Business Context and Reporting Period
Jacobs Engineering Group Inc. (now associated with Jacobs Solutions Inc.) filed this unaudited Form 10-Q for the quarter ended April 1, 2016, covering the three and six months ended April 1, 2016, compared with March 27, 2015. The company provides engineering, construction, project management, operations and maintenance, and technical services through four newly organized lines of business: Petroleum & Chemicals, Aerospace & Technology, Buildings & Infrastructure, and Industrial.
During the second quarter, Jacobs reorganized its operating structure around the four lines of business and continued its 2015 Restructuring program. The prior-period segment information was restated to conform to the new presentation.
Key Financial Metrics
| Metric | Three months ended April 1, 2016 | Six months ended April 1, 2016 |
|---|---|---|
| Revenue | $2.782 billion | $5.630 billion |
| Operating profit | $86.8 million | $146.2 million |
| Operating margin | 3.1% | 2.6% |
| Net earnings attributable to Jacobs | $65.3 million | $111.8 million |
| Diluted EPS | $0.54 | $0.92 |
| Net cash provided by operating activities | Not separately provided | $264.3 million |
- Revenue declined 4.2% in the quarter and 7.6% year to date.
- GAAP net earnings attributable to Jacobs declined 20.4% in the quarter and 38.6% year to date.
- Direct contract costs were 84.0% of revenue in the quarter and 84.3% year to date, compared with 83.1% and 83.4%, respectively, in the prior-year periods.
- Excluding restructuring charges, adjusted net earnings were $91.0 million, or $0.75 diluted EPS, for the quarter, and $185.6 million, or $1.53 diluted EPS, year to date. These are non-GAAP measures presented by management.
- Cash and cash equivalents were $559.7 million at April 1, 2016, compared with $460.9 million at October 2, 2015.
- Receivables were $2.415 billion, and working capital was approximately $1.2 billion at April 1, 2016.
- Total debt consisted of $530.0 million outstanding under the revolving credit facility and $2.7 million of notes payable. The company reported $1.1 billion of available borrowing capacity under its $1.6 billion revolving facility, which expires in February 2020.
- Letters of credit outstanding totaled $238.4 million, including $2.5 million issued under the revolving facility.
- Cash used in investing activities was $43.0 million, including $29.3 million of capital expenditures and $10.5 million for a business acquisition.
- Cash used in financing activities was $122.8 million, including $72.3 million of share repurchases and approximately $52.7 million of net long-term debt repayments.
Material Changes Versus the Prior Comparable Period
- Petroleum & Chemicals revenue declined 17.2% in the quarter and 18.0% year to date, primarily because lower oil prices reduced client spending in oil and gas and refining. Quarterly operating profit increased 8.0%, while year-to-date operating profit declined 1.9%; margins improved to 3.6% and 3.5%, respectively.
- Aerospace & Technology revenue declined 4.5% in the quarter and 6.7% year to date, partly because U.S. customers shifted toward small-business contract awards. Operating margins improved to 8.2% and 7.7%.
- Buildings & Infrastructure revenue declined 3.8% in the quarter and 6.9% year to date because of reduced or deferred U.S. and U.K. client spending. Operating margins improved to 7.3% in both periods.
- Industrial revenue increased 20.5% in the quarter and 9.6% year to date, driven by Life Sciences projects, but operating profit declined 74.1% and 48.2%, respectively. The decline reflected weakness in Mining & Minerals, the absence of a prior-year project-claim benefit, a litigation settlement, and a customer bankruptcy.
- Backlog was $18.2 billion at April 1, 2016, down 3.5% from the prior-year period, or down 0.2% on a constant-currency basis. Petroleum & Chemicals and Aerospace & Technology backlog declined, while Buildings & Infrastructure and Industrial backlog increased.
- Restructuring charges were $35.4 million in the quarter and $103.8 million year to date, compared with $14.0 million in each prior-year comparable period. The restructuring accrual was $136.1 million at April 1, 2016.
- Cash flow from operations increased to $264.3 million from $104.2 million, primarily because of improved working-capital performance. The company attributed a $281.5 million year-over-year improvement to working-capital accounts.
- The effective tax rate declined to 29.9% for the quarter and 23.3% year to date, compared with 31.7% and 31.5%. The decline included discrete benefits from federal tax refunds, release of a foreign tax reserve, and a first-quarter valuation-allowance release.
- The company repurchased 778,000 shares during the quarter and 1.803 million shares since the July 2015 authorization, for total spending of $72.3 million. Approximately $427.7 million remained available under the $500 million program.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide specific full-year earnings or revenue guidance. Management stated that it expects adequate liquidity and capital resources to fund operations, acquisitions, and debt service for the next twelve months.
- Management expects restructuring actions and cost reductions to support performance, and stated that Industrial margins should improve going forward. However, lower oil, copper, and iron ore prices continue to pressure customer capital spending.
- Backlog is not necessarily indicative of future revenue. Substantially all contracts may be canceled or terminated by clients, and backlog is subject to scope changes, funding conditions, project cancellations, and cost changes.
- Jacobs reported a judgment of approximately $108.9 million in its favor in litigation against ConAgra Foods; post-trial motions were pending and ConAgra indicated it might appeal.
- Motiva sought more than $8 billion in alleged actual damages, plus potentially unquantified punitive damages, fees, and interest, in arbitration involving a Jacobs-Bechtel joint venture. A hearing was scheduled for September 2016. Management did not expect a material adverse effect but acknowledged litigation uncertainty.
- Nui Phao Mining Company claimed more than $167 million in arbitration against a Jacobs subsidiary. Jacobs denied liability and was defending the matter.
- The company also disclosed ongoing litigation involving California court facilities and potential disgorgement claims. Management did not expect a material adverse effect.
- Contract revenues are subject to estimates involving percentage of completion, incentive fees, claims, change orders, recoverability of costs, and contract losses. Actual results may differ materially from estimates.
- Management stated that debt covenants were satisfied and that there were no material changes to previously disclosed risk factors. Disclosure controls and procedures were deemed effective.
Important Facts for Investors to Verify
- Reconcile the company name and corporate history, since the filing is under Jacobs Engineering Group Inc. and predates the current Jacobs Solutions Inc. identity.
- Assess whether the restructuring program is producing sustainable cost savings after the unusually high $103.8 million of year-to-date charges.
- Monitor backlog conversion, cancellations, and further effects of low commodity prices, particularly in Petroleum & Chemicals and Mining & Minerals.
- Evaluate the quality and sustainability of cash flow, including the extent to which the $264.3 million operating cash inflow reflects working-capital timing.
- Review the pending Motiva, Nui Phao, California court-facilities, ConAgra, customer-bankruptcy, and litigation-settlement matters for potential changes in exposure.
- Confirm the effect of discrete tax benefits on the reported tax rate and earnings, as these benefits may not recur.
- Note that the filing’s narrative contains an apparent unit typo for year-to-date pass-through costs; the accompanying table reports $1.271 billion, while one discussion states $12.7 billion.