filings.toolsItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
In order to better understand the changes that occur to key elements of our financial condition, results of operations and cash flows, a reader of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be aware of the critical accounting policies we apply in preparing our consolidated financial statements.
The consolidated financial statements contained in this report were prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements and the financial statements of any business performing long-term engineering and construction-type contracts requires management to make certain estimates and judgments that affect both the entity’s results of operations and the carrying values of its assets and liabilities. Although our significant accounting policies are described in Note 2 - Significant Accounting Policies of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K, the following discussion is intended to highlight and describe those accounting policies that are especially critical to the preparation of our consolidated financial statements.
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Revenue Accounting for Contracts - We recognize revenue earned on our technical professional and field services projects under the percentage-of-completion method described in ASC 605-35, Construction-Type and Production-Type Contracts. In general, we recognize revenues at the time we provide services. Pre-contract costs are generally expensed as incurred, unless they are directly associated with an anticipated contract and recoverability from that contract is probable. Contracts are generally segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered. For multiple contracts with a single customer we account for each contract separately.
The percentage-of-completion method of accounting is applied by comparing contract costs incurred to date to the total estimated costs at completion. Contract losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion.
Unapproved change orders are included in the contract price to the extent it is probable that such change orders will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. Claims meeting these recognition criteria are included in revenues only to the extent of the related costs incurred.
Certain cost-reimbursable contracts include incentive-fee arrangements. These incentive fees can be based on a variety of factors but the most common are the achievement of target completion dates, target costs, and/or other performance criteria. Failure to meet these targets can result in unrealized incentive fees. We recognize incentive fees based on expected results using the percentage-of-completion method of accounting. As the contract progresses and more information becomes available, the estimate of the anticipated incentive fee that will be earned is revised as necessary. We bill incentive fees based on the terms and conditions of the individual contracts. In certain situations, we are allowed to bill a portion of the incentive fees over the performance period of the contract. In other situations, we are allowed to bill incentive fees only after the target criterion has been achieved. Incentive fees which have been recognized but not billed are included in receivables in the accompanying Consolidated Balance Sheets.
Certain cost-reimbursable contracts with government customers as well as certain commercial clients provide that contract costs are subject to audit and adjustment. In this situation, revenues are recorded at the time services are performed based upon the amounts we expect to realize upon completion of the contracts. In those situations where an audit indicates that we may have billed a client for costs not allowable under the terms of the contract, we estimate the amount of such nonbillable costs and adjust our revenues accordingly.
When we are directly responsible for subcontractor labor or third-party materials and equipment, we reflect the costs of such items in both revenues and costs (and we refer to such costs as “pass-through” costs). On those projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not reflected in either revenues or costs.
Joint Ventures - 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. In general, at any given time, the equity of our joint ventures represents the undistributed profits earned on contracts the joint ventures hold with clients. Very few of our joint ventures have employees or third-party debt or credit facilities. The debt held by the joint ventures is non-recourse to the general credit of Jacobs. 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. See Note 15- Contractual Guarantees, Litigation, Investigations and Insurance for further discussion.
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 Company uses a qualitative approach to determine if the Company is the primary beneficiary of the VIE, which considers factors that indicate a party has the power to direct the activities that most significantly impact the joint venture’s economic performance. These factors include the composition of the governing board, how board decisions are approved, the powers granted to the operational manager(s) and partner that holds that position(s), and to a certain extent, the partner’s economic interest in the joint venture. The Company analyzes each joint venture initially to determine if it should be consolidated or unconsolidated.
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| • | Consolidated if the Company is the primary beneficiary of a VIE, or holds the majority of voting interests of a non-VIE (and no significant participative rights are available to the other partners). |
| • | Unconsolidated if the Company is not the primary beneficiary of a VIE, or does not hold the majority of voting interest of a non-VIE. |
Share-Based Payments - We measure the value of services received from employees and directors in exchange for an award of an equity instrument based on the grant-date fair value of the award. The computed value is recognized as a non-cash cost on a straight-line basis over the period the individual provides services, which is typically the vesting period of the award (with the exception of awards containing an internal performance measure which are recognized on a straight-line basis over the vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares expected to be earned).
Accounting for Pension Plans - The accounting for pension plans requires the use of assumptions and estimates in order to calculate periodic pension cost and the value of the plans’ assets and liabilities. These assumptions include discount rates, investment returns and projected salary increases, among others. The actuarial assumptions used in determining the funded statuses of the plans are provided in Note 10 - Pension and Other Postretirement Benefit Plans of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
The expected rates of return on plan assets for fiscal 2019 range from 2.9% to 7.5% and were 3.5% to 8.5% for fiscal 2018. We believe the range of rates selected for fiscal 2019 reflects the long-term returns expected on the plans’ assets, considering recent market conditions, projected rates of inflation, the diversification of the plans’ assets, and the expected real rates of market returns. The discount rates used to compute plan liabilities were changed from a range of 1.3% to 7.0% in fiscal 2017 to a range of 1.3% to 8.1% in fiscal 2018. These assumptions represent the Company’s best estimate of the rates at which its pension obligations could be effectively settled.
Changes in the actuarial assumptions often have a material effect on the values assigned to plan assets and liabilities, and the associated pension expense. For example, if the discount rate used to value the net pension benefit obligation (“PBO”) at September 28, 2018, was higher by 0.5%, the PBO would have been lower at that date by approximately $180.2 million for non-U.S. plans, and by approximately $21.9 million for U.S. plans. If the expected return on plan assets was higher by 1.0%, the net periodic pension cost for fiscal 2018 would be lower by approximately $18.7 million for non-U.S. plans, and by approximately $3.7 million for U.S. plans. Differences between actuarial assumptions and actual performance (i.e., actuarial gains and losses) that are not recognized as a component of net periodic pension cost in the period in which such differences arise are recorded to accumulated other comprehensive income (loss) and are recognized as part of net periodic pension cost in future periods in accordance with U.S. GAAP. Management monitors trends in the marketplace within which our pension plans operate in an effort to assure the fairness of the actuarial assumptions used.
Contractual Guarantees, Litigation, Investigations, and Insurance - 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 in which we are involved includes personal injury claims, professional liability claims, and breach of contract claims. In most cases, we are the defendant. Where we provide a separate guarantee, it is strictly in support of the underlying contractual commitment. Guarantees take various forms including surety bonds required by law, or standby letters of credit ("LOC") (also referred to as “bank guarantees”) or corporate guarantees given to induce a party to enter into a contract with a subsidiary. Standby LOCs are also used as security for advance payments or in various other 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 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 the Company brings. We have also elected to retain a portion of losses and liabilities that occur through the use of various deductibles, limits, and retentions under our insurance programs. As a result, we may be subject to a future liability for which we are only partially insured or completely uninsured. We intend to mitigate any such future liability by continuing to exercise prudent business judgment in negotiating the terms and conditions of 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 U.S., as well as by various government agencies representing jurisdictions outside the U.S.
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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.
Testing Goodwill for Possible Impairment - The goodwill carried on our Consolidated Balance Sheets is tested annually for possible impairment, and on an interim basis if indicators of possible impairment exist. For purposes of impairment testing, goodwill is assigned to the applicable reporting units based on the current reporting structure. In performing the annual impairment test, we evaluate our goodwill at the reporting unit level. The Company performs the annual goodwill impairment test for the reporting units at the end of the third quarter of our fiscal year. However, during the quarter ended September 28, 2018, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible asset impairment testing from the last day of the fiscal third quarter to the first day of the fourth quarter. This voluntary change is expected to result in better alignment of the Company's annual impairment test with the Company’s strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. It would be impracticable to apply this change retrospectively because retrospective application would require reliance on significant estimates and assumptions with the use of hindsight. Accordingly, this change will only be applied prospectively.
Additionally, during the second quarter of fiscal 2018, we reorganized our operating and reporting structure around three global lines of business (“LOBs”), which also serve as the Company’s operating segments: (i) Aerospace, Technology, Environmental and Nuclear, (ii) Buildings, Infrastructure and Advanced Facilities, and (iii) Energy, Chemicals and Resources. This reorganization occurred in conjunction with the integration of CH2M into the Company's legacy businesses, and was intended to better serve our global clients, leverage our workforce, help streamline operations, and provide enhanced growth opportunities. The Company’s LOB leadership and internal reporting structures report to the Chief Executive Officer, who is also the Chief Operating Decision Maker (“CODM”), and enable the CODM to evaluate the performance of each of these segments and make appropriate resource allocations among each of the segments. For purposes of 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.
U.S. GAAP does not prescribe a specific valuation method for estimating the fair value of reporting units. Any valuation technique used to estimate the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others.
We used an income approach to test our goodwill for possible impairment which requires us to make estimates and judgments. Under the income approach, fair value is determined by using the discounted cash flows of our reporting units. The Company’s discount rate reflects a weighted average cost of capital (“WACC”) for a peer group of companies representative of the Company’s respective reporting units. The fair values for each reporting unit exceeded the respective book values ranging from 31% to 132%.
It is possible that changes in market conditions, economy, facts and circumstances, judgments and assumptions used in estimating the fair value could change, resulting in possible impairment of goodwill in the future. The fair values resulting from the valuation techniques used are not necessarily representative of the values we might obtain in a sale of the reporting units to willing third parties.
We have determined that the fair value of our reporting units substantially exceeded their respective carrying values for the Consolidated Balance Sheets presented.
Restructuring and Other Charges
During the fourth fiscal quarter of 2017, the Company implemented certain restructuring and pre-integration plans associated with the closing of its acquisition of CH2M, which occurred on December 15, 2017. The restructuring activities and related costs under these plans 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 2018 and include restructuring activities amounting to approximately $101.7 million in pre-tax charges during the year ended September 28, 2018. Combined with $89.2 million in integration activities for the same period, the total cost of these restructuring and integration activities approximated
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$190.8 million for the year ended September 28, 2018. These activities are expected to continue through fiscal 2019. These activities are not expected to involve the exit of any service types or client end-markets. Also during fiscal 2018 the Company disposed of its investment in Guimar in order to resolve potential conflicts arising from the CH2M acquisition, which resulted in a loss as discussed below.
During the second fiscal quarter of 2017, the Company entered into strategic business restructuring activities associated with realignment of its Europe, United Kingdom ("U.K.") and Middle East regional operations in our BIAF segment. Pre-tax net charges of $22.6 million were recorded associated mainly with net realizable value write-offs on contract accounts receivable of $16.5 million, with additional charges recorded for statutory redundancy and severance costs of $1.4 million and other liabilities of $4.7 million.
During the second fiscal quarter of 2015, the Company began implementing a series of initiatives intended to improve operational efficiency, reduce costs, and better position itself to drive growth of the business in the future. We refer to these initiatives, in the aggregate, as the “2015 Restructuring”. These activities evolved and developed over time as management identified and evaluated opportunities for changes in the Company’s operations (and related areas of potential cost savings), as economic conditions changed and as the realignment of the Company’s operations into its global LOB structure was implemented. Actions related to the 2015 Restructuring included involuntary terminations, the abandonment of certain leased offices, combining operational organizations, and the colocation of employees into other existing offices. These activities did not involve the exit of any service types or client end-markets. The 2015 Restructuring was completed in fiscal 2017, although cash payments continue to be made under the related accruals recorded in connection with these activities.
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 related to previously vacated facilities which are now planned to be utilized) on the Company's reportable segment income by line of business in connection with the CH2M acquisition for the year ended September 28, 2018 and the 2015 Restructuring and realignment of the Company's BIAF Europe, U.K. and Middle East regional operations for the years ended September 29, 2017 and September 30, 2016 (in thousands):
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Aerospace, Technology, Environmental and Nuclear | $ | 20,254 | $ | 2,356 | $ | 8,210 | |||||
| Buildings, Infrastructure and Advanced Facilities | 56,238 | 47,743 | 24,566 | ||||||||
| Energy, Chemicals and Resources | 37,166 | 42,558 | 113,315 | ||||||||
| Corporate | 77,148 | 42,781 | 41,816 | ||||||||
| Total | $ | 190,806 | $ | 135,438 | $ | 187,907 |
The activity in the Company’s accrual for the Restructuring and other charges for the year ended September 28, 2018 is as follows (in thousands):
| Balance at September 29, 2017 | $ | 142,767 | |
| CH2M Acquisition Assumed Liabilities | 31,576 | ||
| CH2M Charges | 190,806 | ||
| Payments & Usage | (189,673 | ) | |
| Balance at September 28, 2018 | $ | 175,476 |
The following table summarizes the Restructuring and other charges by major type of costs in connection with the CH2M acquisition for the year ended September 28, 2018 and the 2015 Restructuring and realignment of the Company's Europe, U.K. and Middle East regional operations for the years ended September 29, 2017 and September 30, 2016 (in thousands):
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| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Lease Abandonments | $ | 53,914 | $ | 55,647 | $ | 92,643 | |||||
| Involuntary Terminations | 37,063 | 43,667 | 85,599 | ||||||||
| Outside Services | 36,308 | 4,236 | 7,398 | ||||||||
| Other (1) | 63,521 | 31,888 | 2,267 | ||||||||
| Total | $ | 190,806 | $ | 135,438 | $ | 187,907 |
(1) Includes $21.0 million in the fourth quarter of fiscal 2018 relating to the loss on the sale of our Guimar joint venture investment recognized in other income (expense).
Cumulative amounts incurred to date for Restructuring and other charges by each major type of costs as of September 28, 2018 are as follows (in thousands):
| Lease Abandonments | $ | 292,773 | |
| Involuntary Terminations | 221,642 | ||
| Outside Services | 60,677 | ||
| Other | 96,252 | ||
| Total | $ | 671,344 |
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Fiscal Years Ended September 28, 2018, September 29, 2017 and September 30, 2016
(In thousands, except per share information)
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Revenues | $ | 14,984,646 | $ | 10,022,788 | $ | 10,964,157 | |||||
| Direct cost of contracts | (12,156,276 | ) | (8,250,536 | ) | (9,196,326 | ) | |||||
| Gross profit | 2,828,370 | 1,772,252 | 1,767,831 | ||||||||
| Selling, general and administrative expenses | (2,180,399 | ) | (1,379,983 | ) | (1,429,233 | ) | |||||
| Operating Profit | 647,971 | 392,269 | 338,598 | ||||||||
| Other Income (Expense): | |||||||||||
| Interest income | 8,984 | 8,748 | 7,848 | ||||||||
| Interest expense | (76,760 | ) | (12,035 | ) | (15,260 | ) | |||||
| Gain (Loss) on disposal of business and investments | (20,967 | ) | 10,880 | (41,410 | ) | ||||||
| Miscellaneous income (expense), net | (4,523 | ) | (6,645 | ) | (3,053 | ) | |||||
| Total other (expense) income, net | (93,266 | ) | 948 | (51,875 | ) | ||||||
| Earnings Before Taxes | 554,705 | 393,217 | 286,723 | ||||||||
| Income Tax Expense | (381,563 | ) | (105,842 | ) | (72,208 | ) | |||||
| Net Earnings of the Group | 173,142 | 287,375 | 214,515 | ||||||||
| Net (Earnings) Loss Attributable to Noncontrolling Interests | (9,711 | ) | 6,352 | (4,052 | ) | ||||||
| Net Earnings Attributable to Jacobs | $ | 163,431 | $ | 293,727 | $ | 210,463 | |||||
| Net Earnings Per Share: | |||||||||||
| Basic | $ | 1.18 | $ | 2.43 | $ | 1.75 | |||||
| Diluted | $ | 1.17 | $ | 2.42 | $ | 1.73 |
2018 Overview
The Company's net earnings for fiscal 2018 were $163.4 million (or $1.17 per diluted share), a decrease of $130.3 million, or 44.4%, from $293.7 million (or $2.42 per diluted share) for the corresponding period last year. Included in the Company’s operating
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results were $140.1 million (or $1.01 per share) in after tax Restructuring and other charges, $60.7 million in CH2M and ECR transaction costs and $259.2 million in income tax charges associated with the Tax Cuts and Jobs Act (“the Act”) enacted on December 22, 2017. Our fiscal 2017 results included $87.9 million (or $0.72 per share) in after tax charges associated with Restructuring and other charges and $10.6 million in CH2M transaction costs. Income taxes for fiscal 2018 were $381.6 million, an increase of $275.7 million, or 260.5%, from $105.8 million due mainly to the impacts from the provisional remeasurement of the deferred tax items and other impacts from U.S. Tax Reform.
On December 15, 2017, the Company completed the acquisition of CH2M, an international provider of engineering, construction and technical services, by acquiring 100% of the outstanding shares of CH2M common stock and preferred stock. The purpose of the acquisition was to further diversify the Company’s market presence in the water, nuclear and environmental remediation sectors and to further the Company’s growth strategy. The Company paid total consideration of approximately $1.8 billion in cash (excluding $315.2 million of cash acquired) and issued approximately $1.4 billion of Jacobs’ common stock to the former stockholders and certain equity award holders of CH2M.
Backlog at September 28, 2018 was $27.3 billion, up $7.5 billion, from $19.8 billion for the corresponding period last year. New prospects and new sales remain strong and the Company continues to have a positive outlook for many of the industry groups and markets in which our clients operate.
Results of Operations
As previously noted by Company management, the Company was continuing to finalize its year end audit processes, including with respect to income taxes, at the time of its 4th quarter earnings release. In that regard, the Company’s 2018 income tax expense also includes approximately $15.0 million in deferred income taxes associated with final one-time adjustments with respect to valuation allowances on foreign tax credits associated with the acquisition of the CH2M business that had not been included in the Company’s fourth quarter fiscal 2018 earnings release furnished on Form 8-K on November 20, 2018. The impact of these adjustments was $.10 per share for the year ended September 28, 2018.
Fiscal 2018 Compared to Fiscal 2017
Total revenues for the year ended September 28, 2018, were $14.98 billion, an increase of $4.96 billion, or 49.5%, from $10.02 billion for the corresponding period last year. The increase in revenues was due primarily to favorable impacts from the CH2M acquisition, which contributed approximately $3.81 billion in incremental revenues for fiscal 2018. Higher volumes in our legacy ATEN, BIAF and ECR businesses also contributed to the increase.
Pass-through costs included in revenues for the year ended September 28, 2018 were $3.06 billion in comparison to $2.54 billion in the prior year. These year-over-year increases are due primarily to impacts from the CH2M acquisition as well as to pass-through costs in revenues from the ATEN businesses. In general, pass-through costs are more significant on projects that have a higher content of field services activities. Pass-through costs are generally incurred at specific points during the life cycle of a project and are highly dependent on the needs of our individual clients and the nature of the clients’ projects. However, because we have hundreds of projects which start at various times within a fiscal year, the effect of pass-through costs on the level of direct costs of contracts can vary between fiscal years without there being a fundamental or significant change to the underlying business.
Gross profit for the year ended September 28, 2018 was $2.83 billion, up $1.06 billion, or 59.6% from $1.77 billion from the corresponding period in 2017. Our gross profit margins were 18.9% and 17.7% for the years ended September 28, 2018 and September 29, 2017, respectively. The higher volume impacts seen in our ATEN, BIAF and ECR businesses, incremental benefits of the CH2M businesses acquired, and our continuing strategic focus on realigning our portfolio to higher margin businesses and project execution drove improving gross profit and margins for the year over year periods.
Selling, general & administrative expenses for the year ended September 28, 2018 were $2.18 billion, an increase of $800.4 million, or 58.0%, from $1.38 billion for the corresponding period last year. The increase in SG&A expenses is due mainly to incremental SG&A expense from the CH2M businesses acquired of approximately $650.3 million during the 2018 period, which included $99.3 million of restructuring and other charges and deal related costs, as well as higher personnel related costs year over year and charges associated with a legal matter of $15.0 million. Also, unfavorable impacts from foreign exchange (mainly from the stronger Australian Dollar and Indian Rupee) approximated $16.0 million.
Net interest expense for the year ended September 28, 2018 was $67.8 million, an increase of $64.5 million from $3.3 million for the corresponding period last year. The increases in net interest expense as compared to the corresponding periods last year was due primarily to higher levels of average debt balances outstanding related to financing activities for the acquisition of CH2M, which was partially funded with term loan financing of $1.5 billion and revolving credit line borrowings of $850 million.
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Miscellaneous expense, net for the year ended September 28, 2018 was $4.5 million, a decrease of $2.1 million as compared to $6.6 million for the corresponding period last year. The increases were due primarily to unfavorable year over year impacts from unrealized gains and losses from foreign exchange.
Gain/(Loss) on disposal of business and investments was $(21.0) million and $10.9 million for the years ended September 28, 2018 and September 29, 2017, respectively. The reported loss amounts for fiscal 2018 were associated mainly with the Company's divestiture of its equity investment in the Guimar joint venture. The 2017 gain amount was associated mainly with the Company’s divestiture of its equity investment in Neste Jacobs Oy, a joint venture between the Company and Neste Corporation.
The Company’s consolidated effective income tax rate is generally higher than the U.S. statutory rate of 24.60010276% primarily due to the impacts related to U.S. Tax Reform and the integration of CH2M's tax attributes. The following table reconciles total income tax expense using the statutory U.S. federal income tax rate to the consolidated income tax expense shown in the accompanying Consolidated Statements of Earnings for the years ended September 28, 2018 and September 29, 2017 (dollars in thousands):
| For the Years Ended | |||||||||||||
| September 28, 2018 | % | September 29, 2017 | % | ||||||||||
| Statutory amount | $ | 136,458 | 24.6 | % | $ | 137,626 | 35.0 | % | |||||
| State taxes, net of the federal benefit | 7,587 | 1.4 | % | 8,955 | 2.3 | % | |||||||
| Exclusion of tax on non-controlling interests | (2,389) | (0.4 | )% | 2,223 | 0.6 | % | |||||||
| Foreign: | |||||||||||||
| Difference in tax rates of foreign operations | 9,860 | 1.8 | % | (16,987 | ) | (4.3 | )% | ||||||
| Benefit from valuation allowance release | (5,105) | (0.9 | )% | (3,085 | ) | (0.8 | )% | ||||||
| U.K. tax rate change on deferred tax assets | — | — | — | — | |||||||||
| Nontaxable income from foreign affiliate | — | — | (3,280 | ) | (0.8 | )% | |||||||
| U.S. tax cost of foreign operations | 6,577 | 1.2 | % | 18,612 | 4.7 | % | |||||||
| Tax differential on foreign earnings | 11,332 | 2.0 | % | (4,740 | ) | (1.2 | )% | ||||||
| Foreign tax credits | (21,729) | (3.9 | )% | (20,454 | ) | (5.2 | )% | ||||||
| Tax Reform | 154,150 | 27.8 | % | — | — | ||||||||
| Valuation Allowance | 104,221 | 18.8 | % | — | — | ||||||||
| Uncertain tax positions | (1,297) | (0.2 | )% | (5,779 | ) | (1.5 | )% | ||||||
| Other items: | |||||||||||||
| IRS §179D deduction | (4,520) | (0.8 | )% | (3,351 | ) | (0.8 | )% | ||||||
| IRS §199D deduction | — | — | (2,113 | ) | (0.5 | )% | |||||||
| Foreign partnership loss | (3,990) | (0.7 | )% | (9,861 | ) | (2.5 | )% | ||||||
| Other items - net | 1,740 | 0.3 | % | 3,336 | 0.7 | % | |||||||
| Total other items | (6,770) | (1.2 | )% | (11,989 | ) | (3.1 | )% | ||||||
| Taxes on income | $ | 381,563 | 68.8 | % | $ | 105,842 | 26.9 | % |
The Company’s consolidated effective income tax rate for the year ended September 28, 2018 increased to 68.788%% from 26.9% in fiscal 2017. Key drivers for this year over year increase include the impacts from the provisional remeasurement of the deferred tax items and other impacts from U.S. Tax Reform.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the top corporate U.S. federal statutory tax rate from 35% to 21% starting on January 1, 2018, resulting in a blended statutory tax rate for fiscal year filers. The Company’s blended federal statutory tax rate for fiscal 2018 is 24.6%. It also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, places limitations and exclusions on varied tax deductions and creates new taxes on certain foreign sourced earnings. The majority of the tax provisions are effective for the first tax year beginning after January 1, 2018, which will be the Company’s taxable year beginning fiscal 2019.
Fiscal 2017 Compared to Fiscal 2016
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Total revenues for the year ended September 29, 2017, were $10.02 billion, decrease of $941.4 million, or 8.6%, from $10.96 billion for the corresponding period last year. The decrease in revenues was due primarily to lower volumes in the ECR and ATEN LOBs. These lower volumes were driven mainly by lower field services volume, primarily with ECR customers and the timing of project completions versus new project timing.
Pass-through costs included in revenues for the year ended September 29, 2017 were $2.54 billion in comparison to $2.49 billion in line with amounts in the corresponding period last year. In general, pass-through costs are more significant on projects that have a higher content of field services activities. Pass-through costs are generally incurred at specific points during the life cycle of a project and are highly dependent on the needs of our individual clients and the nature of the clients’ projects. However, because we have hundreds of projects which start at various times within a fiscal year, the effect of pass-through costs on the level of direct costs of contracts can vary between fiscal years without there being a fundamental or significant change to the underlying business.
Gross profit for the year ended September 29, 2017 was $1.77 billion, an increase of $4.4 million, or 0.25% from the corresponding period in 2016. Our gross profit margins were 17.7% and 16.1% for the years ended September 29, 2017 and September 30, 2016, respectively. Our continuing strategic focus on realigning our portfolio to higher margin businesses and project execution drove improving gross profit and margins for the year over year periods.
Selling, general & administrative expenses for the year ended September 29, 2017 were $1.38 billion, decrease of $49.2 million, or 3.44%, from $1.43 billion for the corresponding period last year. The decrease in SG&A expenses for the comparative annual periods was due mainly to lower Restructuring and other charges of $75.9 million and related savings from the 2015 Restructuring. These decreases were offset in part by higher year over year spending mainly in personnel related costs and professional service fees, including an additional $17.1 million associated with CH2M professional service fees and integration costs.
Net interest expense for the year ended September 29, 2017 was $3.3 million, a decrease of $4.1 million from $7.4 million for the corresponding period last year. The decrease in interest expense for the year ended September 29, 2017 as compared to the corresponding period last year was due primarily to the reversal of $2.5 million of accrued interest expense related to the statute expiration of a foreign tax reserve as well as higher levels of interest income.
Miscellaneous expense, net for the year ended September 29, 2017 was $6.6 million, an increase as compared to $3.1 million million for the corresponding period last year. This change was due primarily to a reversal in fiscal 2016 of $5.1 million of accrued penalties related to the statute expiration of a foreign tax reserve, which did not recur in fiscal 2017, offset in part by other miscellaneous charges.
Gain (loss) on disposal of business and investments was $10.9 million and $(41.4) million for the years ended September 29, 2017 and September 30, 2016, respectively. The reported amounts for fiscal 2017 were associated mainly with the Company’s divestiture of its equity investment in Neste Jacobs Oy, a joint venture between the Company and Neste Corporation. The $(41.4) million loss on disposal in fiscal 2016 was mainly attributable to the Company’s loss on the sale of our French subsidiary of $24.4 million, and a non-cash write-off on an equity investment of $17.0 million.
The Company’s consolidated effective income tax rate is generally lower than the U.S. statutory rate of 35% primarily due to the impacts of favorable tax rate differences in our foreign operations. The following table reconciles total income tax expense using the statutory U.S. federal income tax rate to the consolidated income tax expense shown in the accompanying Consolidated Statements of Earnings for the years ended September 29, 2017 and September 30, 2016 (dollars in thousands):
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| For the Years Ended | |||||||||||||
| September 29, 2017 | % | September 30, 2016 | % | ||||||||||
| Statutory amount | $ | 137,626 | 35 | % | $ | 100,353 | 35.0 | % | |||||
| State taxes, net of the federal benefit | 8,955 | 2.3 | % | 7,853 | 2.7 | % | |||||||
| Exclusion of tax on non-controlling interests | 2,223 | 0.6 | % | (1,418 | ) | (0.5 | )% | ||||||
| Foreign: | |||||||||||||
| Difference in tax rates of foreign operations | (16,987 | ) | (4.3 | )% | (17,184 | ) | (6.0 | )% | |||||
| Benefit from foreign valuation allowance release | (3,085 | ) | (0.8 | )% | (11,182 | ) | (3.9 | )% | |||||
| U.K. tax rate change on deferred tax assets | — | — | % | 8,853 | 3.1 | % | |||||||
| Nontaxable income from foreign affiliate | (3,280 | ) | (0.8 | )% | — | — | % | ||||||
| U.S. tax cost of foreign operations | 18,612 | 4.7 | % | 30,850 | 10.9 | % | |||||||
| Tax differential on foreign earnings | (4,740 | ) | (1.2 | )% | 11,337 | 4.1 | % | ||||||
| Foreign tax credits | (20,454 | ) | (5.2 | )% | (44,018 | ) | (15.4 | )% | |||||
| Uncertain tax positions | (5,779 | ) | (1.5 | )% | 1,449 | 0.5 | % | ||||||
| Other items: | |||||||||||||
| IRS §179D deduction | (3,351 | ) | (0.8 | )% | (2,153 | ) | (0.8 | )% | |||||
| IRS §199D deduction | (2,113 | ) | (0.5 | )% | (2,800 | ) | (1.0 | )% | |||||
| Foreign partnership loss | (9,861 | ) | (2.5 | )% | (2,658 | ) | (0.9 | )% | |||||
| Other items - net | 3,336 | 0.7 | % | 4,263 | 1.5 | % | |||||||
| Total other items | (11,989 | ) | (3.1 | )% | (3,348 | ) | (1.2 | )% | |||||
| Taxes on income | $ | 105,842 | 26.9 | % | $ | 72,208 | 25.2 | % |
The Company’s consolidated effective income tax rate for the year ended September 29, 2017 increased to 26.9% from 25.2% for fiscal 2016. Key drivers for this year over year increase include the impacts of lower foreign tax credit benefits and lower benefits from valuation allowance releases on foreign deferred tax assets, partly offset by favorable impacts of U.S. tax cost of foreign operations, the non-recurrence of 2016 tax rate change impacts on deferred income tax assets in the UK and favorable impacts from change in uncertain tax positions.
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Segment Financial Information
The following tables present total revenues and segment operating profit 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 and expenses relating to the Restructuring and other charges and transaction costs associated with the CH2M transaction and integration costs and the ECR sale (in thousands). Prior period information has been recast to reflect the current period presentation.
| For the Years Ended | |||||||||||
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Revenues from External Customers: | |||||||||||
| Aerospace, Technology, Environmental and Nuclear | $ | 4,372,008 | $ | 2,464,363 | $ | 2,845,913 | |||||
| Buildings, Infrastructure and Advanced Facilities | 6,184,883 | 3,830,697 | 3,419,505 | ||||||||
| Energy, Chemicals and Resources | 4,427,755 | 3,727,728 | 4,698,739 | ||||||||
| Total | $ | 14,984,646 | $ | 10,022,788 | $ | 10,964,157 |
| For the Years Ended | |||||||||||
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Segment Operating Profit: | |||||||||||
| Aerospace, Technology, Environmental and Nuclear (1) | $ | 311,871 | $ | 200,179 | $ | 215,119 | |||||
| Buildings, Infrastructure and Advanced Facilities (2) | 482,277 | 263,679 | 217,412 | ||||||||
| Energy, Chemicals and Resources | 218,109 | 161,312 | 153,797 | ||||||||
| Total Segment Operating Profit | 1,012,257 | 625,170 | 586,328 | ||||||||
| Other Corporate Expenses | (113,702 | ) | (81,595 | ) | (60,100 | ) | |||||
| Restructuring and Other Charges | (170,148 | ) | (134,206 | ) | (187,630 | ) | |||||
| Transaction Costs | (80,436 | ) | (17,100 | ) | — | ||||||
| Total U.S. GAAP Operating Profit | 647,971 | 392,269 | 338,598 | ||||||||
| Gain (Loss) on disposal of business and investments | (20,967 | ) | 10,880 | (41,410 | ) | ||||||
| Total Other (Expense) Income, net (3) | (72,299 | ) | (9,932 | ) | (10,465 | ) | |||||
| Earnings Before Taxes | $ | 554,705 | $ | 393,217 | $ | 286,723 |
| (1) | Includes $15.0 million in charges during the year ended September 28, 2018 associated with a legal matter. |
| (2) | Excludes $23.8 in restructuring and other charges for the year ended September 29, 2017. See Note 8, Restructuring and Other Charges. |
| (3) | Includes amortization of deferred financing fees related to the CH2M acquisition of $1.8 million for the year ended September 28, 2018. Also, includes $1.2 million and $277 thousand of restructuring and other charges for the years ended September 29, 2017 and September 30, 2016, respectively. |
In evaluating the Company’s performance by operating segment, the CODM reviews various metrics and statistical data for each LOB but focuses primarily on revenues and operating profit. As discussed above, segment operating profit includes not only local SG&A expenses but the SG&A expenses of the Company’s support groups that have been allocated to the segments. In addition, the Company attributes each LOB’s specific incentive compensation plan costs to the LOBs. The revenues of certain LOBs are more affected by pass-through revenues than other LOBs. The methods for recognizing revenue, incentive fees, project losses and change orders are consistent among the LOBs.
During the fourth fiscal quarter of 2017, the Company implemented certain restructuring activities (primarily severance related activities) associated with the Company’s acquisition of CH2M. Following the closing of the CH2M acquisition, these activities have continued into fiscal 2018 and include associated charges for professional services, personnel costs, severance and costs associated with co-locating Jacobs and CH2M offices, amounting to approximately $190.8 million in pre-tax charges during fiscal 2018. These activities are expected to continue through 2019. These activities are not expected to involve the exit of any service types or client end-markets.
Transaction costs associated with the CH2M acquisition in the accompanying consolidated statements of earnings for the years ended September 28, 2018 and September 29, 2017 are comprised of the following (in millions):
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| For the Years Ended | |||||||
| September 28, 2018 | September 29, 2017 | ||||||
| Personnel costs | $ | 50.2 | $ | 2.2 | |||
| Professional services and other expenses | 27.5 | 14.9 | |||||
| Total | $ | 77.7 | $ | 17.1 |
Personnel costs above include change of control payments and related severance costs. In evaluating the Company’s performance by operating segment, the CODM reviews revenues and operating profit. As discussed above, segment operating profit includes not only local SG&A expenses but the SG&A expenses of the Company’s support groups that have been allocated to the segments. In addition, the Company attributes each LOB’s specific incentive compensation plan costs to the LOBs. The revenues of certain LOBs are more affected by pass-through revenues than other LOBs. The methods for recognizing revenue, incentive fees, project losses and change orders are consistent among the LOBs.
Aerospace, Technology, Environmental and Nuclear
| For the Years Ended | |||||||||||
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Revenue | $ | 4,372,008 | $ | 2,464,363 | $ | 2,845,913 | |||||
| Operating Profit | $ | 311,871 | $ | 200,179 | $ | 215,119 |
Fiscal 2018 vs. 2017
Aerospace, Technology, Environmental and Nuclear segment revenues for the year ended September 28, 2018 were $4.37 billion, up $1.91 billion, or 77.4%, from $2.46 billion for the corresponding period last year. The increase in revenues were due in large part to nuclear and environmental revenue resulting from the CH2M acquisition. Also, our revenues were positively impacted by year over year revenue volume growth across our legacy portfolio, highlighted by increased spending by customers in the U.S. government business sector and our nuclear and defense unit in the U.K. Impacts on revenues from favorable foreign currency were approximately $23.8 million for fiscal year 2018.
Operating profit for the segment was $311.9 million for the year ended September 28, 2018, up $111.7 million, or 55.8%, from $200.2 million for the corresponding period last year. In addition to incremental operating profit benefits from the CH2M acquisition, the increase from the prior year was primarily attributable to continued growth in profits from our U.S. governmental business sector and improvements in our nuclear and defense unit in the U.K. and fee income with our U.K. joint venture. SG&A for the ATEN segment increased for fiscal 2018 attributable mainly to incremental SG&A associated with the CH2M acquisition during the fiscal 2018 and additional charges of $15.0 million associated with a legal matter incurred during fiscal 2018.
Fiscal 2017 vs. 2016
Aerospace, Technology, Environmental and Nuclear segment revenues for the year ended September 29, 2017 were $2.46 billion, down $381.6 million, or 13.4%, from $2.85 billion for the corresponding period in 2016. The decrease in revenues was mainly in our U.S. government business sector, where rebid losses and small business award preferences drove the declines. Unfavorable foreign currency impacts of approximately $13.0 million also contributed to this year over year decline. These unfavorable items were partially offset by positive gains from organic growth and improvement in our telecommunications sector, our NASA projects and our projects for the Ministry of Defense in Australia.
Operating profit for the ATEN segment was $200.2 million for the year ended September 29, 2017, down $14.9 million, or 6.9%, from $215.1 million for the year ended September 30, 2016. This decrease in profitability was due primarily to the revenue declines in the U.S. government business sector mentioned above, as well as lower equity income from our U.K. joint venture for the comparative periods mainly associated with year over year declines in project funding.
Buildings, Infrastructure and Advanced Facilities
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| For the Years Ended | |||||||||||
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Revenue | $ | 6,184,883 | $ | 3,830,697 | $ | 3,419,505 | |||||
| Operating Profit | $ | 482,277 | $ | 263,679 | $ | 217,412 |
Fiscal 2018 vs. 2017
Revenues for the Buildings, Infrastructure and Advanced Facilities segment for the year ended September 28, 2018 were $6.18 billion, up $2.35 billion, or 61.5%, from $3.83 billion for the corresponding period last year. The increase in revenues was due in part to favorable impacts from the CH2M acquisition of approximately $2.22 billion together with revenue increases across all our businesses with strong investment in Life Sciences, Electronics, Water and Transport Infrastructure markets. Impacts on revenues from favorable foreign currency were approximately $59.6 million for fiscal 2018.
Operating profit for the segment for the year ended September 28, 2018 was $482.3 million, an increase of $218.6 million, or 82.9%, from $263.7 million for the comparative period in 2017. The increase in operating profit was in part due to favorable impacts from the CH2M acquisition, together with positive impacts from the higher year over year revenues for the segment. SG&A for the BIAF segment increased for fiscal 2018, with this increase being attributable mainly to incremental SG&A associated with the CH2M acquisition during fiscal 2018.
Fiscal 2017 vs. 2016
Revenues for the Buildings, Infrastructure and Advances Facilities segment for the year ended September 29, 2017 were $3.83 billion, an increase of $411.2 million, or 12.0%, versus $3.42 billion for the corresponding period in 2016. The year over year increases in revenues was due mainly to U.S. client spending level increases in the PMCM market and increased client major capex spending in the Life Sciences business. Year over year impacts on revenues from unfavorable foreign currency were approximately $36.0 million.
Operating profit for the segment for the year ended September 29, 2017 was $263.7 million, up $46.3 million, or 21.3%, compared to $217.4 million for 2016. Excluded from the presented operating profit amounts for the year ending September 29, 2017 were $23.8 million in Restructuring and other charges related to strategic business restructuring activities in our U.K, Middle East and Europe businesses. Increases in profitability for the period in 2017 over 2016 were due mainly to higher revenue from the U.S. PMCM projects and higher levels of professional service and project procurement business in the Life Sciences business, partially offset by charges from a contract settlement of $6.0 million.
Energy, Chemicals and Resources
| For the Years Ended | |||||||||||
| September 28, 2018 | September 29, 2017 | September 28, 2018 | |||||||||
| Revenue | $ | 4,427,755 | $ | 3,727,728 | $ | 4,698,739 | |||||
| Operating Profit | $ | 218,109 | $ | 161,312 | $ | 153,797 |
Fiscal 2018 vs. 2017
Energy, Chemicals and Resources revenues for the year ended September 28, 2018 were $4.43 billion, an increase of $700.0 million, or 18.8%, from $3.73 billion for the corresponding period last year. The increase in revenues was due primarily to the ongoing execution of several large petrochemical projects with significant pass-through costs, growth in the construction operations and maintenance market as clients focus on capital efficiency, the continued recovery of mining and minerals market as clients begin the transition from feasibility studies into the investment phase of projects, and the increasing trend among oil producers to drive downstream investments to refining and chemicals. Also, the CH2M acquisition added approximately $284.4 million during fiscal year 2018. Additionally, foreign currency impacts were favorable by approximately $56.4 million for fiscal 2018 versus the corresponding periods of 2017.
Operating profit for the segment for the year ended September 28, 2018 was $218.1 million, an increase of $56.8 million or 35.2% from $161.3 million for the corresponding period last year. The increase in profitability was due to higher revenue and favorable mix across the portfolio. SG&A for the segment was up $77.0 million for fiscal 2018 versus the 2017 periods, due
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mainly to incremental operating general and administrative expense coming with the CH2M acquisition. Additionally, included in the prior fiscal year was a one-time $9.9 million benefit associated with benefit plan changes in our India operations.
Fiscal 2017 vs. 2016
Energy, Chemicals and Resources revenues for the year ended September 29, 2017 were $3.73 billion, a decrease of $971.0 million, or 20.7%, versus $4.70 billion for the corresponding period in 2016. The decrease in revenues was primarily due to the completion or wind-down of several projects with significant pass-through revenue as well as award delays of large post front-end engineering and design projects, as clients continue to evaluate their capital spending plans as oil prices remained low and weaker market conditions in the Mining and Minerals business. These factors resulted in lower field service revenues compared with the prior year periods, while client investment spending continues primarily on compliance, maintenance and sustaining capital programs. Additionally, foreign currency impacts were unfavorable of approximately $18.0 million on year over year revenue comparisons for fiscal 2017 versus fiscal 2016.
Operating profit for the segment for the year ended September 29, 2017 was $161.3 million, up $7.5 million, or 4.9%, compared to $153.8 million for 2016. Increases in profitability for the period in 2017 over 2016 were due mainly to improved project performance in the Minings & Minerals business and SG&A savings from restructuring efforts and a one-time $9.9 million benefit associated with benefit plan changes in our India operations offset by revenue declines from lower business volumes as mentioned above, offset by revenue declines from lower business volumes mentioned previously.
Other Corporate Expenses
Other corporate expense were $113.7 million, $81.6 million and $60.1 million for the years ended September 28, 2018, September 29, 2017 and September 30, 2016. These increases were due primarily to increased intangible asset amortization relating to the CH2M acquisition, higher professional service fees, personnel related costs, settlement charges associated with certain of the Company's pension plans and higher depreciation associated with increased corporate technology investments, partially offset by savings associated with the 2015 Restructuring program.
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 our incentive compensation plans relating to corporate personnel whose other compensation costs are not allocated to the LOBs; (iii) the amortization of intangible assets acquired as part of 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.
Backlog Information
Backlog is not a defined measure and our methodology for determining backlog may vary from the methodology used by other companies. Currently, we report a combined backlog number based upon the legacy reporting methodologies used by Jacobs and the acquired business of CH2M prior to the acquisition while we work to harmonize these reporting methodologies as part of the Company's integration activities underway.
We include in backlog the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Our policy with respect to O&M contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For national government programs (other than national government O&M contracts, which are subject to the same policy applicable to all other O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, excluding option periods. Because of variations in the nature, size, expected duration, funding commitments and the scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts.
Consistent with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client, including our U.S. government work. While management uses all information available to it to determine backlog, at any given time our backlog is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein. Backlog is not necessarily an indicator of future revenues.
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Because certain contracts (e.g., contracts relating to large EPC projects as well as national government programs) can cause large increases to backlog in the fiscal period in which we recognize the award, and because many of our contracts require us to provide services that span over a number of fiscal quarters (and sometimes over fiscal years), we evaluate our backlog on a year-over-year basis, rather than on a sequential, quarter-over-quarter basis.
Please refer to Item 1A- Risk Factors , above, for a discussion of other factors that may cause backlog to ultimately convert into revenues at different amounts.
The following table summarizes our backlog for the years ended September 28, 2018, September 29, 2017 and September 30, 2016 (in millions):
| September 28, 2018 | September 29, 2017 | September 30, 2016 | |||||||||
| Aerospace, Technology, Environmental and Nuclear | $ | 8,857 | $ | 6,358 | $ | 4,472 | |||||
| Buildings, Infrastructure and Advanced Facilities | 11,376 | 6,789 | 7,063 | ||||||||
| Energy, Chemicals and Resources | 7,066 | 6,642 | 7,226 | ||||||||
| Total | $ | 27,299 | $ | 19,789 | $ | 18,761 |
The increase in backlog in Aerospace, Technology, Environmental and Nuclear for the years presented were primarily the result of new awards from the U.S. federal government and the CH2M acquisition in fiscal year 2018.
The increase in backlog in Buildings, Infrastructure and Advanced Facilities for the years presented were primarily the result of new awards in Australia and the U.S. markets and the CH2M acquisition in fiscal year 2018.
The increase in backlog in Energy, Chemicals and Resources from fiscal year 2017 to 2018 was due to the CH2M acquisition offset in part by work off of projects in the Americas with significant pass-through cost. The decrease seen in from fiscal year 2017 to 2016 was primarily due to the weakness in the upstream market, partly offset by strong performance in chemicals backlog.
Backlog relating to work to be performed either directly or indirectly for the U.S. federal government and its agencies totaled approximately $6.8 billion (or 24.9% of total backlog), $4.6 billion (or 23.2% of total backlog) and $4.8 billion (or 25.4% of total backlog) at September 28, 2018, September 29, 2017 and September 30, 2016, respectively. Most of our federal government contracts require that services be provided beyond one year. In general, these contracts must be funded annually (i.e., the amounts to be spent under the contract must be appropriated by the U.S. Congress to the procuring agency, and then the agency must allot these sums to the specific contracts).
We estimate that approximately $9.9 billion, or 36%, of total backlog at September 28, 2018 will be realized as revenues within the next fiscal year.
Liquidity and Capital Resources
At September 28, 2018, our principal sources of liquidity consisted of $793.4 million in cash and cash equivalents, $1,448.4 million of available borrowing capacity under our $1.6 billion 2014 revolving credit facility (the “Revolving Credit Facility”) and cash flows from operating activities. Additional information regarding the Revolving Credit Facility and the Term Loan Facility is set forth in Note 9 - Borrowings in Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K. We finance much of our operations and growth through cash generated by our operations.
On December 15, 2017, the Company completed the acquisition of CH2M HILL Companies, Ltd. (CH2M), an international provider of engineering, construction, and technical services, by acquiring 100% of the outstanding shares of CH2M common stock and preferred stock. The Company paid total consideration of approximately $1.8 billion in cash (excluding $315.2 million in cash acquired) and issued approximately $1.4 billion of Jacobs’ common stock to the 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 $700.0 million. Immediately following the effective time of the acquisition, the Company repaid CH2M’s revolving credit facility and second lien notes including the related prepayment penalty. The Company financed the cash consideration for the CH2M acquisition, the repayment of CH2M’s outstanding indebtedness and other transaction expenses with a combination of cash on hand and debt financing, which included borrowings under the Term Loan Facility in an aggregate principal amount of $1.5 billion and additional borrowings under the Revolving Credit Facility.
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At September 28, 2018, our cash and cash equivalents were $793.4 million, an increase of $19.1 million from $774.2 million at September 29, 2017.
This increase was due to cash flows provided by operations of $481.2 million and favorable cash flows from financing activities of $1.1 billion, partly offset by $1.6 billion in cash flows used in investing activities and exchange rate effects on cash of $(26.8) million.
Our cash flow from operations of $481.2 million during fiscal 2018 was comparatively lower than the $574.9 million in cash flow from operations for the corresponding period in fiscal 2017, due mainly to higher levels of working capital (mainly in accounts receivable), lower net earnings attributable to the group, cash used for payments on the opening balance sheet liabilities and post acquisition costs incurred in connection with the CH2M acquisition and payments associated with obligations from Restructuring and other charges.
With respect to the Company’s working capital accounts, the Company’s cash flows from operations are greatly affected by the cost-plus nature of our customer contracts. Because such a high percentage of our revenues are earned on cost-plus type contracts, and due to the significance of revenues relating to pass-through costs, most of the costs we incur are included in invoices we send to clients. Although we continually monitor our accounts receivable, we manage the operating cash flows of the Company by managing the working capital accounts in total, rather than by the individual elements. The primary elements of the Company’s working capital accounts are accounts receivable, accounts payable and billings in excess of cost. Accounts payable consist of obligations to third parties relating primarily to costs incurred for projects which are generally billable to clients. Accounts receivable consist of amounts due from our clients of which a substantial portion are for project-related costs. Billings in excess of cost consist of billings to and payments from our clients for costs yet to be incurred.
This relationship between revenues and costs, and between receivables and payables, is unique to our industry, and facilitates review of our liquidity at the total working capital level.
Our cash used in investing activities for fiscal 2018 of $1.6 billion was comparatively higher than the $236.2 million cash used in investing activities for the corresponding period in fiscal 2017 which was primarily driven by cash used for the CH2M acquisition, net of cash amounts acquired from the acquisition of $315.2 million. Additions to property and equipment were slightly down from the comparative period.
Our cash from financing activities of $1.1 billion for fiscal 2018 resulted mainly from proceeds from borrowings of $5.8 billion, most of which was used in connection with financing of the CH2M acquisition. Repayments of long-term debt of $4.6 billion during first half of fiscal 2018 were up compared to $1.8 billion in fiscal 2017, with this increase due mainly to the payoff of CH2M’s legacy debt balances in connection with the closing of the acquisition. Comparatively lower cash flows from proceeds from issuances of common stock during fiscal 2018 were offset by lower cash outflows for common stock repurchases. The Company paid $86.6 million in dividends, including to noncontrolling interests of $4.6 million, during the year, with $58.8 million in dividends paid in the comparative prior year period.
At September 28, 2018, the Company had approximately $342.9 million in cash and cash equivalents held in the U.S. and $450.5 million held outside of the U.S. (primarily in the U.K., the Eurozone, Chile and India), which is used primarily for funding operations in those regions. Other than the tax cost of repatriating funds to the U.S. (see Note 13- Income Taxes of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K), there are no material impediments to repatriating these funds to the U.S.
The Company had $446.6 million in letters of credit outstanding at September 28, 2018. Of this amount, $2.5 million was issued under the Revolving Credit Facility and $444.1 million was issued under separate, committed and uncommitted letter-of-credit facilities.
On October 21, 2018, Jacobs and WorleyParsons Limited, a company incorporated in Australia (“Buyer”), entered into a Stock and Asset Purchase Agreement pursuant to which Buyer agreed to acquire the Company’s ECR business for a purchase price of $3.3 billion consisting of (i) $2.6 billion in cash plus (ii) ordinary shares of the Buyer equal to $700 million, subject to adjustments for changes in working capital and certain other items (the “Transaction”). The Transaction, which has been approved by the boards of directors of the Company and Buyer, is expected to close in the first half of calendar year 2019.
We believe we have adequate liquidity and capital resources to fund our operations and support our debt service, and also to make discretionary payments such as the payment of dividends and buyback of shares and to support our ongoing acquisition strategy for the next twelve months based on the liquidity provided by our cash and cash equivalents on hand, our borrowing capacity
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remaining under the Revolving Credit Facility and our continuing cash from operations. We were in compliance with all of our debt covenants at September 28, 2018.
Contractual Obligations
The following table sets forth certain information about our contractual obligations as of September 28, 2018 (in thousands):
| Payments Due by Fiscal Period | |||||||||||||||||||
| Total | 1 Year or Less | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |||||||||||||||
| Debt obligations | $ | 2,151,877 | $ | 941 | $ | 1,650,936 | $ | — | $ | 500,000 | |||||||||
| Operating leases (1) | 1,219,521 | 215,375 | 346,009 | 251,605 | 406,532 | ||||||||||||||
| Obligations under defined benefit pension plans (2) | 359,074 | 34,150 | 71,404 | 75,753 | 177,767 | ||||||||||||||
| Obligations under nonqualified deferred compensation plans (3) | 258,901 | 38,015 | 80,697 | 84,778 | 55,410 | ||||||||||||||
| Purchase obligations (4) | 2,693,034 | 2,596,228 | 96,806 | — | — | ||||||||||||||
| Interest (5) | 176,080 | 61,302 | 85,158 | 29,620 | — | ||||||||||||||
| Total | $ | 6,858,487 | $ | 2,946,011 | $ | 2,331,010 | $ | 441,756 | $ | 1,139,709 |
| (1) | Assumes the Company will make the end of lease term residual value guarantee payment of $62.4 million in 2025 with respect to the lease of an office building in Houston, Texas. Please refer to Note 14- Commitments and Contingencies and Derivative Financial Instruments of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K. |
| (2) | Assumes that future contributions will be consistent with amounts projected to be contributed in fiscal 2018, allowing for certain growth based on rates of inflation and salary increases, but limited to the amount recorded as of September 28, 2018. Actual contributions will depend on a variety of factors, including amounts required by local laws and regulations, and other funding requirements. |
| (3) | Assumes that future payments will be consistent with amounts paid in fiscal 2018. Due to the non-qualified nature of the plans, and the fact that benefits are based in part on years of service, the payments included in the schedule were limited to the amount recorded as of September 28, 2018. |
| (4) | Represents those liabilities estimated to be under firm contractual commitments as of September 28, 2018; primarily accounts payable, accrued payroll and accrued dividends. |
| (5) | Determined based on borrowings outstanding at the end of fiscal 2018 using the interest rates in effect at that time and, for our outstanding long-term debt, concluding with the expiration date of the debt facilities, as defined below. |
Effects of Inflation and Changing Prices
The effects of inflation and changing prices on our business is discussed in Item 1A- Risk Factors , and is incorporated herein by reference.
Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the form of guarantees not reflected in our balance sheet that arise in the normal course of business. However, such off-balance sheet arrangements are not reasonably likely to have an effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or resources that are material to investors. See Note 14 - Commitments and Contingencies and Derivative Financial Instruments of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board (“FASB”) issues accounting standards updates (each an “ASU”) to its Accounting Standards Codification (“ASC”), which constitutes the primary source of U.S. GAAP. The Company regularly monitors ASUs as they are issued and considers their applicability to its business. All ASUs applicable to the Company are adopted by the due date and in the manner prescribed by the FASB.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. The new guidance provided by ASU 2014-09 is intended to remove inconsistencies and perceived weaknesses in the existing revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability, provide more useful information and simplify the preparation
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of financial statements. The effective date for ASU 2014-09 is for annual reporting periods beginning after December 15, 2017 and interim periods therein.
The Company’s adoption activities have been performed over three phases: (i) assessment, (ii) design and (iii) implementation. As part of these phases, the Company has identified the following potentially significant differences to date:
Performance Obligations
Under current U.S. GAAP, the Company typically segments contracts that contain multiple services by service type - for instance, engineering, procurement and construction services - for purposes of revenue recognition. Under ASU 2014-09, 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. Typically, this will occur when the company is contracted to perform both engineering and construction on a project. In these circumstances, the timing and pattern of revenue recognition will change. The remainder of the Company's contracts will continue to be treated as having discrete units of account because they either contain only one service or because the Company has determined that the component services in the contract are distinct.
Contract Modifications
In many instances, the Company enters into separate contracts for related services (e.g., engineering and construction) but is held responsible for providing a single deliverable (“Phased Projects”). Under ASU 2014-09, the separate contracts may be required to be combined and treated as a single contract with one performance obligation. This modification or combination of contracts may result in a cumulative catchup adjustment, which will have an immediate impact on the Company’s results of operations in the period the contract combination or modification occurs. In addition, it will change the timing and pattern of revenue recognition after the period the contracts have been combined or modified.
Based on the two noted changes above, the Company has identified selected changes to our systems, processes and internal controls and designed updates for each to meet the standard's revised reporting and disclosure requirements. The Company has also assessed the impact of ASU 2014-09 to the recently acquired CH2M business. We will align CH2M's accounting policies, processes and controls with the policies, processes and controls being implemented across the Company.
The Company will adopt the new standard using the Modified Retrospective application for periods beginning with the first fiscal quarter of 2019. This standard will impact the Company’s Consolidated Financial Statements and will its administrative operations. The impact will depend on the magnitude of the items discussed above. While the Company will continue to evaluate the impact through the implementation phase, we expect a reduction of retained earnings in our consolidated financial statements in the period of adoption due to revenue recognition timing for certain engineering and construction contracts shifting as a result of being accounted for as a single performance obligation. This adjustment will create a corresponding adjustment in the Company's consolidated financial statements to accounts receivable and unbilled receivables and to billings in excess of costs.
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 currently requires a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. 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 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
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the new guidance on its consolidated financial statements. It is not expected that the updated guidance will have a significant impact on the Company’s consolidated financial statements.
ASU 2017-04, Simplifying the Test for Goodwill Impairment, is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. An entity will now recognize a goodwill impairment charge for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. Management does not expect the adoption of ASU 2017-04 to have any impact on the Company's financial position, results of operations or cash flows.
In March 2017, the FASB issued ASU No. 2017-07, Compensation- Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new standard intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new standard requires the service cost component of net periodic cost be reported in the same line item(s) as other employee compensation costs and all other components of the net periodic cost be reported in the consolidated statements of earnings and comprehensive income below operating income. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017 for public companies and early adoption is permitted. Management is currently evaluating the impact that the adoption of ASU 2017-07 will have on the Company's financial position, results of operations and cash flows.
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