Jacobs Engineering Group Inc. Fiscal 2015 Form 10-K Summary
Business Context and Reporting Period
Jacobs Engineering Group Inc. provided engineering, design, consulting, construction, operations and maintenance services to industrial, commercial and government clients through more than 200 offices globally. The filing covers the fiscal year ended October 2, 2015; the source identifies fourth-quarter results but the filing is an annual Form 10-K. Jacobs reported one operating segment and served markets including national government programs, chemicals and polymers, refining, infrastructure, oil and gas, buildings, pharmaceuticals and mining.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $12.115 billion | $12.695 billion | Down 4.6% |
| Operating profit | $445.5 million | $528.1 million | Down 15.6% |
| Operating margin | 3.7% | 4.2% | Declined |
| Net earnings attributable to Jacobs | $303.0 million | $328.1 million | Down 7.6% |
| Diluted EPS | $2.40 | $2.48 | Down 3.2% |
| Net margin | 2.5% | 2.6% | Declined |
| Cash flow from operations | $484.6 million | $721.7 million | Down $237.1 million |
| Capital expenditures | $88.4 million | $132.1 million | Down 33.1% |
| Cash and equivalents | $460.9 million | $732.6 million | Down $271.8 million |
| Long-term debt | $584.4 million | $764.1 million | Down $179.6 million |
| Backlog | $18.8 billion | $18.4 billion | Up 2.3% |
Fiscal 2015 included an additional week of operations, which management stated was not material. Approximately 83% of revenue came from cost-reimbursable contracts and 17% from fixed-price contracts. Pass-through costs included in revenue were $2.603 billion, down from $2.955 billion.
Material Changes Versus the Prior Comparable Period
- Project Services revenue decreased 4.1% to $6.307 billion, primarily because of lower activity in refining and chemicals and polymers.
- Process, Scientific, and Systems Consulting revenue increased 56.6% to $1.188 billion, primarily due to the Federal Network Systems acquisition.
- Construction revenue decreased 20.5% to $3.292 billion, reflecting the winding down of a U.S. mining project and lower refining activity.
- Operations and Maintenance revenue increased 8.7% to $1.328 billion.
- National Government Programs revenue increased 15.8% to $2.644 billion, while Chemicals and Polymers declined 20.3% to $2.381 billion and Mining and Minerals declined 50.3% to $456.9 million.
- Revenue was negatively affected by approximately $561 million from the stronger U.S. dollar, and management identified a $12.1 million unfavorable currency impact on fiscal 2015 results.
- The company recorded $157.2 million of pretax costs related to its 2015 restructuring. Management presented adjusted net earnings of $410.9 million, or $3.26 diluted EPS, excluding $107.9 million after tax, or $0.86 per diluted share, of restructuring costs.
- The 2015 inter-company debt refinancing generated a one-time tax benefit of $23.1 million, or $0.18 per share.
- Jacobs repurchased 9.7 million shares for $422.3 million during fiscal 2015 and exhausted the prior $500 million authorization. A new $500 million authorization was approved in July 2015.
Liquidity, Debt and Financial Position
At October 2, 2015, Jacobs had $460.9 million of cash and $1.013 billion of available borrowing capacity under its $1.6 billion revolving credit facility. Total facility utilization was $586.9 million, including $584.4 million of direct borrowings and $2.5 million of letters of credit. The facility expires in February 2019, and the company was in compliance with its covenants.
Working capital was $1.302 billion, with a current ratio of 1.66 to 1. Letters of credit outstanding totaled $236.4 million. Management stated that cash, borrowing capacity and other facilities were adequate to fund operations, acquisitions and debt service for the next twelve months. Defined benefit pension and post-retirement obligations were underfunded by approximately $413.1 million.
Outlook, Commentary, Risks and Unusual Items
- Management cited continuing pressure from lower crude oil, copper and iron ore prices, affecting refining, upstream oil and gas, and mining clients. It was refocusing resources toward brownfield, sustaining-capital and maintenance work.
- Infrastructure and National Government Programs performed well. Management viewed infrastructure and buildings markets as improving and stated that new prospects and sales remained strong.
- Backlog was near record levels, but approximately $600 million of the increase was offset by foreign exchange. Approximately $7.3 billion, or 38.6% of backlog, was expected to convert to revenue within the next fiscal year.
- Backlog is subject to cancellation, termination, suspension, funding restrictions and scope changes and therefore is not necessarily indicative of future revenue or earnings.
- During the first quarter of fiscal 2016, Jacobs reorganized around four global lines of business: Petroleum and Chemicals, Buildings and Infrastructure, Aerospace and Technology, and Industrial. Systems for reporting these lines were expected to be completed no later than the second quarter of fiscal 2016.
- Material risks include cyclicality in client markets, commodity-price exposure, government funding and contract audits, fixed-price cost overruns, project execution and safety liability, litigation, international and foreign-exchange exposure, acquisitions and integration, qualified-personnel availability, cybersecurity and environmental obligations.
- Significant disclosed legal matters included a Motiva arbitration claim exceeding $7 billion, an NPMC arbitration claim exceeding $136 million, and Freeport counterclaims alleging $116 million of damages. Management stated that these matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- Goodwill totaled $3.049 billion, or 39.2% of total assets. Fiscal 2015 impairment testing indicated that reporting-unit fair values exceeded carrying values by more than 20% to 40%, with no impairment recorded.
Most Important Facts for Investors to Verify
- Reconcile GAAP earnings of $303.0 million and diluted EPS of $2.40 with management’s adjusted figures excluding restructuring costs and the one-time tax benefit.
- Assess whether lower activity in chemicals, refining and mining is cyclical or represents a sustained reduction in client capital spending.
- Review backlog quality, funding status, expected margins and cancellation exposure, particularly the $4.6 billion tied directly or indirectly to U.S. federal agencies.
- Monitor cash conversion, receivables, payment-term extensions and the decline in operating cash flow to $484.6 million.
- Evaluate debt repayment, share repurchases, available revolver capacity and the company’s ability to fund acquisitions while maintaining liquidity.
- Review the Motiva, NPMC, Freeport and California court-related proceedings, including reserves, insurance coverage and potential exposure.
- Assess restructuring execution, expected cost savings and the effects of the fiscal 2016 reorganization on segment reporting and accountability.
- Consider pension underfunding, goodwill concentration, foreign-currency losses and the sensitivity of contract estimates, claims and incentive fees.