NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Basis of Presentation
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 27, 2019 (“2019 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 December 27, 2019, and for the three months ended December 27, 2019.
Our interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.
Effective the beginning of fiscal first quarter 2020, the Company adopted ASU 2016-02, Leases ("ASC 842"), including the subsequent ASU's that amended and clarified the related guidance. The Company adopted ASC 842 using a modified retrospective approach, and accordingly the new guidance was applied to leases that existed or were entered into after the first day of adoption without adjusting the comparative periods presented. Please refer to Note-14 Leases for a discussion of our updated policies and disclosures related to leases.
Effective the beginning of fiscal first quarter 2019, the Company adopted ASC 606, Revenue from Contracts with Customers, including the subsequent ASUs that amended and clarified the related guidance. The Company adopted ASC Topic 606 using the modified retrospective method, and accordingly the new guidance was applied retrospectively to contracts that were not completed or substantially completed as of September 29, 2018 (the date of initial application). Please refer to Note 13- Revenue Accounting for Contracts and Adoption of ASC Topic 606 for a discussion of our updated policies related to revenue recognition.
On June 12, 2019, Jacobs completed the acquisition of The KeyW Holding Corporation (“KeyW”), a U.S.-based national security solutions provider to the intelligence, cyber, and counterterrorism communities by acquiring 100% of the outstanding shares of KeyW common stock. The Company paid total consideration of $902.6 million which was comprised of approximately $604.2 million in cash to the former stockholders and certain equity award holders of KeyW and the assumption of KeyW’s debt of approximately $298.4 million. The Company repaid all of the assumed KeyW debt by the end of Q4 fiscal 2019. The Company has recorded its preliminary purchase price allocation associated with the acquisition, which is summarized in Note 5- Business Combinations.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On April 26, 2019, Jacobs completed the sale of its Energy, Chemicals and Resources ("ECR") business to Worley Limited, a company incorporated in Australia ("Worley"), for a purchase price of $3.4 billion consisting of (i) $2.8 billion in cash plus (ii) 58.2 million ordinary shares of Worley, subject to adjustments for changes in working capital and certain other items (the “ECR sale”). As a result of the ECR sale, substantially all ECR-related assets and liabilities have been sold (the "Disposal Group"). We determined that the Disposal Group should be reported as discontinued operations in accordance with ASC 210-05, Discontinued Operations because their disposal represents a strategic shift that had a major effect on our operations and financial results. As such, the financial results of the ECR business are reflected in our unaudited Consolidated Statements of Earnings as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of the Disposal Group are reflected as held-for-sale in the unaudited Consolidated Balance Sheet as of September 27, 2019. Further, as of the quarter ended December 27, 2019, a portion of the ECR business remains held by Jacobs and continues to be classified as held for sale during the first quarter of fiscal 2020 in accordance with U.S. GAAP. For further discussion see Note 7- Sale of Energy, Chemicals and Resources ("ECR") Business to the consolidated financial statements.
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 2019 Form 10-K for a discussion of other significant estimates and assumptions affecting our consolidated financial statements.
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.
Please refer to Note 2- Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2019 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. Please also refer to Note 7- Sale of Energy, Chemicals and Resources for discussion regarding the Company's investment in Worley ordinary shares.
The net carrying amounts of cash and cash equivalents, trade receivables and payables and short-term debt approximate fair value due to the short-term nature of these instruments. See Note 12- Borrowings for a discussion of the fair value of long-term debt.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. New Accounting Pronouncements
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging ("ASC 815"): Targeted Improvements to Accounting for 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 is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The updated guidance did not 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.
ASU No. 2016-13, Financial Instruments - Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual periods beginning with the first quarter of fiscal 2021, and must be applied on a modified retrospective basis. We are currently evaluating the potential impact of this standard.
5. Business Combinations
KeyW
On June 12, 2019, Jacobs completed the acquisition of The KeyW Holding Corporation (“KeyW”), a U.S. based national security solutions provider to the intelligence, cyber, and counterterrorism communities, by acquiring 100% of the outstanding shares of KeyW common stock. The acquisition allows Jacobs to further expand its government services business. The Company paid total consideration of $902.6 million which was comprised of approximately $604.2 million in cash to the former stockholders and certain equity award holders of KeyW and the assumption of KeyW’s debt of approximately $298.4 million. The Company has repaid all of the assumed KeyW debt by the end of Q4 fiscal 2019.
The following summarizes the fair values of KeyW assets and acquired liabilities assumed as of the acquisition date (in millions):
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
Assets
|
|
|
Cash and cash equivalents
|
$
|
29.1
|
|
|
Receivables
|
80.1
|
|
|
Inventories, net
|
21.3
|
|
|
Prepaid expenses and other
|
2.5
|
|
|
Property, equipment and improvements, net
|
25.9
|
|
|
Deferred tax asset and other
|
35.4
|
|
|
Goodwill
|
613.1
|
|
|
Identifiable intangible assets
|
179.0
|
|
|
Total Assets
|
$
|
986.4
|
|
|
|
|
|
Liabilities
|
|
|
Accounts payable
|
$
|
8.3
|
|
|
Accrued expenses
|
68.7
|
|
|
Short term debt
|
298.4
|
|
|
Other current liabilities
|
3.9
|
|
|
Other non-current liabilities
|
2.9
|
|
|
Total Liabilities
|
382.2
|
|
|
Net assets acquired
|
$
|
604.2
|
|
The purchase price allocation is based upon preliminary information and is subject to change when additional information is obtained. Goodwill recognized results from a substantial assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. Goodwill recognized of $136.0 million is expected to be deductible for tax purposes. The Company has not completed its final assessment of the fair values of purchased receivables, tax balances or contingent liabilities. The final purchase price allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
Identified intangibles include customer relationships, contracts and backlog and developed technology. The customer relationships, contracts and backlog intangible represents the fair value of existing contracts, underlying customer relationships and backlog. The customer relationships, contract and backlog intangible, and the developed technology intangible have lives of 10 and 12 years, respectively. Other intangible liabilities consist of the fair value of office leases and have a weighted average life of approximately 9 years.
Fair value measurements relating to the KeyW acquisition are made primarily using Level 3 inputs including discounted cash flow techniques. Fair value is estimated using inputs primarily for 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 reflects the level of risk associated with receiving future cash flows. 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.
The following presents summarized unaudited pro forma operating results of Jacobs assuming that the Company had acquired KeyW at October 1, 2017. 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, except per share data):
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 28, 2018
|
|
|
|
Revenues
|
$
|
3,210.1
|
|
|
|
|
Net earnings of the Group
|
$
|
69.0
|
|
|
|
|
Net earnings (loss) attributable to Jacobs
|
$
|
64.5
|
|
|
|
|
Net earnings (loss) attributable to Jacobs per share:
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
0.45
|
|
|
|
|
Diluted earnings (loss) per share
|
$
|
0.45
|
|
|
|
Included in the table above are the unaudited pro forma operating results of continuing operations. Also, income tax expense (benefit) for the three-month pro forma period ended December 28, 2018 was $23.3 million.
John Wood Group's Nuclear Business
On August 20, 2019, Jacobs announced the entry into an agreement to acquire John Wood Group's Nuclear consulting, remediation and program management business for an enterprise value of £250 million (approximately $300 million) on a debt-free, cash-free basis. The transaction is expected to close by the end of the second quarter of fiscal 2020.
6. Goodwill and Intangibles
The carrying value of goodwill associated with continuing operations and appearing in the accompanying Consolidated Balance Sheets at December 27, 2019 and September 27, 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Mission Solutions
|
|
People & Places Solutions
|
|
Total
|
|
Balance September 27, 2019
|
$
|
2,202
|
|
|
$
|
3,231
|
|
|
$
|
5,433
|
|
|
|
|
|
|
|
|
|
Post-Acquisition Adjustments
|
1
|
|
|
—
|
|
|
1
|
|
|
Foreign Exchange Impact
|
1
|
|
|
2
|
|
|
3
|
|
|
Balance December 27, 2019
|
$
|
2,204
|
|
|
$
|
3,233
|
|
|
$
|
5,437
|
|
The following table provides certain information related to the Company’s acquired intangibles in the accompanying Consolidated Balance Sheets at December 27, 2019 and September 27, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships, Contracts and Backlog
|
|
|
|
Developed Technology
|
|
Trade Names
|
|
|
|
Lease Intangible Assets
|
|
|
|
Total
|
|
Balances September 27, 2019
|
$
|
622,392
|
|
|
|
|
$
|
40,833
|
|
|
$
|
1,183
|
|
|
|
|
$
|
668
|
|
|
|
|
$
|
665,076
|
|
|
Amortization
|
(21,081)
|
|
|
|
|
(875)
|
|
|
(71)
|
|
|
|
|
182
|
|
|
|
|
(21,845)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
2,656
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
(419)
|
|
|
|
|
2,237
|
|
|
Balances December 27, 2019
|
$
|
603,967
|
|
|
|
|
$
|
39,958
|
|
|
$
|
1,112
|
|
|
|
|
$
|
431
|
|
|
|
|
$
|
645,468
|
|
In addition, we acquired $4.7 million in lease intangible liabilities in connection with the acquisitions of CH2M HILL Companies, Ltd. in 2017 and of KeyW, of which $3.8 million remains unamortized at December 27, 2019.
The following table presents estimated amortization expense of intangible assets for the remainder of fiscal 2020 and for the succeeding years.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in millions)
|
|
2020
|
|
$
|
67.4
|
|
|
2021
|
|
82.5
|
|
|
2022
|
|
81.7
|
|
|
2023
|
|
81.4
|
|
|
2024
|
|
81.4
|
|
|
Thereafter
|
|
247.3
|
|
|
Total
|
|
$
|
641.7
|
|
7. Sale of Energy, Chemicals and Resources ("ECR") Business
On April 26, 2019, Jacobs completed the sale of its ECR business to Worley for a purchase price of $3.4 billion consisting of (i) $2.8 billion in cash plus (ii) 58.2 million ordinary shares of Worley, subject to adjustments for changes in working capital and certain other items (the “ECR sale”). The stock purchase agreement for the ECR sale contained a lock-up on our ability to sell the Worley shares received in the transaction, which expired in the first quarter of fiscal 2020.
Gain on Sale and Deferred Gain
As a result of the sale of the ECR business, the Company recognized a pre-tax gain of $1.0 billion, $935.1 million of which was recognized in fiscal 2019 and $61.9 million which is included in Net Earnings of the Group from Discontinued Operations on the consolidated statement of earnings for the three months ended December 27, 2019, which is further discussed below.
Upon closing the ECR sale, the Company retained a noncontrolling interest (with significant influence) in People & Places Solutions ("P&PS")-related activities in one international legal entity that is now controlled and consolidated by Worley. The fair value of the Company’s retained interest in the net assets and liabilities of this entity was estimated at $33.0 million and recorded at closing. For another international legal entity, the closing and transfer of ECR-related assets to Worley will occur at a future date, currently estimated to be in the second quarter of fiscal 2020. Accordingly, the Company allocated proceeds received to this deferred closing on a relative fair value basis and recognized a deferred gain of $34.4 million, which will be recorded in income when the ECR-related assets are transferred. Subsequent to quarter end, the Company received the approval from the relevant regulatory body for this transfer.
In addition to consideration received for the sale of the business, the proceeds received included advanced consideration for the Company to deliver IT application and related hardware assets at a future date (ECR Business “IT Migration Date”) to Worley upon completion of the interim transition services, described further below. This deliverable of IT assets was considered to be a separate element of the ECR business sale transaction, and accordingly, we allocated a portion of the proceeds received of $95.3 million on a relative fair value basis to this separate deliverable and recognized deferred income. Upon completion and acceptance of this deliverable by Worley in December 2019, the deferred proceeds were recognized in income, along with expenses associated with any costs incurred and deferred by the Company for this deliverable.
Investment in Worley Stock
As discussed above, the Company received 58.2 million in ordinary shares of Worley. Pursuant to the purchase agreement for the ECR sale, 51.4 million of the shares were considered "restricted" during a lock-up period beginning April 26, 2019 and ending in December 2019. During the lock-up period Jacobs could not, without Worley's consent, directly or indirectly dispose of the "restricted" shares. The remaining 6.8 million shares not considered "restricted" were sold in the prior year, netting a loss of $4.9 million, which was recognized in miscellaneous income (expense), net. Dividend income and unrealized gains and losses on changes in fair value of Worley shares are recognized in miscellaneous income (expense), net in continuing operations.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's investment in Worley is measured at fair value through net income as it is an equity investment with a readily determinable fair value based on quoted market prices. The 51.4 million ordinary shares that are no longer considered "restricted" are recorded within prepaid expenses and other in the Company's consolidated balance sheets at their estimated fair value, which is $556.5 million as of December 27, 2019. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Transition Service Agreement
Upon closing of the ECR sale, the Company entered into a Transition Services Agreement ("TSA") with Worley pursuant to which the Company, on an interim basis, provides various services to Worley including executive consultation, corporate, information technology, and project services. The term of the TSA agreement began immediately following closing of the ECR sale on April 26, 2019 and will continue for up to one year, with an option to extend the period if mutually agreed upon. Pursuant to the terms of the TSA, the Company will receive payments for the interim services which approximate costs incurred to perform the services. The Company has recognized costs recorded in SG&A expense incurred to perform the TSA, offset by $12.0 million in TSA related income for such services that is reported in miscellaneous income (expense) for the three months ended December 27, 2019 before inclusion of certain incremental outside service support costs agreed to be shared equally by the parties.
Discontinued Operations
As a result of the ECR sale, substantially all ECR-related assets and liabilities have been sold (the "Disposal Group"). We determined that the Disposal Group should be reported as discontinued operations in accordance with ASC 210-05, Discontinued Operations because their disposal represents a strategic shift that had a major effect on our operations and financial results. As such, the financial results of the ECR business are reflected in our unaudited Consolidated Statements of Earnings as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of the Disposal Group are reflected as held-for-sale in the unaudited Consolidated Balance Sheets. As of the quarter ended December 27, 2019, a portion of the ECR business remains held by Jacobs as described above and continues to be classified as held for sale during the first fiscal quarter of 2020 in accordance with U.S. GAAP.
Summarized Financial Information of Discontinued Operations
The following table represents earnings (loss) from discontinued operations, net of tax (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
Revenues
|
$
|
7,099
|
|
|
$
|
1,164,707
|
|
|
|
|
|
|
Direct cost of contracts
|
(4,692)
|
|
|
(995,606)
|
|
|
|
|
|
|
Gross profit
|
2,407
|
|
|
169,101
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
47,159
|
|
|
(91,010)
|
|
|
|
|
|
|
Operating Profit (Loss)
|
49,566
|
|
|
78,091
|
|
|
|
|
|
|
Gain on sale of ECR business
|
61,943
|
|
|
—
|
|
|
|
|
|
|
Other (expense) income, net
|
1
|
|
|
2,120
|
|
|
|
|
|
|
Earnings Before Taxes from Discontinued Operations
|
111,510
|
|
|
80,211
|
|
|
|
|
|
|
Income Tax Expense
|
(33,923)
|
|
|
(20,053)
|
|
|
|
|
|
|
Net Earnings of the Group from Discontinued Operations
|
$
|
77,587
|
|
|
$
|
60,158
|
|
|
|
|
|
Selling, general and administrative expenses includes an offsetting insurance recovery of $50.0 million for the three months ended December 27, 2019 recorded in connection with the Nui Phao ("NPMC") legal matter described in Note 19- Commitments and Contingencies. The gain on sale of the ECR business of $61.9 million for the three months ended December 27, 2019 primarily includes additional income for the release of a deferred gain upon achievement of the IT Migration Date described above in connection with the delivery to Worley of certain IT application and hardware assets related to the ECR business, as well as adjustments to the purchase price for working capital and certain other items in connection with the ECR sale.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following tables represent the assets and liabilities held for sale (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
September 27, 2019
|
|
|
|
|
|
|
Receivables and contract assets
|
$
|
3,976
|
|
|
$
|
871
|
|
|
Prepaid expenses and other
|
46
|
|
|
81
|
|
|
Current assets held for sale
|
$
|
4,022
|
|
|
$
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Equipment and Improvements, net
|
$
|
1,200
|
|
|
$
|
1,643
|
|
|
Goodwill
|
24,896
|
|
|
24,896
|
|
|
|
|
|
|
|
Miscellaneous
|
434
|
|
|
439
|
|
|
Noncurrent assets held for sale
|
$
|
26,530
|
|
|
$
|
26,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
778
|
|
|
$
|
2,495
|
|
|
Contract liabilities
|
19
|
|
|
78
|
|
|
Current liabilities held for sale
|
$
|
797
|
|
|
$
|
2,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Deferred Liabilities
|
$
|
52
|
|
|
$
|
97
|
|
|
Noncurrent liabilities held for sale
|
$
|
52
|
|
|
$
|
97
|
|
The significant components included in our Consolidated Statements of Cash Flows for the discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
Depreciation and amortization:
|
|
|
|
|
Property, equipment and improvements
|
$
|
—
|
|
|
$
|
2,110
|
|
|
Intangible assets
|
$
|
—
|
|
|
$
|
614
|
|
|
Additions to property and equipment
|
$
|
—
|
|
|
$
|
(1,254)
|
|
|
Stock based compensation
|
$
|
—
|
|
|
$
|
3,615
|
|
8. Segment Information
The Company's two operating segments and global lines of business ("LOBs") are as follows: Critical Mission Solutions ("CMS") and People & Places Solutions ("P&PS"); with the previous Energy, Chemicals and Resources ("ECR") LOB now reported as discontinued operations. For further information on ECR, refer to Note 7- Sale of Energy, Chemicals and Resources ("ECR") Business.
The Company’s Chair and Chief Executive Officer is the Chief Operating Decision Maker (“CODM”) and can evaluate the performance of each of these segments and make appropriate resource allocations among each of the segments. For purposes of the 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.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under this organization, the sales function is managed on an LOB basis, and accordingly, the associated cost is embedded in the segments and reported to the respective head of each LOB. 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).
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, General and Administrative costs (“SG&A”) that relate to its business as a whole which are not allocated to the LOBs.
The following tables present total revenues and segment operating profit from continuing operations for each reportable segment (in thousands) and includes a reconciliation of segment operating profit to total U.S. GAAP operating profit by including certain corporate-level expenses, Restructuring and other charges and transaction and integration costs (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
Revenues from External Customers:
|
|
|
|
|
|
|
|
|
Critical Mission Solutions
|
|
|
|
|
$
|
1,182,457
|
|
|
$
|
1,035,028
|
|
|
People & Places Solutions
|
|
|
|
|
2,177,592
|
|
|
2,048,760
|
|
|
Total
|
|
|
|
|
$
|
3,360,049
|
|
|
$
|
3,083,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
Segment Operating Profit:
|
|
|
|
|
|
|
|
|
Critical Mission Solutions
|
$
|
90,422
|
|
|
$
|
72,152
|
|
|
|
|
|
|
People & Places Solutions
|
178,328
|
|
|
159,459
|
|
|
|
|
|
|
Total Segment Operating Profit
|
268,750
|
|
|
231,611
|
|
|
|
|
|
|
Other Corporate Expenses (1)
|
(66,719)
|
|
|
(71,247)
|
|
|
|
|
|
|
Restructuring and Other Charges
|
(49,663)
|
|
|
(47,234)
|
|
|
|
|
|
|
Transaction Costs
|
(1,023)
|
|
|
—
|
|
|
|
|
|
|
Total U.S. GAAP Operating Profit
|
151,345
|
|
|
113,130
|
|
|
|
|
|
|
Total Other (Expense) Income, net (2)
|
102,824
|
|
|
(20,939)
|
|
|
|
|
|
|
Earnings from Continuing Operations Before Taxes
|
$
|
254,169
|
|
|
$
|
92,191
|
|
|
|
|
|
(1)Other corporate expenses include costs that were previously allocated to the ECR segment prior to discontinued operations presentation in connection with the ECR sale in the approximate amount of $6.4 million for the three-month period ended December 28, 2018. Other corporate expenses also include intangibles amortization of $21.8 million and $18.7 million for the three-month periods ended December 27, 2019 and December 28, 2018, respectively.
(2)Includes revenues under the Company's TSA with Worley of $12.0 million, $99.1 million of fair value adjustments (unrealized gains) related to our investment in Worley stock and certain foreign currency revaluations relating to the ECR sale and the amortization of deferred financing fees related to the CH2M acquisition of $0.6 million for the three months ended December 27, 2019. For the three months ended December 28, 2018, primarily includes interest expense of $25.3 million and the amortization of deferred financing fees related to the CH2M acquisition of $0.5 million. Also, includes items related to restructuring and other charges for the three months ended December 27, 2019 and December 28, 2018, which are the loss on settlement of the CH2M portion of the U.S.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
pension plan of $2.4 million and the gain on the settlement of the CH2M retiree medical plans of $2.2 million, respectively. See Note 11 - Restructuring and Other Charges.
Included in “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 the 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 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.
9. Receivables and contract assets
The following table presents the components of receivables appearing in the accompanying Consolidated Balance Sheets at December 27, 2019 and September 27, 2019, as well as certain other related information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
September 27, 2019
|
|
Components of receivables and contract assets:
|
|
|
|
|
Amounts billed, net
|
$
|
1,367,214
|
|
|
$
|
1,222,339
|
|
|
Unbilled receivables and other
|
1,274,862
|
|
|
1,216,028
|
|
|
Contract assets
|
414,039
|
|
|
401,842
|
|
|
Total receivables and contract assets, net
|
$
|
3,056,115
|
|
|
$
|
2,840,209
|
|
|
Other information about receivables:
|
|
|
|
|
Amounts due from the United States federal government, included above, net of advanced billings
|
$
|
639,671
|
|
|
$
|
630,975
|
|
Amounts 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, which represent an unconditional right to payment subject only to the passage of time, are reclassified to amounts billed when they are billed under the terms of the contract. Prior to adoption of ASC 606, receivables related to contractual milestones or achievement of performance-based targets were included in unbilled receivables. These are now included in contract assets. We anticipate that substantially all of such unbilled amounts will be billed and collected over the next twelve months.
Contract assets represent unbilled amounts where the right to payment is subject to more than merely the passage of time and includes performance-based incentives and services provided ahead of agreed contractual milestones. Contract assets are transferred to unbilled receivables when the right to consideration becomes unconditional and are transferred to amounts billed upon invoicing. The increase in contract assets was a result of normal business activity and not materially impacted by any other factors.
10. Joint Ventures and VIEs
As is common to the industry, we execute certain contracts jointly with third parties through various forms of joint ventures. 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. Many of these joint ventures are formed for a specific project. The assets of our joint ventures generally consist almost entirely of cash and receivables (representing amounts due from clients), and the liabilities of our joint ventures generally 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. Many of the joint ventures are deemed to be variable interest entities (“VIE”) because they lack sufficient equity to finance the activities of the joint venture.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The assets of a joint venture are restricted for use to the obligations of the particular joint venture and are not available for general operations of the Company. Our risk of loss on these arrangements is usually shared with our partners. The liability of each partner is usually joint and several, which means that each partner may become liable for the entire risk of loss on the project. Furthermore, on some of our projects, the Company has granted guarantees which may encumber both our contracting subsidiary company and the Company for the entire risk of loss on the project. The Company is unable to estimate the maximum potential amount of future payments that we could be required to make under outstanding performance guarantees related to joint venture projects due to a number of factors, including but not limited to, the nature and extent of any contractual defaults by our joint venture partners, resource availability, potential performance delays caused by the defaults, the location of the projects, and the terms of the related contracts. Refer to Note 19 - Commitments and Contingencies, for further discussion relating to performance guarantees.
For consolidated joint ventures, the entire amount of the services performed, and the costs associated with these services, including the services provided by the other joint venture partners, are included in the Company's result of operations. Likewise, the entire amount of each of the assets and liabilities are included in the Company’s Consolidated Balance Sheets. For the consolidated VIEs, the carrying value of assets and liabilities was $254.1 million and $139.5 million, respectively, as of December 27, 2019 and $192.6 million and $138.5 million, respectively as of September 27, 2019. There are no consolidated VIEs that have debt or credit facilities.
Unconsolidated joint ventures are accounted for under proportionate consolidation or the equity method. Proportionate consolidation is used for joint ventures that include unincorporated legal entities and activities of the joint venture are construction-related. For those joint ventures accounted for under proportionate consolidation, only the Company’s pro rata share of assets, liabilities, revenue, and costs are included in the Company’s balance sheet and results of operations. For the proportionate consolidated VIEs, the carrying value of assets and liabilities was $58.3 million and $60.8 million as of December 27, 2019, respectively and $61.1 million and $63.7 million as of September 27, 2019, respectively. For those joint ventures accounted for under the equity method, the Company's investment balances for the joint venture are included in Other Noncurrent Assets: Miscellaneous on the balance sheet and the Company’s pro rata share of net income is included in revenue. In limited cases, there are basis differences between the equity in the joint venture and Jacobs' investment created when Jacobs purchased its share of the joint venture. These basis differences are amortized based on an internal allocation to underlying net assets, excluding allocations to goodwill. As of December 27, 2019, the Company’s equity method investments exceeded its share of venture net assets by $73.3 million. Our investments in equity method joint ventures on the Consolidated Balance Sheets as of December 27, 2019 and September 27, 2019 were $176.2 million and $157.9 million, respectively. During three months ended December 27, 2019 and December 28, 2018, we recognized income from equity method joint ventures of $17.3 million and $10.2 million, respectively.
Accounts receivable from unconsolidated joint ventures accounted for under the equity method is $27.2 million and $19.5 million as of December 27, 2019 and September 27, 2019, respectively.
11. Restructuring and Other Charges
During fiscal 2019, the Company implemented certain restructuring and pre-separation initiatives associated with the sale of the ECR business, the acquisition of KeyW and other related cost reduction initiatives. The restructuring activities and related costs were comprised mainly of separation and lease abandonment programs, while the pre-separation activities and costs were mainly related to the engagement of consulting services and internal personnel and other related costs dedicated to the Company’s ECR-business separation.
During the fourth fiscal quarter of 2017, the Company implemented certain restructuring and pre-integration initiatives associated with the impending acquisition of CH2M, which closed on December 15, 2017. The restructuring activities and related costs were comprised mainly of severance and lease abandonment programs, while the pre-integration activities and costs were mainly related to the engagement of consulting services and internal personnel and other related costs dedicated to the Company’s acquisition integration management efforts. Following the closing of the CH2M acquisition, these activities continued through the first quarter of fiscal 2020 and continue to be comprised mainly of severance, lease abandonment, IT related, consulting and other professional services as well as internal personnel costs.
The activities of the above-mentioned programs are expected to be substantially completed before the end of fiscal 2020.
Collectively, the above-mentioned restructuring activities are referred to as “Restructuring and other charges.”
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the impacts of the Restructuring and other charges by LOB in connection with the CH2M and KeyW acquisitions and the ECR sale for the three months ended December 27, 2019 and December 28, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
Critical Mission Solutions
|
$
|
4,291
|
|
|
$
|
449
|
|
|
|
|
|
|
People & Places Solutions
|
10,153
|
|
|
11,224
|
|
|
|
|
|
|
Corporate
|
37,597
|
|
|
33,386
|
|
|
|
|
|
|
Continuing Operations (1)
|
52,041
|
|
|
45,059
|
|
|
|
|
|
|
Energy, Chemicals and Resources (included in Discontinued Operations)
|
—
|
|
|
(5,658)
|
|
|
|
|
|
|
Total
|
$
|
52,041
|
|
|
$
|
39,401
|
|
|
|
|
|
(1) For the three months ended December 27, 2019 and December 28, 2018, amounts include $49.7 million and $47.2 million, respectively, in items impacting operating profit, along with items recorded in other income (expense), net, which are the loss on settlement of the CH2M portion of the U.S. pension plan of $2.4 million and the gain on the settlement of the CH2M retiree medical plans of $2.2 million, respectively. See Note 8- Segment Information.
The activity in the Company’s accrual for the Restructuring and other charges including the program activities described above for the three months ended December 27, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at September 27, 2019
|
$
|
162,702
|
|
|
Transfer to lease right-of-use asset as a result of adoption of ASC 842 (1)
|
(116,797)
|
|
|
Net Charges
|
52,041
|
|
|
Payments and Usage
|
(55,276)
|
|
|
Balance at December 27, 2019
|
$
|
42,670
|
|
(1) In addition, there was $24.6 million in lease cease-use liabilities relating to the 2015 Restructuring Plan reclassified to the ROU asset as a result of the adoption of ASC 842, see Note 14- Leases. The 2015 Restructuring Plan is no longer active and therefore activity related to the plan is not included in the table.
The following table summarizes the Restructuring and other charges by major type of costs in connection with the CH2M and KeyW acquisitions and the ECR sale for the three months ended December 27, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
Lease Abandonments
|
$
|
—
|
|
|
$
|
9,554
|
|
|
|
|
|
|
Involuntary Terminations
|
13,153
|
|
|
2,348
|
|
|
|
|
|
|
Outside Services
|
31,466
|
|
|
18,198
|
|
|
|
|
|
|
Other
|
7,422
|
|
|
14,959
|
|
|
|
|
|
|
Total
|
$
|
52,041
|
|
|
$
|
45,059
|
|
|
|
|
|
Cumulative amounts since 2017 incurred to date under our various restructuring and other activities described above by each major type of cost as of December 27, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
Lease Abandonments
|
$
|
161,501
|
|
|
Involuntary Terminations
|
88,831
|
|
|
Outside Services
|
200,601
|
|
|
Other
|
78,850
|
|
|
Total
|
$
|
529,783
|
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. Borrowings
Short-Term Debt
At December 27, 2019, short-term debt consisted of a bilateral term loan facility and uncommitted credit arrangements with several banks providing short-term borrowing capacity and overdraft protection with an aggregate principal balance of $200.0 million. Offset from the bilateral term loan are deferred financing fees of $0.1 million. The $200.0 million bilateral term loan facility incurs interest at LIBOR plus a margin of 1% and matures in June 2020. Amounts outstanding under the bilateral 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 Company was in compliance with the covenants under the bilateral term loan facility at December 27, 2019.
Long-Term Debt
At December 27, 2019 and September 27, 2019, long-term debt consisted of the following (principal amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Maturity
|
|
December 27, 2019
|
|
September 27, 2019
|
|
Revolving Credit Facility
|
LIBOR + applicable margin (1)
|
|
|
March 2024
|
|
|
$
|
916,771
|
|
|
$
|
303,780
|
|
|
Term Loan Facility
|
LIBOR + applicable margin (2)
|
|
|
December 2020
|
|
|
—
|
|
|
400,000
|
|
|
Fixed-rate notes due:
|
|
|
|
|
|
|
|
|
Senior Notes, Series A
|
4.27%
|
|
|
May 2025
|
|
|
190,000
|
|
|
190,000
|
|
|
Senior Notes, Series B
|
4.42%
|
|
|
May 2028
|
|
|
180,000
|
|
|
180,000
|
|
|
Senior Notes, Series C
|
4.52%
|
|
|
May 2030
|
|
|
130,000
|
|
|
130,000
|
|
|
Less: Deferred Financing Fees
|
|
|
|
|
(1,868)
|
|
|
(2,535)
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-term debt, net
|
|
|
|
|
$
|
1,414,903
|
|
|
$
|
1,201,245
|
|
(1) Depending on the Company’s Consolidated Leverage Ratio (as defined in the credit agreement governing the Revolving Credit Facility (defined below)), borrowings under the Revolving Credit Facility bear interest at either a eurocurrency rate plus a margin of between 0.875% and 1.5% or a base rate plus a margin of between 0% and 0.5%. The applicable LIBOR rates at December 27, 2019 and September 27, 2019 were approximately 1.59% and 1.00%.
(2) Depending on the Company’s Consolidated Leverage Ratio (as defined in the credit agreement governing the Term Loan Facility (defined below)), borrowings under the Term Loan 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 applicable LIBOR rate at September 27, 2019 was approximately 3.05%.
On February 7, 2014, Jacobs and certain of its subsidiaries entered into a $1.6 billion long-term unsecured, revolving credit facility (as amended, the “2014 Revolving Credit Facility”) with a syndicate of U.S. and international banks and financial institutions. On March 27, 2019, the Company entered into a second amended and restated credit agreement (the "Revolving Credit Facility") which amended and restated the 2014 Revolving Credit Facility by, among other things, (a) extending the maturity date of the credit facility to March 27, 2024, (b) increasing the facility amount to $2.25 billion (with an accordion feature that allows a further increase of the facility amount up to $3.25 billion), (c) eliminating the covenants restricting investments, joint ventures and acquisitions by the Company and its subsidiaries and (d) adjusting the financial covenants to eliminate the net worth covenant upon the removal of the same covenant from the Company’s existing Note Purchase Agreement (defined below). We were in compliance with the covenants under the Revolving Credit Facility at December 27, 2019.
The Revolving Credit Facility 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 Revolving Credit Facility. The Revolving Credit Facility also provides for a financial letter of credit sub facility of $400.0 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. The Company pays a facility fee of between 0.08% and 0.20% per annum depending on the Company’s Consolidated Leverage Ratio.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On September 28, 2017, the Company entered into a $1.5 billion unsecured delayed-draw term loan facility (as amended, the “Term Loan Facility”) with a syndicate of financial institutions as lenders and letter of credit issuers. 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 was repaid in full as of December 27, 2019.
On March 12, 2018, Jacobs entered into a note purchase agreement (as amended, the "Note Purchase Agreement") with respect to the issuance and sale in a private placement transaction of $500.0 million in the aggregate principal amount of the Company’s senior notes in three series (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 closed on May 15, 2018. The Company used 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 liens, mergers, dispositions and transactions with affiliates. In addition, the Note Purchase Agreement contains customary events of default. We were in compliance with the covenants under the Note Purchase Agreement at December 27, 2019.
We believe the carrying value of the Revolving Credit Facility, the Term Loan Facility, the Bilateral Term Loan, and Other debt outstanding approximates fair value based on the interest rates and scheduled maturities applicable to the outstanding borrowings. The fair value of the Senior Notes is estimated to be $529.8 million at December 27, 2019, based on Level 2 inputs. The fair value is determined by discounting future cash flows using interest rates available for issuances with similar terms and average maturities.
The Company has issued $2.3 million in letters of credit under the Revolving Credit Facility, leaving $1.33 billion of available borrowing capacity under the Revolving Credit Facility at December 27, 2019. In addition, the Company had issued $269.6 million under separate, committed and uncommitted letter-of-credit facilities for total issued letters of credit of $271.8 million at December 27, 2019.
13. Revenue Accounting for Contracts
Disaggregation of Revenues
Our revenues are principally derived from contracts to provide a diverse range of technical, professional, and construction services to a large number of industrial, commercial, and governmental clients. We provide a broad range of 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. Our contracts are with many different customers in numerous industries. Refer to Note 8- Segment Information for additional information on how we disaggregate our revenues by reportable segment.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table further disaggregates our revenue by geographic area for the three months ended December 27, 2019 and December 28, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
United States
|
$
|
2,532,705
|
|
|
$
|
2,182,304
|
|
|
|
|
|
|
Europe
|
551,272
|
|
|
614,224
|
|
|
|
|
|
|
Canada
|
55,396
|
|
|
50,488
|
|
|
|
|
|
|
Asia
|
30,440
|
|
|
35,611
|
|
|
|
|
|
|
India
|
5,980
|
|
|
12,639
|
|
|
|
|
|
|
Australia and New Zealand
|
129,194
|
|
|
126,647
|
|
|
|
|
|
|
South America and Mexico
|
11
|
|
|
2,649
|
|
|
|
|
|
|
Middle East and Africa
|
55,051
|
|
|
59,226
|
|
|
|
|
|
|
Total
|
$
|
3,360,049
|
|
|
$
|
3,083,788
|
|
|
|
|
|
Contract Liabilities
Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. Revenue recognized for the three months ended December 27, 2019 and December 28, 2018 that was included in the contract liability balance on September 27, 2019 and September 28, 2018, respectively was $244.1 million and $225.2 million, respectively.
Remaining Performance Obligations
The Company’s remaining performance obligations as of December 27, 2019 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company had approximately $13.42 billion in remaining performance obligations as of December 27, 2019. The Company expects to recognize approximately 48% of our remaining performance obligations into revenue within the next twelve months and the remaining 52% thereafter.
Although remaining performance obligations reflect business that is considered to be firm, cancellations, scope adjustments, foreign currency exchange fluctuations or deferrals may occur that impact their volume or the expected timing of their recognition. Remaining performance obligations are adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate.
14. Leases
On September 28, 2019 the Company adopted ASU 2016-02, Leases ("ASC 842"), along with ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, which amended and clarified the related guidance. ASC 842 requires lessees to recognize assets and liabilities for most leases. The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of an identified asset for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract, and (2) the customer has the right to control the use of the identified asset. Lessees are required to classify leases as either finance or operating leases. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
ASC 842 provided several optional practical expedients for use in transition to and ongoing application of ASC 842. The Company elected to utilize the package of practical expedients in ASC 842-10-65-1(f) that, upon adoption of ASC 842, allows entities to (1) not reassess whether any expired or existing contracts are or contain leases, (2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption and (3) not reassess initial direct costs for any existing leases. The Company did not elect the transition practical expedient pertaining to the use of hindsight. The Company elected to utilize the practical expedient in ASC 842-10-15-37 in which the Company has chosen to account for each separate lease component of a contract and its associated nonlease components as a single lease component.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company adopted ASC 842 using the modified retrospective method, and accordingly, the new guidance was applied to leases that existed as of September 28, 2019 (the date of initial application) without adjusting the comparative periods presented. As a result, as of September 28, 2019, the Company has recorded total right-of-use ("ROU") assets of $767.0 million, which is comprised of approximately $82.3 million in reclassifications of previously recorded lease incentives and deferred rent, offset by $141.4 million in restructured lease cease-use liability. Additionally, the Company has recorded total current lease liabilities of $180.7 million, and total noncurrent lease liabilities of $810.1 million. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or any impact on the Company’s cash flows.
The Company’s right-of use assets and lease liabilities relate to real estate, project assets used in connection with long-term construction contracts, IT assets and vehicles. The Company’s leases have remaining lease terms of one year to thirteen years. The Company’s lease obligations are primarily for the use of office space and are primarily operating leases. Certain of the Company’s leases contain renewal, extension, or termination options. The Company assesses each option on an individual basis and will only include options reasonably certain of exercise in the lease term. The Company generally considers the base term to be the term provided in the contract. None of the Company’s lease agreements contain material options to purchase the lease property, material residual value guarantees, or material restrictions or covenants.
Long-term project asset and vehicle leases (leases with terms greater than twelve months), along with all real estate and IT asset leases, are recorded on the consolidated balance sheet at the present value of the minimum lease payments not yet paid. Because the Company primarily acts as a lessee and the rates implicit in its leases are not readily determinable, the Company generally uses its incremental borrowing rate on the lease commencement date to calculate the present value of future lease payments. Certain leases include payments that are based solely on an index or rate. These variable lease payments are included in the calculation of the ROU asset and lease liability and are initially measured using the index or rate at the lease commencement date. Other variable lease payments, such as payments based on use and for property taxes, insurance, or common area maintenance that are based on actual assessments are excluded from the ROU asset and lease liability, and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease, such as commissions.
Certain lease contracts contain nonlease components such as maintenance and utilities. The Company has made an accounting policy election, as allowed under ASC 842-10-15-37 and discussed above, to capitalize both the lease component and nonlease components of its contracts as a single lease component for all of its right-of-use assets.
Short-term project asset and vehicle leases (project asset and vehicle leases with an initial term of twelve months or less or leases that are cancellable by the lessee and lessor without significant penalties) are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the lease term. The majority of the Company’s short-term leases relate to equipment used on construction projects. These leases are entered into at agreed upon hourly, daily, weekly or monthly rental rates for an unspecified duration and typically have a termination for convenience provision. Such equipment leases are considered short-term in nature unless it is reasonably certain that the equipment will be leased for a term greater than twelve months.
The components of lease expense (reflected in selling, general and administrative expenses) for the three months ended December 27, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 27, 2019
|
|
Lease cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
44,080
|
|
|
Variable lease cost
|
|
8,597
|
|
|
Sublease income
|
|
(3,334)
|
|
|
Total lease cost
|
|
$
|
49,343
|
|
Information related to the Company's right-of use assets and lease liabilities as of December 27, 2019 was as follows (in thousands):
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Asset/Liabilities
|
|
Balance Sheet Classification
|
|
December 27, 2019
|
|
Right-of-use assets
|
|
|
|
|
|
Operating lease assets
|
|
Miscellaneous assets
|
|
$
|
760,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Liabilities
|
|
|
|
|
|
|
Operating lease liabilities, current
|
|
Accrued liabilities
|
|
176,546
|
|
|
Operating lease liabilities, noncurrent
|
|
Other deferred liabilities
|
|
804,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
981,295
|
|
Supplemental information related to the Company's leases for the three months ended December 27, 2019 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 27, 2019
|
|
Cash paid for amounts included in the measurements of lease liabilities
|
|
$
|
48,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
16,482
|
|
|
|
|
|
|
Weighted average remaining lease term - operating leases
|
|
7.9 years
|
|
|
|
|
|
|
Weighted average discount rate - operating leases
|
|
2.7
|
%
|
Total remaining lease payments under the Company's leases for the remainder of fiscal 2020 and for the succeeding years was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
|
2020
|
|
$
|
142,102
|
|
|
2021
|
|
169,480
|
|
|
2022
|
|
152,328
|
|
|
2023
|
|
135,567
|
|
|
2024
|
|
119,794
|
|
|
Thereafter
|
|
374,113
|
|
|
|
|
1,093,384
|
|
|
Less Interest
|
|
(112,089)
|
|
|
|
|
$
|
981,295
|
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. Pension and Other Postretirement Benefit Plans
The following table presents the components of net periodic benefit cost recognized in earnings during the three months ended December 27, 2019 and December 28, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
|
|
|
|
Component:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,465
|
|
|
$
|
2,489
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
13,031
|
|
|
15,142
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
(27,665)
|
|
|
(24,837)
|
|
|
|
|
|
|
|
|
|
|
Amortization of previously unrecognized items
|
3,110
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
Plan Amendment and settlement loss (gain)
|
2,651
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,408)
|
|
|
$
|
(3,443)
|
|
|
|
|
|
|
|
|
|
The service cost component of net periodic pension expense is presented in the same line item as other compensation costs (direct cost of contracts and selling, general and administrative expenses) and the other components of net periodic pension expense are presented in miscellaneous income (expense), net on the Consolidated Statements of Earnings. In the first quarter of fiscal 2019, the Company elected to discontinue the CH2M Hill Retiree Medical Plan and the OMI Retiree Medical Plan, effective December 31, 2018. Lump sum payments were made to certain participants in the first quarter of fiscal 2019, resulting in a partial plan settlement and related settlement gain of $2.2 million. In the first quarter of fiscal 2020, the Company incurred a settlement loss on one of its U.S. defined benefit plans of approximately $2.7 million.
On January 1, 2019, the CH2M Hill Pension Plan and the CH2M Hill IDC Pension Plan merged into the Company's Sverdrup Pension Plan. The newly combined plan is called the Jacobs Consolidated Pension Plan.
The following table presents certain information regarding the Company’s cash contributions to our pension plans for fiscal 2020 (in thousands):
|
|
|
|
|
|
|
|
Cash contributions made during the first three months of fiscal 2020
|
$
|
6,613
|
|
|
Cash contributions projected for the remainder of fiscal 2020
|
19,983
|
|
|
Total
|
$
|
26,596
|
|
16. Accumulated Other Comprehensive Income
The following table presents the Company's roll forward of accumulated other comprehensive income (loss) after-tax for the three months ended December 27, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Pension Liabilities
|
|
Foreign Currency Translation Adjustment
|
|
Gain/(Loss) on Cash Flow Hedges
|
|
Total
|
|
Balance at September 27, 2019
|
$
|
(436,749)
|
|
|
$
|
(480,045)
|
|
|
$
|
(18)
|
|
|
$
|
(916,812)
|
|
|
Other comprehensive income (loss)
|
(18,320)
|
|
|
52,297
|
|
|
18
|
|
|
33,995
|
|
|
Reclassifications from other comprehensive income (loss)
|
2,651
|
|
|
—
|
|
|
—
|
|
|
2,651
|
|
|
Balance at December 27, 2019
|
$
|
(452,418)
|
|
|
$
|
(427,748)
|
|
|
$
|
—
|
|
|
$
|
(880,166)
|
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. Income Taxes
The Company’s effective tax rates from continuing operations for the three months ended December 27, 2019 and December 28, 2018 were 27.0% and 24.7%, respectively. The Company’s effective tax rate from continuing operations for the three months ended December 27, 2019 was higher than the corresponding rate in the prior period primarily due to one-time income tax charges associated with partnership interest basis differences generated during the quarter. These items were partially offset by a $3.7 million favorable settlement with the Indian Revenue Service in the period ended December 27, 2019 and a $3.5 million benefit from the application of Internal Revenue Code section 179D which is associated with design of energy efficient facilities.
See Note 7- Sale of Energy, Chemicals and Resources ("ECR") Business for further information on the Company's discontinued operations reporting for the sale of the ECR business.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted in the United States and significantly revised the U.S. corporate income tax laws. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allowed registrants to record provisional amounts during a one year “measurement period” like that used when accounting for business combinations. As of December 22, 2018, we completed our accounting for the tax effects of the 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 revised remeasurement resulted in cumulative charges to income tax expense of $144.4 million for the measurement period. The Act called for a one-time tax on deemed repatriation of foreign earnings. This one-time transition tax was based on our total post-1986 earnings and profits (E&P) of certain of our foreign subsidiaries. We recorded $14.3 million in cumulative transition taxes during the measurement period, although the transition tax was expected to be offset by foreign tax credits in the future, resulting in no additional cash tax liability. In addition, the Company recorded $104.2 million in cumulative valuation expense charges during the measurement period with respect to certain foreign tax credit deferred tax assets as a result of the Tax Act and CH2M integration.
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.
18. 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 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 EPS is determined by taking net earnings, less earnings available to participating securities.
The following table reconciles the denominator used to compute basic EPS to the denominator used to compute diluted EPS for the three months ended December 27, 2019 and December 28, 2018 (in thousands):
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
December 28, 2018
|
|
|
|
|
|
Numerator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Jacobs from continuing operations
|
$
|
179,423
|
|
|
$
|
64,894
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations allocated to participating securities
|
(92)
|
|
|
(135)
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations allocated to common stock for EPS calculation
|
$
|
179,331
|
|
|
$
|
64,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Jacobs from discontinued operations
|
$
|
77,587
|
|
|
$
|
59,402
|
|
|
|
|
|
|
Net earnings (loss) from discontinued operations allocated to participating securities
|
(40)
|
|
|
(124)
|
|
|
|
|
|
|
Net earnings (loss) from discontinued operations allocated to common stock for EPS calculation
|
$
|
77,547
|
|
|
$
|
59,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings allocated to common stock for EPS calculation
|
$
|
256,878
|
|
|
$
|
124,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
Weighted average basic shares
|
133,202
|
|
|
|
142,451
|
|
|
|
|
|
|
Shares allocated to participating securities
|
(68)
|
|
|
|
(297)
|
|
|
|
|
|
|
Shares used for calculating basic EPS attributable to common stock
|
133,134
|
|
|
|
$
|
142,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock compensation plans
|
1,484
|
|
|
|
1,424
|
|
|
|
|
|
|
Shares used for calculating diluted EPS attributable to common stock
|
134,618
|
|
|
|
143,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
Basic Net Earnings from Continuing Operations Per Share
|
$
|
1.35
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
Basic Net Earnings from Discontinued Operations Per Share
|
$
|
0.58
|
|
|
|
$
|
0.42
|
|
|
|
|
|
|
Basic EPS
|
$
|
1.93
|
|
|
|
$
|
0.87
|
|
|
|
|
|
|
Diluted Net Earnings from Continuing Operations Per Share
|
$
|
1.33
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
Diluted Net Earnings from Discontinued Operations Per Share
|
$
|
0.58
|
|
|
|
$
|
0.41
|
|
|
|
|
|
|
Diluted EPS
|
$
|
1.91
|
|
|
|
$
|
0.86
|
|
|
|
|
|
Share Repurchases
On January 17, 2019, the Company’s Board of Directors authorized a share repurchase program of up to $1.0 billion of the Company’s common stock, to expire on January 16, 2022 (the "2019 Repurchase Authorization"). During fiscal 2019, the Company launched accelerated share repurchase programs by advancing a total of $500 million to two financial institutions in privately negotiated transactions (collectively, the "2019 ASR Programs"). The specific number of shares that the Company repurchased under the 2019 ASR Programs were determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period which ended on June 5, 2019 for the first $250 million in repurchases and on December 4, 2019 for the second $250 million in repurchases. The purchases were recorded as share retirements for purposes of calculating earnings per share.
The following table summarizes the activity under the 2019 Repurchase Authorization in the first quarter of fiscal 2020, which relates only to the final non-cash settlement of the second $250 million ASR program.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Authorized
(2019 Repurchase Authorization)
|
|
Average Price Per Share (1)
|
|
Shares Repurchased
|
|
Total Shares Retired
|
|
$1,000,000,000
|
|
|
$91.08
|
|
|
351,486
|
|
|
351,486
|
|
(1) Includes commissions paid and calculated at the average price per share
As of December 27, 2019, the Company has $393.7 million remaining under the 2019 Repurchase Authorization.
On January 16, 2020, the Company’s Board of Directors authorized an additional share repurchase program of up to $1.0 billion of the Company’s common stock, to expire on January 15, 2023 (the "2020 Repurchase Authorization"). There have been no repurchases under the 2020 Repurchase Authorization as of December 27, 2019.
The share repurchase programs do not obligate the Company to purchase any shares. Share repurchases may be executed through various means including, without limitation, accelerated share repurchases, open market transactions, privately negotiated transactions, purchases pursuant to a Rule 10b5-1 plan or otherwise. The authorization for the share repurchase programs may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. The timing, amount and manner of share repurchases may depend upon market conditions and economic circumstances, availability of investment opportunities, the availability and costs of financing, currency fluctuations, the market price of the Company's common stock, other uses of capital and other factors.
Dividend Program
On January 16, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.19 per share of the Company’s common stock to be paid on February 28, 2020, to shareholders of record on the close of business on January 31, 2020. Future dividend declarations are subject to review and approval by the Company’s Board of Directors. Dividends paid through the first fiscal quarter of 2020 and the preceding fiscal year are as follows:
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Declaration Date
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Record Date
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Payment Date
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Cash Amount (per share)
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September 19, 2019
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October 4, 2019
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November 1, 2019
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$0.17
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July 11, 2019
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July 26, 2019
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August 23, 2019
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$0.17
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May 2, 2019
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May 17, 2019
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June 14, 2019
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$0.17
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January 17, 2019
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February 15, 2019
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March 15, 2019
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$0.17
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September 11, 2018
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September 28, 2018
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October 26, 2018
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$0.15
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19. Commitments and Contingencies
In the normal course of business, we make contractual commitments, some of which are supported by separate guarantees; and on occasion we are a party in a litigation or arbitration proceeding. The litigation or arbitration in which we are involved includes personal injury claims, professional liability claims and breach of contract claims. 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 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. We record in the Consolidated Balance Sheets amounts representing our estimated liability relating to such guarantees, litigation and insurance claims. Guarantees are accounted for in accordance with ASC 460-10, Guarantees, at fair value at the inception of the guarantee.
At December 27, 2019 and September 27, 2019, the Company had issued and outstanding approximately $271.8 million and $262.2 million, respectively, in LOCs and $1.98 billion and $2.0 billion, respectively, in surety bonds.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
We maintain insurance coverage for most insurable aspects of our business and operations. Our insurance programs have varying coverage limits depending upon the type of insurance and include certain conditions and exclusions which insurance companies may raise in response to any claim that is asserted by or against the Company. We have also elected to retain a portion of losses and liabilities that occur through using 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 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 we are subject to many types of audits, investigations, and claims by, or on behalf of, the government including with respect to contract performance, pricing, cost allocations, procurement practices, labor practices, and 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 United States, as well as by various government agencies representing jurisdictions outside the United States.
Our Consolidated Balance Sheets include amounts representing our probable estimated liability relating to such claims, guarantees, litigation, 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, as well as 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. Insurance recoveries are recorded as assets if recovery is probable and estimated liabilities are not reduced by expected insurance recoveries.
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 a material adverse effect on our consolidated financial statements, beyond amounts currently accrued.
On September 30, 2015, Nui Phao Mining Company Limited (“NPMC”) commenced arbitration proceedings against Jacobs E&C Australia Pty Limited (“Jacobs E&C”) in Singapore before the Singapore International Arbitration Centre. Jacobs E&C was engaged by NPMC for the provision of management, design, engineering, and procurement services for a Nui Phao mine/mineral processing project in Vietnam as part of the Company’s former Energy, Chemicals & Resources (“ECR”) line of business. A three-week hearing on the merits concluded on December 15, 2017, and on March 28, 2019, the arbitration panel issued a decision finding against Jacobs E&C. On August 30, 2019, NPMC and Jacobs E&C settled all of the proceedings related to this matter. Under the terms of the settlement, Jacobs E&C made a payment to NPMC in the amount of $130.0 million in the fourth quarter of fiscal 2019. The settlement otherwise remains confidential. During the quarter ended December 27, 2019, the Company recognized the reduction of $50.0 million of selling, general and administrative expenses in discontinued operations as a result of the realization of related insurance recoveries. Under the terms of the sale of the Company's ECR business to Worley on April 26, 2019, the Company retained liability with respect to this matter.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 and is seeking compensatory damages in the amount of approximately $530.0 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 which we believe will result in alleged damages in excess of $1.7 billion and has drawn on bonds. This draw on bonds does not impact the Company's ultimate liability. The Tribunal has granted a motion by the Consortium to adjourn the hearing previously scheduled to begin on February 17, 2020. It is anticipated that the hearing will commence in May 2020 and continue in August 2020. No decision is expected before 2021. In September 2018, JKC filed a declaratory judgment action in Western Australia alleging that the entities which executed parent company guaranties for the Consortium, including CH2M Hill Companies, Ltd., have an obligation to pay JKC’s ongoing costs to complete the project after termination. A hearing on that matter was held on March 12 and 13, 2019, and a decision in favor of the Consortium was issued. JKC has appealed the decision and a hearing on the appeal is scheduled for March 2020. If the Consortium is found liable, these matters 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 pursuing its affirmative claims against JKC, 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, in excess of the current reserve for this matter. See Note 5- Business Combinations, in the 2019 Form 10-K for further information related to CH2M contingencies.
On December 22, 2008, a coal fly ash pond at the Kingston Power Plant of the Tennessee Valley Authority ("TVA") was breached, releasing fly ash waste into the Emory River and surrounding community. In February 2009, TVA awarded a contract to the Company to provide project management services associated with the clean-up. All remediation and dredging were completed in August 2013 by other contractors under direct contracts with TVA. The Company did not perform the remediation, and its scope was limited to program management services. Certain employees of the contractors performing the cleanup work on the project filed lawsuits against the Company beginning in August 2013, alleging they were injured due to the Company's failure to protect the plaintiffs from exposure to fly ash, and asserting related personal injuries. There are currently six separate cases pending against the Company. The primary case, Greg Adkisson, et al. v. Jacobs Engineering Group Inc., case No. 3:13-CV-505-TAV-HBG, filed in the U.S. District Court for the Eastern District of Tennessee, consists of 10 consolidated cases. This case and the related cases involve several hundred plaintiffs that have been filed against the Company by employees of the contractors that completed the remediation and dredging work. The cases are at various stages of litigation, and several of the cases are currently stayed pending resolution of other cases. Separately, in May 2019, Roane County and the cities of King and Herriman filed a claim against TVA and the Company alleging that they misled the public about risks associated with the released fly ash. In December 2019, the court granted the Company's motion to dismiss the complaint. This matter is scheduled for trial in 2021. In addition, in November 2019, a resident of Roane County filed a putative class action against TVA and the Company alleging they failed to adequately warn local residents about risks associated with the released fly ash. There has been no finding of liability against the Company or that any of the alleged illnesses are the result of exposure to fly ash in any of the above matters. The Company disputes the claims asserted in all of the above matters and is vigorously defending these claims. The Company does not expect the resolution of these matters to have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
On October 31, 2019, the Company received a request from the Enforcement Division of the Securities and Exchange Commission (the "SEC") for the voluntary production of certain information and documents. The information and documents sought by the SEC primarily relate to the operations of a joint venture in Morocco which was at one time partially-owned by the Company (and subsequently divested), including in respect of possible corrupt practices. The Company is fully cooperating with the SEC and is producing the requested information and documents in its possession. 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.