Business Context and Reporting Period
Jacobs Engineering Group Inc. (now Jacobs Solutions Inc.) filed this unaudited Form 10-Q for the fiscal quarter ended July 1, 2016, covering the three and nine months ended July 1, 2016, compared with June 26, 2015. The company provides engineering, design, construction, operations and maintenance, and technical services through four lines of business: Petroleum & Chemicals, Aerospace & Technology, Buildings & Infrastructure, and Industrial.
During the second quarter of fiscal 2016, Jacobs reorganized its reporting structure around these four lines of business. Prior-period segment information was restated accordingly.
Financial Performance and Position
| Metric | Three months ended July 1, 2016 | Three months ended June 26, 2015 | Nine months ended July 1, 2016 | Nine months ended June 26, 2015 |
|---|---|---|---|---|
| Revenue | $2.694 billion | $2.908 billion | $8.324 billion | $8.998 billion |
| Operating profit | $109.6 million | $100.4 million | $255.8 million | $391.7 million |
| Net earnings attributable to Jacobs | $69.1 million | $91.1 million | $180.8 million | $273.1 million |
| Diluted EPS | $0.57 | $0.73 | $1.49 | $2.15 |
| Net cash from operating activities | Not separately provided | Not separately provided | $445.7 million | $386.8 million |
- Revenue declined 7.3% in the quarter and 7.5% year to date.
- Reported operating margin was approximately 4.1% in the quarter and 3.1% year to date, versus approximately 3.5% and 4.4%, respectively, in the comparable periods.
- Direct contract costs were 83.2% of revenue in the quarter and 83.9% year to date. SG&A declined 11.0% in the quarter and 2.1% year to date.
- Cash and cash equivalents were $616.4 million at July 1, 2016, up from $460.9 million at October 2, 2015. Approximately $160.0 million was held in the United States and $456.4 million outside the United States.
- Receivables were $2.234 billion, down from $2.549 billion at fiscal year-end. Working capital was approximately $1.1 billion.
- Long-term debt was $479.0 million, down from $584.4 million at October 2, 2015. Notes payable were $8.9 million.
- Jacobs had $1.1 billion of available borrowing capacity under its $1.6 billion revolving credit facility and $232.4 million of letters of credit outstanding. The company stated that it was in compliance with its debt covenants.
- Investing activities used $92.8 million, including $49.7 million for acquisitions and $46.4 million for capital expenditures. Financing activities used $181.1 million, including $102.4 million for share repurchases.
Material Changes Versus the Prior Comparable Period
- Reported net earnings attributable to Jacobs decreased 24.2% in the quarter and 33.8% for the first nine months.
- Excluding restructuring charges, adjusted net earnings declined 21.7% in the quarter to $94.8 million and 10.4% year to date to $280.4 million. Adjusted diluted EPS was $0.78 for the quarter and $2.31 year to date.
- The 2015 Restructuring reduced pre-tax earnings by $32.9 million in the quarter and $136.7 million year to date. The company reported $133.3 million remaining in the restructuring accrual at July 1, 2016.
- Segment operating profit increased 6.9% in the quarter but declined 5.3% year to date. Aerospace & Technology and Buildings & Infrastructure improved, while Petroleum & Chemicals and Industrial were weaker year to date.
- Petroleum & Chemicals revenue declined 22.1% in the quarter and 19.3% year to date, primarily because low oil prices reduced client capital spending and awards.
- Aerospace & Technology operating profit increased 15.7% in the quarter and 4.9% year to date, supported partly by additional U.K. government nuclear-work fees.
- Buildings & Infrastructure operating profit increased 20.5% in the quarter and 9.1% year to date, reflecting cost control and restructuring benefits.
- Industrial revenue increased 11.9% in the quarter and 10.4% year to date, driven primarily by Life Sciences projects, but year-to-date operating profit declined 30.6% because of weakness in Mining & Minerals, a prior-year project claim benefit, a litigation settlement, and a customer bankruptcy.
- Backlog was $18.3 billion, down 2.6% year over year, or 0.7% excluding currency effects. Petroleum & Chemicals backlog fell to $5.1 billion; Industrial backlog increased to $3.2 billion, primarily from Life Sciences awards.
- Operating cash flow increased $59.0 million year over year, primarily because of improved working-capital cash generation, despite lower earnings.
- The effective tax rate increased to 31.0% from negative 0.1% in the quarter and to 26.5% from 23.4% year to date. The prior-year quarter benefited from a $23.1 million tax benefit related to intercompany debt refinancing.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No specific full-year earnings or revenue guidance is provided in the filing text. Management stated that it expected adequate liquidity and capital resources for operations, acquisitions, and debt service over the next twelve months.
- Management cited continuing pressure from low crude oil, copper, and iron ore prices on client capital spending, particularly in Petroleum & Chemicals and Mining & Minerals.
- Management said restructuring actions were lowering the cost structure and helping offset volume pressure. The company was not exiting any service type or client end-market.
- Backlog is not necessarily an indicator of future revenue; substantially all contracts may be cancelled or terminated at the client’s option, subject to contractual termination rights.
- Material contingencies include a Motiva arbitration related to a refinery expansion project seeking more than $8 billion in alleged actual damages plus potentially unquantified punitive damages, fees, and interest. The company denied liability and did not expect a material adverse outcome, but acknowledged that an adverse result could materially affect the business and financial condition.
- Nui Phao Mining Company Limited asserted an arbitration claim exceeding $167 million. Jacobs denied liability and did not expect a material adverse effect.
- Other risks include government contract audits and investigations, litigation, insurance limitations, customer credit exposure, foreign exchange, pension obligations, contract estimates, claims and change orders, and project-performance guarantees.
- The company derecognized approximately $115.5 million of a U.S. government-contract pension obligation and corresponding receivable after it ceased performing the contract. Other deferred liabilities declined $217.8 million from fiscal year-end.
- Management concluded that disclosure controls were effective as of July 1, 2016, with no material change in internal control over financial reporting.
Most Important Facts to Verify
- Whether the significant year-to-date earnings decline was temporary and how much restructuring savings can be sustained after the $136.7 million of charges.
- The quality and conversion of the $18.3 billion backlog, particularly given cancellations, scope reductions, work-off exceeding sales, and client termination rights.
- Exposure to the Motiva arbitration claim exceeding $8 billion and the status of the scheduled September 2016 hearing.
- Collection risk following the Industrial customer bankruptcy and the level of unbilled receivables and claims receivable.
- Whether low commodity prices continue to reduce Petroleum & Chemicals and Mining & Minerals awards and margins.
- The effect of tax-related discrete benefits, prior-year refinancing benefits, pension changes, litigation settlements, and other unusual items on normalized earnings.
- Available liquidity after considering $479.0 million of revolving debt, $232.4 million of letters of credit, cash held outside the United States, and remaining share-repurchase authorization of approximately $397.6 million.