Business Context and Reporting Period
Jacobs Engineering Group Inc. (now identified in the request as Jacobs Solutions Inc.) filed this unaudited Form 10-Q for the three months ended December 30, 2016, the first quarter of fiscal 2017. The company operated through four lines of business: Aerospace & Technology, Buildings & Infrastructure, Industrial, and Petroleum & Chemicals.
The filing states that interim results are not necessarily indicative of full-year results. Prior-period segment information was restated to reflect the company’s current organizational structure.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $2.552 billion | $2.848 billion | Down 10.4% |
| Operating profit | $88.6 million | $59.5 million | Up 49.1% |
| Operating margin | 3.5% | 2.1% | Up approximately 1.4 percentage points |
| Net earnings attributable to Jacobs | $60.5 million | $46.5 million | Up 30.1% |
| Diluted EPS | $0.50 | $0.38 | Up $0.12 |
| Net cash from operating activities | $105.4 million | $26.7 million | Up $78.7 million |
| Cash and equivalents at period-end | $736.5 million | $443.7 million | Prior-year comparative period-end balance |
Adjusted for restructuring charges, management reported net earnings of $83.3 million, or $0.68 per diluted share, compared with $94.7 million, or $0.78 per diluted share, in the prior-year quarter. The filing does not present a company-wide adjusted operating margin.
Direct contract costs were $2.132 billion, or 83.6% of revenue, compared with 84.5% in the prior-year quarter. Pass-through costs included in revenue were $673.0 million, essentially unchanged from $670.3 million.
Segment Results
| Line of business | Revenue | Operating profit | Operating margin |
|---|---|---|---|
| Aerospace & Technology | $577.4 million | $51.1 million | 8.8% |
| Buildings & Infrastructure | $580.6 million | $38.8 million | 6.7% |
| Industrial | $751.7 million | $25.1 million | 3.3% |
| Petroleum & Chemicals | $641.8 million | $23.7 million | 3.7% |
Balance Sheet, Debt, Liquidity and Cash Flow
- Total assets were $7.110 billion at December 30, 2016, compared with $7.360 billion at September 30, 2016.
- Cash and cash equivalents increased to $736.5 million from $655.7 million at fiscal year-end. Approximately $217.0 million was held in the United States and $519.5 million outside the United States.
- Working capital was approximately $1.2 billion.
- Long-term debt was $387.0 million. The company had $1.2 billion of available borrowing capacity under its $1.6 billion unsecured revolving credit facility, which expires in February 2020.
- Total letters of credit outstanding were $240.3 million. The company reported compliance with its debt covenants.
- Operating cash flow was $105.4 million; investing cash outflow was $23.1 million, including $21.1 million of capital expenditures; and financing cash inflow was $20.4 million.
- The company repurchased approximately 558,000 shares for $30.2 million during the quarter. Approximately $317.2 million remained available under the $500 million repurchase authorization.
- The board initiated a quarterly cash dividend program. A $0.15 per share dividend was declared after quarter-end for payment on March 17, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue declined $296.3 million, primarily because of lower volumes in Petroleum & Chemicals and Aerospace & Technology. Petroleum & Chemicals revenue fell 31.9%, while Aerospace & Technology revenue fell 13.8%.
- Buildings & Infrastructure revenue increased 3.1%, and Industrial revenue increased 11.8%.
- Reported earnings improved largely because restructuring charges declined to $31.7 million from $68.4 million. Excluding restructuring, adjusted net earnings declined 12%.
- Aerospace & Technology operating margin improved to 8.8% from 7.2%, supported by higher-margin work, fixed-price contract performance and project closeouts.
- Buildings & Infrastructure margin declined to 6.7% from 7.2% because of slow project starts and higher costs.
- Industrial margin declined to 3.3% from 4.1%, reflecting weak Mining & Minerals conditions and lower-margin procurement activity in Life Sciences.
- Petroleum & Chemicals margin improved to 3.7% from 3.4% as cost reductions and restructuring savings partly offset lower activity.
- Backlog was $18.149 billion, down 0.4% year over year. Excluding currency effects, backlog increased approximately 1.5%. Industrial backlog declined to $2.494 billion, while Aerospace & Technology and Buildings & Infrastructure backlog increased.
- Accumulated other comprehensive loss increased substantially, primarily because of a $287.5 million foreign-currency translation loss. Goodwill and accumulated other comprehensive income at September 30, 2016 were each overstated by $209.9 million due to incorrect foreign-currency translation rates; the correction had no effect on earnings or cash flows.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal full-year earnings or revenue guidance. Management stated that oil and gas investment remained focused mainly on maintenance and sustaining capital, while larger strategic projects were proceeding more slowly as customers evaluated capital plans. Management also cited continued cost-reduction efforts and restructuring initiatives.
- The 2015 Restructuring remained in progress and included employee terminations, office closures, organizational consolidation and employee relocations. The restructuring accrual was $139.7 million at December 30, 2016.
- Backlog is subject to client cancellation or termination, scope changes, funding changes and foreign-exchange movements; management cautioned that backlog is not necessarily an indicator of future revenue.
- Revenue recognition relies on estimates of contract costs, incentive fees, claims and change orders. Contract losses are recognized when identified, and actual results may differ from estimates.
- The company is exposed to foreign-currency and interest-rate fluctuations. Foreign-currency translation materially reduced comprehensive income during the quarter.
- Pending matters included an arbitration claim by Nui Phao Mining Company exceeding $167 million; the company denied liability and expected no material adverse effect. A separate Motiva arbitration alleging more than $8 billion of damages was rejected in full by the arbitral panel on December 30, 2016, subject to court confirmation.
- In a California court matter, Jacobs Facilities was found to have substantially complied with applicable licensing requirements, and a $4.7 million judgment plus prejudgment interest was entered in favor of a Jacobs entity; the opposing party filed an appeal in January 2017.
- The company stated that its disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether the improvement in reported earnings is sustainable after the decline in restructuring charges and the company’s disclosed adjusted earnings decline.
- The pace of recovery, if any, in Petroleum & Chemicals and Industrial end markets, particularly oil and gas, refining and Mining & Minerals.
- Conversion of the $18.1 billion backlog into revenue and cash, including cancellation, funding, margin and foreign-exchange risks.
- Progress and remaining costs of the 2015 Restructuring program.
- Working-capital performance, receivables collection and the sustainability of the quarter’s $105.4 million operating cash flow.
- Foreign-currency exposure, the effect of translation losses on equity, and the location and repatriation implications of cash held outside the United States.
- Resolution of the Nui Phao arbitration, the California appeal and other contractual, government-audit, insurance and litigation contingencies.
- Future dividend declarations, share repurchases, debt covenant compliance and available revolver capacity.