JACOBS ENGINEERING GROUP INC. — Form 10-Q Summary
Business context and reporting period
This filing is for the quarter ended January 1, 2016, the first quarter of fiscal 2016. The registrant is identified in the filing as Jacobs Engineering Group Inc.; the supplied metadata refers to Jacobs Solutions Inc. Results are unaudited and are compared with the three months ended December 26, 2014.
Jacobs provides technical professional services, construction, and operations and maintenance services across government, infrastructure, refining, chemicals, energy, mining, buildings, and pharmaceutical markets.
Key financial metrics
| Metric | Q1 FY2016 | Prior comparable period |
|---|---|---|
| Revenue | $2.848 billion | $3.187 billion |
| Operating profit | $59.5 million | $158.2 million |
| Operating margin | 2.1% | 5.0% |
| Net earnings attributable to Jacobs | $46.5 million | $100.1 million |
| Diluted EPS | $0.38 | $0.77 |
| Net earnings margin | 1.6% | 3.1% |
| Cash provided by operating activities | $26.7 million | $139.0 million |
| Capital expenditures | $16.0 million | $33.8 million |
| Cash and cash equivalents | $443.7 million | $670.1 million at prior-year quarter-end |
Direct contract costs were $2.407 billion, or 84.5% of revenue, compared with 83.7% in the prior period. SG&A was $381.0 million, including $68.4 million of restructuring costs. Excluding restructuring, SG&A was $312.6 million, down 13.4% year over year.
The effective tax rate was 12.9%, compared with 31.4% in the prior period, including an $11.2 million one-time tax benefit from releasing a valuation allowance on certain foreign deferred tax assets.
Debt, liquidity, and capital allocation
- Long-term debt was $621.9 million at January 1, 2016, compared with $584.4 million at October 2, 2015.
- The company had $975.6 million of available borrowing capacity under its $1.6 billion revolving credit facility, which expires in February 2020.
- Total letters of credit outstanding were $240.9 million.
- Management reported compliance with debt covenants and stated that available liquidity was adequate for operations, acquisitions, and debt service for the next twelve months.
- Operating working capital was approximately $1.3 billion. Approximately $97.4 million of cash was held in the United States and $346.3 million outside the United States.
- The company repurchased 1.024 million shares for $42.1 million during the quarter. Approximately $457.9 million remained available under the $500 million authorization.
Material changes versus the prior comparable period
- Revenue declined 10.6%, primarily from lower pass-through costs, reduced activity in chemicals and polymers, national government, mining and minerals, and oil and gas upstream, and unfavorable currency effects.
- Operating profit fell $98.8 million, and reported net earnings attributable to Jacobs declined 53.5%.
- Adjusted net earnings excluding restructuring costs were $94.7 million, down 5.4% from the prior comparable period; adjusted diluted EPS was $0.78 versus $0.77.
- Technical professional services revenue declined 14.8% to $1.647 billion, while field services revenue declined 4.2% to $1.201 billion.
- Revenue increased in refining-downstream by 8.4%, infrastructure by 1.9%, and pharmaceuticals and biotechnology by 23.5%. It declined in chemicals and polymers by 30.2%, mining and minerals by 50.7%, oil and gas upstream by 21.0%, and national government programs by 11.6%.
- Backlog was $18.2 billion, down 4.6% year over year, or 2.2% on a constant-currency basis. Approximately $470 million of the decline reflected foreign exchange.
- Cash from operations declined $112.3 million, reflecting lower earnings and less favorable working-capital movements. Management attributed the working-capital change primarily to timing and stated that it did not indicate a known operating trend.
Guidance, outlook, risks, and unusual items
The filing does not provide a specific quantitative full-year earnings or revenue guidance figure. Management stated that the restructuring is lowering the cost structure and helping offset pressure in certain markets. Management identified continuing weakness in crude oil, copper, and iron ore prices as a constraint on client capital spending, particularly in chemicals, oil and gas upstream, and mining. It cited opportunities in pharmaceuticals and biotechnology, infrastructure, refining-downstream, sustaining capital, maintenance, and brownfield projects.
The 2015 Restructuring continued during the quarter through employee terminations, office abandonments, organizational consolidation, and employee co-location. Management stated that the company was not exiting any service types or client end-markets. The filing presents adjusted earnings excluding the $68.4 million pre-tax restructuring charge as a non-GAAP performance measure.
Material contingencies include arbitration claims involving Motiva exceeding $7 billion, Nui Phao Mining claims exceeding $167 million, and Freeport counterclaims alleging $116 million of damages. Jacobs disputes the claims and stated that it does not expect these matters to have a material adverse effect, although outcomes remain uncertain. The company is also subject to government contract audits, investigations, litigation, insurance exposures, and tax audits.
A small acquisition of J.L. Patterson & Associates was completed during fiscal 2016 and was not material to first-quarter consolidated results. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported earnings with management’s adjusted earnings, particularly the $68.4 million restructuring charge and $11.2 million tax benefit.
- Assess whether weakness in energy, chemicals, and mining markets is temporary or reflects sustained reductions in client capital spending.
- Monitor backlog conversion, cancellations, scope reductions, foreign-exchange effects, and the decline in technical professional services backlog.
- Review operating cash flow and working-capital timing, including receivables of $2.424 billion and accounts payable of $421.2 million.
- Confirm debt levels, borrowing capacity, letters of credit, and continued compliance with facility covenants.
- Track the Motiva, Nui Phao, Freeport, and California court-facilities matters, including reserves and developments that could change management’s materiality assessment.
- Verify the entity-name discrepancy between the supplied metadata and the filing, which identifies the registrant as Jacobs Engineering Group Inc.