Jacobs Engineering Group Inc. Fiscal 2016 Form 10-K Summary
Business context and reporting period
The filing is for Jacobs Engineering Group Inc. (now identified in the request metadata as Jacobs Solutions Inc.) for the fiscal year ended September 30, 2016. It is an annual Form 10-K, not a quarterly filing; fiscal 2015 included an additional week. Jacobs provides global engineering, technical, professional, construction, consulting, and operations and maintenance services across government, infrastructure, industrial, aerospace, technology, petroleum, and chemicals markets.
During the second quarter, Jacobs reorganized into four reportable lines of business: Aerospace & Technology, Buildings & Infrastructure, Industrial, and Petroleum & Chemicals. The company had approximately 54,900 employees, including about 43,800 full-time/staff employees and 11,100 project-based field employees, at September 30, 2016.
Financial performance and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Revenue | $10.964 billion | $12.115 billion | Down 9.5% |
| Operating profit | $338.6 million | $445.5 million | Down 24.0% |
| Operating margin | 3.1% | 3.7% | Down approximately 60 basis points |
| Net earnings attributable to Jacobs | $210.5 million | $303.0 million | Down 30.5% |
| Diluted EPS | $1.73 | $2.40 | Down 27.9% |
| Net cash from operating activities | $680.2 million | $484.6 million | Up $195.6 million |
| Cash and cash equivalents | $655.7 million | $460.9 million | Up $194.9 million |
| Long-term debt | $385.3 million | $584.4 million | Down $199.1 million |
| Backlog | $18.76 billion | $18.81 billion | Down 0.2% |
The company’s effective tax rate increased to 25.2% from 23.5%. Return on average equity declined to 4.92% from 6.92%. Approximately 82% of revenue came from cost-reimbursable contracts and 18% from fixed-price contracts. Pass-through costs included in revenue were approximately $2.49 billion.
Segment results were mixed. Aerospace & Technology revenue declined 9.1%, while operating margin improved to 7.7% from 7.0%. Buildings & Infrastructure revenue declined 8.3%, but operating margin improved to 7.8% from 5.9%. Industrial revenue increased 11.0%, but operating margin declined to 2.9% from 5.0%. Petroleum & Chemicals revenue declined 22.7%, while operating margin improved to 3.9% from 3.3%.
Liquidity, debt, and capital allocation
- Working capital was $1.08 billion, with a current ratio of 1.61 to 1.
- Jacobs had $1.21 billion of available capacity under its $1.6 billion unsecured revolving credit facility, which expires in February 2019.
- Total borrowings under the facility were $385.3 million, and the company was in compliance with its debt covenants.
- Letters of credit totaled $256.0 million, including $253.5 million issued under separate facilities.
- Fiscal 2016 financing activities used $317.0 million of cash, including $152.6 million for share repurchases. Approximately 3.4 million shares were repurchased during the year.
- The company had $347.5 million remaining under its $500 million share repurchase authorization at year-end.
- No regular cash dividend had been initiated. Management was evaluating whether to continue repurchases and potentially begin a cash dividend.
Material changes versus the prior comparable period
- Revenue and earnings declined, primarily because weak oil prices reduced customer capital spending in Petroleum & Chemicals, and because of lower spending in certain infrastructure, government, mining, and field-services markets.
- The 2015 Restructuring generated $187.9 million of pre-tax costs in fiscal 2016, compared with $157.2 million in fiscal 2015. The actions included workforce reductions, office closures, organizational combinations, and employee relocations.
- Fiscal 2016 included a $17.1 million loss on the sale of the French subsidiary and a $10.4 million non-cash write-off of an equity investment.
- Excluding the restructuring and other specified items, adjusted net earnings were approximately $373.6 million, or $3.08 per diluted share, compared with approximately $410.9 million, or $3.26 per diluted share, in fiscal 2015.
- Operating cash flow improved substantially because of a $373.1 million favorable change in working capital, despite lower earnings.
- Backlog remained essentially flat. Aerospace & Technology and Buildings & Infrastructure backlog increased, while Industrial backlog declined by approximately $543.9 million and Petroleum & Chemicals backlog declined modestly.
- The company completed two small acquisitions, J.L. Patterson & Associates and The Van Dyke Technology Group, neither of which was material to consolidated results.
Guidance, outlook, commentary, risks, and unusual items
Management stated that new prospects and sales remained strong and that it had a positive outlook for many served industries and markets. Approximately $7.7 billion, or 41.3% of year-end backlog, was expected to convert to revenue during fiscal 2017. The filing does not provide formal fiscal 2017 revenue or earnings guidance. Management expected to communicate its corporate strategy and goals at an Investor Day scheduled for December 1, 2016.
Key risks include cyclical customer spending, oil and commodity-price volatility, government funding and procurement risks, contract cancellations or delays, fixed-price cost overruns, competition and margin pressure, personnel retention, foreign-exchange exposure, international political and regulatory risks including Brexit, cybersecurity, environmental and safety liabilities, joint-venture and subcontractor performance, and delays or failures in customer payments.
The most significant disclosed contingency is an arbitration brought by Motiva relating to a refinery expansion project. Motiva alleged fraud and breach of fiduciary duty and claimed damages exceeding $8 billion. The hearing concluded October 21, 2016, and the company denied liability and stated that it did not expect a material adverse outcome, although an adverse decision could materially affect the company. A separate Nui Phao mining arbitration involved a claim exceeding $167 million; Jacobs also denied liability and did not expect a material adverse effect.
Goodwill was $3.08 billion, or approximately 41.8% of total assets. No goodwill impairment was recorded, but the reorganization increased the number of reporting units and could increase future impairment risk. Defined benefit plans were underfunded by approximately $403.1 million at year-end. The company estimated total contractual obligations of $2.91 billion, including $832.5 million of operating lease commitments and $1.12 billion of purchase obligations.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The company stated that its disclosure controls and internal controls were effective as of September 30, 2016.
Important facts for investors to verify
- Confirm the company-name transition from Jacobs Engineering Group Inc. to Jacobs Solutions Inc. and ensure the filing is matched to the correct current issuer.
- Review the full reconciliation of reported earnings to adjusted earnings, particularly the $187.9 million restructuring charge and other unusual items.
- Assess whether backlog conversion, cancellation rights, contract funding, and expected margins support the stated $7.7 billion fiscal 2017 revenue conversion estimate.
- Monitor Petroleum & Chemicals and Industrial backlog, customer capital spending, oil prices, and the effect of government contract awards.
- Review the Motiva and Nui Phao arbitration disclosures, insurance coverage, reserves, and potential cash-flow exposure.
- Evaluate pension underfunding, required contributions, goodwill concentration, and assumptions used in impairment testing.
- Verify the company’s capital-allocation decision regarding the remaining share repurchase authorization and the potential initiation of a dividend.