Jacobs Engineering Group Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017, compared with April 1, 2016. The filing identifies the registrant as Jacobs Engineering Group Inc.; the request metadata refers to Jacobs Solutions Inc. Financial statements are unaudited.
Business Context
Jacobs operates through four global lines of business: Aerospace & Technology, Buildings & Infrastructure, Industrial, and Petroleum & Chemicals. Backlog was $18.5 billion at March 31, 2017, up 1.4% from $18.2 billion at April 1, 2016, or up approximately 2.9% excluding currency effects.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2017 | Year-over-Year | Six Months Ended March 31, 2017 | Year-over-Year |
|---|---|---|---|---|
| Revenue | $2.303 billion | Down 17.2% | $4.854 billion | Down 13.8% |
| Operating profit | $68.2 million | Down from $86.8 million | $156.8 million | Up from $146.2 million |
| Net earnings attributable to Jacobs | $50.0 million | Down 23.3% | $110.6 million | Down 1.1% |
| Diluted EPS | $0.41 | Down from $0.54 | $0.91 | Down from $0.92 |
| Operating margin | Approximately 3.0% | Down from approximately 3.1% | Approximately 3.2% | Up from approximately 2.6% |
| Operating cash flow | Not separately provided | — | $201.0 million | Down from $264.3 million |
Direct contract costs were 81.8% of revenue in the quarter and 82.7% for the six months, compared with 84.0% and 84.3%, respectively, in the prior-year periods. Selling, general and administrative expense was $351.1 million for the quarter and $681.8 million for the six months.
- Cash and liquidity: Cash and equivalents were $674.6 million, including approximately $106.4 million in the United States and $568.2 million internationally. Working capital was approximately $1.1 billion.
- Debt: Long-term debt was $334.9 million. The company had approximately $1.3 billion of available capacity under its $1.6 billion revolving credit facility and was in compliance with debt covenants.
- Letters of credit: Total outstanding letters of credit were $256.6 million.
- Investing and financing: Investing activities used $72.5 million, including $45.8 million for property and equipment and $24.8 million for acquisitions. Financing activities used $93.1 million, including $81.2 million for share repurchases and $18.1 million of dividends.
- Capital returns: The company repurchased 1.4 million shares for $81.2 million during the six months. It paid its first quarterly dividend of $0.15 per share and declared another $0.15 dividend payable June 16, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower volumes in Petroleum & Chemicals, Aerospace & Technology, and Industrial, including lower field-services activity and the completion or wind-down of large projects with significant pass-through revenue.
- Petroleum & Chemicals revenue fell 35.6% in the quarter and 33.7% for the six months as clients delayed larger strategic projects amid low oil prices. Segment operating profit nevertheless increased in the quarter because of restructuring-related SG&A savings and a one-time India benefit.
- Aerospace & Technology revenue fell 13.8% in both the quarter and six months, primarily because of U.S. government rebid losses and small-business award preferences. Operating profit declined 18.3% in the quarter.
- Buildings & Infrastructure revenue increased 1.1% in the quarter and 2.0% for the six months, supported by U.S. project-management and construction-management spending.
- Industrial revenue fell 12.6% in the quarter, mainly from lower oil-and-gas field-services activity, while six-month revenue was approximately flat. Industrial operating profit benefited from the absence of prior-year litigation-settlement and customer-bankruptcy charges.
- Adjusted net earnings excluding restructuring and other charges were $95.2 million, or $0.78 per diluted share, in the quarter, up from $91.0 million, or $0.75, in the prior-year quarter. Six-month adjusted net earnings were $178.6 million, or $1.47 per diluted share, down from $185.6 million, or $1.53.
- Foreign currency reduced reported revenue by approximately $40 million in aggregate across the segments for the quarter and approximately $73 million for the six months, based on segment disclosures.
Guidance, Outlook, Risks and Unusual Items
- Outlook: The filing does not provide clear quantitative earnings or revenue guidance. Management stated that it expects adequate liquidity to fund operations, acquisitions, debt service, and dividends for the next twelve months.
- Restructuring: Restructuring and other charges were $72.2 million in the quarter and $104.0 million for the six months. The charges included $52.3 million of 2015 Restructuring costs and $22.6 million of Europe, U.K., and Middle East restructuring charges in the quarter. The 2015 Restructuring was substantially completed, with future costs not expected to exceed $15 million and expected annual savings of approximately $285 million.
- Other unusual items: A $9.9 million non-cash benefit from restructuring employee welfare trust plans in India was recorded in SG&A. Europe, U.K., and Middle East restructuring included a $16.5 million write-off of contract receivables. Approximately $6 million of corporate reserves were released in connection with contract-dispute settlements.
- Accounting correction: The company corrected an immaterial historical error involving foreign-currency translation of non-U.S. goodwill. At September 30, 2016, goodwill and accumulated other comprehensive income had each been overstated by $209.9 million. The correction affected other comprehensive income and balance-sheet presentation, but not earnings or cash flow.
- Tax: The quarterly effective tax rate was 27.0%, versus 29.9% in the prior-year quarter; the six-month rate was 28.1%, versus 23.3%. The company stated that uncertain tax positions could decrease by approximately $10 million over the next twelve months.
- Risks: Key risks include project cancellations and contract-performance exposure, government audits and investigations, litigation, customer credit and collection risk, foreign-currency movements, dependence on client capital spending, and the discretionary nature of future dividends. The company disclosed a Singapore arbitration claim exceeding $167 million but does not expect a material adverse outcome.
- Accounting standards: The company was evaluating the future effects of revenue-recognition, lease, and share-based-payment accounting standards. The revenue standard could have a significant financial-statement and administrative impact.
Investor Verification Priorities
- Verify the registrant name and corporate identity, because the filing text identifies Jacobs Engineering Group Inc., not Jacobs Solutions Inc.
- Assess whether restructuring savings materialize and distinguish recurring operating performance from restructuring benefits, reserve releases, and the India non-cash benefit.
- Monitor Petroleum & Chemicals and Industrial volumes, oil-and-gas capital spending, project completions, cancellations, and pass-through revenue.
- Reconcile backlog quality and conversion, particularly the Industrial backlog decline and the exposure of backlog to client cancellation or termination rights.
- Review the goodwill translation correction and the resulting accumulated other comprehensive loss, including the effect of foreign-currency movements.
- Track operating cash conversion, receivables and unbilled amounts, letters of credit, debt utilization, and the ability to sustain share repurchases and dividends.
- Follow the $167 million-plus arbitration claim, California litigation appeal, government contract audits, tax audits, and potential $10 million tax benefit.