | $ | 84,007 | | | $ | 103,751 | |
Page 12
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
respectively. The activity in the Company’s accrualintegration activities for the 2015 Restructuringsame periods amounted to approximately $14.2 million and $28.0 million in pre-tax charges for the three and six month periodsmonths ended March 31, 2017 is as follows (in thousands):Balance at September 30, 2016 | $ | 152,174 | |
Charges | | 31,741 | |
Payments | | (44,166 | ) |
Balance at December 30, 2016 | $ | 139,749 | |
Charges | | 52,266 | |
Payments | | (37,008 | ) |
Balance at March 31, 2017 | $ | 155,007 | |
The following table summarizes30, 2018, respectively. These activities are expected to continue through fiscal 2019. These activities are not expected to involve the 2015 Restructuring by major typeexit of restructuring costs for the three and six month periods ended March 31, 2017 and April 1, 2016 (in thousands):
any service types or client end-markets. | Three Months Ended | | | Six Months Ended | |
| March 31, 2017 | | | April 1, 2016 | | | March 31, 2017 | | | April 1, 2016 | |
Lease Abandonments | $ | 27,992 | | | $ | 19,872 | | | $ | 44,601 | | | $ | 64,271 | |
Involuntary Terminations | | 18,554 | | | | 15,410 | | | | 29,886 | | | | 38,289 | |
Outside Services | | 2,261 | | | | 86 | | | | 3,552 | | | | 1,191 | |
Other restructuring related | | 3,459 | | | | - | | | | 5,968 | | | | - | |
Total | $ | 52,266 | | | $ | 35,368 | | | $ | 84,007 | | | $ | 103,751 | |
Cumulative amounts incurred to date for the 2015 Restructuring by each major type of restructuring costs as of March 31, 2017 is as follows (in thousands):
| Cumulative Amount Incurred to Date | |
Lease Abandonments | $ | 227,813 | |
Involuntary Terminations | | 170,798 | |
Outside Services | | 23,684 | |
Other restructuring related | | 6,811 | |
Total | $ | 429,106 | |
Also, duringDuring the second fiscal quarter of 2017, the Company entered into strategic business restructuring activities associated with realignment of its Europe, United Kingdom ("U.K.") and Middle East regional operations.operations in our BIAF segment. Pre-tax net charges of $22.6 million were recorded during the quarter associated mainly with net realizable value write-offs on contract accounts receivable of $16.5 million, with additional charges recorded for statutory redundancy and severance costs of $1.4 million and other liabilities of $4.7 million which are both expected to be paid or settled within the next 12 months. Further, management has determined thatmonths. Additional charges of $1.2 million were recorded under this business realignment during third quarter fiscal 2017 associated mainly with contract accounts receivable charges.
During the second fiscal quarter of 2015, the Company began implementing a series of initiatives intended to improve operational efficiency, reduce costs, and better position itself to drive growth of the business in the future. We refer to these
business restructuring activities do not qualify for discontinued operations treatmentinitiatives, in
accordance with U.S. GAAPthe aggregate, as the
associated businesses were not material.Collectively,“2015 Restructuring”. These activities evolved and developed over time as management identified and evaluated opportunities for changes in the Company’s operations (and related areas of potential cost savings), as economic conditions changed and as the realignment of the Company’s operations into its four global LOBs was implemented. Actions related to the 2015 Restructuring included involuntary terminations, the abandonment of certain leased offices, combining operational organizations, and the colocation of employees into other existing offices. These activities did not involve the exit of any service types or client end-markets. The 2015 Restructuring was completed in fiscal 2017, although related cash payments continue to be made under the related accruals recorded in connection with these activities.
Collectively, the above mentioned
business restructuring activities
in the Europe, U.K. and Middle East region are referred to as “Restructuring and other
charges”.Long-term Debt
charges.”
The following table summarizes the impacts of the Restructuring and other charges (or recoveries, which primarily relate to the reversals of lease abandonment accruals related to previously vacated facilities which are now planned to be utilized) on the Company’s reportable segment income by line of business in connection with the CH2M acquisition for the three and six months ended March 30, 2018 and the 2015 Restructuring and realignment of the Company's Europe, U.K. and Middle East regional operations for the three and six months ended March 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Aerospace, Technology, Environmental and Nuclear | $ | 1,409 |
| | $ | 1,274 |
| | $ | 1,722 |
| | $ | 1,646 |
|
| Buildings, Infrastructure and Advanced Facilities | 18,287 |
| | 9,996 |
| | 21,178 |
| | 18,002 |
|
| Energy, Chemicals and Resources | (7,588 | ) | | 20,634 |
| | (3,967 | ) | | 36,442 |
|
| Corporate | 57,243 |
| | 20,362 |
| | 69,768 |
| | 27,917 |
|
| Total | $ | 69,351 |
| | $ | 52,266 |
| | $ | 88,701 |
| | $ | 84,007 |
|
The activity in the Company’s accrual for the Restructuring and other charges for the six-month period ended March 30, 2018 is as follows (in thousands):
|
| | | |
| Balance at Balance at September 29, 2017 | $ | 142,767 |
|
| CH2M Acquisition Assumed Liabilities | 31,576 |
|
| CH2M Charges | 88,701 |
|
| Payments | (77,093 | ) |
| Balance at Balance at March 30, 2018 | $ | 185,951 |
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following table summarizes the Restructuring and other charges by major type of costs in connection with the CH2M acquisition for the three and six month periods ended March 30, 2018, and the 2015 Restructuring and realignment of the Company's Europe, U.K. and Middle East regional operations for the three and six months ended March 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Lease Abandonments | $ | 37,073 |
| | $ | 27,992 |
| | $ | 40,436 |
| | $ | 44,601 |
|
| Involuntary Terminations | 16,936 |
| | 18,554 |
| | 19,120 |
| | 29,886 |
|
| Outside Services | 8,170 |
| | 2,261 |
| | 16,759 |
| | 3,552 |
|
| Other | 7,172 |
| | 3,459 |
| | 12,386 |
| | 5,968 |
|
| Total | $ | 69,351 |
| | $ | 52,266 |
| | $ | 88,701 |
| | $ | 84,007 |
|
Cumulative amounts incurred to date for Restructuring and other charges by each major type of cost as of March 30, 2018 are as follows (in thousands):
|
| | | |
| Lease Abandonments | $ | 279,295 |
|
| Involuntary Terminations | 203,699 |
|
| Outside Services | 41,127 |
|
| Other | 21,317 |
|
| Total | $ | 545,438 |
|
At March 30, 2018 and September 29, 2017, long-term debt consisted of the following:
|
| | | | | | | |
| | March 30, 2018 | | September 29, 2017 |
| Term Loan Facility | $ | 1,500,000 |
| | $ | — |
|
| Less: Deferred Financing Fees | (3,455 | ) | | — |
|
| Revolving Credit Facility | 1,009,365 |
| | 235,000 |
|
| Other | 5,890 |
| | — |
|
| Total Long-term debt, net | $ | 2,511,800 |
| | $ | 235,000 |
|
On February 7, 2014, Jacobs and certain of its subsidiaries
haveentered into a $1.6 billion long-term unsecured, revolving credit facility (the
“2014“Revolving Credit Facility”) with a syndicate of large U.S. and international banks and financial institutions. The
2014Revolving Credit Facility provides an accordion feature that allows the Company and the lenders to increase the facility amount to $2.1 billion.
The total amount outstanding under the
2014Revolving Credit Facility in the form of direct borrowings at March
31, 201730, 2018 was
$334.9 million.$1.0 billion. The Company has issued $2.5 million in letters of credit under the
2014Revolving Credit Facility, leaving
$1.3 billion$588.1 million of available borrowing capacity
Page 13
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
under the 2014Revolving Credit Facility at March 31, 2017.30, 2018. In addition, the Company had issued $254.1$446.7 million under separate, committed and uncommitted letter-of-credit facilities for total issued letters of credit of $256.6$449.2 million at March 31, 2017.
30, 2018.
The 2014Revolving Credit Facility expires in February 2020 and permits the Company to borrow under two separate tranches in U.S. dollars, certain specified foreign currencies, and any other currency that may be approved in accordance with the terms of the 2014Revolving Credit Facility. Depending on the Company’s Consolidated Leverage Ratio (as defined in the credit agreement governing the 2014Revolving Credit Facility), borrowings under the 2014Revolving Credit Facility bear interest at either a eurocurrency rate plus a margin of between 1.0% and 1.5% or a base rate plus a margin of between 0% and 0.5%. The 2014Revolving Credit Facility also provides for a financial letter of credit sub facility of $300.0 million, permits performance letters of credit, and provides for a $50.0 million sub facility for swing line loans. Letters of credit are subject to fees based on the Company’s Consolidated Leverage Ratio at the time any such letter of credit is issued. The Company pays a facility fee of between 0.100% and 0.250% per annum depending on the
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Company’s Consolidated Leverage Ratio. Amounts outstanding under the 2014Revolving Credit Facility may be prepaid at the option of the Company without premium or penalty, subject to customary breakage fees in connection with the prepayment of euro currency loans. The 2014Revolving Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type including, among other things, limitations on certain other indebtedness, loans and investments, liens, mergers, asset sales and transactions with affiliates.In addition, the 2014Revolving Credit Facility contains customary events of default. We were in compliance with our debt covenants at March 30, 2018.
On September 28, 2017, the Company entered into a Second Amendment to the Revolving Credit Facility, which provides for, among other things, an amendment to certain financial definitions used in the Revolving Credit Facility, including “Consolidated EBITDA”. These amendments were effective upon the consummation of the acquisition of CH2M in December 2017.
On September 28, 2017, the Company entered into a $1.5 billion unsecured delayed-draw term loan facility (the “Term Loan Facility”) with a syndicate of financial institutions as lenders and letter of credit issuers and BNP Paribas as administrative agent, TD Bank, N.A. and U.S. Bank National Association as co-documentation agent, BNP Paribas Securities Corp., The Bank of Nova Scotia and Wells Fargo Securities, LLC as joint book runners, and as joint arrangers.
We incurred loans under the Term Loan Facility on December 15, 2017 in connection with the closing of the CH2M acquisition in order to pay cash consideration for the acquisition, and to pay fees and expenses related to the acquisition and the Term Loan Facility. The Term Loan Facility matures in December 2020 and permits the Company to borrow in U.S. dollars at a base rate or a eurocurrency rate. Depending on the Company’s consolidated leverage ratio, borrowings under the Term Loan Facility bear interest at either a eurocurrency rate plus a margin of between 1.00% and 1.50% or a base rate plus a margin of between 0.00% and 0.50%. Amounts outstanding under the Term Loan Facility may be prepaid at the option of the Company without premium or penalty, subject to customary breakage fees in connection with the prepayment of eurocurrency loans.
The Term Loan Facility contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limitations on certain other indebtedness, investments, liens, mergers, asset sales and transactions with affiliates. In addition, the Term Loan Facility contains customary events of default. We were in compliance with
our debtthese covenants at March
31, 2017.Revenue Accounting30, 2018.
On March 12, 2018, Jacobs entered into a note purchase agreement (the "Note Purchase Agreement") pursuant to which the Company has agreed to issue and sell in a private placement transaction $500.0 million in the aggregate principal amount of the Company’s senior notes in three series: $190.0 million aggregate principal amount of 4.27% senior notes, Series A, due May 8, 2025, $180.0 million aggregate principal amount of 4.42% senior notes, Series B, due May 8, 2028 and $130.0 million aggregate principal amount of 4.52% senior notes, Series C, due May 8, 2030 (collectively, the “Senior Notes”). The Note Purchase Agreement provides that if the Company's consolidated leverage ratio exceeds a certain amount, the interest on the Senior Notes may increase by 75 basis points. The Senior Notes may be prepaid at any time subject to a make-whole premium. The sale of the Senior Notes is expected to close in May 2018. The Company intends to use the net proceeds from the offering of Senior Notes to repay certain existing indebtedness and for
Contracts / Accountingother general corporate purposes. The Note Purchase Agreement contains affirmative, negative and financial covenants customary for
Joint Venturesfinancings of this type, including, among other things, covenants to maintain a minimum consolidated net worth and maximum consolidated leverage ratio and limitations on certain other indebtedness, investments, liens, mergers, asset sales and transactions with affiliates. In addition, the Note Purchase Agreement contains customary events of default.
In conjunction with the acquisition of CH2M, the Company assumed certain long-term financing that was incurred by CH2M prior to the acquisition. The total balance included in Long-term debt assumed as of March 30, 2018 was $5.9 million, which includes equipment financing of $3.4 million, bearing interest rates ranging from 0.22% to 3.29% due in monthly installments through September 2021, and a note payable of $2.5 million bearing interest at 6-month LIBOR plus 2.5%, due July 2019.
| |
| 12. | Revenue Accounting for Contracts / Accounting for Joint Ventures |
We recognize revenue earned on our technical professional and field services projects under the percentage-of-completion method described in ASC 605-35, Construction-Type and Production-Type Contracts. In general, we recognize revenuerevenues at the time we provide services. Depending on the commercial terms of the contract, we recognize revenues either whenPrecontract costs are generally expensed as incurred, or using theunless they are directly associated with an anticipated contract and recoverability from that contract is probable. Contracts are generally segmented between types of services, such as project services and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered. For multiple contracts with a single customer we account for each contract separately.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The percentage-of-completion method of accounting is applied by relatingcomparing contract costs incurred to date to the total estimated costs at completion. Contract losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. For multiple contracts with a single customer, we account for each
Unapproved change orders are included in the contract separately. We also recognize as revenues, costs associated with claims and unapproved change ordersprice to the extent it is probable that such claims and change orders will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. A significant portionClaims meeting these recognition criteria are included in revenues only to the extent of the Company’s revenue is earned on cost reimbursable contracts.related costs incurred. The percentage of revenues realized by the Company by type of contract during fiscal 20162017 can be found in Note 1—1 Description of Business and Basis of Presentation of Notes to Consolidated Financial Statements included in our 20162017 Form 10-K. Certain cost-reimbursable contracts include incentive-fee arrangements. TheThese incentive fees in such contracts can be based on a variety of factors but the most common factors are the achievement of target completion dates, target costs, and/or other performance criteria. Failure to meet these targets can result in unrealized incentive fees. We recognize incentive fees based on expected results using the percentage-of-completion method of accounting. As the contract progresses and more information becomes available, the estimate of the anticipated incentive fee that will be earned is revised as necessary. We bill incentive fees based on the terms and conditions of the individual contracts.In certain situations, we are allowed to bill a portion of the incentive fees over the performance period of the contract.In other situations, we are allowed to bill incentive fees only after the target criterion has been achieved. Incentive fees which have been recognized but not billed are included in receivables in the accompanying Consolidated Balance Sheets. Certain cost-reimbursable contracts with government customers as well as certain commercial clients provide that contract costs are subject to audit and adjustment.In this situation, revenues are recorded at the time services are performed based upon the amounts we expect to realize upon completion of the contracts. Revenues are not recognized for non-recoverable costs. In those situations where an audit indicates that we may have billed a client for costs not allowable under the terms of the contract, we estimate the amount of such non-billable costs and adjust our revenues accordingly. When we are directly responsible for subcontractor labor or third-party materials and equipment, we reflect the costs of such items in both revenues and
costs.costs (and we refer to such costs as “pass-through” costs). On those projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not reflected in either revenues or costs.
Page 14
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
The following table sets forth pass-through costs included in revenues for each of the three and six
monthsmonth periods ended
March 30, 2018 and March 31, 2017
and April 1, 2016 (in thousands):
| | For the Three Months Ended | | | For the Six Months Ended | |
| | March 31, 2017 | | | April 1, 2016 | | | March 31, 2017 | | | April 1, 2016 | |
Pass-through costs included in revenues | | $ | 560,566 | | | $ | 601,129 | | | $ | 1,233,545 | | | $ | 1,271,460 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Pass-through costs included in revenues | $ | 712,881 |
| | $ | 560,566 |
| | $ | 1,309,050 |
| | $ | 1,233,545 |
|
As is common to the industry, we execute certain contracts jointly with third parties through various forms of joint ventures and consortiums. Although the joint ventures own and hold the contracts with the clients, the services required by the contracts are typically performed by us and our joint venture partners, or by other subcontractors under subcontracting agreements with the joint ventures. The assets of our joint ventures, therefore, consist almost entirely of cash and receivables (representing amounts due from clients), and the liabilities of our joint ventures consist almost entirely of amounts due to the joint venture partners (for services provided by the partners to the joint ventures under their individual subcontracts) and other subcontractors. In general, at any given time, the equity of our joint ventures represents the undistributed profits earned on contracts the joint ventures hold with clients. Very few of our joint ventures have employees. None of our joint ventures have third-party debt or credit facilities. Our joint ventures, therefore, are simply mechanisms used to deliver engineering and construction services to clients. Rarely do they, in and of themselves, present any risk of loss to us or toUnder U.S. GAAP, our partners separate from those that we would carry if we were performing the contract on our own. Our share of theprofits and losses associated with the contracts held by the joint ventures is reflected in our consolidated financial statements as occurred.Consolidated Financial Statements
. Certain of our joint ventures meet the definition of a
“variablevariable interest
entity”entity (“VIE”).
As defined in U.S. GAAP, a VIE is a legal entity in which equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the following three characteristics: (i) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance; (ii) the obligation to absorb the expected losses of the legal entity; or (iii) the right to receive the expected residual returns of the legal entity. Accordingly, entities issuing consolidated financial statements (e.g., a “reporting entity”) must consolidate a VIE if the reporting entity has a “controlling financial interest” in the VIE, as demonstrated by the reporting entity having both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and (ii) the right to receive benefits from the VIE that could potentially be significant to the VIE or the obligation to absorb losses of the VIE that could potentially be significant to the VIE.In evaluating our VIEs for possible consolidation, we perform a qualitative analysis to determine whether or not we have a “controlling financial interest” in the VIE as defined by U.S. GAAP. We consolidate only those VIEs over which we have a controlling financial interest. Theinterest and are the primary beneficiary.
For the Company’s unconsolidated joint ventures, we use either the equity method of accounting or proportionate consolidation. There were no changes in facts and circumstances during the period that caused the Company does not currently participateto reassess the method of accounting for its VIEs.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| |
| 13. | Defined Pension Benefit Obligations |
In connection with the acquisition of CH2M on December 15, 2017, the Company preliminarily recorded estimates of CH2M’s pension plan assets and liabilities which are reflected in
any significant VIEs.Disclosures About Defined Pension Benefit Obligations
the amounts of $1.1 billion and ($1.2 billion), respectively. CH2M sponsors several defined benefit pension plans primarily in the U.S. and the U.K. In the U.S., CH2M has three noncontributory defined benefit pension plans. Plan benefits are generally based on years of service and compensation during the span of employment.
The following table presents the components of net periodic benefit cost recognized in earnings during
each of the three and six months ended March
31, 201730, 2018 and
April 1, 2016 (in thousands): | | For the Three Months Ended | | | For the Six Months Ended | |
| | March 31, 2017 | | | April 1, 2016 | | | March 31, 2017 | | | April 1, 2016 | |
Component: | | | | | | | | | | | | | | | | |
Service cost | | $ | 2,184 | | | $ | 8,504 | | | $ | 4,400 | | | $ | 17,180 | |
Interest cost | | | 8,699 | | | | 15,207 | | | | 17,427 | | | | 30,909 | |
Expected return on plan assets | | | (15,527 | ) | | | (18,926 | ) | | | (31,115 | ) | | | (38,433 | ) |
Amortization of previously unrecognized items | | | 3,530 | | | | 5,579 | | | | 7,086 | | | | 11,312 | |
Settlement (gain) loss | | | 41 | | | | (169 | ) | | | 84 | | | | (332 | ) |
Net periodic benefit cost | | $ | (1,073 | ) | | $ | 10,195 | | | $ | (2,118 | ) | | $ | 20,636 | |
The decrease in periodic benefit costs for the three and six months ended March 31, 2017 as compared(in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Component: | | | | | | | |
| Service cost | $ | 1,902 |
| | $ | 2,184 |
| | $ | 4,965 |
| | $ | 4,400 |
|
| Interest cost | 11,500 |
| | 8,699 |
| | 27,571 |
| | 17,427 |
|
| Expected return on plan assets | (19,014 | ) | | (15,527 | ) | | (45,018 | ) | | (31,115 | ) |
| Amortization of previously unrecognized items | 2,594 |
| | 3,530 |
| | 5,047 |
| | 7,086 |
|
| Settlement loss (gain) | — |
| | 41 |
| | 3,819 |
| | 84 |
|
| Net periodic benefit | $ | (3,018 | ) | | $ | (1,073 | ) | | $ | (3,616 | ) | | $ | (2,118 | ) |
In December 2017, the Company incurred a settlement loss of approximately $3.8 million related to
the corresponding period last year was primarily due to the curtailment of our U.K. plans and the de-recognition of the U.S.its Sverdrup pension plan
for participating employees who were assigned to, and worked exclusively on, a specific operating contract within the U.S.
federalPage 15
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
government. While these costs were fully reimbursed by the U.S. federal government pursuant to applicable cost accounting standards, net periodic pension costs of $1.1 million are included in our net periodic benefit costs table for the period ended March 31, 2017.
The following table presents certain information regarding the Company’s cash contributions to our pension plans for fiscal
20172018 (in thousands):
Cash contributions made during the first six months of fiscal 2017 | | $ | 9,070 | |
Cash contributions we expect to make during the remainder of fiscal 2017 | | | 10,122 | |
Total | | $ | 19,192 | |
Other Comprehensive Income
|
| | | |
| Cash contributions made during the first six months of fiscal 2018 | $ | 11,319 |
|
| Cash contributions we expect to make during the remainder of fiscal 2018 | 18,741 |
|
| Total | $ | 30,060 |
|
During the first quarter of fiscal year 2018, the Company adopted ASU No 2016-09, Improvements to Employee Share Based Payment Accounting. As a result, the cash paid by the Company to taxing authorities as a result of withholding shares for the exercise of employee stock awards is classified as financing activity and this change is adopted retrospectively. Additionally, all excess tax benefits related to share-based payments in our provision for income taxes are now classified as an operating activity along with other income taxes in the statement of cash flows and this change is applied prospectively. These items were historically recorded in additional paid-in capital and in financing activities. The amount recognized by the Company in excess tax benefits related to share-based payments in our provision for income taxes for the three and six months ended March 30, 2018 was not material.
Finally, we have elected to begin accounting for share-based compensation award forfeitures when they occur instead of estimating the number of forfeitures expected in accordance with the new guidance. This change in accounting policy for share-based compensation award forfeitures resulted in a $1.8 million cumulative effect of change in accounting principle to retained earnings in the Company’s Consolidated Balance Sheets.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| |
| 15. | Other Comprehensive Income |
The following table presents amounts reclassified from the change in pension liabilities in other comprehensive income to direct cost of contracts and SG&A expenses in the Company’s Consolidated Statements of Earnings for the three and six months ended March 30, 2018 and March 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Amortization of Defined Benefit Items: | | | | | | | |
| Actuarial losses | $ | (2,660 | ) | | $ | (3,530 | ) | | $ | (5,181 | ) | | $ | (7,086 | ) |
| Prior service cost | 66 |
| | 78 |
| | 134 |
| | 155 |
|
| Total Before Income Tax | (2,594 | ) | | (3,452 | ) | | (5,047 | ) | | (6,931 | ) |
| Income Tax Benefit | 418 |
| | 799 |
| | 1,022 |
| | 1,602 |
|
| Total reclassifications, after-tax | $ | (2,176 | ) | | $ | (2,653 | ) | | $ | (4,025 | ) | | $ | (5,329 | ) |
On December 22, 2017, the Tax Cuts and AprilJobs Act (the “Act”) was enacted in the United States. The Act reduced the top corporate U.S. federal statutory tax rate from 35% to 21% starting on January 1, 20162018, resulting in a blended statutory tax rate for fiscal year filers. The Company’s blended federal statutory tax rate for fiscal 2018 is 24.6%. It also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, places limitations and exclusions on varied tax deductions and creates new taxes on certain foreign sourced earnings. The majority of the tax provisions, excluding the change in corporate tax rates, are effective for the first tax year beginning after January 1, 2018, which will be the Company’s taxable year beginning fiscal 2019.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Act.
As of March 30, 2018, we have not completed our accounting for the tax effects of the enactment of the Act. However, we have made a provisional estimate of the effects of the statutory tax rate reduction impact on our existing deferred tax balances and the one-time transition tax. We are not yet able to make a reasonable estimate on the other aspects of the Act and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment of the Act.
For the deferred tax balances, we remeasured the U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company’s provisional remeasurement resulted in a $16.9 million net unfavorable discrete charge to income tax expense for the six months ended March 30, 2018. In addition, during the first quarter of fiscal 2018 the Company recorded a provisional valuation allowance with respect to certain foreign tax credit deferred tax assets as a result of the Tax Act in the amount of $52.5 million. We are still analyzing many aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax assets and liabilities.
The Act calls for a one-time tax on deemed repatriation of foreign earnings. This one-time transition tax is based on our total post-1986 earnings and profits (E&P) of certain of our foreign subsidiaries. We have made a provisional estimate of the transition tax. Based upon our review of the Company’s historical foreign tax credit position and post-1986 E&P, it is estimated at this time that the Company should not have any liability for the transition tax. However, we are still in the process of completing our calculation of the total post-1986 E&P for the newly acquired foreign subsidiaries related to the
Company’s defined benefit pension plans (in thousands):recent CH2M acquisition. Our estimate may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. | | For the Three Months Ended | | | For the Six Months Ended | |
| | March 31, 2017 | | | April 1, 2016 | | | March 31, 2017 | | | April 1, 2016 | |
Amortization of Defined Benefit Items: | | | | | | | | | | | | | | | | |
Actuarial losses | | $ | (3,530 | ) | | $ | (4,307 | ) | | $ | (7,086 | ) | | $ | (8,768 | ) |
Prior service cost | | | 78 | | | | 59 | | | | 155 | | | | 120 | |
Total Before Income Tax | | | (3,452 | ) | | | (4,248 | ) | | | (6,931 | ) | | | (8,648 | ) |
Income Tax Benefit | | | 799 | | | | 1,015 | | | | 1,602 | | | | 2,061 | |
Total reclassifications, after-tax | | $ | (2,653 | ) | | $ | (3,233 | ) | | $ | (5,329 | ) | | $ | (6,587 | ) |
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Income Taxes
The Company’s consolidated effective income tax rate for the three months ended March
31, 2017 declined30, 2018 increased to
27.0%57.5% from
29.9%27.0% for the corresponding period last year.
Contributing toThe increase in the
quarter over quarter decrease in thequarterly effective tax rate
is primarily due to $40.6 million in discrete expense during the current year quarter from the provisional remeasurement of the U.S. deferred taxes which was
primarily due to changes in estimate during the quarter as a
$3.3 million benefit realizedresult of updates in
preliminary purchase price accounting for the
second fiscal quarter of 2017 related to nontaxable income received by a foreign affiliate and a $1.9 million benefit realized from a favorable IRS audit adjustment claimed by the Company pertainingCH2M acquisition that closed prior to the
design of energy efficient buildings pursuant to Internal Revenue Code section 179D. Also contributing to the decrease in the tax rate were changes in geographic income mix comprising the remaining difference in the year over year rate for the comparative three month periods.During the second fiscal quarter of 2016, the Company realized certain discrete tax benefits associated with the release of a foreign tax reserve due to statute expiration. In connection with the releaseenactment of the foreign tax reserve, the Company also reversed $2.7 million of accrued interest expense and $5.1 million of accrued penalties, which is recorded in Other Income (Expense) in the Consolidated Statements of Earnings.
Act.
The Company’s consolidated effective income tax rate for the six months ended March
31, 2017 increased to30, 2018 was 66.8%, an increase from 28.1%
from 23.3% for the corresponding period last year. The
primary driver contributing to the year over year increase in the
effective tax rate is
due to $69.4 million in net discrete charges during the
absencesix month period, comprised of
an $11.2a $16.9 million
detriment from the provisional remeasurement of the deferred tax items in the U.S., and a corresponding valuation allowance
release in the first six monthscharge of
fiscal 2016 pertaining to certain foreign net operating losses.$52.5 million.
The amount of income taxes the Company pays is subject to ongoing audits by tax jurisdictions around the world. In the normal course of business, the Company is subject to examination by tax authorities throughout the world, including such major jurisdictions as Australia, Canada, India, the Netherlands, the United Kingdom and the United States. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. The Company believes that it has adequately provided for reasonably foreseeable outcomes related to these matters. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate.
Page 16
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions of approximately
$10$6.7 million
(being realized as a reduction in income tax expense) as a result of concluding various tax audits and closing tax years.
Earnings Per Share
On December 15, 2017 the Company completed the acquisition of CH2M. For income tax purposes, the transaction was accounted for as a stock purchase. As a result of the acquisition, the Company adjusted its U.S. GAAP opening balance sheet of CH2M to reflect preliminary estimates of the fair value of the net assets acquired. For income tax purposes, the tax attributes and
Certain Related Informationbasis of net assets acquired carryover without any step-up to fair value. The Company has made preliminary estimates and recorded deferred taxes associated with the purchase accounting. It is expected that the Company will make adjustments to the purchase accounting over the relevant measurement period as allowed by ASC 805.
| |
| 17. | Earnings Per Share and Certain Related Information |
Basic and diluted earnings per share
(“EPS”) are computed using the two-class method, which is an earnings allocation method that determines
earnings per share (“EPS”)EPS for common shares and participating securities. The undistributed earnings are allocated between common shares and participating securities as if all earnings had been distributed during the period. Participating securities and common shares have equal rights to undistributed earnings. Net earnings used for the purpose of determining basic and diluted
earnings per shareEPS is determined by taking net earnings, less earnings available to participating securities.
For the three months and six months ended March 31, 2017, the earnings available to participating securities were $0.6 million and $1.4 million, respectively.JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following table
(i) reconciles the denominator used to compute basic EPS to the denominator used to compute diluted EPS for the three
and six months ended March
30, 2018 and March 31, 2017
and April 1, 2016; (ii) provides information regarding the number of non-qualified stock options and shares of restricted stock that were antidilutive and therefore disregarded in calculating the weighted average number of shares outstanding used in computing diluted EPS; and (iii) provides the number of shares of common stock issued from the exercise of stock options and the release of restricted stock (in thousands):
| | For the Three Months Ended | | | For the Six Months Ended | |
| | March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Diluted: | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 119,484 | | | | 120,216 | | | | 119,416 | | | | 120,554 | |
Dilutive potential common shares (1) | | | 2,230 | | | | 927 | | | | 2,385 | | | | 1,000 | |
Diluted weighted average shares outstanding | | | 121,714 | | | | 121,143 | | | | 121,801 | | | | 121,554 | |
| | | | | | | | | | | | | | | | |
Antidilutive stock options and restricted stock | | | 120 | | | | 3,714 | | | | 148 | | | | 3,651 | |
Shares of common stock issued from the exercise of stock options and the release of restricted stock | | | 281 | | | | 228 | | | | 1,367 | | | | 515 | |
(1)
| Diluted earnings per share includes any dilutive impact of stock options, restricted stock units, performance-based restricted stock units and performance awards.
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Numerator for Basic and Diluted EPS: | | | | | | | |
| Net income | $ | 48,587 |
| | $ | 50,018 |
| | $ | 50,750 |
| | $ | 110,554 |
|
| Net income allocated to participating securities | (254 | ) | | (594 | ) | | (269 | ) | | (1,389 | ) |
| Net income allocated to common stock for EPS calculation | $ | 48,333 |
| | $ | 49,424 |
| | $ | 50,481 |
| | $ | 109,165 |
|
| | | | | | | | |
| Denominator for Basic and Diluted EPS: | | | | | | | |
| Weighted average basic shares | 142,531 |
| | 120,919 |
| | 133,770 |
| | 120,935 |
|
| | | | | | | | |
| Shares allocated to participating securities | (746 | ) | | (1,435 | ) | | (816 | ) | | (1,519 | ) |
| Shares used for calculating basic EPS attributable to common stock | 141,785 |
| | 119,484 |
| | 132,954 |
| | 119,416 |
|
| | | | | | | | |
| Effect of dilutive securities: | | | | | | | |
| Stock compensation plans | 1,048 |
| | 795 |
| | 1,035 |
| | 866 |
|
| Shares used for calculating diluted EPS attributable to common stock | 142,833 |
| | 120,279 |
| | 133,989 |
| | 120,282 |
|
| | | | | | | | |
| Basic EPS | $ | 0.34 |
| | $ | 0.41 |
| | $ | 0.38 |
| | $ | 0.91 |
|
| Diluted EPS | $ | 0.34 |
| | $ | 0.41 |
| | $ | 0.38 |
| | $ | 0.91 |
|
On July 23, 2015, the Company’s Board of Directors authorized a share repurchase program of up to $500 million of the Company’s common stock. The following table summarizes the activity under this program
from the authorization dateduring fiscal 2018 (in thousands, except per-share amounts):
Amount Authorized | | | Average Price Per Share (1) | | | Total Shares Retired | | | Shares Repurchased | |
$ | 500,000 | | | $ | 48.15 | | | | 4,854 | | | | 4,854 | |
|
| | | | | | |
| Amount Authorized | | Average Price Per
Share (1) | | Total Shares
Retired | | Shares
Repurchased |
| $500,000 | | $60.77 | | 49 | | 49 |
(1)
| |
| (1) | Includes commissions paid and calculated at the average price per share since the repurchase program authorization date. |
Share repurchases may be executed through various means including, without limitation, open market transactions, privately negotiated transactions or otherwise. The share repurchase program does not obligate the Company to purchase any shares and expires
Page 17
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
on July 22, 2018. The authorization for the share repurchase program may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. The timing of share repurchases may depend upon market conditions, other uses of capital, and other factors.
On
December 1, 2016, the Company announced that the Board of Directors has approved the initiation of a cash dividend program. A quarterly dividend of $0.15 per share was paid on March 17, 2017, to shareholders of record as of the close of business on February 17, 2017. On May 4, 2017,January 18, 2018, the Company’s Board of Directors declared a quarterly
cash dividend of $0.15 per share
of the Company’s common stock that was paid on March 16, 2018, to
shareholders of record on the close of business on February 16, 2018. On May 3, 2018 the Company‘s Board of Directors declared a quarterly dividend of $0.15 per share of the Company’s common stock that will be paid on June
16, 201715, 2018, to shareholders of record
as ofon the close of business on May
19, 2017.18, 2018. Future dividend payments are subject to review and approval by the Company’s Board of Directors.
Commitments and Contingencies
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| |
| 18. | Commitments and Contingencies |
In the normal course of business, we
make contractual commitments some of which are
subject to certain contractual guaranteessupported by separate guarantees; and
litigation. The guarantees to whichon occasion we are a party
generally relate to project schedules and plant performance. Most of thein a litigation or arbitration proceeding. The litigation in which we are involved
has us as a defendant in workers’ compensation,includes personal injury
environmental, employment/labor,claims, professional liability
claims, and
breach of contract claims. In most cases, we are the defendant. Where we provide a separate guarantee it is strictly in support of the underlying contractual commitment. Guarantees take various forms including surety bonds required by law, or standby letters of credit (LOC) (also referred to as “bank guarantees”) or corporate guarantees given to induce a party to enter into a contract with a subsidiary. Standby LOCs are also used as security for advance payments or in various other
similar lawsuits.transactions. The guarantees have various expiration dates ranging from an arbitrary date to completion of our work (e.g., engineering only) to completion of the overall project.
At March 30, 2018 and September 30, 2017, the Company had issued and outstanding approximately $449.2 million and $262.1 million, respectively, in LOCs and $922.2 million and $57.4 million, respectively, in surety bonds.
We maintain insurance coverage for
variousmost insurable aspects of our business and operations. Our insurance programs have varying coverage limits
depending upon the type of insurance, and
maximums,include certain conditions and
exclusions which insurance companies may
seekraise in response to
not pay any
claims we might make.claim that the Company brings. We have also elected to retain a portion of losses
and liabilities that occur through the use of various deductibles, limits, and retentions under our insurance programs. As a result, we may be subject to
a future liability for which we are only partially insured or completely uninsured. We intend to mitigate any such future liability by continuing to exercise prudent business judgment in negotiating the terms and conditions of
our contracts.the contracts which the Company enters with its clients. Our insurers are also subject to business risk and, as a result, one or more of them may be unable to fulfill their insurance obligations due to insolvency or otherwise.
Additionally, as a contractor providing services to the U.S. federal government
and several of its agencies, we are subject to many
levelstypes of audits, investigations, and claims by, or on behalf of, the
U.S. federal government
including with respect to
our contract performance, pricing,
costs, cost allocations,
procurement practices, labor practices, and
procurement practices.socioeconomic obligations. Furthermore, our income, franchise, and similar tax returns and filings are also subject to audit and investigation by the Internal Revenue Service, most states within the U.S., as well as by various government agencies representing jurisdictions outside the U.S.
We record in our Consolidated Balance Sheets amounts representing our
probable estimated liability relating to such claims, guarantees, litigation,
and audits, and investigations. We perform an analysis to determine the level of reserves to establish for insurance-related claims that are known and have been asserted against us, and for insurance-related claims that are believed to have been incurred based on actuarial analysis, but have not yet been reported to our claims administrators as of the respective balance sheet dates. We include any adjustments to such insurance reserves in our consolidated results of operations.
The Company believes, after consultation with counsel, that such guarantees, litigation, U.S. government contract-related audits, investigations and claims, and income tax audits and investigations should not have
anya material adverse effect on our consolidated financial statements.
On September 30, 2015, Nui Phao Mining Company Limited (“NPMC”) commenced arbitration proceedings against Jacobs E&C Australia Pty Limited (“Jacobs E&C”). The arbitration is pending in Singapore before the Singapore International Arbitration Centre. In March 2011, Jacobs E&C was engaged by NPMC for the provision of management, design, engineering, and procurement services for the Nui Phao mine/mineral processing project in Vietnam. In the Notice of Arbitration and in a subsequently filed Statement of Claim and Supplementary Statement of Claim dated February 1, 2016 and February 26, 2016, respectively, NPMC asserts various causes of action and alleges that the quantum of its claim exceeds
$167$167.0 million. Jacobs has denied liability and is vigorously defending this claim. A
three week hearing on the merits
has been set for November 2017.concluded on December 15, 2017 and a decision is expected later this year. The Company does not expect the resolution of this matter to have a material adverse effect on its financial condition, results of operations and/or cash flows.
Page 18
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
March 31, 2017
(continued)
On December 7, 2009, the Judicial Council of California, Administrative Office of the Courts (“AOC”) initiated an action in the San Francisco County Superior Court against Jacobs Facilities Inc. (“JFI”) and Jacobs Project Management (“JPM”) and subsequently added Jacobs as a defendant. The action arises out of a contract between AOC and JFI pursuant to which JFI provided regular maintenance and repairs at certain AOC court facilities. AOC has alleged, among other things, that the Jacobs entities are required under California’s Contractors’ State License Law (“CSLL”) to disgorge certain fees paid by AOC, and the Jacobs entities have, among other things, cross-claimed for unpaid sums for work performed. On May 2, 2012, the jury returned a special verdict in favor of the Jacobs entities finding, among other things, JPM was owed approximately $4.7 million in unpaid fees and that JFI was not required to disgorge the approximate $18.3 million that AOC had paid for work performed.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
California Business and Professions Code Section 7031(e). Establishing “substantial compliance” would prevent $18.3 million in disgorgement against Jacobs and permit Jacobs to recover $4.7 million. The evidentiary hearing on substantial compliance was conducted between July 18 and August 5, 2016. On December 29, 2016, the court issued a Statement of Decision in favor of the Company, finding that
Jacobs FacilitiesJFI had substantially complied with the CSLL, and entered a judgment in favor of JPM in the amount of $4.7 million plus prejudgment interest. On January 30, 2017, AOC filed a notice of appeal. The Company does not expect the resolution of this matter to have a material adverse effect on its financial condition, results of operations and/or cash flows.
Page 19
In 2012, CH2M HILL Australia Pty Limited, a subsidiary of CH2M, entered into a 50/50 integrated joint venture with Australian construction contractor UGL Infrastructure Pty Limited. The joint venture entered into a Consortium Agreement with General Electric and GE Electrical International Inc. The Consortium was awarded a subcontract by JKC Australia LNG Pty Limited for the engineering, procurement, construction and commissioning of a 360 MW Combined Cycle Power Plant for INPEX Operations Australia Pty Limited at Blaydin Point, Darwin, NT, Australia. In January 2017, the Consortium terminated the Subcontract because of JKC’s repudiatory breach and demobilized from the work site. JKC claimed the Consortium abandoned the work and itself purported to terminate the Subcontract. The Consortium and JKC are now in dispute over the termination. In August 2017, the Consortium filed an International Chamber of Commerce arbitration against JKC for compensatory damages in the amount of $665.5 million for repudiatory breach or, in the alternative, seeking damages for unresolved contract claims and change orders. JKC has provided a preliminary estimate of the monetary value of its claims in the amount of approximately $1.7 billion and has drawn on bonds, CH2M's share of which totals about $26 million. This draw on bonds does not impact the Company's ultimate liability. A decision in this matter is not expected before 2020. If the Consortium is found liable, this matter could have a material adverse effect on the Company’s business, financial condition, results of operations and /or cash flows, particularly in the short term. However, the Consortium has denied liability and is vigorously defending these claims, and based on the information currently available, the Company does not expect the resolution of this matter to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The purpose of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is to provide a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition from the most recent fiscal year-end to March 31, 2017,30, 2018, and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year. In order to better understand such changes, readers of this MD&A should also read:
The discussion of the critical and significant accounting policies used by the Company in preparing its consolidated financial statements. The most current discussion of our critical accounting policies appears in Item 7—7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 20162017 Form 10-K, and the most current discussion of our significant accounting policies appears in Note 2—2, Significant Accounting Polices in Notes to Consolidated Financial Statements of our 20162017 Form 10-K;
The Company’s fiscal 20162017 audited consolidated financial statements and notes thereto included in our 20162017 Form 10-K; and
Item 7—7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 20162017 Form 10-K.
In addition to historical information, this MD&A and other parts of this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not directly relate to any historical or current fact. When used herein, words such as “expects,” “anticipates,” “believes,” “seeks,” “estimates,” “plans,” “intends,” “future,” “will,” “would,” “could,” “can,” “may,” and similar words are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although such statements are based on management’s current estimates and expectations, and/or currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause our actual results to differ materially from what may be inferred from the forward-looking statements. Some of the factors that could cause or contribute to such differences include, but are not limited to, those listed and discussed in Item 1A—1A, Risk Factors, included in our 20162017 Form 10-K.10-K and our subsequent Quarterly Report on Form 10-Q for the first fiscal quarter of 2018. We undertake no obligation to release publicly any revisions or updates to any forward-looking statements. We encourage you to read carefully the risk factors, describedas well as the financial and business disclosures contained in our 2016this Quarterly Report on Form 10-K10-Q and in other documents we file from time to time with the United States Securities and Exchange Commission.Reorganization Under Commission ("SEC").
During the second fiscal quarter of 2016,fiscal 2018, we reorganized our operationsoperating and reporting structure around fourthree global lines of business (“LOB”LOBs”), which also serve as ourthe Company’s operating segments: Petroleum &(i) Aerospace, Technology, Environmental and Nuclear, (ii) Buildings, Infrastructure and Advanced Facilities, and (iii) Energy, Chemicals Buildings & Infrastructure, Aerospace & Technology, and Industrial. We determined that this new organization wouldResources. This reorganization occurred in conjunction with the integration of CH2M into the Company's legacy businesses, and is intended to better support the needs of managing each unique set of customers that fall within each segment. As a result of the reorganization, we subsequently realignedserve our global clients, leverage our workforce, help streamline operations, and provide enhanced growth opportunities. The Company’s LOB leadership and internal reporting structures report to enable ourthe Chief Executive Officer, who is also ourthe Chief Operating Decision Maker (“CODM”), and enable the CODM to evaluate the performance of each of these segments and make appropriate resource allocations among each of the segments. As partFor purposes of the reorganization,Company’s goodwill impairment testing, it has been determined that the Company’s operating segments are also its reporting units based on management’s conclusion that the components comprising each of its operating segments share similar economic characteristics and meet the aggregation criteria for reporting units in accordance with ASC 350, Intangibles-Goodwill and Other.
Under the new organization, each LOB has a president that reports directly to the CODM. The sales function
which had beenis managed
centrally for many years,on an LOB basis, and accordingly, the associated cost is
now embedded in the new segments and
reportsreported to the respective LOB presidents.
In addition, a portion of the costs of other support functions (e.g., finance, legal, human resources, and information technology) is allocated to each LOB using methodologies which, we believe, effectively attribute the cost of these support functions to the revenue generating activities of the Company on a rational basis. The cost of the Company’s cash incentive plan, the Management Incentive Plan (“MIP”) and the expense associated with the Jacobs Engineering Group Inc. 1999 Stock Incentive Plan (“1999 SIP”) have likewise been charged to the LOBs except for those amounts determined to relate to the business as a whole (which amounts remain in other corporate expenses).
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Aerospace, Technology, Environmental and TechnologyNuclear (ATEN) – We provide an in-depth range of scientific, engineering, construction, nuclear, environmental and technical support services to the aerospace, defense, technical and automotive industries in several countries. Long-term clients include the Ministry of Defence in the U.K., the UK Nuclear Decommissioning Authority, NASA, the U.S. Department of Defense (“DoD”), the U.S. Special Operations Command ("USSOCOM"), the U.S. Intelligence community, and the Australian Department of Defence. Specific to NASA, one of our major government customers in the U.S., is our ability to design, build, operate, and maintain highly complex facilities relating to space systems, including test and evaluation facilities, launch facilities, and support infrastructure. We provide environmental characterization and restoration services to commercial and government customers both in the U.S. and U.K. This includes designing, building and operating high hazard remediation systems including for radiologically contaminated media. In addition, we design and build aerodynamic, climatic, altitude and acoustic facilities in support of the automotive industry, as well as provide a wide range of services in the telecommunications market.
Our experience in the defense sector includes military systems acquisition management and strategic planning; operations and maintenance of test facilities and ranges; test and evaluation services in computer, laboratory, facility, and range environments; test facility computer systems instrumentation and diagnostics; and test facility design and build. We also provide systems engineering and integration of complex weapons and space systems, as well as hardware and software design of complex flight and ground systems.
Page 20
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
We have provided advanced technology engineering services to the DoD for more than 50 years, and currently support major defense programs in the U.S. and internationally. We operate and maintain several DoD test centers and provide services and assist in the acquisition and development of systems and equipment for Special Operations Forces, as well as the development of biological, chemical, and nuclear detection and protection systems.
We maintain enterprise information systems for government and commercial clients worldwide, ranging from the operation of complex computational networks to the development and validation of specific software applications. We also support the DoD and the intelligence community in a number of information technology programs, including network design, integration, and support; command and control technology; development and maintenance of databases and customized applications; and cyber security solutions.
Buildings, & Infrastructure and Advanced Facilities(BIAF) – We provide services to transit,broad sectors including buildings, water, transportation (roads, rail, aviation built environment, mission critical, rail, and civil construction projectsports), and advanced facilities for life sciences, semiconductors, data centers, consumer products and other advanced manufacturing operations throughout North America, Europe, India, the Middle East, Australia, and Asia. Our representative clients include national government departments/agencies in the U.S., U.K., Australia, and Asia, state and local departments of transportation within the U.S, and private industry freight transport firms. Typical projects include providing development/rehabilitation plans for highways, bridges, transit, tunnels, airports, railroads, intermodal facilities, and maritime or port projects. Our interdisciplinary teams can work independently or as an extension of the client’s staff. We have experience with alternative financing methods, which have been used in Europe through the privatization of public infrastructure systems.
Our water infrastructure group aids emerging economies, which are investing heavily in water and wastewater systems, and governments in North America and Europe, which are addressing the challenges of drought and an aging infrastructure system. We develop or rehabilitate critical water resource systems, water/wastewater conveyance systems, and flood defense projects.
We also plan, design, and construct buildings for a variety of clients and markets. We believe our global presence and understanding of contracting and delivery demands keep us well positioned to provide professional services worldwide. Our diversified client base encompasses both public and private sectors and relates primarily to institutional, commercial, government and corporate buildings, including projects at many of the world's leading medical and research centers, and universities. We focus our efforts and resources in two areas: where capital-spending initiatives drive demand, and where changes and advances in technology require innovative, value-adding solutions. We also provide integrated facility management services (sometimes through joint ventures with third parties) for which we assume responsibility for the ongoing operation and maintenance of entire commercial or industrial complexes on behalf of clients.
We have specific capabilities in energy and power, master planning, and commissioning of office headquarters, aviation facilities, mission-critical facilities, municipal and civic buildings, courts and correctional facilities, mixed-use and commercial centers, healthcare and education campuses, and recreational complexes. For advanced technology clients, who require highly specialized buildings in the fields of medical research, nano science, biotechnology, and laser sciences, we offer total integrated design
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
and construction management solutions. We also have global capabilities in the pharma-bio, data center, government intelligence, corporate headquarters/interiors, and science and technology-based education markets. Our government building projects include large, multi-year programs in the U.S. and Europe supporting various U.S. and U.K. government
agenciesIndustrial – We provide engineering, procurement, project management, construction, and on-site maintenance to our global clients in the Life Sciences, Mining & Minerals, Specialty Chemicals & Manufacturing and Field Services markets. agencies.
We provide our Life Sciences clients single-point consulting, engineering, procurement, construction management, and validation project delivery, enabling us to execute capital programs on a single-responsibility basis. Typical projects in the life sciences sector include laboratories, research and development facilities, pilot plants, bulk active pharmaceutical ingredient production facilities, full-scale biotechnology production facilities, and tertiary manufacturing facilities.
We provide services relating to modular construction, as well as other consulting and strategic planning to help our clients complete capital projects faster and more efficiently.
In addition, we offer services in containment, barrier technology, locally controlled environments, building systems automation, and off-the-site design and fabrication of facility modules, as well as vaccine production and purification, and aseptic processing.
Our
Energy, Chemicals and Resources(ECR) –We serve the energy, chemicals and resources sectors, including upstream, midstream and downstream oil, gas, refining, chemicals and mining and minerals business targets the non-ferrous and ferrous metal markets, precious metals, energy minerals (uranium, coal, oil sands), and industrial and fertilizer minerals (borates, trona, phosphates and potash). We work with many resource companiesPage 21
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
undertaking new and existing facility upgrades, process plant and underground and surface material handling and infrastructure developments.
We offer project management, front-end studies, full engineering, procurement and construction management (“EPCM”) and engineering, procurement and construction (“EPC”) capabilities, and completions, commissioning and start-up services specializing in new plant construction, brownfield expansions, and sustaining capital and maintenance projects. We are also able to deliver value to our mining clients by providing distinctive adjacent large infrastructure capabilities to support their mining operations.
We provide a wide range of services, technology and manufactured equipment through our specialty chemicals group, where we own and license our proprietary technology. Our specialty chemicals areas are focused on sulfuric acid, sulphur, bleaching chemicals for pulp & paper, and synthetic chemicals, and manufactured equipment. Our manufacturing business areas include the Food & Beverage, Consumer Products, Semi-Conductor, and Pulp & Paper markets.
Our global Field Services unit supports construction and operations and maintenance (“O&M”) across the company, and performs our direct hire services.
Our construction activities include providing both construction management services and traditional field construction services to our clients. Historically, our field construction activities focused primarily on those construction projects where we perform much of the related engineering and design work (EPC/EPCM). However, we deliver construction-only projects when we have negotiated pricing and other contract terms we deem acceptable and which result in a fair return for the degree of risk we assume.
In our O&M business, we provide all services required to operate and maintain large, complex facilities on behalf of clients including asset management, direct hire maintenance and operations, complex turn-around planning and execution, and small capital programs. We provide key management and support services over all aspects of the operations of a facility, including managing subcontractors and other on-site personnel.
Petroleum & Chemicals –industries. We provide integrated delivery of complex projects for our Oil and Gas, Refining, and Petrochemicals clients. Bridging the upstream, midstream and downstream industries, our services encompass consulting, engineering, procurement, construction, maintenance, and project management.
We provide services relating to onshore and offshore oil and gas production facilities, including fixed and floating platforms and subsea tie-backs, as well as full field development solutions, including processing facilities, gathering systems, transmission pipelines and terminals. Our heavy oil experience makes us a leader in upgrading, steam-assisted gravity drainage and in-situ oil sands projects. We have developed modular well pad and central processing facility designs. We also provide fit-for-purpose and standardized designs in the onshore conventional and unconventional space, paying particular attention to water and environmental issues.
In addition, we provide our refining customers with feasibility/economic studies, technology evaluation and conceptual engineering, front end loading (FEED), detailed engineering, procurement, construction, maintenance and commissioning services. We deliver installed
EPCengineering, procurement and construction (EPC) solutions as to grass root plants, expansions and revamps of existing units. Our focus is on both the inside the battery limit (ISBL) processing units as well as utilities and off-sites. We have engineering alliances and maintenance programs that span decades with core clients. With the objective of driving our clients’ total installed costs down, we endeavor to leverage emerging market sourcing and high value engineering. Our Comprimo Sulfur Solutions® is a significant technology for gas treatment and sulfur recovery plants around the world.
We provide services as to technically complex petrochemical facilities; from new manufacturing complexes, to expansions and modifications and management of plant relocations. We have experience with many licensed technologies, integrated basic petrochemicals, commodity and specialty chemicals projects, and olefins, aromatics, synthesis gas and their respective derivatives.
Restructuring
Our mining and
Other ChargesDuringminerals business targets the second fiscal quarternon-ferrous and ferrous metal markets, precious metals, energy minerals (uranium, coal, oil sands), and industrial and fertilizer minerals (borates, trona, phosphates and potash). We work with many resource companies undertaking new and existing facility upgrades, process plant and underground and surface material handling and infrastructure developments.
We offer project management, front-end studies, full engineering, procurement and construction management (“EPCM”) and engineering, procurement and construction (“EPC”) capabilities, and completions, commissioning and start-up services specializing in new plant construction, brownfield expansions, and sustaining capital and maintenance projects. We are also able to deliver value to our mining clients by providing distinctive adjacent large infrastructure capabilities to support their mining operations.
We provide a wide range of 2015,services, technology and manufactured equipment through our specialty chemicals group, where we own and license our proprietary technology. Our specialty chemicals areas are focused on sulfuric acid, sulphur, bleaching chemicals for pulp & paper, and synthetic chemicals, and manufactured equipment. Our manufacturing business areas include the Company began implementing a series of initiatives intended to improve operational efficiency, reduce costs,Food & Beverage, Consumer Products, Semi-Conductor, and better position itself to drive growth ofPulp & Paper markets.
Our global Field Services unit supports construction and operations and maintenance (“O&M”) across the
business in the future (the “2015 Restructuring”). The 2015 Restructuring was not completed in fiscal 2015,company, and
actions related to the 2015 Restructuring continued into fiscal 2016 and 2017. Actions related to the 2015 Restructuring include involuntary terminations, the abandonment of certain leased offices, combining operational organizations, and the co-location of employees into other existing offices. The Company’s consolidated results of operations for the second fiscal quarters of 2017 and 2016 include $52.3 million and $35.4 million, respectively, and $84Page 22
performs our direct hire services.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
million
Our construction activities include providing both construction management services and $103.8 milliontraditional field construction services to our clients. Historically, our field construction activities focused primarily on those construction projects where we perform much of the related engineering and design work (EPC/EPCM). However, we deliver construction-only projects when we have negotiated pricing and other contract terms we deem acceptable and which result in a fair return for the six month periods ended March 31,degree of risk we assume.
In our O&M business, we provide all services required to operate and maintain large, complex facilities on behalf of clients including asset management, direct hire maintenance and operations, complex turn-around planning and execution, and small capital programs. We provide key management and support services over all aspects of the operations of a facility, including managing subcontractors and other on-site personnel.
CH2M Acquisition
On December 15, 2017, the Company completed the acquisition of CH2M. For purposes of the Company’s second quarter fiscal 2018 segment reporting, the operating financial information of CH2M has been categorized within the Company’s new LOB business structure, with its sales and 2016, respectively,operating profit results for the time period during which CH2M has been under the ownership of pre-taxthe Company being allocated to the Company’s ATEN, BIAF and ECR lines of business.
Restructuring and Other Charges
During the fourth fiscal quarter of 2017, the Company implemented certain restructuring activities (primarily severance and lease abandonment costs associated with co-locating Jacobs and CH2M offices) and integration activities (primarily professional fees for outside services and personnel related costs) associated with the 2015 Restructuring.The following table summarizesCompany’s acquisition of CH2M. Following the major typeclosing of the CH2M acquisition, these activities have continued into the first half of fiscal 2018 and include restructuring costs foractivities amounting to approximately $55.2 million and $60.7 million in pre-tax charges during the three and six month periods ended
March 31, 201730, 2018, respectively. The integration activities for the same periods amounted to approximately $14.2 million and April 1, 2016 (in thousands): | Three Months Ended | | | Six Months Ended | |
| March 31, 2017 | | | April 1, 2016 | | | March 31, 2017 | | | April 1, 2016 | |
Lease Abandonments | $ | 27,992 | | | $ | 19,872 | | | $ | 44,601 | | | $ | 64,271 | |
Involuntary Terminations | | 18,554 | | | | 15,410 | | | | 29,886 | | | | 38,289 | |
Outside Services | | 2,261 | | | | 86 | | | | 3,552 | | | | 1,191 | |
Other restructuring related | | 3,459 | | | | - | | | | 5,968 | | | | - | |
Total | $ | 52,266 | | | $ | 35,368 | | | $ | 84,007 | | | $ | 103,751 | |
The 2015 Restructuring was substantially completed as of$28.0 million in pre-tax charges for the end of the second fiscal quarter of 2017, with future expensesthree and six months ended March 30, 2018, respectively. These activities are expected to continue through 2019. These activities are not expected to exceed $15 million.involve the exit of any service types or client end-markets. The Company expectsis targeting to achieve annual cost savings fromof $150.0 million upon the 2015 Restructuring upon its completion to approximate $285 million per year.
Also, duringof these activities.
During the second fiscal quarter of 2017, the Company entered into strategic business restructuring activities associated with realignment of its Europe, U.K. and Middle East regional operations.operations in our BIAF segment. Pre-tax net charges of $22.6 million were recorded during the quarter associated mainly with net realizable value write-offs on contract accounts receivable of $16.5 million, with additional charges recorded for statutory redundancy and severance costs of $1.4 million and other liabilities of $4.7 million which are both expected to be paid or settled within the next 12 months. Further, management has determined thatAdditional charges of $1.2 million were recorded under this business realignment during third quarter fiscal 2017 associated mainly with contract accounts receivable charges.
During the second fiscal quarter of 2015, the Company began implementing a series of initiatives intended to improve operational efficiency, reduce costs, and better position itself to drive growth of the business in the future. We refer to these
business restructuring activities do not qualify for discontinued operations treatmentinitiatives, in
accordance with U.S. GAAPthe aggregate, as the
associated businesses were not material.Collectively,“2015 Restructuring”. These activities evolved and developed over time as management identified and evaluated opportunities for changes in the Company’s operations (and related areas of potential cost savings), as economic conditions changed and as the realignment of the Company’s operations into its four global LOBs was implemented. Actions related to the 2015 Restructuring included involuntary terminations, the abandonment of certain leased offices, combining operational organizations, and the colocation of employees into other existing offices. These activities did not involve the exit of any service types or client end-markets. The 2015 Restructuring was completed in fiscal 2017 although, related cash payments continue under the related accruals recorded in connection with these activities.
Collectively, the above mentioned business restructuring activities in the Europe, U.K. and Middle East region are referred to as “Restructuring and other charges”. charges.”
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following table summarizes the effectsimpacts of the Restructuring and other charges (or recoveries, which primarily relate to the reversals of lease abandonment accruals related to previously vacated facilities which are now planned to be utilized) on the Company's reportable segment income by line of business in connection with the Company’s consolidated resultsCH2M acquisition for the three and six months ended March 30, 2018 and the 2015 Restructuring and realignment of the Company's Europe, U.K. and Middle East regional operations for the three and six months period ended March 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Aerospace, Technology, Environmental and Nuclear | $ | 1,409 |
| | $ | 1,274 |
| | $ | 1,722 |
| | $ | 1,646 |
|
| Buildings, Infrastructure and Advanced Facilities | 18,287 |
| | 9,996 |
| | 21,178 |
| | 18,002 |
|
| Energy, Chemicals and Resources | (7,588 | ) | | 20,634 |
| | (3,967 | ) | | 36,442 |
|
| Corporate | 57,243 |
| | 20,362 |
| | 69,768 |
| | 27,917 |
|
| Total | $ | 69,351 |
| | $ | 52,266 |
| | $ | 88,701 |
| | $ | 84,007 |
|
The activity in the Company’s accrual for the Restructuring and April 1, 2016, respectivelyother charges for the six month period ended March 30, 2018 is as follows (in thousands, exceptthousands):
|
| | | |
| Balance at September 29, 2017 | $ | 142,767 |
|
| CH2M Acquisition Assumed Liabilities | 31,576 |
|
| CH2M Charges | 88,701 |
|
| Payments | (77,093 | ) |
| Balance at March 30, 2018 | $ | 185,951 |
|
The following table summarizes the Restructuring and other charges by major type of costs in connection with the CH2M acquisition for
earnings per share)the three and six months ended March 30, 2018 and the 2015 Restructuring and realignment of the Company's Europe, U.K. and Middle East regional operations for the three and six months ended March 31, 2017 (in thousands):
| | Three Months Ended | | | Six Months Ended | |
| | March 31, 2017 | | | March 31, 2017 | |
| | U.S. GAAP | | | Effects of Restructuring and Other Charges | | | Without Restructuring and Other Charges | | | U.S. GAAP | | | Effects of Restructuring and Other Charges | | | Without Restructuring and Other Charges | |
Revenue | | $ | 2,302,567 | | | $ | 16,529 | | | $ | 2,319,096 | | | $ | 4,854,171 | | | $ | 16,529 | | | $ | 4,870,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Direct cost of contracts | | | 1,883,283 | | | | (4,663 | ) | | | 1,878,620 | | | | 4,015,575 | | | | (4,663 | ) | | | 4,010,912 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 351,111 | | | | (51,033 | ) | | | 300,078 | | | | 681,795 | | | | (82,774 | ) | | | 599,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other (expense) income, net | | | (7,682 | ) | | | 1,233 | | | | (6,449 | ) | | | (10,430 | ) | | | 1,233 | | | | (9,197 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings Before Taxes | | | 60,491 | | | | 73,458 | | | | 133,949 | | | | 146,371 | | | | 105,199 | | | | 251,570 | |
Income Tax (Expense) Benefit | | | (16,326 | ) | | | (23,587 | ) | | | (39,913 | ) | | | (41,053 | ) | | | (32,526 | ) | | | (73,579 | ) |
Net earnings of the Group | | | 44,165 | | | | 49,871 | | | | 94,036 | | | | 105,318 | | | | 72,673 | | | | 177,991 | |
Net Earnings Attributable to Non-controlling interests | | | 5,853 | | | | (4,663 | ) | | | 1,190 | | | | 5,236 | | | | (4,663 | ) | | | 573 | |
Net earnings Attributable to Jacobs | | $ | 50,018 | | | $ | 45,208 | | | $ | 95,226 | | | $ | 110,554 | | | $ | 68,010 | | | $ | 178,564 | |
Diluted earnings per share | | $ | 0.41 | | | $ | 0.37 | | | $ | 0.78 | | | $ | 0.91 | | | $ | 0.56 | | | $ | 1.47 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Lease Abandonments | $ | 37,073 |
| | $ | 27,992 |
| | $ | 40,436 |
| | $ | 44,601 |
|
| Involuntary Terminations | 16,936 |
| | 18,554 |
| | 19,120 |
| | 29,886 |
|
| Outside Services | 8,170 |
| | 2,261 |
| | 16,759 |
| | 3,552 |
|
| Other | 7,172 |
| | 3,459 |
| | 12,386 |
| | 5,968 |
|
| Total | $ | 69,351 |
| | $ | 52,266 |
| | $ | 88,701 |
| | $ | 84,007 |
|
Page 23
Cumulative amounts incurred to date for Restructuring and other charges by each major type of costs as of March 30, 2018 are as follows (in thousands):
|
| | | |
| Lease Abandonments | $ | 279,295 |
|
| Involuntary Terminations | 203,699 |
|
| Outside Services | 41,127 |
|
| Other | 21,317 |
|
| Total | $ | 545,438 |
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| | Three Months Ended | | | Six Months Ended | |
| | April 1, 2016 | | | April 1, 2016 | |
| | U.S. GAAP | | | Effects of 2015 Restructuring | | | Without 2015 Restructuring | | | U.S. GAAP | | | Effects of 2015 Restructuring | | | Without 2015 Restructuring | |
Selling, general and administrative expenses | | $ | 357,435 | | | $ | (35,183 | ) | | $ | 322,252 | | | $ | 738,459 | | | $ | (103,566 | ) | | $ | 634,893 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other income (expense), net | | | 3,675 | | | | 185 | | | | 3,860 | | | | 2,012 | | | | 185 | | | | 2,197 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings Before Taxes | | | 90,456 | | | | 35,368 | | | | 125,824 | | | | 148,243 | | | | 103,751 | | | | 251,994 | |
Income Tax (Expense) Benefit | | | (27,067 | ) | | | (9,668 | ) | | | (36,735 | ) | | | (34,548 | ) | | | (29,915 | ) | | | (64,463 | ) |
Net earnings of the Group | | | 63,389 | | | | 25,700 | | | | 89,089 | | | | 113,695 | | | | 73,836 | | | | 187,531 | |
Net Earnings Attributable to Non-controlling interests | | | 1,861 | | | | — | | | | 1,861 | | | | (1,931 | ) | | | — | | | | (1,931 | ) |
Net earnings Attributable to Jacobs | | $ | 65,250 | | | $ | 25,700 | | | $ | 90,950 | | | $ | 111,764 | | | $ | 73,836 | | | $ | 185,600 | |
Diluted earnings per share | | $ | 0.54 | | | $ | 0.21 | | | $ | 0.75 | | | $ | 0.92 | | | $ | 0.61 | | | $ | 1.53 | |
Results of Operations for the three and six months ended March 30, 2018 and March 31, 2017
(in thousands, except per share information)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Revenues | $ | 3,935,028 |
| | $ | 2,302,567 |
| | $ | 6,685,338 |
| | $ | 4,854,171 |
|
| Direct cost of contracts | (3,161,663 | ) | | (1,883,283 | ) | | (5,424,794 | ) | | (4,015,575 | ) |
| Gross profit | 773,365 |
| | 419,284 |
| | 1,260,544 |
| | 838,596 |
|
| Selling, general and administrative expenses | (627,079 | ) | | (351,111 | ) | | (1,066,615 | ) | | (681,795 | ) |
| Operating Profit | 146,286 |
| | 68,173 |
| | 193,929 |
| | 156,801 |
|
| Other Income (Expense): | | | | | | | |
| Interest income | 1,785 |
| | 2,088 |
| | 5,619 |
| | 3,574 |
|
| Interest expense | (19,228 | ) | | (3,755 | ) | | (26,319 | ) | | (7,273 | ) |
| Miscellaneous income (expense), net | (6,676 | ) | | (6,015 | ) | | (9,146 | ) | | (6,731 | ) |
| Total other (expense) income, net | (24,119 | ) | | (7,682 | ) | | (29,846 | ) | | (10,430 | ) |
| Earnings Before Taxes | 122,167 |
| | 60,491 |
| | 164,083 |
| | 146,371 |
|
| Income Tax Expense | (70,235 | ) | | (16,326 | ) | | (109,590 | ) | | (41,053 | ) |
| Net Earnings of the Group | 51,932 |
| | 44,165 |
| | 54,493 |
| | 105,318 |
|
| Net (Earnings) Loss Attributable to Noncontrolling Interests | (3,345 | ) | | 5,853 |
| | (3,743 | ) | | 5,236 |
|
| Net Earnings Attributable to Jacobs | $ | 48,587 |
| | $ | 50,018 |
| | $ | 50,750 |
| | $ | 110,554 |
|
| Net Earnings Per Share: | | | | | | | |
| Basic | $ | 0.34 |
| | $ | 0.41 |
| | $ | 0.38 |
| | $ | 0.91 |
|
| Diluted | $ | 0.34 |
| | $ | 0.41 |
| | $ | 0.38 |
| | $ | 0.91 |
|
Overview – Three and Six Months Ended March 31, 2017The Company’s U.S. GAAP net earnings for the three months ended March 31, 2017 decreased by $15.2 million, or 23.3%, compared to the corresponding period last year. The Company’s U.S. GAAP net earnings for the six months ended March 31, 2017 decreased by $1.2 million, or 1.1%, compared to the corresponding period last year. Excluding the effects of Restructuring and other charges, the Company’s adjusted net earnings for the three months ended March 31, 2017 totaled $95.2 million, representing an increase of $4.3 million, or 4.7%, from the corresponding second fiscal quarter period last year. Excluding the effects of Restructuring and other charges, the Company’s adjusted net earnings for the six months ended March 31, 2017 totaled $178.6 million, representing a decreased of $7.0 million, or 3.8%, from the corresponding six month period last year.
Backlog at March 31, 2017 was $18.5 billion, and represents an increase of $0.2 billion over backlog at April 1, 2016. Excluding the effects of changes in currency exchange rates, backlog was up $0.5 billion, or 2.9%, as compared to the corresponding period last year.
Results of Operations
30, 2018
Net earnings for the second fiscal quarter of 20172018 ended March 31, 2017 decreased $15.230, 2018, were $48.6 million (or $0.34 per diluted share), a decrease of $1.4 million, or 23.3%2.9%, tofrom $50.0 million (or $0.41 per diluted share) from $65.3 million (or $0.54 per diluted share) for the corresponding period last year. Included in the Company’s operating results for the three months ended March 30, 2018 were $51.2 million (or $0.36 per share) in after tax Restructuring and other charges, $3.5 million in CH2M transaction costs and $40.6 million in income tax charges associated with the Tax Cuts and Jobs Act (“the Act”) enacted on December 22, 2017. Our second quarter fiscal 2017 results included $45.2 million (or $0.37 per share) in after tax charges associated with Restructuring and other charges.
For the six months ended March 31, 201730, 2018, net earnings decreased $1.2were $50.8 million (or $0.38 per diluted share), a decrease of $59.8 million, or 1.1%54.1%, tofrom $110.6 million (or $0.91 per diluted share) from $111.8 million (or $0.92 per diluted share) for the corresponding period last year. ExcludingIncluded in the effects ofCompany’s operating results for the six months ended March 30, 2018 were $65.9 million (or $0.49 per share) in after tax Restructuring and other charges, occurring in the second fiscal quarter of 2017 and 2016, adjusted net earnings increased $4.3 million, or 4.7%, to $95.2$54.9 million (or $0.78$0.41 per diluted share) from $91.0in transaction costs associated with the Company’s December 15, 2017 acquisition of CH2M and $69.4 million (or $0.75$0.52 per diluted share) forin income tax charges associated with the corresponding period last year. Excluding the effects ofTax Cuts and Jobs Act (the “Act”). The six months ended March 31, 2018 included $68.0 million (or $0.56 per share) in after tax charges associated with Restructuring and other charges occurringcharges.
On December 15, 2017, the Company completed the acquisition of CH2M, an international provider of engineering, construction, and technical services, by acquiring 100% of the outstanding shares of CH2M common stock and preferred stock. The purpose of the acquisition was to further diversify the Company’s market presence in the
six months end March 31, 2017water, nuclear and
April 1, 2016, adjusted net earnings decreased $7.0environmental remediation sectors and to further the Company’s growth strategy. The Company paid total consideration of approximately $1.8 billion in cash (excluding $315.2 million
or 3.8%,of cash acquired) and issued approximately $1.4 billion of Jacobs’ common stock to
$178.6 million (or $1.47 per diluted share) from $185.6 million (or $1.53 per diluted share) for the
corresponding period last year.Total revenuesformer stockholders and certain equity award holders of CH2M.
Consolidated Results of Operations
Revenues for the second fiscal quarter of 2017 decreased by $479.2 million,2018 were $3.94 billion, an increase of $1.63 billion, or 17.2%, to70.9% from $2.30 billion from $2.78 billion for the corresponding period last year. For the six months ended March 31, 2017, total30, 2018, revenues decreased by $775.5 million,were $6.69 billion, an increase of
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
$1.83 billion, or 13.8%37.7%, tofrom $4.85 billion from $5.63 billion for the corresponding period last year. The decreaseincrease in revenues was due primarily to lowerfavorable impacts from the CH2M acquisition, which contributed approximately $1.18 billion in incremental revenue for the quarter and $1.31 billion for the six months ended March 30, 2018. Also, higher volumes in our legacy ATEN, BIAF and ECR businesses also contributed to the Petroleum & Chemicals, Aerospace & Technologyincrease. Pass-through costs included in revenues for the three and Industrial LOB’s, partially offset bysix months ended March 30, 2018 were $712.9 million and $1.31 billion, respectively, an increase of $152.3 million and $75.5 million, or 27.2% and 6.1%, respectively from the corresponding period last year.
Gross profit for the second quarter of 2018 was $773.4 million, up $354.1 million, or 84.4% from $419.3 million from the corresponding quarter in 2017. Our gross profit margins were 19.7% and 18.2% for the three month periods ended March 30, 2018 and March 31, 2017, respectively. Gross profit for the six months ended March 30, 2018 was $1,260.5 million, up $421.9 million, or 50.3% from $838.6 million from the corresponding quarter in 2017. Our gross profit margins were 18.9% and 17.3% for the six month periods ended March 30, 2018 and March 31, 2017, respectively. The higher volume impacts seen in our ATEN, BIAF and ECR businesses, incremental benefits of the CH2M businesses acquired, and our continuing strategic focus on realigning our portfolio to higher margin businesses and project execution drove improving gross profit and margins for the year over year periods.
SG&A expenses for the three months ended March 30, 2018 were $627.1 million, an increase of $276.0 million, or 78.6%, from $351.1 million for the corresponding period last year. SG&A expenses for the six months ended March 30, 2018 were $1.07 billion, an increase of $384.8 million, or 56.4%, from $681.8 million for the corresponding period last year. The increase in SG&A expenses for the three months ended comparative periods was due mainly to incremental SG&A expense from the acquired CH2M businesses amounting to approximately $246.7 million during the three-month 2018 period, which included $48.6 million of restructuring and other charges and deal related costs. Also, charges of $17.3 million were recorded during the three months ended March 30, 2018 associated with a legal matter.. Also, unfavorable impacts from foreign exchange (mainly from the stronger Euro and British Pound) approximated $10.4 million. SG&A expense for the three months ended March 30, 2018 included Restructuring and charges of $68.9 million, CH2M transaction costs of $4.9 million during the three-month period ended March 30, 2018, while three months ended March 31, 2017 SG&A included $51.0 million in charges from the 2015 Restructuring which concluded at the end of fiscal 2017. For the six months ended March 30, 2018, the increase in SG&A expenses was due mainly to incremental SG&A expense from the CH2M businesses acquired of approximately $296.9 million during the six-month 2018 period, which included $78.0 million of restructuring and other charges and deal related costs, as well as higher personnel related costs year over year and charges associated with a legal matter of $17.3 million. . Also, unfavorable impacts from foreign exchange (mainly from the stronger Euro and British Pound) approximated $16.0 million.
Net interest expense for the three and six months ended March 30, 2018 was $17.4 million and $20.7 million, respectively, an increase of $15.8 million and $17.0 million from $1.7 million and $3.7 million, respectively, for the corresponding periods last year. The increases in net interest expense as compared to the corresponding periods last year was due primarily to higher levels of average debt balances outstanding related to financing activities for the acquisition of CH2M, which was partially funded with term loan financing of $1.5 billion and revolving credit line borrowings of $850 million.
Miscellaneous expense, net for the three and six months ended March 30, 2018 was $6.7 million and $9.1 million, respectively, up $0.7 million and $2.4 million from $6.0 million and $6.7 million, respectively, for the corresponding periods last year. The increases were due primarily to unfavorable year over year impacts from unrealized gains and losses from foreign exchange.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the Buildings & Infrastructure LOB. These lower volumes were driven mainly by lower field services volume,United States. The Act reduces the top corporate U.S. federal statutory tax rate from 35% to 21% starting on January 1, 2018, resulting in a blended statutory tax rate for fiscal year filers. The Company’s blended federal statutory tax rate for fiscal 2018 is 24.6%. It also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, places limitations and exclusions on varied tax deductions and creates new taxes on certain foreign sourced earnings. The majority of the tax provisions are effective for the first tax year beginning after January 1, 2018, which will be the Company’s taxable year beginning fiscal 2019.
The Company’s consolidated effective income tax rate for the three and six months ended March 30, 2018 was 57.5% and 66.8%, respectively, an increase from 27.0% and 28.1%, respectively, for the corresponding periods last year. The increase in the effective tax rate for the three months ended March 30, 2018 versus the 2017 corresponding period is primarily
due to $40.6 million in discrete expense during the current year quarter from the provisional remeasurement of the U.S. deferred taxes, principally related to changes in estimate associated with
P&C customersthe preliminary purchase price accounting on the CH2M acquisition. The increase in the effective tax rate for the six month period ended March 30, 2018 over the prior year is due to $69.4 million in net discrete charges, comprised of a $16.9 million detriment from the provisional remeasurement of the deferred tax items in the U.S., and
the timinga corresponding valuation allowance charge of
project completions versus new project timing.Page 24
$52.5 million.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Reconciliation
It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions of approximately $6.7 million (being realized as a reduction in income tax expense) as a result of concluding various tax audits and closing tax years.
Segment
Operating Profit to Total Operating ProfitFinancial Information
The following table
reconcilesprovides selected financial information for our operating segments and includes a reconciliation of segment operating profit to total
U.S. GAAP operating profit by including certain corporate-level expenses and expenses relating to Restructuring and other charges
and transaction expenses relating to the CH2M acquisition (in thousands).
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Segment Operating Profit | $ | 148,736 | | | $ | 140,946 | | | $ | 287,401 | | | $ | 288,355 | |
Unallocated corporate expenses | | (8,338 | ) | | | (18,797 | ) | | | (26,634 | ) | | | (38,373 | ) |
Restructuring and Other Charges | | (72,225 | ) | | | (35,368 | ) | | | (103,966 | ) | | | (103,751 | ) |
Total Operating Profit | $ | 68,173 | | | $ | 86,781 | | | $ | 156,801 | | | $ | 146,231 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Revenues from External Customers: | | | | | | | |
| Aerospace, Technology, Environmental and Nuclear | $ | 1,105,673 |
| | $ | 602,043 |
| | $ | 1,851,594 |
| | $ | 1,205,228 |
|
| Buildings, Infrastructure and Advanced Facilities | 1,758,412 |
| | 897,829 |
| | 2,790,177 |
| | 1,836,723 |
|
| Energy, Chemicals and Resources | 1,070,943 |
| | 802,695 |
| | 2,043,567 |
| | 1,812,220 |
|
| Total | $ | 3,935,028 |
| | $ | 2,302,567 |
| | $ | 6,685,338 |
| | $ | 4,854,171 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Segment Operating Profit: | | | | | | | |
| Aerospace, Technology, Environmental and Nuclear (1) | $ | 61,338 |
| | $ | 44,341 |
| | $ | 127,669 |
| | $ | 94,397 |
|
| Buildings, Infrastructure and Advanced Facilities (2) | 138,017 |
| | 63,342 |
| | 201,986 |
| | 118,690 |
|
| Energy, Chemicals and Resources | 56,328 |
| | 41,053 |
| | 102,790 |
| | 74,314 |
|
| Total Segment Operating Profit | 255,683 |
| | 148,736 |
| | 432,445 |
| | 287,401 |
|
| Other Corporate Expenses | (35,660 | ) | | (8,338 | ) | | (77,789 | ) | | (26,634 | ) |
| Restructuring and Other Charges | (68,885 | ) | | (72,225 | ) | | (88,234 | ) | | (103,966 | ) |
| CH2M Transaction Costs | (4,852 | ) | | — |
| | (72,493 | ) | | — |
|
| Total U.S. GAAP Operating Profit | 146,286 |
| | 68,173 |
| | 193,929 |
| | 156,801 |
|
| Total Other (Expense) Income, net (3) | (24,119 | ) | | (7,682 | ) | | (29,846 | ) | | (10,430 | ) |
| Earnings Before Taxes | $ | 122,167 |
| | $ | 60,491 |
| | $ | 164,083 |
| | $ | 146,371 |
|
| |
| (1) | Includes $17.3 million in charges during the three and six month periods ended March 30, 2018 associated with a legal matter. |
| |
| (2) | Excludes $22.6 million in restructuring and other charges for the three and six months ended March 31, 2017. See Note 10, Restructuring and Other Charges. |
| |
| (3) | Includes deferred financing fees related to the CH2M acquisition of $466 thousand and $722.0 thousand for the three and six months ended March 30, 2018, respectively. |
During the fourth fiscal quarter of 2017, the Company implemented certain restructuring activities (primarily severance related activities) associated with the Company’s announced definitive agreement to acquire CH2M. Following the closing of the CH2M acquisition, these activities have continued into the first half of fiscal 2018 and include associated charges for professional services, personnel costs, severance and costs associated with co-locating Jacobs and CH2M offices, amounting to approximately $69.4 million in pre-tax charges during second quarter ended March 30, 2018. These activities are expected to continue through 2019. These activities are not expected to involve the exit of any service types or client end-markets.
Transaction costs associated with the CH2M acquisition in the accompanying consolidated statements of earnings for the six months ended March 30, 2018 are comprised of the following (in millions):
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
|
| | | |
| Personnel costs | $ | 45.9 |
|
| Professional services and other expenses | 26.9 |
|
| Total | $ | 72.8 |
|
Personnel costs above include change of control payments and related severance costs. In evaluating the Company’s performance by operating segment, the CODM reviews revenues and operating profit. As discussed above, segment operating profit includes not only local SG&A expenses but the SG&A expenses of the Company’s support groups that have been allocated to the segments. In addition, the Company attributes each LOB’s specific incentive compensation plan costs to the LOBs. The revenues of certain LOBs are more affected by pass-through revenues than other LOBs. The methods for recognizing revenue, incentive fees, project losses, and change orders are consistent among the LOBs.
Aerospace, Technology, Environmental and Nuclear
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Revenue | $ | 1,105,673 |
| | $ | 602,043 |
| | $ | 1,851,594 |
| | $ | 1,205,228 |
|
| Operating Profit | $ | 61,338 |
| | $ | 44,341 |
| | $ | 127,669 |
| | $ | 94,397 |
|
Aerospace, Technology, Environmental and Nuclear segment revenues for the three months ended March 30, 2018 were $1.11 billion, up $503.6 million, or 83.7%, from $602.0 million for the corresponding period last year. Segment revenues for the six months ended March 30, 2018 were $1.85 billion, up $646.4 million, or 53.6%, from $1.21 billion for the corresponding period last year. The three and six month increases in revenue were due in large part to approximately $373.0 million and $457.0 million, respectively, in incremental nuclear and environmental revenue resulting from the CH2M acquisition. Also, our revenues were positively impacted by year over year revenue volume growth across our legacy portfolio, highlighted by increased spending by customers in the U.S. government business sector. Year over year impacts on revenues from unfavorable foreign currency were not material.
Operating profit for the segment was $61.3 million for the three months ended March 30, 2018, up $17.0 million, or 38.3%, from $44.3 million for the corresponding period last year. Operating profit for the segment was $127.7 million for the six months ended March 30, 2018, up $33.3 million, or 35.2% from $94.4 million for the corresponding period last year. In addition to incremental operating profit benefits from the CH2M acquisition, the increase from the prior year was primarily attributable to improvements in our nuclear and defense unit in the U.K. and fee income with our AWE business. SG&A increased by approximately $64.7 million and $74.6 million for the three and six months ended March 30, 2018, with this increase being attributable mainly to incremental SG&A associated with the CH2M acquisition during the first half of fiscal 2018 and additional charges of $17.3 million associated with a legal matter incurred during the second quarter of fiscal 2018.
Buildings, Infrastructure and Advanced Facilities
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Revenue | $ | 1,758,412 |
| | $ | 897,829 |
| | $ | 2,790,177 |
| | $ | 1,836,723 |
|
| Operating Profit | $ | 138,017 |
| | $ | 63,342 |
| | $ | 201,986 |
| | $ | 118,690 |
|
Revenues for the Buildings, Infrastructure and Advanced Facilities segment for the three months ended March 30, 2018 were $1.76 billion, up $860.6 million, or 95.9%, from $897.8 million for the corresponding period last year. Segment revenues for the six months ended March 30, 2018 were $2.79 billion, up $953.5 million, or 51.9%, from $1.84 billion for the corresponding period last year. The year over year increase in revenues for the three and six month periods was due in part to favorable impacts from the CH2M acquisition of approximately $722.0 million and $752.0 million, respectively, together with revenue increases in our U.K., U.S. and Asia Pacific markets around continued strong investment in transport infrastructure and in the project-management/construction-management ("PMCM") market. Impacts on revenues from favorable foreign currency were approximately $23.0 million and $59.0 million for the three and six month periods of 2018 compared to the corresponding prior year periods in 2017, respectively.
Operating profit for the segment for the three months ended March 30, 2018 was $138.0 million, an increase of $74.7 million, or 117.9%, from $63.3 million for the comparative period in 2017. Operating profit for the segment for the six months ended March 30, 2018 was $202.0 million, an increase of $83.3 million, or 70.2%, from $118.7 million for the comparative period in 2017.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The year over year increase in operating profit for the three and six months periods of 2018 compared to 2017 was in part due to favorable impacts from the CH2M acquisition, together with positive impacts from the higher year over year revenues for the segment. SG&A increased by approximately $144.8 million and $167.0 million for the three and six months ended March 30, 2018, with this increase being attributable mainly to incremental SG&A associated with the CH2M acquisition during the first half of fiscal 2018.
Energy, Chemicals and Resources
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | March 30, 2018 | | March 31, 2017 | | March 30, 2018 | | March 31, 2017 |
| Revenue | $ | 1,070,943 |
| | $ | 802,695 |
| | $ | 2,043,567 |
| | $ | 1,812,220 |
|
| Operating Profit | $ | 56,328 |
| | $ | 41,053 |
| | $ | 102,790 |
| | $ | 74,314 |
|
Energy, Chemicals and Resources revenues for the three months ended March 30, 2018 were $1.07 billion, an increase of $268.2 million, or 33.4%, from $802.7 million for the corresponding period last year. Segment revenues for the six months ended March 30, 2018 were $2.04 billion, up $231.3 million, or 12.8%, from $1.81 billion for the corresponding period last year. The increase in revenues for the three and six months ended March 30, 2018 as compared to the prior year was due primarily to continued improvement in the construction operations and maintenance market as clients focus on capital efficiency and consolidating their customer portfolio, the continuing recovery of mining and minerals market primarily driven by feasibility studies, and the increasing trend among oil producers to drive downstream investments to refining and chemicals. Also, the CH2M acquisition added approximately $87.0 million to revenue during the quarter and approximately $104.0 million during the year to date period. Additionally, foreign currency impacts were favorable by approximately $43.6 million and $52.5 million, respectively, for the three and six month periods of 2018 versus the corresponding periods of 2017.
Operating profit for the segment for the three months ended March 30, 2018 was $56.3 million, an increase of $15.3 million or 37.2% from $41.1 million for the corresponding period last year. Operating profit for the segment for the six months ended March 30, 2018 was $102.8 million, an increase of $28.5 million, or 38.3%, from $74.3 million for the corresponding period last year. The increase in profitability was due to higher revenue and favorable mix across the portfolio. SG&A for the segment was up $28.5 million and $37.1 million for the three and six month periods ended March 30, 2018 versus the 2017 periods, due mainly to incremental operating general and administrative expense coming with the CH2M acquisition. Impacts on operating profits from favorable foreign currency were not material for the three-month and six-month periods of 2018.
Other Corporate Expenses
Other corporate expenses for the three months ended March 30, 2018 were $35.7 million, an increase of $27.3 million from $8.3 million for the corresponding period last year and $77.8 million, an increase of $51.2 million from $26.6 million for the six month period ended March 30, 2018. These increases were due primarily to higher professional service fees, personnel related costs, settlement charges associated with the Sverdrup U.S. pension plan amounting to $3.8 million and higher depreciation associated with increased corporate technology investments, partially offset by savings associated with the 2015 Restructuring program.
Included in
“Unallocatedother corporate
expenses”expenses in the above table are costs and expenses which relate to general corporate activities as well as corporate-managed benefit and insurance programs. Such costs and expenses include: (i) those elements of SG&A expenses relating to the business as a whole; (ii) those elements of our incentive compensation plans relating to corporate personnel whose other compensation costs are not allocated to the LOBs; (iii) the amortization of intangible assets acquired as part of purchased business combinations; (iv) the quarterly variances between the Company’s actual costs of certain of its self-insured integrated risk and employee benefit programs and amounts charged to the LOBs; and (v) certain adjustments relating to costs associated with the Company’s international defined benefit pension plans. In addition,
“Unallocatedother corporate
expenses”expenses may also include from time to time certain adjustments to contract margins (both positive and negative) associated with projects where it has been determined, in the opinion of management, that such adjustments are not indicative of the performance of the related LOB.
“Unallocated corporate expenses” for the three months ended March 31, 2017 decreased $10.5 million, or 55.6% from the corresponding period last year. For the six months ended March 31, 2017, “unallocated corporate expenses” decreased $11.7 million, or 30.6% from the corresponding period last year. The decrease in unallocated corporate expenses for the three and six months ended March 31, 2017 as compared to the prior year comparable periods was driven primarily by lower pension costs associated with the curtailment of our U.K. plans and the de-recognition of the U.S. pension plan for participating employees who were assigned to, and worked exclusively on, a specific operating contract with the U.S. federal government. Additionally, during the second fiscal quarter of 2017 approximately $6 million in corporate reserves were released in connection with the settlement of certain client contractual disputes.
“Restructuring and other charges” for the three months ended March 31, 2017 increased $36.9 million, or 104.2%, from the corresponding period last year. For the six months ended March 31, 2017, “Restructuring and other charges” were $104.0 million and was essentially flat as compared to the corresponding period last year. The increase for the three months ended March 31, 2017 was driven primarily by lease abandonments in California and Canada in connection with the 2015 Restructuring. In addition, during the second fiscal quarter of 2017, the Company entered into strategic business restructuring activities associated with realignment of its Europe, U.K. and Middle East regional operations. Pre-tax net charges of $22.6 million were recorded during the quarter associated mainly with net realizable value write-offs on contract accounts receivable of $16.5 million, with additional charges recorded for statutory redundancy and severance costs of $1.4 million and other liabilities of $4.7 million which are both expected to be paid or settled within the next twelve months. Further, management has determined that these business restructuring activities do not qualify for discontinued operations treatment in accordance with U.S. GAAP as the associated businesses were not material.
Operating Results
In evaluating the Company’s performance by operating segment, the CODM reviews various metrics and statistical data for each LOB but focuses primarily on revenues and operating profit. As discussed above, segment operating profit includes not only local SG&A expenses but the SG&A expenses of the Company’s support groups that have been allocated to the segments. In addition, the Company attributes each LOB’s specific incentive compensation plan costs to the LOBs. The revenues of certain LOBs are more affected by pass-through revenues than other LOBs. The methods for recognizing revenue, incentive fees, project losses, and change orders are consistent among the LOBs.
Aerospace & Technology
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Revenue | $ | 577,040 | | | $ | 669,464 | | | $ | 1,154,476 | | | $ | 1,339,655 | |
Operating Profit | | 45,057 | | | | 55,121 | | | | 96,144 | | | | 103,120 | |
Page 25
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Aerospace & Technology segment revenues for the three months ended March 31, 2017 was $577.0 million, down $92.4 million, or 13.8%, from $669.5 million for the corresponding period last year. For the six months ended March 31, 2017, revenues for this segment were $1.15 billion, down $185.2 million, or 13.8%, from $1.34 billion for the corresponding period last year. The decrease in revenues for both periods was mainly in our U.S. government business sector, where rebid losses and small business award preferences drove the declines. Also, foreign currency impacts contributed approximately $7 million and $17 million of the revenue decline for the respective three month and six month period comparisons.
Operating profit for the segment was $45.1 million for the three months ended March 31, 2017, down $10.1 million, or 18.3% from $55.1 million for the corresponding period last year. Operating profit for the six months ended March 31, 2017 was $96.1 million, down $7.0 million, or 6.8% from $103.1 million for the same period last year. The decrease in operating profit for both periods was due primarily to the revenue declines in the U.S. government business sector mentioned above as well as $4 million in lower equity income reported from our U.K. joint venture based on lower project work levels year over year.
Buildings & Infrastructure
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Revenue | $ | 585,242 | | | $ | 579,128 | | | $ | 1,165,859 | | | $ | 1,142,458 | |
Operating Profit | | 43,987 | | | | 42,463 | | | | 82,784 | | | | 82,915 | |
Buildings & Infrastructure revenues for the three months ended March 31, 2017 increased $6.1 million, or 1.1%, to $585.2 million from $579.1 million for the corresponding period last year. For the six months ended March 31, 2017, revenues increased $23.4 million, or 2.0%, to $1.17 billion from $1.14 billion for the corresponding period last year. The increase in revenues for the three and six months ended March 31, 2017 as compared to the prior year comparable period was due mainly to U.S. client spending level increases in the project-management/construction-management (“PMCM”) market, offset in part by unfavorable impacts from foreign currency of $14 million and $30 million, respectively, for the three and six months ended March 31, 2017 as compared to the same periods in 2016.
Operating profit for Buildings & Infrastructure for the three months ended March 31, 2017 increased $1.5 million, or 3.6%, from $42.5 million to $44.0 million when compared to the corresponding period last year. For the six months ended March 31, 2017, operating profit was $82.8 million and was essentially flat when compared to the corresponding period last year. Increases in operating profit for both the three and six month periods ended March 31, 2017 associated mainly with the higher revenue levels in PMCM were largely offset by a contract settlement charge of $6 million during the second fiscal quarter of 2017.
Industrial
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Revenue | $ | 582,458 | | | $ | 666,556 | | | $ | 1,334,196 | | | $ | 1,338,656 | |
Operating Profit | | 24,073 | | | | 12,417 | | | | 49,202 | | | | 39,772 | |
Industrial revenues for the three months ended March 31, 2017 decreased $84.1 million, or 12.6%, to $582.5 million from $666.6 million for the corresponding period last year. For the six months ended March 31, 2017 revenues were $1.33 billion and were essentially flat when compared to the corresponding period last year. The decrease in revenues for the three months ended March 31, 2017, as compared to the corresponding period last year, was due mainly to a decline in the Field Services business of $86.8 million resulting from a drop in major capex and maintenance spending programs primarily related to customers in the oil and gas industry, as well as unfavorable impacts from foreign currency of $7 million. On a six month basis, the decline in Field Services in the second fiscal quarter of 2017 was offset by increases in Industrial’s overall revenues for the first fiscal quarter of 2017 due mainly to increased client major capex spending in the Life Sciences business, partially offset by a decline in the Mining & Minerals business due to weaker market conditions and unfavorable impacts from foreign currency of $7 million.
Industrial operating profit for the three months ended March 31, 2017 increased $11.7 million, or 93.9%, to $24.1 million from $12.4 million for the corresponding period last year. For the six months ended March 31, 2017, operating profit increased $9.4 million, or 23.7%, to $49.2 million from $39.8 million for the corresponding period last year. The year over year comparisons of operating profit for the three and six months ended March 31, 2017 versus the 2016 periods were impacted by the unfavorable charges
Page 26
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
in the second fiscal quarter of 2016 associated with litigation settlements and a customer bankruptcy amounting to $12.2 million. Excluding these items, Industrial operating profit for the second fiscal quarter of 2017 was roughly flat with the second fiscal quarter of 2016, with Life Sciences showing higher incremental profitability based on higher volumes while offset by lower results in Field Services and Mining and Minerals based on lower revenues as described above. Similarly, on a six month basis, Industrial operating profit for 2017 was down slightly by $2.8 million from 2016 due mainly to unfavorable results in Mining and Minerals and Field Services revenue declines being largely offset by improved profitability from the higher revenue levels in Life Sciences.
Petroleum & Chemicals
| For the Three Months Ended | | | For the Six Months Ended | |
| March 31,
2017 | | | April 1,
2016 | | | March 31,
2017 | | | April 1,
2016 | |
Revenue | $ | 557,827 | | | $ | 866,615 | | | $ | 1,199,640 | | | $ | 1,808,928 | |
Operating Profit | | 35,619 | | | | 30,945 | | | | 59,271 | | | | 62,548 | |
Petroleum & Chemicals revenues for the three months ended March 31, 2017 decreased $308.8 million, or 35.6%, to $557.8 million from $866.6 million for the corresponding period last year. For the six months ended March 31, 2017, revenues decreased $609.3 million, or 33.7%, to $1.20 billion from $1.81 billion for the corresponding period last year. The decrease in revenues for the three and six months ended March 31, 2017 as compared to the prior year comparable periods, was due primarily to lower business volumes across the segment due to the completion or wind-down of several large projects with significant pass through revenue and the delay in the post FEED awards of larger strategic projects as clients continue to evaluate their capital spending plans while oil prices remain low. This resulted in lower field service revenues versus the year ago periods. Client investment spending continues primarily on compliance, maintenance and sustaining capital programs. Additionally, unfavorable impacts from foreign currency of $9 million and $19 million, respectively, contributed to the revenue declines for the three and six month periods ended March 31, 2017 as compared to the same periods for 2016.
Operating profit for the three months ended March 31, 2017 increased $4.7 million, or 15.1%, to $35.6 million from $30.9 million for the corresponding period last year. Despite lower business volumes mentioned above, the increase in operating profit for the three months ended March 31, 2017 as compared to the prior year comparable period was primarily due to SG&A savings of $9.5 million from restructuring efforts and a $9.9 million one-time benefit associated with changes in benefit plans in our India operations. For the six months ended March 31, 2017, operating profit decreased $3.3 million, or 5.2%, to $59.3 million from $62.5 million for the corresponding period last year. The decrease in operating profit for the six months ended March 31, 2017 as compared to the prior year comparable period was due mainly to the lower business volumes mentioned above, offset by significant SG&A savings of $21 million from the 2015 Restructuring and the $9.9 million benefit associated with the benefit plan changes in our India operations.
Consolidated Results
Direct costs of contracts for the second fiscal quarter of 2017 decreased $454.3 million, or 19.4%, to $1.9 billion from $2.3 billion for the corresponding period last year. Direct costs of contracts for the six months ended March 31, 2017 decreased $729.4 million, or 15.4%, to $4.0 billion from $4.7 billion for the corresponding period last year. Direct costs of contracts include all costs incurred in connection with and directly for the benefit of client contracts, including depreciation and amortization relating to assets used in providing the services required by the related projects. The level of direct costs of contracts may fluctuate between reporting periods due to a variety of factors, including the amount of pass-through costs we incur during a period. On those projects where we are responsible for subcontract labor or third-party materials and equipment, we reflect the amounts of such items in both revenues and costs (and we refer to such costs as “pass-through costs”). On other projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not considered pass-through costs and are, therefore, not reflected in either revenues or costs. To the extent that we incur a significant amount of pass-through costs in a period, our direct costs of contracts are likely to increase as well.
Pass-through costs included in revenues for the second fiscal quarter of 2017 decreased $40.6 million, or 6.7%, to $560.6 million from $601.1 million for the corresponding period last year. Pass-through costs included in revenues for the six months ended March 31, 2017 decreased $37.9 million, or 3.0%, to $1.2 billion from $1.3 billion for the corresponding period last year. In general, pass-through costs are more significant on projects that have a higher content of field services activities. Pass-through costs are generally incurred at specific points during the life cycle of a project and are highly dependent on the needs of our individual clients and the nature of the clients’ projects. However, because we have hundreds of projects which start at various times within a fiscal year, the effect of pass-through costs on the level of direct costs of contracts can vary between fiscal years without there being a fundamental or significant change to the underlying business. The decrease in pass-through costs for the three and six months ended March 31, 2017 was due primarily to a decrease in our field services activity.
Page 27
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
As a percentage of revenues, direct costs of contracts for the three and six months ended March 31, 2017 was 81.8% and 82.7%, respectively. This compares to 84.0% and 84.3% for the three and six months ended April 1, 2016. The relationship between direct costs of contracts and revenues will fluctuate between reporting periods depending on a variety of factors including the mix of business during the reporting periods being compared as well as the level of margins earned from the various types of services provided. Generally, the more procurement we do on behalf of our clients (e.g., where we purchase equipment and materials for use on projects and/or procure subcontracts in connection with projects) and the more field services revenues we have relative to technical, professional services revenues, the higher the ratio will be of direct costs of contracts to revenues. Because revenues from pass-through costs typically have lower margin rates associated with them, it is not unusual for us to experience an increase or decrease in such revenues without experiencing a corresponding increase or decrease in our gross margins and operating profit. The reduction in cost relative to revenue is driven by 1) our strategic focus on realigning our portfolio to higher profit businesses (approximately two thirds of the reduction in costs relative to revenue) and 2) lower margin field services revenue as a percent of total revenue resulting in mix benefits (approximately one third of the reduction in costs relative to revenue).
SG&A expenses for the three months ended March 31, 2017 decreased $6.3 million, or 1.8%, to $351.1 million from $357.4 million for the corresponding period last year. SG&A expenses for the six months ended March 31, 2017 decreased $56.7 million, or 7.7%, to $681.8 million from $738.5 million for the corresponding period last year. The decrease in SG&A expenses for the three months ended March 31, 2017 as compared to the corresponding period last year was due primarily to higher savings associated with the 2015 Restructuring and other charges, mostly offset by higher year over year costs related to the 2015 Restructuring and other charges associated with our strategic business restructuring in our Europe, U.K. and Middle East regional operations. The decrease for the six months ended March 31, 2017 as compared to the corresponding period last year was due primarily to higher savings associated with Restructuring and other charges. Excluding the impact of Restructuring and other charges, adjusted SG&A expenses for the second fiscal quarter of 2017 decreased $22.2 million, or 6.9%, to $300.1 million from $322.3 million for the corresponding period last year. Also, adjusted SG&A expenses for the six months ended March 31, 2017 decreased $35.9 million, or 5.7%, to $599.0 million from $634.9 million for the corresponding period last year excluding Restructuring and other charges.
Net interest expense for the three months ended March 31, 2017 was $1.7 million as compared to net interest income of $0.1 million for the corresponding period last year. Net interest expense for the six months ended March 31, 2017 was $3.7 million as compared to net interest expense of $1.3 million for the corresponding period last year. The increase in interest expense for both the three and six months ended March 31, 2017 as compared to the corresponding period last year was due primarily to a reversal of $2.7 million of accrued interest expense related to the statute expiration of a foreign tax reserve recorded during the second fiscal quarter of 2016.
Miscellaneous expense for the three and six months ended March 31, 2017 was $6.0 million and $6.7 million, respectively. This compares to miscellaneous income of $3.6 million and $3.3 million, respectively, for the corresponding period last year. The increase in miscellaneous expense for both the three and six months ended March 31, 2017 as compared to the corresponding period last year was due primarily to a reversal of $5.1 million of accrued penalties related to the statute expiration of a foreign tax reserve that was recorded during the second fiscal quarter of 2016 and $1.2 million in charges associated with the sale of a business from prior years.
The Company’s consolidated effective income tax rate for the three months ended March 31, 2017 declined to 27.0% from 29.9% for the corresponding period last year. Contributing to the quarter over quarter decrease in the effective tax rate was a $3.3 million benefit realized in the second fiscal quarter of 2017 related to nontaxable income received by a foreign affiliate and a $1.9 million benefit realized from a favorable IRS audit adjustment claimed by the Company pertaining to the design of energy efficient buildings pursuant to Internal Revenue Code section 179D. Also contributing to the decrease in the tax rate were changes in geographic income mix comprising the remaining difference in the year over year rate for the comparative three month periods.
During the second fiscal quarter of 2016, the Company realized certain discrete tax benefits associated with the release of a foreign tax reserve due to statute expiration. In connection with the release of the foreign tax reserve, the Company also reversed $2.7 million of accrued interest expense and $5.1 million of accrued penalties, which is recorded in Other Income (Expense) in the Consolidated Statements of Earnings.
The Company’s consolidated effective income tax rate for the six months ended March 31, 2017 increased to 28.1% from 23.3% for the corresponding period last year. The primary driver contributing to the year over year increase in the tax rate is the absence of an $11.2 million valuation allowance release in the first six months of fiscal 2016 pertaining to certain foreign net operating losses.
The amount of income taxes the Company pays is subject to ongoing audits by tax jurisdictions around the world. In the normal course of business, the Company is subject to examination by tax authorities throughout the world, including such major jurisdictions as Australia, Canada, India, the Netherlands, the United Kingdom and the United States. Our estimate of the potential outcome of any uncertain tax issue is subject to our assessment of the relevant risks, facts, and circumstances existing at the time. The Company
Page 28
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
believes that it has adequately provided for reasonably foreseeable outcomes related to these matters. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, which may impact our effective tax rate.
It is reasonably possible that, during the next 12 months, we may realize a decrease in our uncertain tax positions of approximately $10 million (being realized as a reduction in income tax expense) as a result of concluding various tax audits and closing tax years.
Backlog Information
We include in backlog the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Our policy with respect to O&M contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For national government programs (other than national government O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, excluding option periods. Because of the nature, size, expected duration, funding commitments, and the
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts.
Consistent with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client. While management uses all information available to it to determine backlog,
our backlog at any given time
our backlog is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein. Backlog is not necessarily an indicator of future revenues.
Because certain contracts (e.g., contracts relating to large EPC projects as well as national government programs) can cause large increases to backlog in the fiscal period in which we recognize the award, and because many of our contracts require us to provide services that span over a number of fiscal quarters (and sometimes over fiscal years), we evaluate our backlog on a year-over-year basis, rather than on a sequential, quarter-over-quarter basis.
The following table summarizes our backlog at March
31, 201730, 2018 and
April 1, 2016 (in millions): | | March 31, 2017 | | | April 1, 2016 | |
| | | | | | | | |
Aerospace & Technology | | $ | 5,490.7 | | | $ | 4,887.2 | |
Buildings & Infrastructure | | | 5,270.3 | | | | 4,838.9 | |
Industrial | | | 2,361.2 | | | | 3,304.3 | |
Petroleum & Chemicals | | | 5,334.7 | | | | 5,179.4 | |
Total | | $ | 18,456.9 | | | $ | 18,209.8 | |
Our backlog increased $0.2 billion, or 1.4%, to $18.5 billion at March 31, 2017 from $18.2 billion at April 1, 2016. (in millions):
|
| | | | | | | |
| | March 30, 2018 | | March 31, 2017 |
| Aerospace, Technology, Environmental and Nuclear | $ | 8,772 |
| | $ | 5,576 |
|
| Buildings, Infrastructure and Advanced Facilities | 10,861 |
| | 6,479 |
|
| Energy, Chemicals and Resources | 6,907 |
| | 6,402 |
|
| Total | $ | 26,540 |
| | $ | 18,457 |
|
The
$0.2 billion increase
was due primarily to new awards from clients operating in
the Buildings & Infrastructure LOB, U.S. federal government and the Chemicals industry partially offset by the cancellation of certain projects in the Life Sciences areas and an approximately $287.8 million reduction due to foreign exchange, and strong revenue associated with large pharma projects.Backlogbacklog in Aerospace, & Technology, atEnvironmental and Nuclear from March 31, 2017 was $5.5 billion, up $0.6 billion when compared to the corresponding period last year. The year-over-year increase in backlog was primarily the result of new awards from the U.S. federal government.
Backloggovernment and the CH2M acquisition.
The increase in
Building &backlog in Buildings, Infrastructure
atand Advanced Facilities from March 31, 2017
was $5.3 billion, up $0.4 billion when compared to the corresponding period last year. The year-over-year increase in backlog was primarily the result of new awards in
Australia and the U.S.
Buildingsmarkets and
Infrastructure market.Backlogthe CH2M acquisition.
The increase in
Industrial atbacklog in Energy, Chemicals and Resources from March 31, 2017 was
$2.4 billion, down $0.9 billion when compareddue to the
corresponding period last year. The year-over-year decreaseCH2M acquisition offset in
backlog was primarily the resultpart by work off of
certain cancellationsprojects in the
Life Sciences area and strong revenue burn associatedAmericas with
large pharma projects, and a significant
impact associated with the effect of exchange rates.Backlog in Petroleum & Chemicals at March 31, 2017 was $5.3 billion, up $0.2 billion when compared to the corresponding period last year. Strong performance in chemicals backlog was somewhat mitigated by continuing weakness in the upstream market.
Page 29
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
pass through cost.
Liquidity and Capital Resources
At March 31, 2017,30, 2018, our principal sources of liquidity consisted of $674.6$835.4 million ofin cash and cash equivalents, and $1.3 billion$588.1 million of available borrowing capacity under our $1.6 billion 2014 Facility; referrevolving credit facility (the “Revolving Credit Facility”), and cash flows from operating activities.
On December 15, 2017, the Company completed the acquisition of CH2M HILL Companies, Ltd. (CH2M), an international provider of engineering, construction, and technical services, by acquiring 100% of the outstanding shares of CH2M common stock and preferred stock. The Company paid total consideration of approximately $1.8 billion in cash (excluding $315.2 million in cash acquired) and issued approximately $1.4 billion of Jacobs’ common stock to the
Note Long-term Debtformer stockholders and certain equity award holders of CH2M. In connection with the acquisition, the Company also assumed CH2M’s revolving credit facility and second lien notes, including a $20.0 million prepayment penalty, which totaled approximately $700.0 million. Immediately following the effective time of the acquisition, the Company repaid CH2M’s revolving credit facility and second lien notes including the related prepayment penalty. The Company financed the cash consideration for the CH2M acquisition, the repayment of CH2M’s outstanding indebtedness and other transaction expenses with a combination of cash on hand and debt financing, which included borrowings under the Term Loan Facility in
Notes to Consolidated Financial Statements appearingan aggregate principal amount of $1.5 billion and additional borrowings under
Part 1, Item 1 of this Quarterly Report on Form 10-Q. We finance much of our operations and growth through cash generated by our operations.During the six months endedRevolving Credit Facility.
At March 31, 2017,30, 2018, our cash and cash equivalents were $835.4 million, an increase of $61.2 million from $774.2 million at September 29, 2017.
This increase was due to cash flows provided by operations of $54.2 million and favorable cash flows from financing activities of $1.5 billion, partly offset by $1.5 billion in cash flows used in investing activities. On a comparative basis, cash and cash equivalents increased by $18.9$18.8 million to $674.6 million during the six month period ended March 31, 2017 from $655.7 million at September 30, 2016 to $674.62016. This increase was driven mainly by cash flow from operations of $201.0 million, at March 31, 2017. This compares to a net increasepartly offset by cash flow used for financing activities of $98.9$93.1 million of cash and cash equivalentsflows used for investing activities of $72.5 million and exchange rate effects on cash of $16.6 million.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Our cash flow from operations of $54.2 million during the six
monthsmonth period ended
April 1, 2016March 30, 2018 was comparatively lower than the $201.0 million in cash flow from
October 3, 2015operations for the corresponding period in fiscal 2017, due mainly to
April 1, 2016.The four most significant factors contributinghigher levels of working capital (mainly in accounts receivable), lower net earnings attributable to the $80.0 million net decreasegroup, cash used for payments on the opening balance sheet liabilities and post acquisition costs incurred in connection with the CH2M acquisition and payments associated with obligations from Restructuring and other charges.
Our cash and cash equivalents duringused in investing activities for the six months ended March 31, 2017 as compared to the six months ended April 1, 2016 are: (i) a $42.9 million decrease in cash flows relating to our working capital accounts; (ii) a $29.6 million increase in30, 2018 was $1.5 billion and primarily driven by cash used in investing activities, (iii) a $8.4 million decrease in Groupfor the CH2M acquisition, net earnings, offset in part by (iv) a $29.7 million decrease inof cash used inamounts acquired from the acquisition of $315.2 million. Additions to property and equipment were roughly flat for the comparative periods.
Our cash from financing activities
in fiscal 2017 as compared to fiscal 2016Our operations provided net cash inflows of $201.0 million during$1.5 billion for the six months ended March 31, 2017. This compares30, 2018 resulted mainly from proceeds from borrowings of $3.1 billion, most of which was used in connection with financing of the CH2M acquisition. Repayments of long term debt of $1.5 billion during first half of fiscal 2018 were up compared to net cash inflows$687.1 million in the first half of $264.3 million forfiscal 2017, with this increase due mainly to the corresponding period last year. The $63.3 million decreasepayoff of CH2M’s legacy debt balances in connection with the closing of the acquisition. Comparatively lower cash flows from operating activities during the six months ended March 31, 2017 as compared to the corresponding period last year was due primarily to a $42.9 million decrease in cash generated from changes within our working capital accounts (discussed below) and an $8.4 million decrease in Group net earnings.
With respect to the Company’s working capital accounts, the Company’s cash flows from operations are greatly affected by the cost-plus nature of our customer contracts. Because such a high percentage of our revenues is earned on cost-plus type contracts, and due to the significance of revenues relating to pass-through costs, most of the costs we incur are included in invoices we send to clients. Although we continually monitor our accounts receivable, we manage the operating cash flows of the Company by managing the working capital accounts in total, rather than by the individual elements. The primary elements of the Company’s working capital accounts are accounts receivable, accounts payable, and billings in excess of cost. Accounts payable consist of obligations to third parties relating primarily to costs incurred for projects which are generally billable to clients. Accounts receivable consist of amounts due from our clients of which a substantial portion are for project-related costs. Billings in excess of cost consist of billings to and payments from our clients for costs yet to be incurred.
This relationship between revenues and costs, and between receivables and payables, is unique to our industry, and facilitates review of our liquidity at the total working capital level.
With respect to the Company’s trade accounts receivable, while our credit risk could be significant based on the fact that we provide services to clients operating in a wide range of industries as well as in a number of countries outside the U.S., we manage these issues closely to reduce exposures as much as possible and historically have not experienced material losses. Our private sector customers include large, well-known, and well-established multi-national companies, and our government customers consist of national, state, and local agencies located principally in the U.S., the U.K., and Australia. Although we have not historically experienced significant collection issues with any of our governmental or commercial customers, we are currently reassessing how we extend credit to certain customers and markets that we service.
We used $72.5 million of cash and cash equivalents for investing activities during the six months ended March 31, 2017 as compared to $43.0 million used during the corresponding period last year. The $29.6 million increase in cash used is primarily due to higher levels of acquisition activity and higher property and equipment purchases during the six months ended March 31, 2017.
Our financing activities resulted in net cash outlfows of $93.1 million during the six months ended March 31, 2017. This compares to net cash outflows of $122.8 million during the corresponding period last year. The $29.7 million decrease in cash used during the six months ended March 31, 2017 as compared to the corresponding period last year was due primarily to (i) $31.2 million in higher cash proceeds from issuances of common stock (ii) $21.4 million less cash outflow from borrowing activities, offset in part by (iii) an $18.1 million cash dividend paid on March 17, 2017, to shareholders of record on the close of business on February 17, 2017. The Company repurchased and retired 1.4 million and 1.8 million shares of its common stock at a cash cost of $81.2 million and $72.3 million, respectively, under its July 23, 2015 share repurchase program during the six month periodsperiod ended March 31, 2017 and April 1, 2016.
Page 30,
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
2018 were offset by lower cash outflows for common stock repurchases. The Company paid $44.2 million in dividends, including to noncontrolling interests of $4.4 million, during the six month period ended March 30, 2018, with $18.1 million in dividends paid in the comparative prior year period.
At March 30, 2018, the Company had $674.6approximately $240.9 million ofin cash and cash equivalents at March 31, 2017. Of this amount, approximately $106.4 million was held in the U.S. and $568.2$594.5 million was held outside of the U.S. (primarily in the U.K., the Eurozone, Chile, and India) and, which is used primarily for funding operations in those regions. Other than the tax cost of repatriating funds to the U.S. (see Note 10—10, Income Taxes of Notes to Consolidated Financial Statements included in our 20162017 Form 10-K), there are no material impediments to repatriating these funds to the U.S. The Company had
$256.6$449.2 million
ofin letters of credit outstanding at March
31, 2017.30, 2018. Of this amount, $2.5 million was issued under the
2014Revolving Credit Facility and
$254.1$446.7 million was issued under separate, committed and uncommitted letter-of-credit facilities.
On March 12, 2018, Jacobs entered into a note purchase agreement (the "Note Purchase Agreement") pursuant to which the Company has agreed to issue and sell in a private placement transaction $500.0 million in the aggregate principal amount of the Company’s senior notes in three series: $190.0 million aggregate principal amount of 4.27% senior notes, Series A, due May 8, 2025, $180.0 million aggregate principal amount of 4.42% senior notes, Series B, due May 8, 2028 and $130.0 million aggregate principal amount of 4.52% senior notes, Series C, due May 8, 2030 (collectively, the “Senior Notes”). The Note Purchase Agreement provides that if the Company's consolidated leverage ratio exceeds a certain amount, the interest on the Senior Notes may increase by 75 basis points. The Senior Notes may be prepaid at any time subject to a make-whole premium. The sale of the Senior Notes is expected to close in May 2018. The Company intends to use the net proceeds from the offering of Senior Notes to repay certain existing indebtedness and for other general corporate purposes. The Note Purchase Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, covenants to maintain a minimum consolidated net worth and maximum consolidated leverage ratio and limitations on certain other indebtedness, investments, liens, mergers, asset sales and transactions with affiliates. In addition, the Note Purchase Agreement contains customary events of default.
We believe we have adequate liquidity and capital resources to fund our operations, support our
debt service, pay dividends and buy back shares and support our ongoing acquisition strategy
service our debt, and pay dividends for the next twelve
months. We had $674.6 million inmonths based on the liquidity provided by our cash and cash equivalents
at March 31, 2017, andon hand, our
consolidated working capital position was $1.1 billion at that date. In addition, there was $1.3 billion of borrowing capacity remaining under the
2014Revolving Credit Facility
and our continuing cash from operations. We were in compliance with all of our debt covenants at March
31, 2017. We believe that the capacity, terms and conditions of the 2014 Facility, combined with cash on-hand and the other committed and uncommitted facilities we have in place, are adequate for our working capital and general business requirements for the next twelve months.30, 2018. | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We do not enter into derivative financial instruments for trading, speculation or other purposes that would expose the Company to market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and currency exchange rates.
Please see the Note 11 Long-term Debt in Notes to Consolidated Financial Statements appearing under Part I,— Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for a discussion of the 2014Revolving Credit Facility, Term Loan Facility and Note Purchase Agreement.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Our Term Loan Facility, Revolving Credit Facility, and certain other debt obligations are subject to variable rate interest which could be adversely affected by an increase in interest rates. As of March 30, 2018, we had an aggregate of $2.5 billion in outstanding borrowings under our Term Loan Facility and our Revolving Credit Facility.
Interest on amounts borrowed under these agreements is subject to adjustment based on the Company’s Consolidated Leverage Ratio (as defined in the credit agreements governing the Term Loan Facility and Revolving Credit Facility). Depending on the Company’s Consolidated Leverage Ratio, borrowings under the Term Loan Facility and Revolving Credit Facility bear interest at a Eurocurrency rate plus a margin of between 1.0% and 1.5% or a base rate plus a margin of between 0% and 0.5%. Additionally, if our consolidated leverage ratio exceeds a certain amount, the interest on the Senior Notes may increase by 75 basis points.
For the six months ended March 30, 2018, our weighted average floating rate borrowings were approximately $1.8 billion. If floating interest rates had increased by 1.00%, our interest expense for the six months ended March 30, 2018 would have increased by approximately $9.0 million.
In situations where our operations incur contract costs in currencies other than their functional currency, we attempt to have a portion of the related contract revenues denominated in the same currencies as the costs. In those situations, where revenues and costs are transacted in different currencies, we sometimes enter into foreign exchange contracts in order to limit our exposure to fluctuating foreign currencies. We follow the provisions of ASC No. 815—815, Derivatives and Hedging in accounting for our derivative contracts. The Company does not currently have exchange rate sensitive instruments that would have a material effect on our consolidated financial statements or results of operations. | |
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Chairman and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of the Company’s disclosure controls and procedures as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March
31, 2017,30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on that evaluation, the Company’s management, with the participation of the
its Chairman and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that the Company’s disclosure controls and procedures, as of the Evaluation Date, were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
U.S. Securities and Exchange Commission’sSEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chairman and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure.
As previously disclosed, the Company acquired CH2M in December 2017. Prior to the acquisition, CH2M reported in their Annual Report on Form 10-K Part II – Item 9A – Controls and Procedures for the year ended December 30, 2016 that it had identified a material weakness in its internal controls over financial reporting relating to internal control deficiencies that involved the development of project cost estimates for long-term contracts accounted for under the percentage-of-completion method. Prior to the closing of the acquisition, CH2M management developed and initiated a plan to remediate these internal control deficiencies, which included the implementation of new and revised key internal controls. As of March 30, 2018, management of the Company has not fully assessed CH2M’s internal control over financial reporting and is currently testing new and revised internal controls for design and operating effectiveness. As permitted by SEC guidance for newly acquired businesses, management’s assessment of the Company’s disclosure controls and procedures did not include an assessment of those disclosure controls and procedures of CH2M that are subsumed by internal control over financial reporting. CH2M accounted for approximately 41% of total assets as of the Evaluation Date and approximately 20% of total revenues of the Company for the six-month period ended on the Evaluation Date.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s system of internal control over financial reporting, which were identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, during the quarter ended March
31, 201730, 2018 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Page 31
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
PART II - OTHEROTHER INFORMATION
| |
| Item 1. | Legal Proceedings. |
The information required by this Item 1 is included in the Note 18, Commitments and Contingencies included in the Notes to Consolidated Financial Statements appearing under Part I,—Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Please refer to Item 1A—1A, Risk Factors in our 20162017 Form 10-K and our subsequent Quarterly Report on Form 10-Q for the first fiscal quarter of 2018, which isare incorporated herein by reference, for a discussion of some of the factors that have affected our business, financial condition, and results of operations in the past and which could affect us in the future. There have been no material changes to those risk factors since the date of the 2016 Form 10-K, except for thefactors. Before making an investment decision with respect to our common stock, you should carefully consider those risk factors, described belowas well as the financial and the information disclosed elsewherebusiness disclosures contained in this quarterly reportQuarterly Report on Form 10-Q that provides factual updates to risk factors contained in our 2016 Form 10-K.There can be no assurance that we will pay dividends on our common stock.
In December 2016, we announced that our Board of Directors approved initiation of a quarterly cash dividend program under which we have paid, and intend to continue paying, a regular quarterly dividend yielding approximately 1% per year starting in 2017. The declaration, amount and timing of such dividends are subject to capital availability and determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable toother current and periodic reports filed with the declaration and payment of cash dividends. Our ability to pay dividends will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments and/or our dividend program could have a material negative effect on our stock price.
SEC. | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
There were no sales of unregistered equity securities during the
secondfirst fiscal quarter of
2017.2018.
A summary of repurchases of our common stock made during each fiscal month during the second fiscal quarter of 2017fiscal 2018 is as follows (in thousands, except per-share amounts):
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share (1) | | | Total Numbers of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
December 31, 2016 through January 27, 2017 | | | 254 | | | $ | 58.13 | | | | 254 | | | $ | 302,478 | |
January 28, 2017 through February 24, 2017 | | | 358 | | | | 57.62 | | | | 358 | | | | 281,860 | |
February 25, 2017 through March 31, 2017 | | | 277 | | | | 56.27 | | | | 277 | | | | 266,273 | |
Total | | | 889 | | | $ | 57.34 | | | | 889 | | | $ | 266,273 | |
|
|
| | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per
Share (1) | | Total Numbers of Shares Purchased as Part Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| January 27, 2018 - February 23, 2018 | | 49 | | $ | 60.77 |
| | 49 | | $ | 247,288 |
|
(1)
|
| |
| (1) | Includes commissions paid. |
(2)
| On July 23, 2015, the Board of Directors approved a program to repurchase up to $500 million of the Company’s common stock over the next three years. Share repurchases may be executed through various means including, without limitation, open market transactions, privately negotiated transactions or otherwise. The share repurchase program, which expires on July 22, 2018, does not oblige the Company to purchase any shares. The authorization for the share repurchase program may be terminated, increased, or decreased by the Company’s Board of Directors in its discretion at any time. The timing of our share repurchases may depend upon market conditions, other uses of capital, and other factors.
|
Page 32
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| |
| Item 3. | Defaults Upon Senior Securities |
None.
None.
| |
| Item 4. | Mine Safety Disclosure. |
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) by the federal Mine Safety and Health Administration. Under the Mine Act, an independent contractor, such as Jacobs, that performs services or construction of a mine is included within the definition of a mining operator. We do not act as the owner of any mines.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
| |
| Item 5. | Other Information. |
None.
None.
Page 33
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
3.1
| | AmendedNote Purchase Agreement, dated March 12, 2018, by and Restated Bylaws ofbetween Jacobs Engineering Group Inc., dated January 19, 2017. and the Purchasers identified therein. Filed as Exhibit 3.14.1 to the Registrant’s Current Report on Form 8-K on January 24, 2017March 13, 2018, and incorporated herein by reference.
|
10.1#
| | Jacobs Engineering Group Inc. 1989 Employee Stock Purchase Plan (as Amended and Restated on January 19, 2017). Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on January 24, 2017 and incorporated herein by reference.
|
10.2#
31.1* | | Jacobs Engineering Group Inc. Global Employee Stock Purchase Plan (as Amended and Restated on January 19, 2017). Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K on January 24, 2017 and incorporated herein by reference.
|
10.3#
| | Form of Restricted Stock Unit Award Agreement (awarded pursuant to the 1999 Outside Directors Stock Plan, as amended).
|
10.4#
| | Summary Description of Amendment to Restricted Stock Unit Award Agreements .
|
31.1
| | |
| | |
31.2
31.2* | | |
| | |
32.1
32.1* | | |
| | |
32.2
32.2* | | |
| | |
95
95* | | |
| 101.INS* | | |
101.INS
| | XBRL Instance Document. |
| 101.SCH* | | |
101.SCH
| | XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | | |
101.CAL
| | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | | |
101.DEF
| | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | | |
101.LAB
| | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | | |
101.PRE
| | XBRL Taxonomy Extension Presentation Linkbase Document. |
#
|
Indicates management contract or compensatory plan or arrangement.
|
|
Page 34
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JACOBS ENGINEERING GROUP INC.
By:
|
| |
| By: | /s/ Kevin C. Berryman |
| Kevin C. Berryman |
| Executive Vice President |
| and Chief Financial Officer |
| (Principal Financial Officer) |
| |
Date: | May 9, 2017 8, 2018 |