Jacobs Engineering Group Inc. (now identified in the request as Jacobs Solutions Inc.) — Fiscal 2017 Q3 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended June 30, 2017, compared with July 1, 2016; balance-sheet comparisons are with September 30, 2016. The company operated through four lines of business: Aerospace & Technology, Buildings & Infrastructure, Industrial, and Petroleum & Chemicals. Results are unaudited.
Key financial metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Revenue | $2.515 billion | $2.694 billion | $7.369 billion | $8.324 billion |
| Operating profit | $128.5 million | $109.6 million | $285.3 million | $255.8 million |
| Operating margin | 5.1% | 4.1% | 3.9% | 3.1% |
| Net earnings attributable to Jacobs | $89.0 million | $69.1 million | $199.6 million | $180.8 million |
| Diluted EPS | $0.74 | $0.57 | $1.64 | $1.49 |
| Net cash from operations | Not separately provided for the quarter | Not separately provided | $380.6 million | $445.7 million |
- Q3 net margin was approximately 3.5%, versus 2.6% in the prior-year quarter. Nine-month net margin was approximately 2.7%, versus 2.2%.
- Cash and cash equivalents were $758.3 million at June 30, 2017, up from $655.7 million at September 30, 2016. Approximately $633.6 million was held outside the United States.
- Long-term debt was $282.0 million, down from $385.3 million at fiscal year-end. The company had approximately $1.3 billion of available capacity under its $1.6 billion revolving facility and $38.3 million of letters of credit outstanding.
- Working capital was approximately $1.1 billion. Management stated that liquidity was adequate for operations, acquisitions, debt service, and dividends for the next twelve months.
- Capital expenditures were $73.6 million and acquisitions used $24.8 million during the first nine months. Financing cash outflows included $97.2 million of share repurchases and $36.2 million of dividends.
- Backlog was $18.56 billion at June 30, 2017, up from $18.32 billion a year earlier.
Material changes versus the prior comparable periods
- Q3 revenue declined 6.6%; nine-month revenue declined 11.5%. Lower volumes in Petroleum & Chemicals, Aerospace & Technology, and Industrial were partly offset by growth in Buildings & Infrastructure.
- Lower revenue was more than offset by improved cost performance: direct contract costs fell to 81.7% of revenue in Q3 from 83.2% and to 82.4% for nine months from 83.9%. Management attributed the improvement to portfolio realignment, lower-margin field-services declines, and restructuring savings.
- Q3 operating profit increased 17.3%, while nine-month operating profit increased 11.5%. Restructuring and other charges declined to $10.7 million in Q3 from $32.9 million and to $115.9 million for nine months from $136.7 million.
- Excluding restructuring and other charges, Q3 adjusted diluted EPS was $0.79 versus $0.78; nine-month adjusted diluted EPS was $2.25 versus $2.31.
- Buildings & Infrastructure revenue increased 16.9% in Q3 and 6.9% for nine months, driven primarily by U.S. project-management and construction-management activity.
- Petroleum & Chemicals revenue decreased 21.7% in Q3 and 30.1% for nine months because of project completions, award delays, lower oil-related capital spending, and unfavorable foreign exchange.
- Industrial revenue decreased 3.5% in Q3 and 1.4% for nine months, but operating profit increased 13.7% and 19.5%, respectively, supported by Life Sciences and improved Mining and Minerals performance.
- Aerospace & Technology revenue decreased 12.3% in Q3 and 13.3% for nine months, primarily from U.S. government rebid losses and small-business award preferences.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide clear formal revenue or EPS guidance. Management expects annual savings from the 2015 Restructuring to approximate $285 million upon completion.
- The 2015 Restructuring was substantially completed in the second fiscal quarter, but $9.5 million of additional costs were recognized in Q3. Cumulative restructuring costs were $437.2 million, with an accrual of $142.8 million at June 30, 2017.
- Separate Europe, U.K., and Middle East restructuring activities generated additional charges of $1.2 million in Q3 and $23.8 million for nine months, primarily related to contract receivable write-offs and employee-related liabilities.
- A one-time, non-cash benefit of approximately $9.9 million arose from restructuring employee welfare trust plans in India during the second quarter.
- The company disclosed an immaterial historical error in translating non-U.S. goodwill. September 30, 2016 goodwill and accumulated other comprehensive income were each overstated by $209.9 million; the correction affected foreign-currency translation and comprehensive income but not earnings or cash flow.
- On August 1, 2017, after quarter-end, Jacobs agreed to acquire CH2M HILL. The transaction contemplated approximately $2.4 billion of cash consideration, funded through cash, revolver borrowings, and $1.2 billion of new three-year term debt, subject to regulatory and shareholder approvals.
- Key risks include cyclicality and client capital-spending decisions, project execution and contract estimates, government contract audits, litigation and guarantees, foreign exchange, tax audits, cybersecurity incidents, and the possibility that the CH2M transaction is delayed or not completed.
- Nui Phao Mining Company asserted an arbitration claim exceeding $167 million; Jacobs denied liability and stated that it did not expect a material adverse effect. The company also disclosed ongoing California litigation and various government and tax audits.
- The effective tax rate was 30.4% for Q3 and 29.2% for nine months. Management indicated that uncertain tax positions could decrease by approximately $11 million over the following twelve months.
Most important facts an investor should verify
- Reconcile reported versus adjusted earnings, particularly the treatment and remaining duration of restructuring and other charges.
- Assess whether backlog growth, especially in Aerospace & Technology and Buildings & Infrastructure, can offset weakness and cancellations in Industrial and Petroleum & Chemicals.
- Review financing documents and pro forma leverage for the proposed CH2M acquisition, including the $1.2 billion term loan and additional revolver usage.
- Validate cash accessibility because most cash was held outside the United States and may involve repatriation tax considerations.
- Monitor contract claims, government audits, litigation, cybersecurity investigations, and the Nui Phao arbitration for changes in reserves or exposure.
- Confirm the effect of the historical goodwill translation correction and the company’s transition planning for the new revenue-recognition standard.