JEC-06.26.2015-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report on
FORM 10-Q
(Mark one)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 26, 2015
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-7463
JACOBS ENGINEERING GROUP INC.
(Exact name of Registrant as specified in its charter)
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| |
Delaware | 95-4081636 |
(State of incorporation) | (I.R.S. employer identification number) |
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155 North Lake Avenue, Pasadena, California | 91101 |
(Address of principal executive offices) | (Zip code) |
(626) 578 – 3500
(Registrant’s telephone number, including area code)
Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: x Yes o No
Indicate by check-mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check-mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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| | | |
Large accelerated filer | x | Accelerated filer | o |
| | | |
Non-accelerated filer | o | Smaller reporting company | o |
Indicate by check-mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Number of shares of common stock outstanding at July 29, 2015: 123,798,755
JACOBS ENGINEERING GROUP INC.
INDEX TO FORM 10-Q
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PART I | | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
PART II | | |
| Item 1. | | |
| Item 1A. | | |
| Item 2 | | |
| Item 4 | | |
| Item 6. | | |
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Part I - FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
|
| | | | | | | |
| June 26, 2015 | | September 26, 2014 |
| (Unaudited) | |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 553,561 |
| | $ | 732,647 |
|
Receivables | 2,679,176 |
| | 2,867,555 |
|
Deferred income taxes | 158,861 |
| | 169,893 |
|
Prepaid expenses and other | 82,243 |
| | 121,976 |
|
Total current assets | 3,473,841 |
| | 3,892,071 |
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Property, Equipment and Improvements, Net | 421,314 |
| | 456,797 |
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Other Noncurrent Assets: | | | |
Goodwill | 3,033,786 |
| | 3,026,349 |
|
Intangibles | 382,966 |
| | 440,192 |
|
Miscellaneous | 647,154 |
| | 638,250 |
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Total other non-current assets | 4,063,906 |
| | 4,104,791 |
|
| $ | 7,959,061 |
| | $ | 8,453,659 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current Liabilities: | | | |
Notes payable | $ | 38,359 |
| | $ | 36,732 |
|
Accounts payable | 510,748 |
| | 622,875 |
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Accrued liabilities | 1,167,448 |
| | 1,279,556 |
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Billings in excess of costs | 376,083 |
| | 410,683 |
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Total current liabilities | 2,092,638 |
| | 2,349,846 |
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Long-term Debt | 646,391 |
| | 764,075 |
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Other Deferred Liabilities | 820,501 |
| | 834,078 |
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Commitments and Contingencies |
| |
|
Stockholders’ Equity: | | | |
Capital stock: | | | |
Preferred stock, $1 par value, authorized - 1,000,000 shares; issued and outstanding - none | — |
| | — |
|
Common stock, $1 par value, authorized - 240,000,000 shares; issued and outstanding—124,142,831 shares and 131,752,768 shares, respectively | 124,143 |
| | 131,753 |
|
Additional paid-in capital | 1,135,943 |
| | 1,173,858 |
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Retained earnings | 3,513,867 |
| | 3,527,193 |
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Accumulated other comprehensive loss | (420,966 | ) | | (363,549 | ) |
Total Jacobs stockholders’ equity | 4,352,987 |
| | 4,469,255 |
|
Noncontrolling interests | 46,544 |
| | 36,405 |
|
Total Group stockholders’ equity | 4,399,531 |
| | 4,505,660 |
|
| $ | 7,959,061 |
| | $ | 8,453,659 |
|
See the accompanying Notes to Consolidated Financial Statements.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Months Ended June 26, 2015 and June 27, 2014
(In thousands, except per share information)
(Unaudited)
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| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Revenues | $ | 2,907,541 |
| | $ | 3,231,791 |
| | $ | 8,997,878 |
| | $ | 9,476,715 |
|
Costs and Expenses: | | | | |
| |
|
Direct cost of contracts | (2,422,944 | ) | | (2,670,052 | ) | | (7,502,891 | ) | | (7,944,731 | ) |
Selling, general and administrative expenses | (384,163 | ) | | (437,802 | ) | | (1,103,286 | ) | | (1,140,565 | ) |
Operating Profit | 100,434 |
| | 123,937 |
| | 391,701 |
|
| 391,419 |
|
Other Income (Expense): | | | | |
| |
|
Interest income | 1,697 |
| | 2,624 |
| | 5,553 |
| | 7,425 |
|
Interest expense | (5,509 | ) | | (5,565 | ) | | (15,374 | ) | | (10,490 | ) |
Gain on sale of intellectual property, net | — |
| | — |
| | — |
| | 12,147 |
|
Miscellaneous income (expense), net | 566 |
| | (2,950 | ) | | (1,034 | ) | | (3,139 | ) |
Total other income (expense), net | (3,246 | ) | | (5,891 | ) | | (10,855 | ) |
| 5,943 |
|
Earnings Before Taxes | 97,188 |
| | 118,046 |
| | 380,846 |
|
| 397,362 |
|
Income Tax Benefit (Expense) | 120 |
| | (46,737 | ) | | (89,233 | ) | | (136,304 | ) |
Net Earnings of the Group | 97,308 |
| | 71,309 |
| | 291,613 |
|
| 261,058 |
|
Net Earnings Attributable to Noncontrolling Interests | (6,246 | ) | | (6,467 | ) | | (18,505 | ) | | (19,024 | ) |
Net Earnings Attributable to Jacobs | $ | 91,062 |
| | $ | 64,842 |
| | $ | 273,108 |
|
| $ | 242,034 |
|
Net Earnings Per Share: | | | | | | | |
Basic | $ | 0.74 |
| | $ | 0.50 |
| | $ | 2.17 |
| | $ | 1.86 |
|
Diluted | $ | 0.73 |
| | $ | 0.49 |
| | $ | 2.15 |
| | $ | 1.83 |
|
See the accompanying Notes to Consolidated Financial Statements including the Company's note on Other Comprehensive Income for a presentation of amounts reclassified to net earnings during the period.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended June 26, 2015 and June 27, 2014
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Net Earnings of the Group | $ | 97,308 |
| | $ | 71,309 |
| | $ | 291,613 |
| | $ | 261,058 |
|
Other Comprehensive Income (Loss): | | | | | | |
|
Foreign currency translation adjustment | 17,650 |
| | 29,147 |
| | (69,041 | ) | | 17,267 |
|
Gain (loss) on cash flow hedges | 3,071 |
| | 1,815 |
| | (1,773 | ) | | 1,912 |
|
Change in pension liabilities | (15,035 | ) | | (20,160 | ) | | 15,886 |
| | (29,308 | ) |
Other comprehensive income (loss) before taxes | 5,686 |
| | 10,802 |
| | (54,928 | ) | | (10,129 | ) |
Income Tax Benefit (Expense): | | | | | | | |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | 3,250 |
|
Cash flow hedges | (839 | ) | | (525 | ) | | 425 |
| | (646 | ) |
Change in pension liabilities | 3,090 |
| | 5,245 |
| | (2,913 | ) | | 7,660 |
|
Income Tax Benefit (Expense) | 2,251 |
| | 4,720 |
| | (2,488 | ) | | 10,264 |
|
Net Other Comprehensive Income (Loss) | 7,937 |
| | 15,522 |
| | (57,416 | ) | | 135 |
|
Net Comprehensive Income of the Group | 105,245 |
| | 86,831 |
| | 234,197 |
| | 261,193 |
|
Net Comprehensive Income Attributable to Noncontrolling Interests | (6,246 | ) | | (6,467 | ) | | (18,505 | ) | | (19,024 | ) |
Net Comprehensive Income Attributable to Jacobs | $ | 98,999 |
| | $ | 80,364 |
| | $ | 215,692 |
| | $ | 242,169 |
|
See the accompanying Notes to Consolidated Financial Statements including the Company's note on Other Comprehensive Income for a presentation of amounts reclassified to net earnings during the period.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended June 26, 2015 and June 27, 2014 (In thousands) (Unaudited)
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| | | | | | | |
| June 26, 2015 | | June 27, 2014 |
Cash Flows from Operating Activities: | | | |
Net earnings attributable to the Group | $ | 291,613 |
| | $ | 261,058 |
|
Adjustments to reconcile net earnings to net cash flows from operations: | | | |
Depreciation and amortization: | | | |
Property, equipment and improvements | 75,718 |
| | 70,701 |
|
Intangible assets | 38,090 |
| | 35,329 |
|
Gain on sale of certain intellectual property | — |
| | (12,147 | ) |
Stock based compensation | 32,925 |
| | 32,546 |
|
Tax deficiency (benefit) from stock based compensation | (732 | ) | | 140 |
|
Equity in earnings of operating ventures, net | 7,601 |
| | (7,065 | ) |
Change in pension plan obligations | (4,357 | ) | | (10,245 | ) |
Change in deferred compensation plans | (2,858 | ) | | (5,957 | ) |
(Gains) losses on sales of assets, net | (198 | ) | | 1,595 |
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Changes in certain assets and liabilities, excluding the effects of businesses acquired: | | | |
Receivables | 149,640 |
| | 171,861 |
|
Prepaid expenses and other current assets | 39,987 |
| | 20,065 |
|
Accounts payable | (94,553 | ) | | (87,753 | ) |
Accrued liabilities | (78,566 | ) | | 66,456 |
|
Billings in excess of costs | (7,208 | ) | | (28,029 | ) |
Income taxes | (54,442 | ) | | (5,225 | ) |
Deferred income taxes | 3,770 |
| | (12,493 | ) |
Other deferred liabilities | (11,933 | ) | | 7,058 |
|
Change in long-term receivables | — |
| | 2,828 |
|
Long-term insurance prepayment | — |
| | (17,602 | ) |
Other, net | 2,256 |
| | 2,092 |
|
Net cash provided by operating activities | 386,753 |
| | 485,213 |
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Cash Flows from Investing Activities: | | | |
Additions to property and equipment | (69,297 | ) | | (92,033 | ) |
Disposals of property and equipment | 5,538 |
| | 966 |
|
Purchases of investments | — |
| | (25,539 | ) |
Sales of investments | 13 |
| | — |
|
Acquisitions of businesses, net of cash acquired | — |
| | (1,226,352 | ) |
Net cash used for investing activities | (63,746 | ) | | (1,342,958 | ) |
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended June 26, 2015 and June 27, 2014 (In thousands) (Unaudited) (Continued)
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| | | | | | | |
| June 26, 2015 | | June 27, 2014 |
Cash Flows from Financing Activities: | | | |
Proceeds from long-term borrowings | 1,214,548 |
| | 669,681 |
|
Repayments of long-term borrowings | (1,291,029 | ) | | (302,386 | ) |
Proceeds from short-term borrowings | 333,156 |
| | 174,374 |
|
Repayments of short-term borrowings | (329,416 | ) | | (189,490 | ) |
Proceeds from issuances of common stock | 25,056 |
| | 34,175 |
|
Common stock repurchases | (372,944 | ) | | — |
|
Tax (deficiency) benefit from stock based compensation | 732 |
| | (140 | ) |
Distributions to noncontrolling interests | (7,230 | ) | | (6,043 | ) |
Net cash provided by (used for) financing activities | (427,127 | ) | | 380,171 |
|
Effect of Exchange Rate Changes | (74,966 | ) | | (6,218 | ) |
Net Decrease in Cash and Cash Equivalents | (179,086 | ) | | (483,792 | ) |
Cash and Cash Equivalents at the Beginning of the Period | 732,647 |
| | 1,256,405 |
|
Cash and Cash Equivalents at the End of the Period | $ | 553,561 |
| | $ | 772,613 |
|
See the accompanying Notes to Consolidated Financial Statements.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
Basis of Presentation
Unless the context otherwise requires:
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• | References herein to "Jacobs" are to Jacobs Engineering Group Inc. and its predecessors; |
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• | References herein to the "Company", "we", "us" or "our" are to Jacobs Engineering Group Inc. and its consolidated subsidiaries; and |
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• | References herein to the "Group" are to the combined economic interests and activities of the Company and the persons and entities holding noncontrolling interests in our consolidated subsidiaries. |
The accompanying consolidated financial statements and financial information included herein have been prepared pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted. Readers of this report should also read our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 26, 2014 ("2014 Form 10-K") as well as Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is also included in our 2014 Form 10-K.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of our consolidated financial statements at June 26, 2015, and for the three and nine month periods ended June 26, 2015 and June 27, 2014.
Our interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.
Please refer to Note 16—Definitions of Notes to Consolidated Financial Statements included in our 2014 Form 10-K for the definitions of certain terms used herein.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires us to employ estimates and make assumptions that affect the reported amounts of certain assets and liabilities; the revenues and expenses reported for the periods covered by the accompanying consolidated financial statements; and certain amounts disclosed in these Notes to the Consolidated Financial Statements. Although such estimates and assumptions are based on management's most recent assessment of the underlying facts and circumstances utilizing the most current information available and past experience, actual results could differ significantly from those estimates and assumptions. Our estimates, judgments, and assumptions are evaluated periodically and adjusted accordingly. Please refer to Note 2—Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2014 Form 10-K for a discussion of the significant estimates and assumptions affecting our consolidated financial statements.
Fair Value and Fair Value Measurements
Certain amounts included in the accompanying consolidated financial statements are presented at "fair value". Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants as of the date fair value is determined (the "measurement date"). When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider only those assumptions we believe a typical market participant would consider when pricing an asset or liability. In measuring fair value, we use the following inputs in the order of priority indicated:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets included in Level 1, such as (i) quoted prices for similar assets or liabilities; (ii) quoted prices in markets that have insufficient volume or infrequent transactions (i.e., less active markets); and (iii) model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data for substantially the full term of the asset or liability.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement.
Please refer to Note 2—Significant Accounting Policies of Notes to Consolidated Financial Statements included in our 2014 Form 10-K for a more complete discussion of the various items within the consolidated financial statements measured at fair value and the methods used to determine fair value.
New Accounting Standards
From time to time, the Financial Accounting Standards Board ("FASB") issues accounting standards updates (each being an "ASU") to its Accounting Standards Codification ("ASC"), which constitutes the primary source of U.S. GAAP. The Company regularly monitors ASUs as they are issued and considers their applicability to its business. All ASUs applicable to the Company are adopted by the due date and in the manner prescribed by the FASB.
In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The new guidance provided by ASU 2014-09 is intended to remove inconsistencies and perceived weaknesses in the existing revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability, provide more useful information and simplify the preparation of financial statements. ASU 2014-09 was initially effective for annual and interim reporting periods beginning after December 15, 2016. On July 9, 2015 the FASB approved a one year deferral of the effective date of this standard. The revised effective date for the standard is for annual reporting periods beginning after December 15, 2017 and interim periods therein. The FASB also approved changes allowing for early adoption of the standard as of the original effective date. The Company continues to evaluate the impact that the new guidance may have on the consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03—Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 was issued to simplify the presentation of debt issuance costs by requiring such costs to be presented as a deduction from the corresponding debt liability. Through this ASU, the FASB intends to make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company does not believe the adoption of this ASU will have a material effect on its consolidated financial statements.
In May 2015, the FASB issued Accounting Standards Update 2015-07—Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by ASC 820—Fair Value Measurement. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. ASU 2015-07 is effective for entities (other than public business entities) for fiscal years beginning after December 15, 2016, with retrospective application to all periods presented. Early application is permitted. The Company is evaluating the impact of the ASU, but does not expect the impacts to be material to its consolidated financial statements.
Business Combinations
On December 13, 2013, the Company acquired all of the outstanding equity interests in Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited (collectively, "SKM"), a provider of engineering, design, procurement, construction and project management services, from the SKM shareholders. The Company purchased SKM for approximately $1.2 billion in cash. SKM's results of operations have been included in the Company's consolidated results of operations since the date of acquisition. The acquisition agreement includes customary representations, warranties, and indemnities supported by an escrow account.
During the first quarter of fiscal 2015, we completed the final purchase price allocation of SKM. The Company recorded a number of adjustments affecting, among other things, the balance sheet position of several major projects; the estimated liabilities relating to acquired professional liability exposures; and other adjustments.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
The following table presents the final purchase price allocation for SKM (in thousands):
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| | | |
Assets: | |
Cash and cash equivalents | $ | 152,051 |
|
Receivables and other current assets | 371,331 |
|
Property and equipment, and other | 71,630 |
|
Intangible assets | 202,166 |
|
Total assets | 797,178 |
|
Liabilities: |
|
Current liabilities | 351,351 |
|
Deferred tax liability | 72,656 |
|
Long-term liabilities | 20,416 |
|
Total liabilities | 444,423 |
|
Net identifiable assets acquired | 352,755 |
|
Goodwill | 866,919 |
|
Net assets acquired | $ | 1,219,674 |
|
The following table presents the values assigned to the acquired SKM intangible assets (in thousands):
|
| | | |
Customer relationships / backlog | $ | 193,260 |
|
Trade name | 8,906 |
|
| $ | 202,166 |
|
The useful lives of the intangible assets acquired from SKM range from 3 to 12 years.
Some of the factors contributing to the recognition of goodwill include: (i) access to a large, highly-trained and stable workforce; (ii) the opportunity to expand our client base in Australia, Asia, South America and the U.K.; (iii) the opportunity to expand our presence in multiple industries, including: mining, infrastructure, buildings, water and energy; and (iv) the opportunity to achieve operating synergies.
During fiscal year 2014, the Company also acquired Federal Network Services LLC ("FNS", formerly a subsidiary of Verizon), Eagleton Engineering, LLC, FMHC Corporation, Stobbarts (Nuclear) Limited, Trompeter Enterprises, and MARMAC Field Services, Inc. The results of operations of these other acquisitions, individually or in the aggregate, were not material to the Company's consolidated results for fiscal 2014. During fiscal 2014, we also acquired an additional 15% interest in Jacobs, Zamel and Turbag Consulting Engineers Company ("ZATE"), a refining, chemicals, infrastructure and civil engineering company headquartered in Al Khobar, Saudi Arabia. This transaction brought the Company's ownership in ZATE to 75%.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
Receivables
The following table presents the components of "Receivables" appearing in the accompanying Consolidated Balance Sheets at June 26, 2015 and September 26, 2014 as well as certain other related information (in thousands):
|
| | | | | | | |
| June 26, 2015 | | September 26, 2014 |
Components of receivables: | | | |
Amounts billed | $ | 1,293,606 |
| | $ | 1,425,341 |
|
Unbilled receivables and other | 1,307,540 |
| | 1,368,482 |
|
Retentions receivable | 78,030 |
| | 73,732 |
|
Total receivables, net | $ | 2,679,176 |
| | $ | 2,867,555 |
|
Other information about receivables: | | | |
Amounts due from the United States federal government, included above, net of advanced billings | $ | 335,352 |
| | $ | 324,928 |
|
Claims receivable | $ | 53,394 |
| | $ | 78,634 |
|
Billed receivables consist of amounts invoiced to clients in accordance with the terms of our client contracts and are shown net of an allowance for doubtful accounts. We anticipate that substantially all of such billed amounts will be collected over the next twelve months.
Unbilled receivables and retentions receivable represent reimbursable costs and amounts earned and reimbursable under contracts in progress as of the respective balance sheet dates. Such amounts become billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones, or completion of the project. We anticipate that substantially all of such unbilled amounts will be billed and collected over the next twelve months.
Claims receivable are included in "Receivables" in the accompanying Consolidated Balance Sheets and represent certain costs incurred on contracts to the extent it is probable that such claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated.
Property, Equipment and Improvements, Net
Property, Equipment and Improvements, Net in the accompanying Consolidated Balance Sheets at June 26, 2015 and September 26, 2014 consisted of the following (in thousands):
|
| | | | | | | |
| June 26, 2015 | | September 26, 2014 |
Land | $ | 20,714 |
| | $ | 21,497 |
|
Buildings | 124,704 |
| | 128,584 |
|
Equipment | 612,236 |
| | 634,415 |
|
Leasehold improvements | 279,307 |
| | 287,814 |
|
Construction in progress | 20,117 |
| | 20,059 |
|
| 1,057,078 |
| | 1,092,369 |
|
Accumulated depreciation and amortization | (635,764 | ) | | (635,572 | ) |
| $ | 421,314 |
| | $ | 456,797 |
|
Long-term Debt
Jacobs and certain of its subsidiaries have a $1.6 billion long-term unsecured, revolving credit facility (the "2014 Facility") with a syndicate of large, U.S. and international banks and financial institutions. The 2014 Facility also provides an
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
accordion feature that allows the Company and the lenders to increase the facility amount to $2.1 billion. The 2014 Facility did not change interest rates for borrowings outstanding under the Company's prior credit facility, but did reduce the fees on the unused portion of the facility.
The total amount outstanding under the 2014 Facility in the form of direct borrowings at June 26, 2015 was $646.4 million. The Company has issued $2.5 million in letters of credit under the 2014 Facility leaving $951.1 million of available borrowing capacity under the 2014 Facility at June 26, 2015. In addition, the Company had $281.8 million issued under separate, committed and uncommitted letter-of-credit facilities for total issued letters of credit of $284.3 million at June 26, 2015.
The 2014 Facility expires in February 2020 and permits the Company to borrow under two separate tranches in U.S. dollars, certain specified foreign currencies, and any other currency that may be approved in accordance with the terms of the 2014 Facility. Depending on the Company's Consolidated Leverage Ratio, borrowings under the 2014 Facility will bear interest at either a eurocurrency rate plus a margin of between 1.0% and 1.5% or a base rate plus a margin of between 0% and 0.5%. The 2014 Facility also provides for a financial letter of credit subfacility of $300.0 million, permits performance letters of credit, and provides for a $50.0 million subfacility for swingline loans. Letters of credit are subject to fees based on the Company's Consolidated Leverage Ratio at the time any such letter of credit is issued. The Company pays a facility fee of between 0.100% and 0.250% per annum depending on the Company's Consolidated Leverage Ratio. Amounts outstanding under the 2014 Facility may be prepaid at the option of the Company without premium or penalty, subject to customary breakage fees in connection with the prepayment of eurocurrency loans. The 2014 Facility contains affirmative, negative, and financial covenants customary for financings of this type including, among other things, limitations on certain other indebtedness, loans and investments, liens, mergers, asset sales and transactions with affiliates. In addition, the 2014 Facility contains customary events of default. We were in compliance with our debt covenants at June 26, 2015.
Revenue Accounting for Contracts / Accounting for Joint Ventures
In general, we recognize revenue at the time we provide services. Depending on the commercial terms of the contract, we recognize revenues either when costs are incurred, or using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. Contract losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. For multiple contracts with a single customer we account for each contract separately. We also recognize as revenues, costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. A significant portion of the Company's revenue is earned on cost reimbursable contracts. The percentage of revenues realized by the Company by type of contract during fiscal 2014 can be found in Note 1—Description of Business and Basis of Presentation of Notes to Consolidated Financial Statements included in our 2014 Form 10-K.
Certain cost-reimbursable contracts include incentive-fee arrangements. The incentive fees in such contracts can be based on a variety of factors but the most common are the achievement of target completion dates, target costs, and/or other performance criteria. Failure to meet these targets can result in unrealized incentive fees. We recognize incentive fees based on expected results using the percentage-of-completion method of accounting. As the contract progresses and more information becomes available, the estimate of the anticipated incentive fee that will be earned is revised as necessary. We bill incentive fees based on the terms and conditions of the individual contracts. In certain situations, we are allowed to bill a portion of the incentive fees over the performance period of the contract. In other situations, we are allowed to bill incentive fees only after the target criterion has been achieved. Incentive fees which have been recognized but not billed are included in Receivables in the accompanying Consolidated Balance Sheets.
Certain cost-reimbursable contracts with government customers as well as certain commercial clients provide that contract costs are subject to audit and adjustment. In this situation, revenues are recorded at the time services are performed based upon the amounts we expect to realize upon completion of the contracts. Revenues are not recognized for non-recoverable costs. In those situations where an audit indicates that we may have billed a client for costs not allowable under the terms of the contract, we estimate the amount of such nonbillable costs and adjust our revenues accordingly.
When we are directly responsible for subcontractor labor or third-party materials and equipment, we reflect the costs of such items in both revenues and costs. On those projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not reflected in either revenues or costs.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
The following table sets forth pass-through costs included in revenues for each of the three and nine months ended June 26, 2015 and June 27, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Pass-through costs included in revenues | $ | 574,350 |
| | $ | 700,294 |
| | $ | 1,896,516 |
| | $ | 2,152,875 |
|
As is common to the industry, we execute certain contracts jointly with third parties through various forms of joint ventures and consortiums. Although the joint ventures own and hold the contracts with the clients, the services required by the contracts are typically performed by us and our joint venture partners, or by other subcontractors under subcontracting agreements with the joint ventures. The assets of our joint ventures, therefore, consist almost entirely of cash and receivables (representing amounts due from clients), and the liabilities of our joint ventures consist almost entirely of amounts due to the joint venture partners (for services provided by the partners to the joint ventures under their individual subcontracts) and other subcontractors. In general, at any given time, the equity of our joint ventures represents the undistributed profits earned on contracts the joint ventures hold with clients. Very few of our joint ventures have employees. None of our joint ventures have third-party debt or credit facilities. Our joint ventures, therefore, are simply mechanisms used to deliver engineering and construction services to clients. Rarely do they, in and of themselves, present any risk of loss to us or to our partners separate from those that we would carry if we were performing the contract on our own. Under U.S. GAAP, our share of losses associated with the contracts held by the joint ventures, if and when they occur, has always been reflected in our Consolidated Financial Statements.
Certain of our joint ventures meet the definition of a "variable interest entity" ("VIE"). As defined in U.S. GAAP, a VIE is a legal entity in which equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any one of the following three characteristics: (i) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance; (ii) the obligation to absorb the expected losses of the legal entity; or (iii) the right to receive the expected residual returns of the legal entity. Accordingly, entities issuing consolidated financial statements (i.e., a "reporting entity") shall consolidate a VIE if the reporting entity has a "controlling financial interest" in the VIE, as demonstrated by the reporting entity having both (i) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance; and (ii) the right to receive benefits from the VIE that could potentially be significant to the VIE or the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
In evaluating our VIEs for possible consolidation, we perform a qualitative analysis to determine whether or not we have a "controlling financial interest" in the VIE as defined by U.S. GAAP. We consolidate only those VIEs over which we have a controlling financial interest. For the Company’s unconsolidated joint ventures, we use the equity method of accounting. The Company does not currently participate in any significant VIEs in which it has a controlling financial interest.
Disclosures About Defined Pension Benefit Obligations
The following table presents the components of net periodic benefit cost recognized in earnings during each of the three and nine months ended June 26, 2015 and June 27, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
Component: | June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Service cost | $ | 9,988 |
| | $ | 10,529 |
| | $ | 26,824 |
| | $ | 31,401 |
|
Interest cost | 19,245 |
| | 20,270 |
| | 52,006 |
| | 60,221 |
|
Expected return on plan assets | (24,195 | ) | | (22,712 | ) | | (65,610 | ) | | (67,552 | ) |
Amortization of previously unrecognized items | 6,362 |
| | 4,941 |
| | 16,798 |
| | 14,617 |
|
Settlement loss | 111 |
| | 142 |
| | 270 |
| | 422 |
|
Net periodic benefit cost | $ | 11,511 |
| | $ | 13,170 |
| | $ | 30,288 |
| | $ | 39,109 |
|
Included in the above table are amounts relating to a U.S. pension plan, the participating employees of which are assigned to, and work exclusively on, a specific operating contract with the U.S. federal government. It is the expectation of the parties to this contract that the cost of this pension plan will be fully reimbursed by the U.S. federal government pursuant to applicable
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
cost accounting standards. The underfunded amount for this pension plan is included in "Other Noncurrent Assets" in the accompanying Consolidated Balance Sheets at June 26, 2015. Net periodic pension costs for this pension plan for the three and nine months ended June 26, 2015 were $1.5 million and $4.4 million, respectively, and three and nine months ended June 27, 2014 were $1.9 million and $5.8 million, respectively.
The following table presents certain information regarding Company cash contributions to our pension plans for fiscal 2015 (in thousands):
|
| | | |
Cash contributions made during the first nine months of fiscal 2015 | $ | 34,645 |
|
Cash contributions we expect to make during the remainder of fiscal 2015 | 9,967 |
|
Total | $ | 44,612 |
|
Other Comprehensive Income
The following table presents amounts reclassified from change in pension liabilities in other comprehensive income to direct cost of contracts and selling, general and administrative expenses in the Company's Consolidated Statements of Earnings for the three and nine months ended June 26, 2015 and June 27, 2014 related to the Company's defined benefit pension plans (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Amortization of Defined Benefit Items: | | | | | | | |
Actuarial losses | $ | (6,448 | ) | | $ | (4,939 | ) | | $(17,050) | | $(14,613) |
Prior service cost | 26 |
| | (28 | ) | | 73 |
| | (81 | ) |
Total Before Income Tax | (6,422 | ) | | (4,967 | ) | | (16,977 | ) | | (14,694 | ) |
Income Tax Benefit | 1,766 |
| | 1,403 |
| | 4,729 |
| | 4,152 |
|
Total Reclassifications, After-tax | $ | (4,656 | ) | | $ | (3,564 | ) | | $ | (12,248 | ) | | $ | (10,542 | ) |
Income Taxes
During the three months ended June 26, 2015, the Company completed the refinancing of certain international inter-company debt. The refinancing resulted in a one-time tax benefit of $23.1 million recorded in Income Tax Benefit (Expense) in the accompanying Consolidated Statements of Earnings.
Earnings Per Share and Certain Related Information
The following table (i) reconciles the denominator used to compute basic earnings per share ("EPS") to the denominator used to compute diluted EPS for the three and nine months ended June 26, 2015 and June 27, 2014; (ii) provides information regarding the number of non-qualified stock options and shares of restricted stock that were antidilutive and therefore disregarded in calculating the weighted average number of shares outstanding used in computing diluted EPS; and (iii) provides the number of shares of common stock issued from the exercise of stock options and the release of restricted stock (in thousands):
|
| | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Shares used to calculate EPS: | | | | | | | |
Weighted average shares outstanding (denominator used to compute basic EPS) | 123,392 |
| | 130,738 |
| | 126,004 |
| | 130,417 |
|
Effect of stock options and restricted stock | 1,209 |
| | 1,873 |
| | 1,235 |
| | 2,043 |
|
Denominator used to compute diluted EPS | 124,601 |
| | 132,611 |
| | 127,239 |
| | 132,460 |
|
Antidilutive stock options and restricted stock | 3,094 |
| | 2,101 |
| | 3,847 |
| | 2,088 |
|
Shares of common stock issued from the exercise of stock options and the release of restricted stock | 649 |
| | 724 |
| | 1,288 |
| | 1,590 |
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
Share Repurchases
On August 19, 2014, the Company's Board of Directors authorized a share repurchase program of up to $500 million of the Company's common stock. The following table summarizes the activity under this program from the authorization date (in thousands, except per-share amounts):
|
| | | | | | | | |
| Amount Authorized | | Average Price Per Share (1) | | Total Shares Retired | | | Shares Repurchased |
| $500,000 | | $45.0581 | | 10,017 | | | 10,017 |
| |
(1) | Includes commissions paid and calculated as the average price per share since the repurchase |
program authorization date.
Share repurchases may be executed through various means including, without limitation, open market transactions, privately negotiated transactions or otherwise. The share repurchase program does not obligate the Company to purchase any shares, and expires on August 19, 2017. The authorization for the share repurchase program may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. The timing of our share repurchases may depend upon market conditions, other uses of capital, and other factors.
On July 23, 2015, the Board of Directors approved a program to purchase up to an additional $500 million of the Company's common stock over the next three years. This approval is in addition to the $48.7 million of capacity remaining as of June 26, 2015 under the Company's August 2014 $500 million share repurchase authorization. The new share repurchase authorization is subject to the same general terms and conditions as the prior share repurchase authorization summarized above.
Commitments and Contingencies
In the normal course of business, we are subject to certain contractual guarantees, claims and litigation. The guarantees to which we are a party generally relate to project schedules and plant performance. Most of the claims and litigation in which we are involved has us as a defendant in workers' compensation; personal injury; environmental; employment/labor; professional liability; and other similar matters.
We maintain insurance coverage for various aspects of our business and operations. Our insurance programs have varying coverage limits and maximums, and insurance companies may and increasingly do seek to not pay any claims we might make. We have also elected to retain a portion of losses that occur through the use of various deductibles, limits, and retentions under our insurance programs. As a result, we may be subject to future liability for which we are only partially insured or completely uninsured. We intend to mitigate any such future liability by continuing to exercise prudent business judgment in negotiating the terms and conditions of our contracts. Our insurers are also subject to business risk and, as a result, one or more of them may be unable to fulfill their insurance obligations due to insolvency or otherwise.
Additionally, as a contractor providing services to the U.S. federal government and several of its agencies, we are subject to many levels of audits, investigations, and claims by, or on behalf of, the U.S. federal government with respect to our contract performance, pricing, costs, cost allocations, and procurement practices. Furthermore, our income, franchise, and similar tax returns and filings are also subject to audit and investigation by the Internal Revenue Service, most states within the U.S. as well as by various government agencies representing jurisdictions outside the U.S.
We record in our Consolidated Balance Sheets amounts representing our estimated liability relating to such claims, guarantees, litigation, and audits and investigations. We perform an analysis to determine the level of reserves to establish for claims that may be insured that are known and have been asserted against us, and for claims that may be insured that are believed to have been incurred based on actuarial analysis, but have not yet been reported to our claims administrators as of the respective balance sheet dates. We include any adjustments to such insurance reserves in our consolidated results of operations.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
June 26, 2015
(continued)
Management believes, after consultation with counsel, that such guarantees, litigation, U.S. government contract-related audits, investigations and claims, and income tax audits and investigations should not have any material adverse effect on our consolidated financial statements.
On August 9, 2014, the Company received a Notice of Arbitration from Motiva Enterprises LLC. The arbitration is
pending in Houston, Texas before the International Institute for Conflict Prevention and Resolution. In 2006, Motiva contracted
with Bechtel-Jacobs CEP Port Arthur Joint Venture (“BJJV”), a joint venture between Bechtel Corporation and Jacobs
Engineering Group, Inc. to perform professional services in connection with the expansion project at the Motiva Port Arthur,
TX refinery. In the Notice of Arbitration, Motiva asserts various causes of action and alleges entitlement to equitable and
monetary relief in excess of $7 billion. BJJV has denied liability and is vigorously defending these claims. The arbitration hearing is expected to occur in the fall of 2016. The Company does not expect this matter to have a material adverse effect on its consolidated financial statements.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
General
The purpose of this Management’s Discussion and Analysis ("MD&A") is to provide a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition since the most recent fiscal year-end, and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year. In order to better understand such changes, readers of this MD&A should also read:
| |
• | The discussion of the critical and significant accounting policies used by the Company in preparing its consolidated financial statements. The most current discussion of our critical accounting policies appears in Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2014 Form 10-K, and the most current discussion of our significant accounting policies appears in Note 2—Significant Accounting Polices in Notes to Consolidated Financial Statements of our 2014 Form 10-K; |
| |
• | The Company’s fiscal 2014 audited consolidated financial statements and notes thereto included in our 2014 Form 10-K; and |
| |
• | Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2014 Form 10-K. |
In addition to historical information, this MD&A may contain forward-looking statements that are not based on historical fact. When used herein, words such as "expects", "anticipates", "believes", "seeks", "estimates", "plans", "intends", and similar words identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although such statements are based on management’s current estimates and expectations, which we believe to be reasonable, and currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause our actual results to differ materially from what may be inferred from the forward-looking statements. Some of the factors that could cause or contribute to such differences are listed and discussed in Item 1A—Risk Factors, included in our 2014 Form 10-K. We undertake no obligation to release publicly any revisions or updates to any forward-looking statements. We encourage you to read carefully the risk factors described in other documents we file from time to time with the United States Securities and Exchange Commission.
The 2015 Restructuring
During the second quarter of fiscal 2015, the Company commenced a series of initiatives intended to improve operational efficiency, reduce costs, and better position itself to drive growth of the business in the future (the "2015 Restructuring"). Actions related to the 2015 Restructuring completed during the second and third quarters of fiscal 2015 include involuntary terminations, the abandonment of certain leased offices, combining operational organizations, and the co-location of employees into other existing offices. We are not exiting any service types or client end-markets. The Company's consolidated results of operations for the third quarter of fiscal 2015 include a $48.0 million pre-tax impact relating to costs associated with the 2015 Restructuring. The costs of the 2015 Restructuring are included in selling, general, and administrative expense in the accompanying Consolidated Statements of Earnings, net of a $4.4 million reduction in bonus plan expense. The Company expects to largely complete the 2015 Restructuring by the end of the first quarter of fiscal 2016. The following table summarizes the effects of the 2015 Restructuring on the Company's consolidated results of operations for the three and nine month periods ended June 26, 2015 (in thousands, except for earnings per share):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 26, 2015 | | June 26, 2015 |
| U.S. GAAP | | Effects of 2015 Restructuring | | Without 2015 Restructuring | | U.S. GAAP | | Effects of 2015 Restructuring | | Without 2015 Restructuring |
Consolidated pre-tax earnings (loss) | $ | 97,188 |
| | $ | (43,622 | ) | | $ | 140,810 |
| | $ | 380,846 |
| | $ | (57,660 | ) | | $ | 438,506 |
|
Tax (expense) benefit | 120 |
| | 13,521 |
| | (13,401 | ) | | (89,233 | ) | | 17,943 |
| | (107,176 | ) |
Net earnings of the Group | 97,308 |
| | (30,101 | ) | | 127,409 |
| | 291,613 |
| | (39,717 | ) | | 331,330 |
|
Non-controlling interests | (6,246 | ) | | — |
| | (6,246 | ) | | (18,505 | ) | | — |
| | (18,505 | ) |
Net earnings of Jacobs | $ | 91,062 |
| | $ | (30,101 | ) | | $ | 121,163 |
| | $ | 273,108 |
| | $ | (39,717 | ) | | $ | 312,825 |
|
Diluted earnings (loss) per share | $ | 0.73 |
| | $ | (0.24 | ) | | $ | 0.97 |
| | $ | 2.15 |
| | $ | (0.31 | ) | | $ | 2.46 |
|
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The 2015 Inter-company Debt Refinancing
During the third quarter of fiscal 2015, the Company completed the refinancing of certain international inter-company debt (the "2015 Inter-company Debt Refinancing"). The 2015 Inter-company Debt Refinancing resulted in a one-time tax benefit of $23.1 million, or $0.19 per share.
The 2014 Restructuring and Other Unusual Events Affecting Fiscal 2014
During the third quarter of fiscal 2014, the Company initiated the "2014 Restructuring". In recognition of the slowdown in several of the Company's clients' end markets, the Company implemented a series of initiatives which, much like the 2015 Restructuring, were intended to improve operational efficiency and reduce costs, and also to accelerate the integration of SKM.
In addition to the 2014 Restructuring and the acquisition of SKM, the Company's consolidated results of operations for fiscal 2014 were affected by the following discrete events:
| |
• | $6.8 million, or $0.05 per diluted share, increase to net earnings due to the favorable resolution of an international tax matter in the first quarter of fiscal 2014 ; as a result of these events, approximately $4.1 million of accrued interest expense was reversed; |
| |
• | $6.4 million, or $0.05 per diluted share, increase to net earnings related to a gain on the sale of certain intellectual property in the second quarter of fiscal 2014 ; |
| |
• | $22.7 million, or $0.18 per diluted share, decrease to net earnings relating to certain specific operational events at SKM and SKM transaction-related costs and expenses incurred during the first half of the fiscal year; and |
| |
• | $22.3 million, or $0.16 per diluted share, decrease to net earnings due to lower margins associated with certain projects in Europe combined with unusual weather effects in the second quarter of fiscal 2014. |
As used herein, the term "2014 Events" refers to the combined effects of both the 2014 Restructuring and the unusual events described above. Within this MD&A, the Company may disclose and discuss its results of operations before the effects of the 2015 Restructuring, the 2014 Events and/or certain other transactions and events described herein. Although such information is non-GAAP in nature, it is presented because management believes it provides a better view of the Company’s operating results to investors to assess the Company’s performance and operating trends. As used herein, the terms "adjusted earnings" and "adjusted net earnings" refer to the Company's GAAP earnings as adjusted to eliminate the effects of the 2014 Events (when used in reference to fiscal 2014 results of operations) and the 2015 Restructuring (when used in reference to fiscal 2015 results of operations).
Overview - Three and Nine Months Ended June 26, 2015
The Company's GAAP net earnings for the three months ended June 26, 2015 increased by $26.2 million, or 40.4%, compared to the corresponding period last year. The Company's GAAP net earnings for the nine months ended June 26, 2015 increased $31.1 million, or 12.8%, compared to the corresponding period last year. Included in net earnings for both the three and nine month periods ended June 26, 2015 is the 2015 Inter-company Debt Refinancing. Excluding the effects of the 2015 Restructuring and the 2014 Restructuring, the Company's adjusted net earnings for the three months ended June 26, 2015 increased by $9.4 million, or 8.4%, compared to the corresponding period last year. Excluding the impacts of the 2015 Restructuring and the 2014 Events, the Company's adjusted net earnings for the nine months ended June 26, 2015 decreased $8.0 million, or 2.5%, compared to the corresponding period last year.
The effects of lower prices of crude oil and certain commodities, including copper and iron ore, continue to present headwinds for clients operating in the Refining-Downstream, Oil & Gas-Upstream, and Mining and Minerals industries and markets. Our Infrastructure and National Government Programs groups continue to perform well. Actions taken pursuant to the 2015 Restructuring have begun to lower the Company's overall cost structure, which is contributing to higher earnings in the third quarter of fiscal 2015 and helping to offset the negative pressures we are experiencing in certain of our markets.
The Company's results for the nine months ended June 26, 2015 when compared to the corresponding period last year were positively impacted by (i) the SKM acquisition, which was included in the full nine months results of fiscal 2015 (39 weeks)compared to only 28 weeks for the corresponding period last year and, to a lesser degree, (ii) the other acquisitions completed during fiscal 2014 (described below). Also influencing the comparability of the Company's fiscal 2015 results of operations to fiscal 2014 were the 2015 Restructuring and the 2014 Events.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following table summarizes the effects of the 2014 Events on the Company's consolidated results of operations for the three and nine month periods ended June 27, 2014 (in thousands, except for earnings per share):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| June 27, 2014 | | June 27, 2014 |
| U.S. GAAP | | Effects of 2014 Restructuring | | Without 2014 Restructuring | | U.S. GAAP | | Effects of 2014 Events | | Without 2014 Events |
Consolidated pre-tax earnings (loss) | $ | 118,046 |
| | $ | (56,654 | ) | | $ | 174,700 |
| | $ | 397,362 |
| | $ | (104,865 | ) | | $ | 502,227 |
|
Tax (expense) benefit | (46,737 | ) | | 9,702 |
| | (56,439 | ) | | (136,304 | ) | | 26,112 |
| | (162,416 | ) |
Net earnings of the Group | 71,309 |
| | (46,952 | ) | | 118,261 |
| | 261,058 |
| | (78,753 | ) | | 339,811 |
|
Non-controlling interests | (6,467 | ) | | — |
| | (6,467 | ) | | (19,024 | ) | | — |
| | (19,024 | ) |
Net earnings of Jacobs | $ | 64,842 |
| | $ | (46,952 | ) | | $ | 111,794 |
| | $ | 242,034 |
| | $ | (78,753 | ) | | $ | 320,787 |
|
Diluted earnings (loss) per share | $ | 0.49 |
| | $ | (0.35 | ) | | $ | 0.84 |
| | $ | 1.83 |
| | $ | (0.59 | ) | | $ | 2.42 |
|
Backlog at June 26, 2015 was $18.8 billion, and represents an increase of 1.8% over backlog at June 27, 2014. Backlog remains near record levels despite the negative effects on backlog stemming from foreign exchange. New prospects and new sales remain strong and the Company continues to have a positive outlook for many of the industry groups and markets in which our clients operate.
During the three and nine months ended June 26, 2015, the Company repurchased and retired 2.7 million and 8.5 million shares, respectively, of its common stock under its share repurchase program. Total cash spent for the shares repurchased during the three and nine months ended June 26, 2015 was $118.7 million and $372.9 million, respectively. Since program inception, the Company has repurchased and retired approximately 10 million shares of its common stock at a total cash cost of approximately $451.3 million.
Business Combinations Completed During Fiscal 2014
In December 2013, the Company acquired all of the outstanding equity interests in SKM. The acquisition of SKM is described in more detail under Notes to Consolidated Financial Statements, above, as well as on page 7 and beginning on page F-11 of our 2014 Form 10-K.
We also completed a number of other acquisitions during fiscal 2014 including Federal Network Services LLC ("FNS", formerly a subsidiary of Verizon); Eagleton Engineering, LLC; FMHC Corporation; Stobbarts (Nuclear) Limited; Trompeter Enterprises; and MARMAC Field Services, Inc. The results of operations of these other acquisitions were not material, individually or in the aggregate, to the Company's consolidated results of operations for fiscal 2014. During fiscal 2014, we also acquired an additional 15% interest in Jacobs, Zamel and Turbag Consulting Engineers Company ("ZATE"). This transaction brought the Company's ownership in ZATE to 75%.
Consistent with other business combinations we have completed in the past, we began integrating SKM and the other businesses we acquired last year into our existing operations almost immediately after each business was acquired. Accordingly, it is not practicable to provide complete financial information for fiscal 2015 on a stand-alone basis for any of the businesses we acquired last year.
Results of Operations
Net earnings for the third quarter of fiscal 2015 ended June 26, 2015 increased $26.2 million, or 40.4%, to $91.1 million (or $0.73 per diluted share) from $64.8 million (or $0.49 per diluted share) for the corresponding period last year. For the nine months ended June 26, 2015, net earnings increased $31.1 million, or 12.8%, to $273.1 million (or per $2.15 diluted share) from $242.0 million (or $1.83 per diluted share) for the corresponding period last year. Included in net earnings for both the third quarter of fiscal 2015 and the nine months ended June 26, 2015 are the costs associated with the 2015 Restructuring and the tax benefit associated with the 2015 Inter-company Debt Refinancing discussed above. Included in the net earnings for the third quarter of fiscal 2014 were costs associated with the 2014 Restructuring. Included in the net earnings for the nine months ended June 27, 2014 are the costs associated with the 2014 Events. Excluding the effects of the 2015 Restructuring and the 2014 Restructuring, adjusted net earnings for the third quarter of fiscal 2015 ended June 26, 2015 increased $9.4 million, or 8.4%, to $121.2 million (or $0.97 per diluted share) from $111.8 million (or $0.84 per diluted share) for the corresponding period last year. Excluding the effects of the 2015 Restructuring and the 2014 Events, adjusted net earnings for the nine months ended
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
June 26, 2015 decreased $8.0 million, or 2.5%, to $312.8 million (or $2.46 per diluted share) from $320.8 million (or $2.42 per diluted share) for the corresponding period last year.
Total revenues for the third quarter of fiscal 2015 decreased by $324.3 million, or 10.0%, to $2.91 billion, from $3.23 billion for the third quarter of fiscal 2014. For the nine months ended June 26, 2015, total revenues decreased by $0.5 billion, or 5.1%, to $9.0 billion, from $9.5 billion for the corresponding period last year. The decreases in revenue were due primarily to the impact of changes in foreign exchange rates, reduced pass through revenues, and lower volumes in the Mining and Minerals, Refining - Downstream, Oil & Gas - Upstream, and the Chemicals and Polymers markets.
The Company's results of operations for the three and nine months ended June 26, 2015 were impacted by changes in exchange rates over the corresponding periods last year in Canada, Europe (the "Euro"), Australia, and the U.K.
The following table sets forth our revenues by the various types of services we provide for the three and nine months ended June 26, 2015 and June 27, 2014, respectively (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
Technical Professional Services Revenues: | | | | | | | |
Project Services | $ | 1,513,942 |
| | $ | 1,729,093 |
| | $ | 4,719,381 |
| | $ | 4,960,235 |
|
Process, Scientific, and Systems Consulting | 284,847 |
| | 164,002 |
| | 874,000 |
| | 477,358 |
|
Total Technical Professional Services Revenues | 1,798,789 |
| | 1,893,095 |
| | 5,593,381 |
| | 5,437,593 |
|
Field Services Revenues: | | | | | | | |
Construction | 826,822 |
| | 1,045,473 |
| | 2,515,879 |
| | 3,119,201 |
|
Operations and Maintenance ("O&M") | 281,930 |
| | 293,223 |
| | 888,618 |
| | 919,921 |
|
Total Field Services Revenues | 1,108,752 |
| | 1,338,696 |
| | 3,404,497 |
| | 4,039,122 |
|
Total Revenues | $ | 2,907,541 |
| | $ | 3,231,791 |
| | $ | 8,997,878 |
| | $ | 9,476,715 |
|
Project Services revenues for the three months ended June 26, 2015 decreased $215.2 million, or 12.4%, from the corresponding period last year. Project Services revenues for the nine months ended June 26, 2015 decreased $240.9 million, or 4.9%, from the corresponding period last year. These decreases in Project Services revenues were due primarily to the lower business volumes in the North American and U.K. Refining - Downstream and Chemicals and Polymers markets, driven principally by the recent decline in oil and other commodity prices, combined with the effects of the strengthening U.S. dollar.
Process, Scientific, and Systems Consulting revenues for the three months ended June 26, 2015 increased $120.8 million, or 73.7%, from the corresponding period last year. Process, Scientific, and Systems Consulting revenues for the nine months ended June 26, 2015 increased $396.6 million, or 83.1%, from the corresponding period last year. The increases were due primarily to the FNS acquisition completed during the fourth quarter of fiscal 2014. The revenues in this service type relate to science, engineering, and technical support services provided primarily to the U.S. federal government clients and its various agencies.
Construction revenues for the three months ended June 26, 2015 decreased $218.7 million, or 20.9%, from the corresponding period last year. Construction revenues for the nine months ended June 26, 2015 decreased $603.3 million, or 19.3%, from the corresponding period last year. The decreases are primarily due to the winding down of a U.S. project in the Mining and Minerals market along with lower volumes in the market overall.
Operations and Maintenance revenues for the three months ended June 26, 2015 decreased $11.3 million, or 3.9%, from the corresponding period last year. Operations and Maintenance revenues for the nine months ended June 26, 2015 decreased $31.3 million, or 3.4%, from the corresponding period last year. The decreases were primarily due to lower volume in the National Government Programs market.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The following table sets forth our revenues by the industry groups and markets in which our clients operate for the three and nine months ended June 26, 2015 and June 27, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| June 26, 2015 | | June 27, 2014 | | June 26, 2015 | | June 27, 2014 |
National Government Programs | $ | 642,124 |
| | $ | 538,296 |
| | $ | 1,928,663 |
| | $ | 1,617,269 |
|
Chemicals and Polymers | 547,915 |
| | 773,153 |
| | 1,858,147 |
| | 2,202,097 |
|
Refining - Downstream | 466,298 |
| | 560,022 |
| | 1,405,562 |
| | 1,705,625 |
|
Infrastructure | 388,711 |
| | 352,422 |
| | 1,168,384 |
| | 1,000,189 |
|
Oil & Gas - Upstream | 224,883 |
| | 280,560 |
| | 676,662 |
| | 683,025 |
|
Buildings | 223,305 |
| | 215,965 |
| | 691,266 |
| | 617,129 |
|
Industrial and Other | 204,396 |
| | 158,149 |
| | 563,090 |
| | 558,631 |
|
Pharmaceuticals and Biotechnology | 112,911 |
| | 88,453 |
| | 347,078 |
| | 339,880 |
|
Mining and Minerals | 96,998 |
| | 264,771 |
| | 359,026 |
| | 752,870 |
|
| $ | 2,907,541 |
| | $ | 3,231,791 |
| | $ | 8,997,878 |
| | $ | 9,476,715 |
|
For the three months ended June 26, 2015, revenues from clients operating in the National Government Programs market increased $103.8 million, or 19.3%, to $642.1 million from $538.3 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues increased $311.4 million, or 19.3%, to $1.9 billion from $1.6 billion for the corresponding period last year. The increases were due primarily to the FNS acquisition completed during the fourth quarter of fiscal 2014.
For the three months ended June 26, 2015, revenues from projects for clients operating in the Chemicals and Polymers industries decreased $225.2 million, or 29.1%, to $547.9 million from $773.2 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues decreased $344.0 million, or 15.6%, to $1.9 billion from $2.2 billion for the corresponding period last year. The decreases in revenues were due primarily to the normal winding-down and completion of certain projects in the U.S, the U.K, and Europe. Although we continue to receive new awards for FEED (front-end engineering design) and pre-FEED services, larger integrated oil companies continue to re-evaluate their investment opportunities considering current oil prices. We also have long-term relationships with numerous chemical companies around the world, and we continue to believe this industry group will provide strong growth opportunities in the long-term. The acquisition of SKM strengthened our capabilities for customers operating in this market as evidenced by a significant professional services contract we were awarded for what will be the largest chlorine dioxide plant in the world, located in Asia.
For the three months ended June 26, 2015, revenues from clients operating in the Refining - Downstream market decreased $93.7 million, or 16.7%, to $466.3 million from $560.0 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues decreased $300.1 million, or 17.6%, to $1.4 billion from $1.7 billion for the corresponding period last year. The decreases occurred within our operations in Canada, Europe, and the U.K.
For the three months ended June 26, 2015, revenues from clients operating in the Infrastructure market increased $36.3 million, or 10.3%, to $388.7 million from $352.4 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues increased $168.2 million, or 16.8%, to $1.2 billion from $1.0 billion for the corresponding period last year. The increases were due primarily to increased activity in the U.K., the U.S., and Australia. We believe market conditions may continue to improve within this industry group, particularly for transportation, water, and certain other projects around the globe (although there is higher uncertainty in U.S. federal funding for certain highway projects). One example is the Asset Management Programme (AMP6) cycle in the U.K., where we provide a full range of professional services, including regulatory strategic consultancy, engineering, project support and asset maintenance.
For the three months ended June 26, 2015, revenues on projects for clients operating in the Oil & Gas-Upstream market decreased $55.7 million, or 19.8%, to $224.9 million from $280.6 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues decreased $6.4 million, or 0.9%, to $676.7 million from $683.0 million for the corresponding period last year. The Company believes that the recent decline in crude oil prices has dampened our client's near-term capital spending plans. As a result, we see certain clients deploying more of their capital budgets to sustaining capital-type programs (small-cap projects and maintenance-driven work), an area where the Company is strong.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
For the three months ended June 26, 2015, revenues from clients operating in the Buildings market increased $7.3 million, or 3.4%, to $223.3 million from $216.0 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues increased $74.1 million, or 12.0%, to $691.3 million from $617.1 million for the corresponding period last year. We saw growth globally with health care, higher education, mission critical, and certain other technically complex buildings and facilities supported by the acquisition of SKM. We view the Buildings market as improving as our business in this industry group continues to shift towards projects for clients in the private sector.
For the three months ended June 26, 2015, revenues from clients operating in the Mining and Minerals market decreased $167.8 million, or 63.4%, to $97.0 million from $264.8 million for the corresponding period last year. For the nine months ended June 26, 2015, revenues decreased $393.8 million, or 52.3%, to $359.0 million from $752.9 million for the corresponding period last year. The decreases in revenues in the fiscal 2015 periods were due to the winding down of several projects in North and South America and Australia without significant new work being added. Globally, continuing pressure on commodity prices have caused our clients in these industries to behave more conservatively when it comes to new spend. It is possible that this situation may continue for the foreseeable future. Accordingly, the Company is refocusing and reallocating it's resources onto brownfield and sustaining capital-type projects. Longer-term, we believe we are well positioned to realize incremental business when the current pricing environment improves.
Direct costs of contracts for the third quarter of fiscal 2015 decreased $247.1 million, or 9.3%, to $2.4 billion from $2.7 billion for the corresponding period last year. Direct costs of contracts for the nine months ended June 26, 2015 decreased $0.4 billion, or 5.6%, to $7.5 billion from $7.9 billion for the corresponding period last year. Direct costs of contracts include all costs incurred in connection with and directly for the benefit of client contracts, including depreciation and amortization relating to assets used in providing the services required by the related projects. The level of direct costs of contracts may fluctuate between reporting periods due to a variety of factors, including the amount of pass-through costs we incur during a period. On those projects where we are responsible for subcontract labor or third-party materials and equipment, we reflect the amounts of such items in both revenues and costs (and we refer to such costs as "pass-through costs"). On other projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not considered pass-through costs and are, therefore, not reflected in either revenues or costs. To the extent that we incur a significant amount of pass-through costs in a period, our direct costs of contracts are likely to increase as well.
Pass-through costs for the third quarter of fiscal 2015 decreased $125.9 million, or 18.0%, to $574.4 million from $700.3 million for the corresponding period last year. Pass-through costs for the nine months ended June 26, 2015 decreased $256.4 million, or 11.9%, to $1.9 billion from $2.2 billion for the corresponding period last year. In general, pass-through costs are more significant on projects that have a higher content of field services activities. Pass-through costs are generally incurred at specific points during the life cycle of a project and are highly dependent on the needs of our individual clients and the nature of the clients’ projects. However, because we have hundreds of projects which start at various times within a fiscal year, the effect of pass-through costs on the level of direct costs of contracts can vary between fiscal years without there being a fundamental or significant change to the underlying business. The change in pass-through costs for the three and none months ended June 26, 2015 when compared to the corresponding periods last year is due primarily to the decline in our field services activity.
As a percentage of revenues, direct costs of contracts for the three and nine months ended June 26, 2015 was 83.3% and 83.4%, respectively. This compares to 82.6% and 83.8% for the three and nine months ended June 27, 2014, respectively. The relationship between direct costs of contracts and revenues will fluctuate between reporting periods depending on a variety of factors including the mix of business during the reporting periods being compared as well as the level of margins earned from the various types of services provided. Generally, the more procurement we do on behalf of our clients (i.e., where we purchase equipment and materials for use on projects and/or procure subcontracts in connection with projects) and the more field services revenues we have relative to technical, professional services revenues, the higher the ratio will be of direct costs of contracts to revenues. Because revenues from pass-through costs typically have lower margin rates associated with them, it is not unusual for us to experience an increase or decrease in such revenues without experiencing a corresponding increase or decrease in our gross margins and operating profit.
Selling, general and administrative ("SG&A") expenses for the third quarter of fiscal 2015 decreased $53.6 million, or 12.3%, to $384.2 million from $437.8 million for the corresponding period last year. SG&A expenses for the nine months ended June 26, 2015 decreased $37.3 million, or 3.3%, to $1.10 billion from $1.14 billion for the corresponding period last year. The decrease for the three and nine months periods as compared to the prior year was due primarily to lower costs stemming from the 2014 Restructuring, which were partially offset by increased costs related to the 2015 Restructuring. Excluding the impact of the 2015 Restructuring and the 2014 Restructuring, adjusted SG&A expenses for the third quarter of fiscal 2015 decreased $40.6 million, or 10.7%, to $340.5 million from $381.1 million for the corresponding period last year. Excluding the effects of the 2015 Restructuring and the 2014 Events, adjusted SG&A expenses for the nine months ended June 26, 2015 decreased $21.8 million, or 2.0%, to $1.05 billion from $1.07 billion for the corresponding period last year.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
Net interest expense for the three and nine months ended June 26, 2015 was $3.8 million and $9.8 million, respectively as compared to $2.9 million and $3.1 million for the corresponding period last year. Included in net interest expense for the nine months ended June 27, 2014 was the reversal of $4.1 million of accrued interest expense recorded in connection with income tax liabilities relating to certain contested international tax matters which were favorably resolved during the first quarter of fiscal 2014. Adjusting for this reversal of expense, net interest expense for the nine months ended June 27, 2014 was $7.2 million.
The Company's effective income tax rate for the third quarter ended June 26, 2015 declined to (0.1%) from 39.6% for the corresponding period last year. The Company's effective income tax rate for the nine months ended June 26, 2015 declined to 23.4% from 34.3% for the corresponding period in fiscal 2014. The decrease in the tax rates for both the three and nine months ended June 26, 2015 as compared to the corresponding periods last year was primarily the result of the $23.1 million, or $0.19 per share, tax benefit related to the 2015 Inter-company Debt Refinancing discussed earlier. Also contributing to the decrease in the tax rate for the nine months ended June 26, 2015 when compared to the corresponding period last year were the benefits realized by other, individually insignificant discrete and non-discrete items realized in the third quarter of fiscal 2015.
Backlog Information
We include in backlog the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Our policy with respect to O&M contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For national government programs (other than national government O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, excluding option periods. Because of the nature, size, expected duration, funding commitments, and the scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts.
Consistent with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client. In a situation where a client terminates a contract, we typically are entitled to receive payment for work performed up to the date of termination, and in certain instances, we may be entitled to allowable termination and cancellation costs. While management uses all information available to it to determine backlog, our backlog at any given time is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein.
Because certain contracts (for example, contracts relating to large engineering, procurement, and construction projects as well as national government programs) can cause large increases to backlog in the fiscal period in which we recognize the award, and because many of our contracts require us to provide services that span over a number of fiscal quarters (and sometimes over fiscal years), we evaluate our backlog on a year-over-year basis, rather than on a sequential, quarter-over-quarter basis.
The following table summarizes our backlog at June 26, 2015 and June 27, 2014 (in millions):
|
| | | | | | | |
| June 26, 2015 | | June 27, 2014 |
Technical professional services | $ | 12,189.2 |
| | $ | 12,324.2 |
|
Field services | 6,624.0 |
| | 6,163.0 |
|
Total | $ | 18,813.2 |
| | $ | 18,487.2 |
|
Our backlog increased $0.3 billion, or 1.8%, to $18.8 billion at June 26, 2015 from $18.5 billion at June 27, 2014. Backlog at June 26, 2015 includes new awards from clients operating in many of the industry groups and markets we serve, and in particular the Chemicals, Infrastructure, and National Governments Programs industry groups and markets. Backlog remains near record levels despite the negative effects on backlog stemming from foreign exchange.
Liquidity and Capital Resources
At June 26, 2015, our principal sources of liquidity consisted of $553.6 million of cash and cash equivalents and $951.1 million of available borrowing capacity under our $1.6 billion revolving credit facility (the "2014 Facility"; refer to the Note Long-term Debt in Notes to Consolidated Financial Statements appearing under Part 1 - Item 1 of this Quarterly Report on Form 10-Q). We finance much of our operations and growth through cash generated by our operations.
During the nine months ended June 26, 2015, our cash and cash equivalents decreased by $179.1 million from $732.6 million at September 26, 2014 to $553.6 million at June 26, 2015. This compares to a net decrease of $483.8 million of cash and cash equivalents during the nine months ended June 27, 2014.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The three most significant factors contributing to the difference in the Company's consolidated cash flows during the nine months ended June 26, 2015 as compared to the corresponding period last year are: (i) the $1.2 billion reduction in cash used to acquire businesses (the Company completed no business acquisitions during the nine months ended June 26, 2015), partially off-set by (ii) $443.8 million of additional cash used during fiscal 2015 to pay-down the Company's long-term debt and (iii) $372.9 million of cash used during fiscal 2015 to repurchase shares of the Company's common stock.
Our operations provided net cash inflows of $386.8 million during the nine months ended June 26, 2015. This compares to net cash inflows of $485.2 million for the corresponding period last year. The $98.5 million decrease in cash flows from operating activities during the nine months ended June 26, 2015 as compared to the corresponding period last year was due primarily to a $182.5 million decrease in cash generated from changes within our working capital accounts (discussed below) offset in part by an increase in net earnings.
With respect to the Company's working capital accounts, the Company's cash flows from operations are greatly affected by the cost-plus nature of our customer contracts. Because such a high percentage of our revenues is earned on cost-plus type contracts, and due to the significance of revenues relating to pass-through costs, most of the costs we incur are included in invoices we send to clients. Although we continually monitor our accounts receivable, we manage the operating cash flows of the Company by managing the working capital accounts in total, rather than by the individual elements. The primary elements of the Company’s working capital accounts are accounts receivable, accounts payable, and billings in excess of cost. Accounts payable consist of obligations to third parties relating primarily to costs incurred for projects which are generally billable to clients. Accounts receivable consist of amounts due from our clients — a substantial portion of which is for project-related costs. Billings in excess of cost consist of billings to and payments from our clients for costs yet to be incurred.
This relationship between revenues and costs, and between receivables and payables, is unique to our industry, and facilitates review of our liquidity at the total working capital level. The $182.5 million decrease in cash flows relating to our working capital accounts is not indicative of any known trend within our operations and was due primarily to the timing of cash receipts and payments within our working capital accounts.
Also contributing to the decrease in cash flows relating to our working capital accounts were the fiscal 2015 payments of liabilities accrued as part of the 2014 Restructuring and the timing of income tax payments in the U.S. and Europe.
With respect to the Company's trade accounts receivable, we believe, in general, that our credit risk is not significant in spite of the fact we provide services to clients in a number of countries outside the U.S. Our private sector customers include large, well-known, and well-established multi-national companies, and our government customers consist of national, state, and local agencies located principally in the U.S., the U.K., and Australia. We have not historically experienced significant collection issues with either of our governmental or non-governmental customers.
We used $63.7 million of cash and cash equivalents for investing activities during the nine months ended June 26, 2015 as compared to $1.3 billion used during the corresponding period last year. The decrease is due to the absence of business acquisitions for the for the nine months ended June 26, 2015 as compared to the corresponding period last year when the Company used $1.2 billion ($1.1 billion net of cash acquired) primarily for the acquisition of SKM.
Our financing activities resulted in net cash outflows of $427.1 million during the nine months ended June 26, 2015. This compares to net cash inflows of $380.2 million during the corresponding period last year. The $807.3 million in incremental cash outflows during fiscal 2015 as compared to the previous year was due primarily to (i) a $443.8 million increase in cash used to pay-off long-term debt during fiscal 2015, combined with (ii) $372.9 million used to repurchase shares of Company common stock (discussed in further detail in Part II, Item 2 of this Quarterly Report on Form 10-Q). Substantially all of the amounts borrowed during fiscal 2014 under our 2014 Facility was used to fund the Company's business acquisitions completed last year.
The Company had $553.6 million of cash and cash equivalents at June 26, 2015. Of this amount, approximately $156.1 million was held in the U.S. and $397.5 million was held outside of the U.S., primarily in Canada, Australia, the U.K., and the Eurozone. Other than the tax cost of repatriating funds to the U.S. (see Note 9—Income Taxes of Notes to Consolidated Financial Statements included in our 2014 Form 10-K), there are no material impediments to repatriating these funds to the U.S.
We believe we have adequate liquidity and capital resources to fund our operations, support our acquisition strategy, and service our debt for the next twelve months. We had $553.6 million in cash and cash equivalents at June 26, 2015, and our consolidated working capital position was $1.4 billion at that date. In addition, there was $951.1 million of borrowing capacity remaining under the 2014 Facility at June 26, 2015. We believe that the capacity, terms and conditions of the 2014 Facility, combined with cash on-hand and the other committed and uncommitted facilities we have in place, are adequate for our working capital and general business requirements for the next twelve months.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
The Company had $284.3 million of letters of credit outstanding at June 26, 2015. Of this amount, $2.5 million was issued under the 2014 Facility and $281.8 million was issued under separate, committed and uncommitted letter-of-credit facilities.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We do not enter into derivative financial instruments for trading, speculation or other purposes that would expose the Company to market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and currency exchange rates.
Interest Rate Risk
Please see the Note Long-term Debt in Notes to Consolidated Financial Statements appearing under Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for a discussion of the 2014 Facility.
Foreign Currency Risk
In situations where our operations incur contract costs in currencies other than their functional currency, we attempt to have a portion of the related contract revenues denominated in the same currencies as the costs. In those situations where revenues and costs are transacted in different currencies, we sometimes enter into foreign exchange contracts in order to limit our exposure to fluctuating foreign currencies. We follow the provisions of ASC 815—Derivatives and Hedging in accounting for our derivative contracts. The Company does not currently have exchange rate sensitive instruments that would have a material effect on our consolidated financial statements or results of operations.
| |
Item 4. | Controls and Procedures. |
The Company’s management, with the participation of its Executive Chairman (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of the Company’s disclosure controls and procedures as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of June 26, 2015, the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on that evaluation, the Executive Chairman (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date.
There were no changes in the Company’s internal control over financial reporting during the quarter ended June 26, 2015 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
| |
Item 1. | Legal Proceedings. |
The information required by this Item 1 is included in the Note Commitments and Contingencies included in the Notes to Consolidated Financial Statements appearing under Part I - Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Please refer to Item 1A—Risk Factors in our 2014 Form 10-K, which is incorporated herein by reference, for a discussion of some of the factors that have affected our business, financial condition, and results of operations in the past and which could affect us in the future. There have been no material changes to those risk factors during the period covered by this Quarterly Report on Form 10-Q.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
There were no sales of unregistered equity securities during the third quarter of fiscal 2015.
Share Repurchases
On August 19, 2014, the Board of Directors approved a program to repurchase up to $500 million of the Company's common stock over the next three years. Share repurchases may be executed through various means including, without limitation, open market transactions, privately negotiated transactions or otherwise. The share repurchase program does not oblige the Company to purchase any shares. The authorization for the share repurchase program may be terminated, increased, or decreased by the Company's Board of Directors in its discretion at any time. The timing of our share repurchases may depend upon market conditions, other uses of capital, and other factors.
A summary of repurchases of our common stock each fiscal month during the third quarter of fiscal 2015 is as follows (in thousands, except per-share amounts):
|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share (1) | | Total Numbers of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
March 28, 2015 through April 24, 2015 | | 808,625 |
| | $ | 46.0456 |
| | 808,625 |
| | $ | 130,159 |
|
April 25, 2015 through May 22, 2015 | | 926,300 |
| | $ | 43.7023 |
| | 926,300 |
| | 89,678 |
|
May 23, 2015 through June 26, 2015 | | 948,569 |
| | $ | 43.2444 |
| | 948,569 |
| | 48,658 |
|
Total | | 2,683,494 |
| | $ | 44.2465 |
| | 2,683,494 |
| | $ | 48,658 |
|
| |
(1) | Includes commissions paid. |
On July 23, 2015, the Board of Directors approved a program to purchase up to an additional $500 million of the Company's common stock over the next three years. This approval is in addition to the capacity remaining under the Company's August 2014 $500 million share repurchase authorization, which was $48.7 million as of June 26, 2015. The new share repurchase authorization is subject to the same general terms and conditions as the prior share repurchase authorization summarized above.
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Item 4. | Mine Safety Disclosure. |
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) by the federal Mine Safety and Health Administration. Under the Mine Act, an independent contractor, such as Jacobs, that performs services or construction of a mine is included within the definition of a mining operator. We do not act as the owner of any mines.
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
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10.1# | | Form of Nonqualified Stock Option Agreement. |
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10.2# | | Form of Restricted Stock Unit Award Agreement (Performance Shares - Net Earnings Growth). |
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31.1 – | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 – | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 – | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 – | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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95 – | | Mine Safety Disclosure. |
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101.INS | | XBRL Instance Document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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# | | Management contract or compensatory plan or arrangement. |
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JACOBS ENGINEERING GROUP INC.
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By: | /s/ Kevin C. Berryman | |
| Kevin C. Berryman | |
| Executive Vice President | |
| and Chief Financial Officer | |
| (Principal Financial Officer) | |
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Date: | July 30, 2015 | |