Business Context and Reporting Period
This Form 10-Q is for Jacobs Engineering Group Inc. (the predecessor legal name of Jacobs Solutions Inc.) and its subsidiaries for the quarter and six months ended March 27, 2015. The interim financial statements are unaudited and use a 52/53-week fiscal year ending in September.
Jacobs provides technical and professional services, construction, operations and maintenance, and government-program services. Fiscal 2015 results include the impact of the 2013 acquisition of Sinclair Knight Merz (SKM) and other fiscal 2014 acquisitions.
Financial Performance and Position
| Metric | Q2 FY2015 | Q2 FY2014 | Six Months FY2015 | Six Months FY2014 |
|---|---|---|---|---|
| Revenue | $2.903 billion | $3.176 billion | $6.090 billion | $6.245 billion |
| Operating profit | $133.0 million | $122.4 million | $291.3 million | $267.5 million |
| Operating margin | 4.6% | 3.9% | 4.8% | 4.3% |
| Net earnings attributable to Jacobs | $82.0 million | $83.5 million | $182.0 million | $177.2 million |
| Diluted EPS | $0.64 | $0.63 | $1.42 | $1.34 |
| Net margin attributable to Jacobs | 2.8% | 2.6% | 3.0% | 2.8% |
Six-month operating cash flow was $104.2 million, versus $195.7 million in the prior-year period. Investing cash use was $54.1 million, primarily for property and equipment. Financing cash outflow was $234.8 million, including $254.2 million for share repurchases. Cash declined by $267.7 million, including an $82.9 million foreign-exchange impact, to $465.0 million at March 27, 2015.
Receivables were $2.700 billion, compared with $2.868 billion at September 26, 2014. Working capital was approximately $1.4 billion. Long-term debt was $712.7 million and notes payable were $42.7 million. The company had $884.8 million of available borrowing capacity under its $1.6 billion revolving credit facility, plus $293.3 million of letters of credit outstanding. Jacobs was in compliance with its debt covenants.
Backlog was $18.867 billion, up 2.5% from $18.413 billion a year earlier, although it decreased approximately $240.4 million sequentially, primarily because of foreign-exchange movements.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 8.6%; six-month revenue declined 2.5%. The decreases reflected foreign-exchange effects, lower pass-through revenue, and reduced volumes in Mining and Minerals, Refining-Downstream, and Chemicals and Polymers.
- Six-month net earnings attributable to Jacobs increased 2.7%, while second-quarter earnings decreased 1.8%. The comparison was affected by the SKM acquisition, the 2015 restructuring, and one-time 2014 events.
- Process, Scientific, and Systems Consulting revenue increased 74.3% in the quarter and 88.0% year to date, primarily because of the FNS acquisition.
- Construction revenue declined 25.3% in the quarter and 18.5% year to date, principally because a U.S. Mining and Minerals project was winding down.
- Mining and Minerals revenue declined 54.6% in the quarter and 46.3% year to date. Refining-Downstream revenue declined 19.6% and 18.0%, respectively.
- Infrastructure revenue increased 10.6% in the quarter and 20.4% year to date; National Government Programs revenue increased 8.7% and 19.2%, respectively.
- Direct contract costs decreased as a percentage of revenue to 83.1% from 83.7% in the quarter and to 83.4% from 84.5% year to date. SG&A declined in the quarter but increased year to date because of acquired businesses.
- The company repurchased 3.3 million shares in the quarter and 5.8 million shares year to date for $140.5 million and $254.2 million, respectively. Approximately $167.4 million remained under the $500 million authorization at quarter-end.
Guidance, Outlook, Risks and Unusual Items
- Management expected to complete the 2015 restructuring during the third and fourth quarters of fiscal 2015. The restructuring generated $14.0 million of pretax costs in the quarter, partly offset by a $3.5 million reduction in bonus expense, reducing diluted EPS by approximately $0.08.
- Management stated that lower crude oil, copper, and iron ore prices were pressuring clients in Refining-Downstream, Oil & Gas-Upstream, and Mining and Minerals. Potential consequences include delayed or canceled projects and lower client capital spending.
- Management described Global Infrastructure and National Government Programs as performing well and maintained a positive outlook for many markets. No specific quantitative full-year earnings or revenue guidance was provided in the filing text.
- Backlog includes funded and unfunded government awards and is subject to client cancellation or termination, scope changes, cost changes, and foreign-exchange movements; therefore, backlog may not convert to revenue on the expected schedule.
- The company is exposed to foreign-currency and interest-rate fluctuations. Foreign exchange reduced cash by $82.9 million in the first six months and contributed to the sequential backlog decline.
- A Motiva Enterprises arbitration involves claims exceeding $7 billion related to a 2006 refinery expansion project performed by a Bechtel-Jacobs joint venture. Jacobs denied liability and stated that it did not expect a material adverse effect, but the matter represents a significant contingent exposure.
- The company remains subject to government contract audits, investigations, pricing and cost-allocation reviews, tax audits, litigation, contractual guarantees, and partially insured or uninsured claims. Management stated that known matters were not expected to have a material adverse effect.
- Management concluded that disclosure controls were effective as of March 27, 2015, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the restructuring produces the expected cost savings and whether additional charges occur in the third and fourth quarters.
- The sustainability and quality of the $18.9 billion backlog, including cancellation rights, funding status, timing of conversion, and foreign-exchange effects.
- Cash conversion and working-capital trends, particularly receivables, accounts payable, billings in excess of costs, and the decline in operating cash flow.
- Debt reduction, revolver availability, covenant compliance, and the effect of the $254.2 million share-repurchase program on liquidity.
- Exposure to continued weakness in oil, gas, mining, metals, and chemicals markets, including project delays and cancellations.
- The status, insurance coverage, reserves, and potential outcomes of the Motiva arbitration and other government, tax, litigation, and professional-liability matters.
- The extent to which reported growth reflects acquisitions, especially SKM and FNS, rather than organic growth.