Jacobs Engineering Group Inc. Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended December 26, 2014, compared with the three months ended December 27, 2013. The filing is unaudited and predates the company’s later name, Jacobs Solutions Inc.
Business Context and Reporting Period
Jacobs provides technical professional services, construction, operations and maintenance, engineering, design, procurement and project management services to government and commercial clients. Fiscal 2015 results included the contribution of the December 2013 acquisition of Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited, or SKM, and other fiscal 2014 acquisitions.
Backlog was $19.1 billion at December 26, 2014, up 5.8% from $18.1 billion at December 27, 2013. Technical professional services backlog was $13.2 billion and field services backlog was $5.9 billion.
Financial Performance and Position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $3.187 billion | $3.069 billion | Up 3.8% |
| Operating profit | $158.2 million | $145.0 million | Up 9.1% |
| Operating margin | 5.0% | 4.7% | Improved |
| Net earnings attributable to Jacobs | $100.1 million | $93.7 million | Up 6.8% |
| Diluted EPS | $0.77 | $0.71 | Up 8.5% |
| Net margin attributable to Jacobs | 3.1% | 3.1% | Slightly improved |
| Net cash from operating activities | $139.0 million | $326.5 million | Down $187.5 million |
Revenue growth was driven primarily by SKM and the FNS acquisition. Project Services revenue increased 6.8% and Process, Scientific and Systems Consulting revenue more than doubled, while Construction revenue declined 12.3% as a U.S. mining project wound down. Direct contract costs represented 83.7% of revenue, compared with 85.2% in the prior-year quarter. SG&A increased 17.0% to $361.2 million, principally because of acquired businesses.
The effective tax rate declined to 31.4% from 32.7%. Management stated that it expected the fiscal 2015 effective tax rate to be below 32.0%.
At December 26, 2014, cash and cash equivalents were $670.1 million, compared with $732.6 million at September 26, 2014. Working capital was approximately $1.4 billion. Receivables were $2.7 billion, including $1.2 billion of unbilled receivables and other amounts. Total debt comprised $44.3 million of current notes payable and $706.6 million of long-term debt.
| Cash flow and financing item | Q1 FY2015 |
|---|---|
| Cash flow from operating activities | $139.0 million |
| Cash used in investing activities | $30.4 million |
| Cash used in financing activities | $140.4 million |
| Capital expenditures | $33.8 million |
| Share repurchases | $113.7 million |
| Ending cash balance | $670.1 million |
Material Changes Versus the Prior Comparable Period
- Revenue increased $118.1 million, primarily from SKM and FNS, while Construction, Refining-Downstream, Chemicals and Polymers, and Mining and Minerals revenue declined.
- Net earnings attributable to Jacobs increased $6.3 million, despite higher SG&A and higher interest expense.
- Net interest expense was $3.0 million versus prior-year net interest income of $2.0 million. The prior-year period benefited from a $4.1 million reversal of accrued interest related to an international tax matter.
- Operating cash flow declined substantially because of working-capital timing, including lower cash generation from changes in working-capital accounts, partly offset by improved customer collections.
- Investing cash usage fell sharply because there were no acquisitions in the current quarter; the prior-year quarter included approximately $1.1 billion of net cash used for the SKM acquisition.
- The company repurchased and retired 2.5 million shares for $113.7 million under a $500 million authorization, leaving approximately $307.9 million available.
- Accumulated other comprehensive loss increased to $401.5 million from $363.5 million, primarily reflecting foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
Management reported a positive outlook for many industry groups and markets and cited growth opportunities in infrastructure, government programs, buildings, chemicals and polymers, and selected international markets. Management also expected fiscal 2015’s effective tax rate to be below 32.0%.
Management cautioned that declining crude oil prices could reduce clients’ near-term upstream oil and gas capital spending, causing project delays or cancellations. Clients in refining, mining and minerals, and certain other industries were described as cautious regarding large capital projects.
Jacobs had a $1.6 billion unsecured revolving credit facility, with $890.6 million of available borrowing capacity at December 26, 2014. Total letters of credit outstanding were $295.2 million. The company stated that it was in compliance with debt covenants and believed available liquidity was adequate for operations, acquisitions and debt service for the next twelve months.
A significant contingency is an arbitration proceeding initiated by Motiva Enterprises LLC involving a Bechtel-Jacobs joint venture. Motiva alleges claims and seeks equitable and monetary relief in excess of $7 billion. Jacobs denied liability and stated that it did not expect the matter to have a material adverse effect on its consolidated financial statements.
Other risks include contract cancellations, project-loss estimates, government contract audits and investigations, professional liability, litigation, uninsured or underinsured claims, foreign-currency movements, pension obligations and acquisition-integration risks. Management stated that there were no material changes to the risk factors disclosed in the 2014 Form 10-K.
The company finalized the SKM purchase price allocation during the quarter, recognizing net assets acquired of $1.220 billion, including $866.9 million of goodwill and $202.2 million of acquired intangible assets.
Investor Verification Checklist
- Verify whether revenue and earnings growth is sustainable after separating SKM and FNS acquisition contributions from organic performance.
- Monitor backlog conversion, cancellations and client funding, particularly in government programs, refining, mining, upstream oil and gas, and large engineering and construction projects.
- Assess working-capital trends and whether operating cash flow recovers from the quarter’s significant decline.
- Review debt reduction, interest expense, available revolver capacity, letters of credit and compliance with financial covenants.
- Evaluate exposure and potential financial impact from the Motiva arbitration claim exceeding $7 billion.
- Confirm the effect of foreign-currency movements, pension obligations, contract claims and government audits on equity and future earnings.
- Determine whether the stated below-32% fiscal 2015 tax-rate expectation remains applicable.