NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 28, 2019
Unless the context otherwise requires:
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•
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References herein to “Jacobs” are to Jacobs Engineering Group Inc. and its predecessors;
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•
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References herein to the “Company”, “we”, “us” or “our” are to Jacobs Engineering Group Inc. and its consolidated subsidiaries; and
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•
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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.
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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 28, 2018 (“2018 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 June 28, 2019, and for the three and nine month periods ended June 28, 2019 and June 29, 2018.
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 2019, the Company adopted ASC Topic 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 is 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 convertible debt of $22.6 million and first and second lien notes which totaled approximately $275.8 million. Immediately following the effective time of the acquisition, the Company repaid KeyW’s first and second lien notes. In July, the Company repaid KeyW's outstanding convertible debt of $22.6 million. The Company has recorded its preliminary purchase price allocation associated with the acquisition, which is summarized in Note 5- Business Combinations.
On April 26, 2019, Jacobs completed the sale of its Energy, Chemicals and Resources ("ECR") business to WorleyParsons Limited, a company incorporated in Australia ("WorleyParsons"), for a purchase price of $3.4 billion consisting of (i) $2.8 billion in cash plus (ii) 58.2 million ordinary shares of WorleyParsons, 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 28, 2018. Further, as of the quarter ended June 28, 2019, a portion of the ECR business remains held by Jacobs and continues to be classified as held for sale during the third fiscal quarter of 2019 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.
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 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. The Company has finalized its purchase accounting processes associated with the acquisition, which is summarized in Note 5- Business Combinations.
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2.
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Use of Estimates and Assumptions
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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 2018 Form 10-K for a discussion of other significant estimates and assumptions affecting our consolidated financial statements.
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3.
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Fair Value and Fair Value Measurements
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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 2018 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 refer to Note 7- Sale of Energy, Chemicals and Resources for discussion regarding the Company's investment in WorleyParsons 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.
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4.
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New Accounting Pronouncements
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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 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The new guidance 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. ASU 2016-02 was further clarified and amended within ASU 2017-13, ASU 2018-01, ASU 2018-10 and ASU 2018-11 which included provisions that would provide us with the option to adopt the provisions of the new guidance using a modified retrospective transition approach, 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 the first quarter of fiscal 2019, the Company adopted ASU 2016-01, Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and to recognize any changes in fair value in net income unless the investments qualify for a practicability exception. The adoption of ASU 2016-01 in the first quarter did not impact the Company’s financial position, results of operations or cash flows. However, as described in Note 7- Sale of Energy, Chemicals and Resources ("ECR") Business, the Company received ordinary shares of WorleyParsons during the third quarter of 2019 which are measured at fair value through net income in accordance with ASU 2016-01.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 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 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.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 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.
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 is 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 convertible debt of $22.6 million and first and second lien notes which totaled approximately $275.8 million. Immediately following the effective time of the acquisition, the Company repaid KeyW’s first and second lien notes. In July, the Company repaid KeyW's outstanding convertible debt of $22.6 million.
The following summarizes the fair values of KeyW assets and acquired liabilities assumed as of the acquisition date (in millions):
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Assets
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Cash and cash equivalents
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$
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29.1
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Receivables
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81.5
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Inventories, net
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25.2
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Prepaid expenses and other
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2.5
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Property, equipment and improvements, net
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24.0
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Deferred tax asset and other
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25.8
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Goodwill
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602.4
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Identifiable intangible assets
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188.3
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Total Assets
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$
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978.8
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Liabilities
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Accounts payable
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$
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8.3
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Accrued expenses
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62.7
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Convertible senior notes - current portion
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22.6
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Other current liabilities
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3.9
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Long-term debt
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275.8
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Other non-current liabilities
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1.4
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Total Liabilities
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374.7
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Net assets acquired
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$
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604.1
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Goodwill recognized results from a substantial assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. $136.8 million of the goodwill recognized is expected to be deductible for tax purposes. During the quarter ended June 28, 2019, the Company completed its initial assessment of the fair values of the acquired assets and liabilities of KeyW.
Identified intangibles include customer relationships, contracts and backlog, developed technology and non-compete agreements. The customer relationships, contracts and backlog intangibles represent the fair value of existing contracts, the life of the underlying customer relationships and backlog is 12 years. The developed technology intangible has a life of 12 years and non-compete agreement intangibles have a life of 1 year.
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 purchase price allocation is based upon preliminary information and is subject to change when additional information is obtained. The Company has not completed its final assessment of the fair values of purchased receivables, intangible assets, property and equipment, tax balances, contingent liabilities or acquired contracts. The final purchase price allocation will result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
From the acquisition date of June 12, 2019 through June 28, 2019, KeyW contributed approximately $23.9 million in revenue and $15.5 million in pre-tax loss included in the accompanying Consolidated Statement of Earnings. Included in these results were approximately $12.7 million in pre-tax transaction costs which related primarily to professional services and other.
The following presents summarized unaudited pro forma operating results of Jacobs assuming that the Company had acquired KeyW at October 1, 2017. These pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the related events occurred (in millions, except per share data):
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Nine Months Ended June 28, 2019
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Nine Months Ended June 29, 2018
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Revenues
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$
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9,562.0
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$
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7,969.0
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Net earnings of the Group
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$
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290.8
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$
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68.9
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Net earnings (loss) attributable to Jacobs
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$
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275.3
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$
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63.3
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Net earnings (loss) attributable to Jacobs per share:
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Basic earnings (loss) per share
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$
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1.98
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$
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0.47
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Diluted earnings (loss) per share
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$
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1.96
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$
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0.46
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Included in the table above are the unaudited pro forma operating results of continuing operations. Additionally, charges relating to transaction expenses, severance expense and other items are removed from the nine months ended June 28, 2019 and are reflected in the prior fiscal year due to the assumed timing of the transaction. Also, income tax expense (benefit) for the nine-month pro forma period ended June 28, 2019 and June 29, 2018 was $14.9 million and $88.1 million, respectively.
CH2M
On December 15, 2017, the Company completed the acquisition of CH2M HILL Companies, Ltd., 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 $700 million of long-term debt. Immediately following the effective time of the acquisition, the Company repaid CH2M’s revolving credit facility and second lien notes including the related prepayment penalty.
The following summarizes the fair values of CH2M assets acquired and liabilities assumed as of the acquisition date (in millions):
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Assets
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Cash and cash equivalents
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$
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315.2
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Receivables
|
1,120.6
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Prepaid expenses and other
|
72.7
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Property, equipment and improvements, net
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175.1
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Goodwill
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3,101.0
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Identifiable intangible assets:
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Customer relationships, contracts and backlog
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412.3
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Lease intangible assets
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4.4
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Total identifiable intangible assets
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416.7
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Miscellaneous
|
543.6
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Total Assets
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$
|
5,744.9
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|
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Liabilities
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|
|
Notes payable
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$
|
2.2
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|
|
Accounts payable
|
309.6
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|
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Accrued liabilities
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735.7
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|
|
Billings in excess of costs
|
260.8
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|
|
Identifiable intangible liabilities:
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|
|
Lease intangible liabilities
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9.6
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Long-term debt
|
706.0
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Other deferred liabilities
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659.0
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Total Liabilities
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2,682.9
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Noncontrolling interests
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(37.3
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)
|
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Net assets acquired
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$
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3,024.7
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Goodwill recognized 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. During the first quarter of fiscal 2019, the Company completed its final assessment of the fair values of the acquired assets and liabilities of CH2M. Accrued liabilities and other deferred liabilities include approximately $404.7 million for estimates related to various legal and other pre-acquisition contingent liabilities accounted for under ASC 450. See Note 18- Commitments and Contingencies relating to CH2M contingencies.
Since the preliminary estimates reported in the fiscal 2018 Form 10-K, the Company updated certain amounts reflected in the final purchase price allocation due to additional information that became available during such period, including results of preliminary mediation discussions, recommendations from external advisors and claims for damages filed against Jacobs related to pre-acquisition contingencies, as summarized in the fair values of CH2M assets acquired and liabilities assumed as set forth above. Specifically, receivables decreased $4.0 million and accrued liabilities and other deferred liabilities decreased $11.5 million, respectively, primarily related to provisional estimates related to various legal and other pre-acquisition contingent liabilities. Further, miscellaneous long-term assets increased $20.7 million largely due to the deferred tax impact of these valuation adjustments. As a result of these adjustments to the preliminary purchase price allocation reported in the fiscal 2018 Form 10-K, goodwill decreased $28.1 million. 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.
Customer relationships, contracts, and backlog intangibles represent the fair value of existing contracts, the underlying customer relationships and backlog of consolidated subsidiaries and have lives ranging from 9 to 11 years (weighted average life of approximately 10 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.
Fair value measurements relating to the CH2M 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. 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. 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.
From the acquisition date of December 15, 2017 through June 29, 2018, CH2M consolidated, including both continuing and discontinued operations, contributed approximately $2.5 billion in revenue and $87.9 million in pretax income included in the accompanying Consolidated Statement of Earnings. Included in these results were approximately $93.3 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 nine month periods ended June 29, 2018 are comprised of the following (in millions):
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|
|
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|
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Three Months Ended June 29, 2018
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|
Nine Months Ended June 29, 2018
|
|
Personnel costs
|
$
|
4.3
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|
|
$
|
50.2
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|
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Professional services and other expenses
|
1.1
|
|
|
27.9
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Total
|
$
|
5.4
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|
|
$
|
78.1
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|
Personnel costs above include change of control payments and related severance costs.
The following presents summarized unaudited pro forma operating results of Jacobs 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, except per share data):
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|
|
|
|
|
|
|
|
Nine Months Ended June 29, 2018
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|
Revenues
|
$
|
11,869.8
|
|
|
Net earnings of the Group
|
$
|
226.1
|
|
|
Net earnings (loss) attributable to Jacobs
|
$
|
222.1
|
|
|
Net earnings (loss) attributable to Jacobs per share:
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|
|
Basic earnings (loss) per share
|
$
|
1.56
|
|
|
Diluted earnings (loss) per share
|
$
|
1.55
|
|
Included in the table above are the unaudited pro forma operating results of the entire Company, including both continuing and discontinued operations. Additionally, charges relating to transaction expenses, severance expense and other items are removed from the nine months ended June 29, 2018 and are reflected in the prior fiscal year due to the assumed timing of the transaction. Also, income tax expense (benefit) for both continuing and discontinued operations for the nine-month pro forma period ended June 29, 2018 was $180.4 million.
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|
|
6.
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Goodwill and Intangibles
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As a result of the refinement of the segment realignment in the first quarter of fiscal 2019 (See Note 8- Segment Information), a portion of the historical carrying value of goodwill for the former Aerospace, Technology, Environmental and Nuclear segment was allocated to the Buildings, Infrastructure and Advanced Facilities segment on a relative fair value basis to reflect the movement of the Global Environmental Solutions ("GES") business between segments. Additionally, because of the sale of the Energy, Chemicals and Resources ("ECR") line of business (see Note 7- Sale of Energy, Chemicals and Resources ("ECR") Business) which is now reflected as discontinued operations, the goodwill balance associated with ECR has been reclassified to noncurrent assets held for sale on the
Consolidated Balance Sheets for the three-months ended June 28, 2019 and the fiscal year ended September 28, 2018. The carrying value of goodwill associated with continuing operations and appearing in the accompanying Consolidated Balance Sheets at June 28, 2019 and September 28, 2018 was as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace, Technology and Nuclear
|
|
Buildings, Infrastructure and Advanced Facilities
|
|
Total
|
|
Balance September 28, 2018
|
$
|
1,581
|
|
|
$
|
3,215
|
|
|
$
|
4,796
|
|
|
Acquired
|
602
|
|
|
—
|
|
|
602
|
|
|
Post-Acquisition Adjustments
|
(10
|
)
|
|
(4
|
)
|
|
(14
|
)
|
|
Foreign Exchange Impact
|
(4
|
)
|
|
(9
|
)
|
|
(13
|
)
|
|
Balance June 28, 2019
|
$
|
2,169
|
|
|
$
|
3,202
|
|
|
$
|
5,371
|
|
The following table provides certain information related to the Company’s acquired intangibles in the accompanying Consolidated Balance Sheets at June 28, 2019 and September 28, 2018 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships, Contracts and Backlog
|
|
Developed Technology
|
|
Trade Names
|
|
Lease Intangible Assets
|
|
Other
|
|
Total
|
|
Balances September 28, 2018
|
$
|
568,323
|
|
|
$
|
—
|
|
|
$
|
2,102
|
|
|
$
|
2,527
|
|
|
$
|
—
|
|
|
$
|
572,952
|
|
|
Amortization
|
(54,064
|
)
|
|
—
|
|
|
(1,249
|
)
|
|
(419
|
)
|
|
—
|
|
|
(55,732
|
)
|
|
Acquired
|
144,000
|
|
|
42,000
|
|
|
|
|
|
|
2,302
|
|
|
188,302
|
|
|
Foreign currency translation
|
(11,417
|
)
|
|
—
|
|
|
36
|
|
|
(24
|
)
|
|
—
|
|
|
(11,405
|
)
|
|
Balances June 28, 2019
|
$
|
646,842
|
|
|
$
|
42,000
|
|
|
$
|
889
|
|
|
$
|
2,084
|
|
|
$
|
2,302
|
|
|
$
|
694,117
|
|
In addition, we acquired $9.6 million in lease intangible liabilities in connection with the CH2M acquisition, of which $2.4 million remains unamortized at June 28, 2019.
The following table presents estimated amortization expense of intangible assets for the remainder of fiscal 2019 and for the succeeding years.
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
(in millions)
|
|
2019
|
|
$
|
22.6
|
|
|
2020
|
|
85.2
|
|
|
2021
|
|
79.9
|
|
|
2022
|
|
78.8
|
|
|
2023
|
|
78.4
|
|
|
Thereafter
|
|
346.8
|
|
|
Total
|
|
$
|
691.7
|
|
|
|
|
|
7.
|
Sale of Energy, Chemicals and Resources ("ECR") Business
|
On April 26, 2019, Jacobs completed the sale of its ECR business to WorleyParsons for a purchase price of $3.4 billion consisting of (i) $2.8 billion in cash plus (ii) 58.2 million ordinary shares of WorleyParsons, subject to adjustments for changes in working capital and certain other items (the “ECR sale”).
On April 26, 2019, the Company and WorleyParsons entered into an Amended and Restated Stock and Asset Purchase Agreement (the “A&R Purchase Agreement”), pursuant to which the previously executed purchase agreement dated October 21, 2018 was amended in connection with closing the sale transaction. Among other things, the amendments in the A&R Purchase Agreement modified the lock-up period for share consideration to apply to 9.9% of WorleyParsons’ ordinary shares and extend to eight weeks following the ECR Business IT Migration Date (as defined in the related Transition Services Agreement ("TSA")) in the event such date has not occurred on or prior to October 1, 2019.
Gain on Sale and Deferred Gain
As a result of the sale of the ECR business, the Company recognized a pre-tax gain of $917.7 million which is included in Net Earnings of the Group from Discontinued Operations on the consolidated statement of earnings for the quarter ended June 28, 2019.
Upon closing the sale of the ECR business, the Company retained a noncontrolling interest (with significant influence) in BIAF-related activities in one international legal entity that is now controlled and consolidated by WorleyParsons. 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 WorleyParsons will occur at a future date. 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.
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 WorleyParsons upon completion of the interim TSA services, described further below. This future deliverable of IT assets is considered to be a separate element of the ECR business sale transaction, and accordingly, we have 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 future deliverable by WorleyParsons, the deferred proceeds will be recognized in income, along with expenses associated with any costs incurred and deferred by the Company for this deliverable.
Investment in WorleyParsons Stock
As discussed above, the Company received 58.2 million in ordinary shares of WorleyParsons. Pursuant to the A&R Purchase Agreement, 51.4 million of the shares are considered "restricted" during a lock-up period beginning April 26, 2019 and ending on October 26, 2019, subject to an eight week extension if the ECR Business IT Migration Date has not occurred on or prior to October 1, 2019. During the lock-up period Jacobs may not, without WorleyParsons' consent, directly or indirectly dispose of the "restricted" shares. The remaining 6.8 million shares not considered "restricted" were sold in the current quarter, netting a loss of $4.9 million.
The Company's investment in WorleyParsons is measured at fair value through net income as it is an equity investment with a readily determinable fair value. The 51.4 million ordinary shares considered "restricted" are recorded within Prepaid expenses and other at their estimated fair value, which is $531.4 million as of June 28, 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 sale the Company entered into a TSA with WorleyParsons pursuant to which the Company, on an interim basis, provides various services to WorleyParsons 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 1 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. Since inception of the TSA agreement, the Company has recognized costs recorded in SG&A expense incurred to perform the TSA, offset by $14.1 million in TSA related income for such services that is reported in miscellaneous income (expense) for the three and nine month periods ended June 28, 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 Sheet as of September 28, 2018. Further, as of the quarter ended June 28, 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 third fiscal quarter of 2019 in accordance with U.S. GAAP.
Amounts reflected below as of September 28, 2018 include certain reclassifications to amounts previously disclosed in our first quarter 2019 Form 10-Q in order to conform to the current quarter classifications of assets and liabilities held for sale based on the current terms of the sale transaction.
The Company incurred approximately $33.3 million and $41.9 million in related transaction costs (mainly professional service fees) for the ECR sale during the three and nine month periods ended June 28, 2019.
Summarized Financial Information of Discontinued Operations
The following table represents earnings (loss) from discontinued operations, net of tax (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended (1)
|
|
For the Nine Months Ended (1)
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Revenues
|
$
|
392,526
|
|
|
$
|
1,223,040
|
|
|
$
|
2,718,317
|
|
|
$
|
3,254,085
|
|
|
Direct cost of contracts
|
(340,525
|
)
|
|
(1,060,548
|
)
|
|
(2,336,076
|
)
|
|
(2,785,343
|
)
|
|
Gross profit
|
52,001
|
|
|
162,492
|
|
|
382,241
|
|
|
468,742
|
|
|
Selling, general and administrative expenses
|
(39,556
|
)
|
|
(118,324
|
)
|
|
(333,155
|
)
|
|
(306,829
|
)
|
|
Operating Profit (Loss)
|
12,445
|
|
|
44,168
|
|
|
49,086
|
|
|
161,913
|
|
|
Gain on sale of ECR business
|
917,697
|
|
|
—
|
|
|
917,697
|
|
|
—
|
|
|
Other (expense) income, net
|
(7,864
|
)
|
|
1,983
|
|
|
(40,158
|
)
|
|
6,374
|
|
|
Earnings Before Taxes from Discontinued Operations
|
922,278
|
|
|
46,151
|
|
|
926,625
|
|
|
168,287
|
|
|
Income Tax Expense
|
(486,594
|
)
|
|
(11,538
|
)
|
|
(487,788
|
)
|
|
(42,072
|
)
|
|
Net Earnings of the Group from Discontinued Operations
|
$
|
435,684
|
|
|
$
|
34,613
|
|
|
$
|
438,837
|
|
|
$
|
126,215
|
|
(1) The ECR business was sold April 26, 2019, therefore the three-month and nine-month periods ended June 28, 2019 include only one month and seven months, respectively, of results.
Selling, general and administrative expenses includes $111.0 million and total other (expense) income, net includes $36.0 million for the nine months ended June 29, 2018 recorded in connection with charges recognized in the second quarter of 2019 related to the Nui Phao ("NPMC") legal matter described in Note 18.
The following tables represent the assets and liabilities held for sale (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
September 28, 2018
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
158,488
|
|
|
Receivables and contract assets
|
2,704
|
|
|
1,040,996
|
|
|
Prepaid expenses and other
|
—
|
|
|
37,200
|
|
|
Current assets held for sale
|
$
|
2,704
|
|
|
$
|
1,236,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Equipment and Improvements, net
|
$
|
1,665
|
|
|
$
|
199,847
|
|
|
Goodwill
|
24,896
|
|
|
1,308,000
|
|
|
Intangibles, net
|
—
|
|
|
83,005
|
|
|
Miscellaneous
|
530
|
|
|
110,838
|
|
|
Noncurrent assets held for sale
|
$
|
27,091
|
|
|
$
|
1,701,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
$
|
—
|
|
|
$
|
1,782
|
|
|
Accounts payable
|
—
|
|
|
351,482
|
|
|
Accrued liabilities
|
2,040
|
|
|
321,627
|
|
|
Contract liabilities
|
63
|
|
|
81,679
|
|
|
Current liabilities held for sale
|
$
|
2,103
|
|
|
$
|
756,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
$
|
—
|
|
|
$
|
2,710
|
|
|
Other Deferred Liabilities
|
—
|
|
|
147,894
|
|
|
Noncurrent liabilities held for sale
|
$
|
—
|
|
|
$
|
150,604
|
|
The significant components included in our Consolidated Statements of Cash Flows for the discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Depreciation and amortization:
|
|
|
|
|
Property, equipment and improvements
|
$
|
2,110
|
|
|
$
|
19,052
|
|
|
Intangible assets
|
$
|
614
|
|
|
$
|
9,443
|
|
|
Additions to property and equipment
|
$
|
(9,204
|
)
|
|
$
|
(14,433
|
)
|
|
Stock based compensation
|
$
|
10,852
|
|
|
$
|
7,637
|
|
The decrease in depreciation and amortization period over period is due to the cessation of such charges under assets held-for-sale accounting rules.
8. Segment Information
During the second quarter of fiscal 2018, we reorganized our operating and reporting structure around three lines of business (“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. Additionally, in the first quarter of fiscal 2019, we further refined our operating segment structure to move the GES business from the ATN segment to the BIAF segment to further align with the management and reporting structure of the business. The three global LOBs are as follows: Aerospace, Technology and Nuclear ("ATN"); Buildings, Infrastructure and Advanced Facilities ("BIAF"); and Energy, Chemicals and Resources. Because the results from our ECR business formerly reported as a stand-alone segment are reflected in our unaudited consolidated financial statements as discontinued operations for all periods presented, they are not reflected in the separate segment disclosures below. For further information, refer to Note 7- Sale of Energy, Chemicals and Resources ("ECR") Business.
The Company’s 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.
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 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).
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). Prior period information has been recast to reflect the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Revenues from External Customers:
|
|
|
|
|
|
|
|
|
Aerospace, Technology and Nuclear
|
$
|
1,156,488
|
|
|
$
|
1,021,523
|
|
|
$
|
3,251,024
|
|
|
$
|
2,656,303
|
|
|
Buildings, Infrastructure and Advanced Facilities
|
2,013,134
|
|
|
1,912,100
|
|
|
6,093,981
|
|
|
4,931,613
|
|
|
Total
|
$
|
3,169,622
|
|
|
$
|
2,933,623
|
|
|
$
|
9,345,005
|
|
|
$
|
7,587,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Segment Operating Profit:
|
|
|
|
|
|
|
|
|
Aerospace, Technology and Nuclear
|
$
|
76,306
|
|
|
$
|
69,085
|
|
|
$
|
222,289
|
|
|
$
|
182,609
|
|
|
Buildings, Infrastructure and Advanced Facilities
|
183,318
|
|
|
163,193
|
|
|
515,465
|
|
|
374,809
|
|
|
Total Segment Operating Profit
|
259,624
|
|
|
232,278
|
|
|
737,754
|
|
|
557,418
|
|
|
Other Corporate Expenses (1)
|
(64,525
|
)
|
|
(34,802
|
)
|
|
(185,674
|
)
|
|
(131,163
|
)
|
|
Restructuring and Other Charges
|
(92,407
|
)
|
|
(30,544
|
)
|
|
(233,579
|
)
|
|
(122,744
|
)
|
|
Transaction Costs
|
(12,738
|
)
|
|
(4,420
|
)
|
|
(12,738
|
)
|
|
(76,915
|
)
|
|
Total U.S. GAAP Operating Profit
|
89,954
|
|
|
162,512
|
|
|
305,763
|
|
|
226,596
|
|
|
Total Other (Expense) Income, net (2)
|
3,445
|
|
|
(15,879
|
)
|
|
(8,344
|
)
|
|
(38,016
|
)
|
|
Earnings from Continuing Operations Before Taxes
|
$
|
93,399
|
|
|
$
|
146,633
|
|
|
$
|
297,419
|
|
|
$
|
188,580
|
|
|
|
|
|
(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 amounts of $2.0 million and $6.4 million for the three-month periods ended June 28, 2019 and June 29, 2018, respectively, and $14.8 million and $19.2 million for the nine-month periods ended June 28, 2019 and June 29, 2018, respectively. Other corporate expenses also include intangibles amortization of $18.4 million and $19.3 million for the three-month periods ended June 28, 2019 and June 29, 2018, respectively, and $55.7 million and $49.1 million for the nine-month periods ended June 28, 2019 and June 29, 2018, respectively.
|
|
|
|
|
(2)
|
Includes gain on the settlement of the CH2M retiree medical plans of $0.0 million and $34.6 million, respectively, and the amortization of deferred financing fees related to the CH2M acquisition of $0.5 million and $1.5 million, respectively, for the three- and nine-month periods ended June 28, 2019, as well as amortization of deferred financing fees related to the CH2M acquisition of $0.5 million and $1.2 million, respectively, for the three- and nine-month periods ended June 29, 2018. Also includes revenues under the Company's TSA agreement with WorleyParsons of $14.1 million, respectively, for the three- and nine-month periods ended June 28, 2019, for which the related costs are included in SG&A.
|
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 June 28, 2019 and September 28, 2018, as well as certain other related information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
September 28, 2018
|
|
Components of receivables and contract assets:
|
|
|
|
Amounts billed, net
|
$
|
1,298,631
|
|
$
|
1,107,250
|
|
|
Unbilled receivables and other
|
1,387,705
|
|
1,393,245
|
|
|
Contract assets
|
92,853
|
|
13,439
|
|
|
Total receivables and contract assets, net
|
$
|
2,779,189
|
|
$
|
2,513,934
|
|
|
Other information about receivables:
|
|
|
|
Amounts due from the United States federal government, included above, net of advanced billings
|
$
|
638,741
|
|
$
|
472,846
|
|
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.
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 18 - 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 $136.5 million and $95.1 million, respectively, as of June 28, 2019 and $162.2 million and $86.0 million, respectively as of September 28, 2018. 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 $69.2 million and $71.8 million as of June 28, 2019, respectively and $85.2 million and $75.9 million as of September 28, 2018, 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 June 28, 2019, the Company’s equity method investments exceeded its share of venture net assets by $73.4 million. Our investments in equity method joint ventures on the Consolidated Balance Sheets as of June 28, 2019 and September 28, 2018 were a net asset of $154.8 million and $148.4 million, respectively. During three months ended June 28, 2019 and June 29, 2018, we recognized income from equity method joint ventures of $13.2 million and $8.7 million, respectively. During the nine months ended June 28, 2019 and June 29, 2018, we recognized income from equity method joint ventures of $39.1 million and $36.0 million, respectively.
Accounts receivable from unconsolidated joint ventures accounted for under the equity method is $14.3 million and $11.1 million as of June 28, 2019 and September 28, 2018, respectively.
11. Restructuring and Other Charges
ECR Sale and Other Restructuring
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 sales management efforts.
Leading up to and subsequent to the ECR sale, these activities include restructuring and other charges amounting to approximately $72.6 million and $106.1 million, respectively, for the three and nine months ended June 28, 2019. These activities are expected to continue into fiscal 2020.
CH2M Restructuring
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 have continued into fiscal 2019 and include restructuring charges amounting to approximately $6.0 million and $68.5 million during the three and nine month periods ended June 28, 2019, respectively, and $33.9 million and $94.6 million in pre-tax charges during the three and nine month periods ended June 29, 2018, respectively. Combined with costs from integration activities of $17.3 million and $30.8 million for the three and nine month periods ended June 28, 2019, and $12.6 million and $40.6 million during the three and nine month periods ended June 29, 2018, respectively, the total cost of these restructuring and integration activities approximated $23.3 million and $99.3 million, in pre-tax charges for three and nine month periods ended June 28, 2019, respectively, and $46.5 million and $135.2 million, respectively, in pre-tax charges for the three and nine months ended June 29, 2018. These activities are expected to be substantially completed by the end of 2019. These activities are not expected to involve the exit of any service types or client end-markets.
Collectively, the above-mentioned restructuring activities are referred to as “Restructuring and other 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) by LOB in connection with the CH2M and KeyW acquisitions and the ECR sale for the three and nine months ended June 28, 2019 and the CH2M acquisition for the three and nine months ended June 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Aerospace, Technology and Nuclear
|
$
|
7,699
|
|
|
$
|
16,936
|
|
|
$
|
8,489
|
|
|
$
|
18,655
|
|
|
Buildings, Infrastructure and Advanced Facilities
|
10,619
|
|
|
32,423
|
|
|
68,644
|
|
|
53,603
|
|
|
Corporate(1)
|
74,921
|
|
|
(19,282
|
)
|
|
127,986
|
|
|
50,486
|
|
|
Continuing Operations
|
93,239
|
|
|
30,077
|
|
|
205,119
|
|
|
122,744
|
|
|
Energy, Chemicals and Resources (included in Discontinued Operations)
|
2,720
|
|
|
16,379
|
|
|
(138
|
)
|
|
12,412
|
|
|
Total
|
$
|
95,959
|
|
|
$
|
46,456
|
|
|
$
|
204,981
|
|
|
$
|
135,156
|
|
(1) Includes $34.6 million in pre-tax gains associated with the Company's CH2M retiree medical plan settlement during the nine months ended June 28, 2019.
The activity in the Company’s accrual for the Restructuring and other charges including the programs described above for the nine-month period ended June 28, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at September 28, 2018
|
$
|
102,297
|
|
|
ECR Sale Transfer
|
(6,746
|
)
|
|
Net Charges(1)
|
204,981
|
|
|
Payments and Usage
|
(150,441
|
)
|
|
Balance at June 28, 2019
|
$
|
150,091
|
|
(1) Includes $34.6 million in pre-tax gains associated with the Company's CH2M retiree medical plan settlement during the nine months ended June 28, 2019.
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 and nine months ended June 28, 2019, and the CH2M acquisition for the three and nine months ended June 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Lease Abandonments
|
$
|
22,982
|
|
|
$
|
14,678
|
|
|
$
|
66,341
|
|
|
$
|
55,114
|
|
|
Involuntary Terminations
|
12,020
|
|
|
10,215
|
|
|
22,979
|
|
|
29,335
|
|
|
Outside Services
|
39,853
|
|
|
11,418
|
|
|
95,987
|
|
|
28,176
|
|
|
Other(1)
|
21,104
|
|
|
10,145
|
|
|
19,674
|
|
|
22,531
|
|
|
Total
|
$
|
95,959
|
|
|
$
|
46,456
|
|
|
$
|
204,981
|
|
|
$
|
135,156
|
|
(1) Includes $34.6 million in pre-tax gains associated with the Company's CH2M retiree medical plan settlement during the nine months ended June 28, 2019.
Cumulative amounts incurred to date under our various restructuring and other programs described above by each major type of cost as of June 28, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
Lease Abandonments
|
$
|
120,255
|
|
|
Involuntary Terminations
|
72,992
|
|
|
Outside Services
|
132,295
|
|
|
Other(1)
|
83,196
|
|
|
Total
|
$
|
408,738
|
|
(1) Includes $34.6 million in pre-tax gains associated with the Company's CH2M retiree medical plan settlement during the nine months ended June 28, 2019.
12. Borrowings
Short-Term Debt
At June 28, 2019, short-term debt consisted of a bilateral term loan facility, convertible senior notes assumed as part of the KeyW acquisition and other notes payable with an aggregate principal balance of $222.7 million.
On June 12, 2019, Jacobs entered into a $200.0 million bilateral term loan facility. This 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 eurocurency loans. We were in compliance with the covenants under the bilateral term loan facility at June 28, 2019.
On June 12, 2019, in connection with the completion of the KeyW acquisition, Jacobs assumed KeyW's 2.5% convertible senior notes valued at $22.6 million as of June 28, 2019. At their maturity on July 15, 2019, the convertible senior notes were repaid.
Long-Term Debt
At June 28, 2019 and September 28, 2018, long-term debt consisted of the following (principal amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Maturity
|
|
June 28, 2019
|
|
September 28, 2018
|
|
New Credit Agreement
|
LIBOR + applicable margin (1)
|
|
March 2024
|
|
$
|
129,046
|
|
|
$
|
—
|
|
|
Revolving Credit Facility
|
LIBOR + applicable margin (2)
|
|
February 2020
|
|
—
|
|
|
149,129
|
|
|
Term Loan Facility
|
LIBOR + applicable margin (3)
|
|
December 2020
|
|
400,000
|
|
|
1,500,000
|
|
|
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
|
|
|
|
|
(3,848
|
)
|
|
(4,998
|
)
|
|
Other
|
Varies
|
|
Varies
|
|
—
|
|
|
36
|
|
|
Total Long-term debt, net
|
|
|
|
|
$
|
1,025,198
|
|
|
$
|
2,144,167
|
|
|
|
|
|
(1)
|
Depending on the Company’s Consolidated Leverage Ratio (as defined in the credit agreement governing the New Credit Agreement (defined below)), borrowings under the New Credit Agreement 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 rate at June 28, 2019 was approximately 1.38%.
|
|
|
|
|
(2)
|
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 bore 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 rates at September 28, 2018 were approximately 1.38% to 3.47%, respectively.
|
|
|
|
|
(3)
|
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 rates at June 28, 2019 and September 28, 2018 was approximately 3.78% and 3.71%, respectively.
|
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 “Revolving Credit Facility”) with a syndicate of large U.S. and international banks and financial institutions. On November 30, 2018, the Company entered into a Third Amendment to the Revolving Credit Facility, which provided for, among other things, the designation as a permitted transaction of the disposition of all or any portion of the ECR business, including in a transaction with WorleyParsons which is consistent in all material respects with the sale transaction announced by the Company on October 21, 2018, and the automatic release of certain designated borrowers party to the Revolving Credit Facility in connection with the closing of the ECR sale (upon the concurrent repayment of any direct borrowings under the Revolving Credit Facility by such designated borrowers). On March 27, 2019, the Company entered into a second amended and restated credit agreement (the "New Credit Agreement") which amended and restated the 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 (i) increase the Consolidated Leverage Ratio test until the closing of the ECR sale and (ii) 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 New Credit Agreement at June 28, 2019.
The New Credit Agreement 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 New Credit Agreement. The New Credit Agreement 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.
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. 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. On November 30, 2018, the Company entered into a First Amendment to the Term Loan Facility, which provides for, among other things, the amendment of certain provisions of the Term Loan Facility to permit the ECR Disposition. 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, acquisitions, dispositions fundamental changes and transactions with affiliates. In addition, the Term Loan Facility contains customary events of default. We were in compliance with the covenants under the Term Loan Facility at June 28, 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 indebtedness, 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 June 28, 2019.
We believe the carrying value of the New Credit Agreement, the Term Loan Facility, the Bilateral Term Loan, convertible senior notes assumed in the KeyW acquisition 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 $523.5 million at June 28, 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 New Credit Agreement, leaving $2.12 billion of available borrowing capacity under the New Credit Agreement at June 28, 2019. In addition, the Company had issued $356.7 million under separate, committed and uncommitted letter-of-credit facilities for total issued letters of credit of $359.0 million at June 28, 2019.
13. Revenue Accounting for Contracts and Adoption of ASC Topic 606
On September 29, 2018, the Company adopted ASC Topic 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). As a result, the Company recorded a cumulative effect adjustment of $37.2 million which is net of $10.3 million of tax. The entry decreased retained earnings related to continuing operations by $21.2 million (net of tax) and retained earnings related to discontinued operations by $16.0 million (net of tax) as of September 29, 2018. Additionally, the following cumulative effect adjustments were recorded:
Continuing operations
|
|
|
|
•
|
An increase to Deferred Income Tax Assets included within miscellaneous assets of $5.4 million;
|
|
|
|
|
•
|
An increase to Contract liabilities of $15.2 million;
|
|
|
|
|
•
|
A decrease to Receivables of $11.4 million;
|
Discontinued operations
|
|
|
|
•
|
An increase to Current liabilities held for sale of $0.6 million;
|
|
|
|
|
•
|
A decrease to Current assets held for sale of $15.4 million;
|
The decrease in retained earnings primarily resulted from a change in the manner in which the Company determines the performance obligations for its projects. Prior to the adoption of ASC 606, the Company typically segmented contracts that contained multiple services by service type - for instance, engineering, procurement and construction services - for purposes of revenue and margin recognition. Under ASC 606, multiple-service contracts where the Company is responsible for providing a single deliverable (e.g. a constructed asset) will be treated as a single performance obligation for purposes of revenue recognition and thus no longer will be segmented if the individual service types are not identified as distinct performance obligations under the contract. Typically, this will occur when the Company is contracted to perform both engineering and construction on a project.
The following table presents how the adoption of ASC Topic 606 affected certain line items in the Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 28, 2019
|
|
June 28, 2019
|
|
(in thousands)
|
Recognition
Under Previous
Guidance
|
|
Impact of the
Adoption of
ASC Topic 606
|
|
Recognition
Under ASC
Topic 606
|
|
Recognition
Under Previous
Guidance
|
|
Impact of the
Adoption of
ASC Topic 606
|
|
Recognition
Under ASC
Topic 606
|
|
Revenues
|
$
|
3,166,867
|
|
|
$
|
2,755
|
|
|
$
|
3,169,622
|
|
|
$
|
9,328,219
|
|
|
$
|
16,786
|
|
|
$
|
9,345,005
|
|
|
Direct costs of contracts
|
(2,543,488
|
)
|
|
—
|
|
|
(2,543,488
|
)
|
|
(7,533,511
|
)
|
|
—
|
|
|
(7,533,511
|
)
|
|
Gross profit
|
623,379
|
|
|
2,755
|
|
|
626,134
|
|
|
1,794,708
|
|
|
16,786
|
|
|
1,811,494
|
|
|
Operating Profit
|
87,199
|
|
|
2,755
|
|
|
89,954
|
|
|
288,977
|
|
|
16,786
|
|
|
305,763
|
|
|
Earnings from Continuing Operations Before Taxes
|
90,644
|
|
|
2,755
|
|
|
93,399
|
|
|
280,633
|
|
|
16,786
|
|
|
297,419
|
|
|
Income tax expense for Continuing Operations
|
2,831
|
|
|
(850
|
)
|
|
1,981
|
|
|
(9,508
|
)
|
|
(3,321
|
)
|
|
(12,829
|
)
|
|
Net Earnings of the Group from Continuing Operations
|
93,475
|
|
|
1,905
|
|
|
95,380
|
|
|
271,125
|
|
|
13,465
|
|
|
284,590
|
|
|
Net Earnings of the Group from Discontinued Operations
|
434,442
|
|
|
1,242
|
|
|
435,684
|
|
|
434,087
|
|
|
4,750
|
|
|
438,837
|
|
|
Net Earnings of the Group
|
527,917
|
|
|
3,147
|
|
|
531,064
|
|
|
705,212
|
|
|
18,215
|
|
|
723,427
|
|
|
Net Earnings Attributable to Jacobs from Continuing Operations
|
87,460
|
|
|
1,905
|
|
|
89,365
|
|
|
255,547
|
|
|
13,465
|
|
|
269,012
|
|
|
Net Earnings Attributable to Jacobs from Discontinued Operations
|
433,835
|
|
|
1,242
|
|
|
435,077
|
|
|
431,892
|
|
|
4,750
|
|
|
436,642
|
|
|
Net Earnings Attributable to Jacobs
|
$
|
521,295
|
|
|
$
|
3,147
|
|
|
$
|
524,442
|
|
|
$
|
687,439
|
|
|
$
|
18,215
|
|
|
$
|
705,654
|
|
The following table presents how the adoption of ASC Topic 606 affected certain line items in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
(in thousands)
|
Recognition
Under Previous
Guidance
|
|
Impact of the
Adoption of
ASC Topic 606
|
|
Recognition
Under ASC
Topic 606
|
|
Receivables and contract assets (previously presented as Receivables)
|
$
|
2,775,479
|
|
|
$
|
3,710
|
|
|
$
|
2,779,189
|
|
|
Current assets held for sale
|
$
|
4,920
|
|
|
$
|
(2,216
|
)
|
|
$
|
2,704
|
|
|
Miscellaneous noncurrent assets
|
$
|
771,423
|
|
|
$
|
(3,321
|
)
|
|
$
|
768,102
|
|
|
Contract Liabilities (previously presented as Billings in excess of costs)
|
$
|
519,561
|
|
|
$
|
(13,167
|
)
|
|
$
|
506,394
|
|
|
Current liabilities held for sale
|
$
|
5,470
|
|
|
$
|
(3,367
|
)
|
|
$
|
2,103
|
|
Update to Major Accounting Policies
Upon adoption of ASC Topic 606, the Company revised its accounting policy on revenue recognition from the policy provided in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended September 28, 2018. The revised accounting policy on revenue recognition is provided below for revenue recognized following the adoption of ASC Topic 606. For periods presented prior to September 29, 2018, our revenue recognition policies are summarized in the 2018 Form 10-K.
Engineering, Procurement & Construction Contracts and Service Contracts
The Company recognizes engineering, procurement, and construction contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Upon adoption of ASC Topic 606, contracts which include engineering, procurement and construction services are generally accounted for as a single deliverable (a single performance obligation) and are no longer segmented between types of services. In some instances, the Company’s services associated with a construction activity are limited only to specific tasks such as customer support, consulting or supervisory services. In these instances, the services are typically identified as separate performance obligations.
The Company recognizes revenue using the percentage-of-completion method, based primarily on contract costs incurred to date compared to total estimated contract costs. The percentage-of-completion method (an input method) is the most representative depiction of the Company’s performance because it directly measures the value of the services transferred to the customer. Subcontractor materials, labor and equipment and, in certain cases, customer-furnished materials and labor and equipment are included in revenue and cost of revenue when management believes that the company is acting as a principal rather than as an agent (e.g., the company integrates the materials, labor and equipment into the deliverables promised to the customer or is otherwise primarily responsible for fulfillment and acceptability of the materials, labor and/or equipment). The Company recognizes revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated, or constructed for a project. Revenue on these uninstalled materials is recognized when control is transferred. Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client. Under the typical payment terms of our engineering, procurement and construction contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly) and customer payments on are typically due within 30 to 60 days of billing, depending on the contract.
For service contracts, the Company recognizes revenue over time using the cost-to-cost percentage-of-completion method. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that have not been billed to clients is classified as unbilled receivables and other and contract assets, both included within Receivables and contract assets on the Consolidated Balance Sheets. Amounts billed to clients in excess of revenue recognized on service contracts to date are classified as a current liability under contract liabilities. In some instances where the Company is standing ready to provide services, the Company recognizes revenue ratably over the service period. Under the typical payment terms of our service contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, and customer payments are typically due within 30 to 60 days of billing, depending on the contract.
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 acting as principal 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”).
Variable Consideration
The nature of the Company’s contracts gives rise to several types of variable consideration, including claims and unpriced change orders; awards and incentive fees; and liquidated damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in the company’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred and only up to the amount of cost incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.
The Company generally provides limited warranties for work performed under its engineering and construction contracts. The warranty periods typically extend for a limited duration following substantial completion of the Company’s work on the project. Historically, warranty claims have not resulted in material costs incurred for which the Company was not compensated for by the customer.
Practical Expedient
If the Company has a right to consideration from a customer in an amount that corresponds directly with the value of the Company’s performance completed to date (a service contract in which the company bills a fixed amount for each hour of service provided), the Company recognizes revenue in the amount to which it has a right to invoice for services performed.
The Company does not adjust the contract price for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a service to a customer and when the customer pays for that service will be one year or less.
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.
The following table further disaggregates our revenue by geographic area for the three and nine months ended June 28, 2019 and June 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
United States
|
$
|
2,357,836
|
|
|
$
|
2,047,974
|
|
|
$
|
6,701,474
|
|
|
$
|
5,086,405
|
|
|
Europe
|
491,036
|
|
|
561,689
|
|
|
1,706,163
|
|
|
1,649,181
|
|
|
Canada
|
59,830
|
|
|
56,104
|
|
|
160,339
|
|
|
115,659
|
|
|
Asia
|
33,918
|
|
|
45,241
|
|
|
113,294
|
|
|
119,699
|
|
|
India
|
12,129
|
|
|
13,629
|
|
|
43,131
|
|
|
38,987
|
|
|
Australia and New Zealand
|
136,711
|
|
|
146,536
|
|
|
386,594
|
|
|
437,244
|
|
|
South America and Mexico
|
1,225
|
|
|
5,964
|
|
|
7,244
|
|
|
12,924
|
|
|
Middle East and Africa
|
76,937
|
|
|
56,486
|
|
|
226,766
|
|
|
127,817
|
|
|
Total
|
$
|
3,169,622
|
|
|
$
|
2,933,623
|
|
|
$
|
9,345,005
|
|
|
$
|
7,587,916
|
|
Contract Liabilities
Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. Amounts classified as “Billings in excess of costs” on the Consolidated Balance Sheets of our 2018 Form 10-K have been renamed to “Contract liabilities” on the Consolidated Balance Sheets.
The increase in contract liabilities was a result of normal business activity and not materially impacted by any other factors. Revenue recognized for the three and nine months ended June 28, 2019 that was included in the contract liability balance on September 28, 2018 was $33 million and $331 million.
Remaining Performance Obligations
The Company’s remaining performance obligations as of June 28, 2019 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. The Company had approximately $11.58 billion in remaining performance obligations as of June 28, 2019. The Company expects to recognize 53% of our remaining performance obligations within the next twelve months and the remaining 47% 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. Pension and Other Postretirement Benefit Plans
The following table presents the components of net periodic benefit cost recognized in earnings during the three and nine months ended June 28, 2019 and June 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Component:
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,212
|
|
|
$
|
1,486
|
|
|
$
|
5,545
|
|
|
$
|
6,463
|
|
|
Interest cost
|
17,088
|
|
|
14,566
|
|
|
52,916
|
|
|
44,850
|
|
|
Expected return on plan assets
|
(26,291
|
)
|
|
(24,378
|
)
|
|
(79,709
|
)
|
|
(74,053
|
)
|
|
Amortization of previously unrecognized items
|
3,182
|
|
|
2,440
|
|
|
9,353
|
|
|
7,240
|
|
|
Plan Amendment and settlement loss (gain)
|
—
|
|
|
—
|
|
|
(34,621
|
)
|
|
3,819
|
|
|
|
$
|
(4,809
|
)
|
|
$
|
(5,886
|
)
|
|
$
|
(46,516
|
)
|
|
$
|
(11,681
|
)
|
As a result of the adoption of ASU 2017-07, Compensation- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in the first quarter of fiscal 2019, the service cost component of net periodic pension expense has been 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 have been reclassified from
selling, general and administrative expense and direct cost of contracts and instead presented in miscellaneous income (expense), net on the Consolidated Statements of Earnings for the three and nine months ended June 28, 2019 and June 29, 2018 in the amount of $6.1 million and $6.1 million, respectively, and $18.3 million and $18.2 million, respectively.
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 second quarter of fiscal 2019, lump sum payments were made to remaining plan participants and the plans were fully settled, resulting in an additional $32.4 million in settlement gains recognized in the second quarter of fiscal 2019.
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. In December 2017, the Company incurred a partial settlement loss of approximately $3.8 million related to its Sverdrup Pension Plan in the U.S.
Due to a recent ruling by the High Court in the United Kingdom regarding equalization between men and women of a tranche of pension (the Guaranteed Minimum Pension) accrued between 1990 and 1997, Jacobs measured the estimated impact of this ruling in its consolidated financial statements, resulting in an increase of approximately $38.2 million in the ASC 715 balance sheet liability in the first quarter of fiscal 2019, with an offset to other comprehensive income, net of tax. Additionally, the Company has recognized an additional $1.2 million in additional net periodic benefit cost during the nine months ended June 28, 2019 as a result of the ruling.
The following table presents certain information regarding the Company’s cash contributions to our pension plans for fiscal 2019 (in thousands):
|
|
|
|
|
|
|
|
Cash contributions made during the first nine months of fiscal 2019
|
$
|
24,856
|
|
|
Cash contributions projected for the remainder of fiscal 2019
|
8,262
|
|
|
Total
|
$
|
33,118
|
|
|
|
|
|
15.
|
Accumulated Other Comprehensive Income
|
The following table presents the Company's roll forward of accumulated other comprehensive income (loss) after-tax for the nine months ended June 28, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Pension Liabilities
|
|
Foreign Currency Translation Adjustment
|
|
Gain/(Loss) on Cash Flow Hedges
|
|
Total
|
|
Balance at September 28, 2018
|
$
|
(309,867
|
)
|
|
$
|
(496,017
|
)
|
|
$
|
(819
|
)
|
|
$
|
(806,703
|
)
|
|
Other comprehensive income (loss)
|
8,413
|
|
|
(51,456
|
)
|
|
1,213
|
|
|
(41,830
|
)
|
|
Reclassifications from other comprehensive income (loss)
|
(21,480
|
)
|
|
106,613
|
|
|
(189
|
)
|
|
84,944
|
|
|
Balance at June 28, 2019
|
$
|
(322,934
|
)
|
|
$
|
(440,860
|
)
|
|
$
|
205
|
|
|
$
|
(763,589
|
)
|
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 allows 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 have 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 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. In the current reporting period, the Company filed its tax return which reflected the transition tax. The net tax liability after considering foreign tax credits resulted in a tax liability of $0.8 million. 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 Company’s effective tax rates from continuing operations for the three months ended June 28, 2019 and June 29, 2018 were (2.1)% and 21.3%, respectively. The Company’s effective tax rates from continuing operations for the nine months ended June 28, 2019 and June 29, 2018 were 4.3% and 58.5%, respectively. The Company’s effective tax rate from continuing operations for the three months ended June 28, 2019 was lower than the effective tax rate for continuing operations for the three months ended June 29, 2018 primarily due to a favorable discrete benefit of $21.7 million as a result of an election made to defer net operating losses under final regulations, resulting in the utilization of additional previously fully valued foreign tax credits, combined with lower pre-tax book income from continuing operations in the third quarter of fiscal 2019. The effective tax rate for the nine months ended June 28, 2019 was lower primarily due to $54.8 million in net discrete expense during the nine months ended June 29, 2018 mainly comprised of $14.0 million from the impact of the remeasurement of deferred taxes for the Act, $52.5 million for an increase to the valuation allowance related to certain foreign tax credits and an offsetting tax benefit of $5.7 million for a federal hurricane credit. Comparatively, in the nine months ended June 28, 2019, the Company had a $62.6 million discrete benefit, predominantly comprised of $37.4 million for a remeasurement of the Company's deferred tax liability for unremitted earnings to account for the change in expected manner of recovery and an additional benefit of $21.7 million as a result of an election made to defer net operating losses under final regulations, resulting in utilization of previously fully reserved foreign tax credits.
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.
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. It is reasonably possible that, during the next twelve months, we may realize a decrease in our uncertain tax positions of approximately $16.3 million as a result of concluding various tax audits and closing tax years.
|
|
|
|
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 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 and nine months ended June 28, 2019 and June 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
|
Numerator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Jacobs from continuing operations
|
$
|
89,365
|
|
|
$
|
113,336
|
|
|
$
|
269,012
|
|
|
$
|
72,811
|
|
|
Net earnings (loss) from continuing operations allocated to participating securities
|
(105
|
)
|
|
(475
|
)
|
|
(444
|
)
|
|
(325
|
)
|
|
Net earnings (loss) from continuing operations allocated to common stock for EPS calculation
|
$
|
89,260
|
|
|
$
|
112,861
|
|
|
$
|
268,568
|
|
|
$
|
72,486
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Jacobs from discontinued operations
|
$
|
435,077
|
|
|
$
|
36,886
|
|
|
$
|
436,642
|
|
|
$
|
128,161
|
|
|
Net earnings (loss) from discontinued operations allocated to participating securities
|
(513
|
)
|
|
(155
|
)
|
|
(720
|
)
|
|
(573
|
)
|
|
Net earnings (loss) from discontinued operations allocated to common stock for EPS calculation
|
$
|
434,564
|
|
|
$
|
36,731
|
|
|
$
|
435,922
|
|
|
$
|
127,588
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings allocated to common stock for EPS calculation
|
$
|
523,824
|
|
|
$
|
149,592
|
|
|
$
|
704,490
|
|
|
$
|
200,074
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
Weighted average basic shares
|
136,772
|
|
|
142,612
|
|
|
139,263
|
|
|
136,717
|
|
|
Shares allocated to participating securities
|
(161
|
)
|
|
(597
|
)
|
|
(230
|
)
|
|
(743
|
)
|
|
Shares used for calculating basic EPS attributable to common stock
|
136,611
|
|
|
$
|
142,015
|
|
|
$
|
139,033
|
|
|
$
|
135,974
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock compensation plans
|
1,212
|
|
|
1,014
|
|
|
1,206
|
|
|
1,028
|
|
|
Shares used for calculating diluted EPS attributable to common stock
|
137,823
|
|
|
143,029
|
|
|
140,239
|
|
|
137,002
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
Basic Net Earnings from Continuing Operations Per Share
|
$
|
0.65
|
|
|
$
|
0.79
|
|
|
$
|
1.93
|
|
|
$
|
0.53
|
|
|
Basic Net Earnings from Discontinued Operations Per Share
|
$
|
3.18
|
|
|
$
|
0.26
|
|
|
$
|
3.14
|
|
|
$
|
0.94
|
|
|
Basic EPS
|
$
|
3.83
|
|
|
$
|
1.05
|
|
|
$
|
5.07
|
|
|
$
|
1.47
|
|
|
Diluted Net Earnings from Continuing Operations Per Share
|
$
|
0.65
|
|
|
$
|
0.79
|
|
|
$
|
1.92
|
|
|
$
|
0.53
|
|
|
Diluted Net Earnings from Discontinued Operations Per Share
|
$
|
3.15
|
|
|
$
|
0.26
|
|
|
$
|
3.11
|
|
|
$
|
0.93
|
|
|
Diluted EPS
|
$
|
3.80
|
|
|
$
|
1.05
|
|
|
$
|
5.02
|
|
|
$
|
1.46
|
|
Share Repurchases
On July 23, 2015, the Company’s Board of Directors authorized a share repurchase program of up to $500.0 million of the Company’s common stock, to expire on July 31, 2018. On July 19, 2018, the Company's Board of Directors authorized the continuation of this share repurchase program for an additional three years, to expire on July 31, 2021. The following table summarizes the activity under this program during fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
Amount Authorized
|
|
Average Price Per
Share (1)
|
|
Total Shares
Retired
|
|
Shares
Repurchased
|
|
$500,000,000
|
|
$61.74
|
|
4,005,007
|
|
4,005,007
|
|
|
|
|
(1)
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Includes commissions paid and calculated at the average price per share.
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On January 17, 2019, 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 16, 2022. On February 19, 2019, the Company launched accelerated share repurchase programs by advancing $250 million to two financial institutions in privately negotiated transactions (collectively, the "2019 ASR Program"). The specific number of shares that the Company repurchased under the 2019 ASR Program was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period completed on June 5, 2019. The purchase was recorded as a share retirement for purposes of calculating earnings per share. Subsequent to the launch of the 2019 ASR Program and other current quarter share repurchases, the Company has $722.8 million remaining under its $1.0 billion share repurchase authorization. The following table summarizes the activity under this program during fiscal 2019:
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Amount Authorized
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Average Price Per Share (1)
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Total Shares
Retired
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Shares Repurchased
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$1,000,000,000
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$75.33
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3,680,017
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3,680,017
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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 share repurchase program does not obligate 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, 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 July 11, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.17 per share of the Company’s common stock to be paid on August 23, 2019, to shareholders of record on the close of business on July 26, 2019. Future dividend declarations are subject to review and approval by the Company’s Board of Directors. Dividends paid through the third fiscal quarter of 2019 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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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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July 19, 2018
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August 3, 2018
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August 31, 2018
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$0.15
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May 3, 2018
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May 18, 2018
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June 15, 2018
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$0.15
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January 18, 2018
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February 16, 2018
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March 16, 2018
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$0.15
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September 27, 2017
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October 13, 2017
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November 10, 2017
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$0.15
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18.
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Commitments and Contingencies
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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 June 28, 2019 and September 28, 2018, the Company had issued and outstanding approximately $359.0 million and $446.6 million, respectively, in LOCs and $1.16 billion and $870.3 million, respectively, in surety bonds.
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 Energy, Chemicals & Resources (“ECR”) line of business. A three-week hearing on the merits concluded on December 15, 2017. On March 28, 2019, the arbitration panel issued a decision finding against Jacobs E&C and awarding damages to NPMC of approximately $95.0 million. NPMC has asserted a claim for interest, costs and attorneys' fees for approximately $70.0 million, which the Company intends to dispute. The award otherwise remains confidential. A hearing on the interest and cost claim is scheduled to begin on October 28, 2019. On June 28, 2019, the Company filed an application in Singapore to set aside the award. In addition, NPMC has filed an application to enforce the award in Australia. A hearing on that application is scheduled to begin on September 4, 2019. In connection with a temporary stay of the proceedings to enforce the award, the Company delivered a bank guarantee in the amount of $95.0 million. The Company expects that a portion of the award is subject to recovery from insurance, however, the Company currently has not accrued a receivable for related insurance recoveries. Under the terms of the sale of the Company’s ECR business to WorleyParsons on April 26, 2019, the Company has retained liability with respect to this matter. The Company recorded pre-tax charges in discontinued operations for estimates related to the award and recovery of costs, estimated related interest and attorneys' fees in the amount of $147.0 million in the second quarter of 2019.
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. A hearing on this matter is scheduled to begin in February 2020 and no decision is expected before 2020. 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. 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 for further information relating to CH2M contingencies.
