JACOBS ENGINEERING GROUP INC. (now Jacobs Solutions Inc.) — Fiscal 2015 Q3 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended June 26, 2015, compared with the periods ended June 27, 2014. The company provides technical professional services, construction, operations and maintenance, and government-related engineering and project services. Results include the acquired Sinclair Knight Merz business and other fiscal 2014 acquisitions.
Financial performance and key metrics
| Metric | Three months ended June 26, 2015 | Prior comparable period | Nine months ended June 26, 2015 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $2.908 billion | $3.232 billion | $8.998 billion | $9.477 billion |
| Operating profit | $100.4 million | $123.9 million | $391.7 million | $391.4 million |
| Operating margin | Approximately 3.5% | Approximately 3.8% | Approximately 4.4% | Approximately 4.1% |
| Net earnings attributable to Jacobs | $91.1 million | $64.8 million | $273.1 million | $242.0 million |
| Diluted EPS | $0.73 | $0.49 | $2.15 | $1.83 |
| Net cash from operations | Not separately provided | Not separately provided | $386.8 million | $485.2 million |
Quarterly revenue declined 10.0% and nine-month revenue declined 5.1%. Management attributed the declines primarily to foreign-exchange effects, lower pass-through revenue, reduced activity in Mining and Minerals, Refining-Downstream, Oil and Gas-Upstream, and Chemicals and Polymers. The quarterly net margin increased to approximately 3.1% from 2.0%, while the nine-month net margin increased to approximately 3.0% from 2.6%, largely reflecting restructuring comparisons and a one-time tax benefit.
Cash and cash equivalents were $553.6 million at June 26, 2015, down from $732.6 million at September 26, 2014. Total current assets were $3.474 billion and current liabilities were $2.093 billion, producing working capital of approximately $1.4 billion. Long-term debt was $646.4 million, and current notes payable were $38.4 million. The company had $951.1 million of available borrowing capacity under its $1.6 billion revolving credit facility and was in compliance with its debt covenants. Letters of credit outstanding totaled $284.3 million.
Operating cash flow decreased by $98.5 million year over year, primarily because of less favorable working-capital changes and the timing of tax payments and restructuring-related payments. Investing cash outflow was $63.7 million, compared with $1.343 billion in the prior period, which included substantial acquisition spending. Financing cash outflow was $427.1 million, including $372.9 million of share repurchases and significant debt repayments.
Material changes versus the prior comparable period
- Technical professional services revenue decreased 5.0% for the quarter but increased 2.9% for the nine months; field services revenue decreased 17.2% for the quarter and 15.7% for the nine months.
- Process, Scientific, and Systems Consulting revenue rose 73.7% for the quarter and 83.1% for the nine months, primarily due to the FNS acquisition.
- Construction revenue declined 20.9% for the quarter and 19.3% for the nine months, primarily because of the winding down of a U.S. Mining and Minerals project.
- Mining and Minerals revenue declined 63.4% for the quarter and 52.3% for the nine months. Chemicals and Polymers revenue declined 29.1% and 15.6%, respectively.
- National Government Programs revenue increased 19.3% for both the quarter and nine months. Infrastructure revenue increased 10.3% for the quarter and 16.8% for the nine months.
- The company initiated a 2015 restructuring involving employee terminations, office closures or consolidations, and organizational changes. Restructuring costs were $48.0 million pre-tax in the quarter and $57.7 million pre-tax for the nine months, partly offset by a $4.4 million reduction in bonus expense.
- A refinancing of certain international intercompany debt generated a one-time $23.1 million tax benefit, or approximately $0.19 per share.
- The company repurchased 8.5 million shares for $372.9 million during the first nine months and had approximately $48.7 million remaining under the existing authorization at quarter-end. On July 23, 2015, the board authorized an additional $500 million repurchase program.
- Backlog was $18.8 billion, up 1.8% from $18.5 billion a year earlier, despite foreign-exchange headwinds.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide a specific earnings or revenue forecast in the filing. It stated that restructuring actions were beginning to reduce the cost structure and expected the 2015 restructuring to be largely complete by the end of the first quarter of fiscal 2016. Management maintained a positive outlook for many markets, citing strong prospects and sales, while identifying lower oil, copper, and iron ore prices as continuing headwinds.
The company expects adequate liquidity to fund operations, support acquisitions, and service debt for at least the next twelve months. Key risks include commodity-price-driven reductions in client capital spending, foreign-currency movements, project execution and contract-margin estimates, customer termination rights, government contract audits, litigation, claims, insurance recoverability, and tax audits.
A significant contingency is an arbitration claim by Motiva Enterprises relating to a refinery expansion project. Motiva alleges entitlement to more than $7 billion; the company and its joint-venture partner deny liability and are defending the matter. The hearing was expected in fall 2016, and management stated that it did not expect the matter to have a material adverse effect on the consolidated financial statements.
The filing states that disclosure controls and procedures were effective as of June 26, 2015, with no material changes to internal control over financial reporting during the quarter. Management reported no material changes to the risk factors in the 2014 Form 10-K.
Important facts investors should verify
- Whether restructuring savings offset the $57.7 million of nine-month restructuring costs and whether additional costs were incurred after the filing.
- The sustainability of earnings excluding the $23.1 million one-time tax benefit and other unusual items.
- Progress in recovering revenue and margins in Mining and Minerals, Chemicals and Polymers, Refining-Downstream, and Oil and Gas-Upstream.
- Backlog conversion, cancellation or termination exposure, funding status of government contracts, and the effect of foreign-exchange movements.
- Cash conversion and working-capital trends, given the decline in operating cash flow despite higher net earnings.
- Debt repayment plans, available revolver capacity, covenant compliance, and the liquidity impact of the expanded share-repurchase authorization.
- Developments in the Motiva arbitration and any related insurance, indemnity, or reserve implications.