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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
Basis of Presentation
Unless the context otherwise requires:
|
·
|
References herein to “Jacobs” are to Jacobs Engineering Group Inc. and its predecessors;
|
|
·
|
References herein to the “Company”, “we”, “us” or “our” are to Jacobs Engineering Group Inc. and its consolidated subsidiaries; and
|
|
·
|
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 Quarterly Report on Form 10-Q 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 October 2, 2015 (“2015 Form 10-K”) as well as Item 7—
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, included in our 2015 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 April 1, 2016, and for the three and six month periods ended April 1, 2016 and March 27, 2015.
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 2015 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 2015 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 (e.g., 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.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement.
Page 7
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
Please refer to Note 2—
Significant Accounting Policies
of Notes to Consolidated Financial Statements included in our 2015 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 its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02—
Leases
. ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The guidance must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is evaluating the impact of the new guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09—
Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period for which financial statements have not been issued or made available for issuance. If an entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is evaluating the impact of the new guidance on its consolidated financial statements.
During the second quarter of fiscal 2016, the Company adopted the provisions of ASU 2015-17—
Balance Sheet Classification of Deferred Taxes.
ASU 2015-17 removes the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Instead, the update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for entities for fiscal years beginning after December 15, 2016, with retrospective application to all periods presented. Early application is permitted. The Company adopted ASU 2015-17 on a retrospective basis. Accordingly, the current deferred taxes and noncurrent deferred tax assets included in miscellaneous noncurrent assets on the October 2, 2015 Consolidated Balance Sheet were reclassified to noncurrent deferred taxes, which increased noncurrent deferred tax assets $160.3 million and decreased miscellaneous noncurrent assets by $213.8 million.
Segment Information
During the second quarter of fiscal 2016, we reorganized our operating and reporting structure around four lines of business (“LOB”). This reorganization is intended to better serve our global clients, leverage our workforce, help streamline operations, and provide enhanced growth opportunities. The four global LOBs are: Petroleum & Chemicals, Buildings & Infrastructure, Aerospace & Technology, and Industrial. Previously, the Company operated its business as a single segment.
Page 8
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
Under the new organization, each LOB has a president that reports directly to the Company's President & CEO (who is also the Company’s
Chief Operating Decision maker, or “CODM”). As part of the reorganization, the cost of the sales function, which had been managed centrally for many years, is now embedded in the new segments and report to the respective line of business presidents. In
addition, a portion of the costs of other support functions (e.g., finance, legal, human resources, and information technology) are allocated to each LOB using methodologies which, we believe, effectively attributes the cost of these support functions to t
he revenue-generating activities of the Company on a rational basis. In addition, the cost of the Company’s cash incentive plan (“MIP”) and the expense associated with the Jacobs Engineering Group Inc. Stock Incentive Plan (“1999 SIP”) have likewise been
charged to the LOBs except for those amounts determined to relate to the business as a whole (which amounts remain in corporate’s results of operations).
Financial information for each LOB is reviewed by the CODM to assess performance and make decisions regarding the allocation of resources. The Company does not track assets by LOB, nor does it provide such information to the CODM.
The CODM evaluates the operating performance of our LOBs using operating profit, which is defined as margin less “corporate charges” (e.g., the allocated amounts described above). The Company incurs certain SG&A costs which relate to its business as a whole which are not allocated to the LOBs.
The following tables present total revenues, and operating profit for each reportable segment. Prior period information has been restated to reflect the current period presentation (in thousands).
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
April 1, 2016
|
|
|
March 27, 2015
|
|
|
April 1, 2016
|
|
|
March 27, 2015
|
|
Revenues from External Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum & Chemicals
|
$
|
866,615
|
|
|
$
|
1,046,767
|
|
|
$
|
1,808,928
|
|
|
$
|
2,207,219
|
|
Aerospace & Technology
|
|
669,464
|
|
|
|
701,115
|
|
|
|
1,339,655
|
|
|
|
1,435,342
|
|
Buildings & Infrastructure
|
|
579,128
|
|
|
|
602,062
|
|
|
|
1,142,458
|
|
|
|
1,226,792
|
|
Industrial
|
|
666,556
|
|
|
|
553,388
|
|
|
|
1,338,656
|
|
|
|
1,220,984
|
|
Total
|
$
|
2,781,763
|
|
|
$
|
2,903,332
|
|
|
$
|
5,629,697
|
|
|
$
|
6,090,337
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
April 1, 2016
|
|
|
March 27, 2015
|
|
|
April 1, 2016
|
|
|
March 27, 2015
|
|
Operating Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum & Chemicals
|
$
|
30,945
|
|
|
$
|
28,656
|
|
|
$
|
62,548
|
|
|
$
|
63,755
|
|
Aerospace & Technology
|
|
55,121
|
|
|
|
53,072
|
|
|
|
103,120
|
|
|
|
103,033
|
|
Buildings & Infrastructure
|
|
42,463
|
|
|
|
42,428
|
|
|
|
82,915
|
|
|
|
80,392
|
|
Industrial
|
|
12,417
|
|
|
|
47,877
|
|
|
|
39,772
|
|
|
|
76,850
|
|
Total Segment Operating Profit
|
|
140,946
|
|
|
|
172,033
|
|
|
|
288,355
|
|
|
|
324,030
|
|
Other Corporate Expenses
|
|
(18,797
|
)
|
|
|
(24,950
|
)
|
|
|
(38,373
|
)
|
|
|
(18,724
|
)
|
Restructuring Charges
|
|
(35,368
|
)
|
|
|
(14,038
|
)
|
|
|
(103,751
|
)
|
|
|
(14,038
|
)
|
Total Other Income (Expense)
|
|
3,675
|
|
|
|
(4,083
|
)
|
|
|
2,012
|
|
|
|
(7,611
|
)
|
Earnings Before Taxes
|
$
|
90,456
|
|
|
$
|
128,962
|
|
|
$
|
148,243
|
|
|
$
|
283,657
|
|
Included in “other corporate expenses” in the above table are costs and expenses which relate to general corporate activities as well as corporate-managed benefit and insurance programs. Such costs and expenses include: (i) those elements of SG&A expenses relating to the business as a whole; (ii) those elements of the MIP and the 1999 SIP relating to corporate personnel whose other compensation costs are not allocated to the LOBs; (iii) the amortization of intangible assets acquired as part of purchased business combinations; (iv) the quarterly variances between the Company’s actual costs of certain of its self-insured integrated risk and employee benefit programs and amounts charged to the LOBs; and (v) certain adjustments relating to costs associated with the Company’s international defined benefit pension plans. In addition, “other corporate expenses” will include adjustments to contract margins (both positive and negative) associated with projects where the adjustments have been assessed, in the opinion of management, not indicative of the performance of the related LOB and therefore should not be attributed to the LOB.
Page 9
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
Business Combinations
During fiscal year 2016, the Company acquired J.L. Patterson & Associates. This acquisition was not material to the Company’s consolidated results for the first six months of fiscal 2016.
Receivables
The following table presents the components of receivables appearing in the accompanying Consolidated Balance Sheets at April 1, 2016 and October 2, 2015 as well as certain other related information (in thousands):
|
|
April 1,
2016
|
|
|
October 2,
2015
|
|
Components of receivables:
|
|
|
|
|
|
|
|
|
Amounts billed
|
|
$
|
1,170,483
|
|
|
$
|
1,213,892
|
|
Unbilled receivables and other
|
|
|
1,159,548
|
|
|
|
1,252,509
|
|
Retentions receivable
|
|
|
85,061
|
|
|
|
82,342
|
|
Total receivables, net
|
|
$
|
2,415,092
|
|
|
$
|
2,548,743
|
|
Other information about receivables:
|
|
|
|
|
|
|
|
|
Amounts due from the United States federal
government, included above, net of advanced
billings
|
|
$
|
284,833
|
|
|
$
|
327,157
|
|
Claims receivable
|
|
$
|
9,291
|
|
|
$
|
32,511
|
|
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 April 1, 2016 and October 2, 2015 consist of the following (in thousands):
|
|
April 1,
2016
|
|
|
October 2,
2015
|
|
Land
|
|
$
|
23,779
|
|
|
$
|
23,757
|
|
Buildings
|
|
|
93,014
|
|
|
|
97,597
|
|
Equipment
|
|
|
571,083
|
|
|
|
592,491
|
|
Leasehold improvements
|
|
|
238,964
|
|
|
|
259,544
|
|
Construction in progress
|
|
|
20,499
|
|
|
|
17,229
|
|
|
|
|
947,339
|
|
|
|
990,618
|
|
Accumulated depreciation and amortization
|
|
|
(603,789
|
)
|
|
|
(609,380
|
)
|
|
|
$
|
343,550
|
|
|
$
|
381,238
|
|
Page 10
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
Restructuring Charges
During the second quarter of fiscal 2015, the Company began implementing 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"). The 2015 Restructuring was not completed in fiscal 2015, and actions related to the 2015 Restructuring continued into fiscal 2016. Actions related to the 2015 Restructuring completed during 2015 and the first six months of fiscal 2016 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 costs of the 2015 Restructuring are included in selling, general, and administrative expense in the Consolidated Statements of Earnings. The following table summarizes the impact of the 2015 Restructuring on the Company's reportable segments for the three and six month periods ended April 1, 2016 (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
April 1, 2016
|
|
|
April 1, 2016
|
|
Petroleum & Chemicals
|
$
|
29,039
|
|
|
$
|
53,015
|
|
Buildings & Infrastructure
|
|
601
|
|
|
|
15,567
|
|
Aerospace & Technology
|
|
239
|
|
|
|
2,435
|
|
Industrial
|
|
2,316
|
|
|
|
19,893
|
|
Corporate
|
|
3,173
|
|
|
|
12,841
|
|
Total
|
$
|
35,368
|
|
|
$
|
103,751
|
|
The Company’s accrual for the 2015 Restructuring as of October 2, 2015 was $102.2 million. There were $103.8 million of charges and $69.8 million of payments during the six months ended April 1, 2016. The accrual balance was $136.1 million as of April 1, 2016.
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 accordion feature that allows the Company and the lenders to increase the facility amount to $2.1 billion.
The total amount outstanding under the 2014 Facility in the form of direct borrowings at April 1, 2016 was $530.0 million. The Company has issued $2.5 million in letters of credit under the 2014 Facility leaving $1.1 billion of available borrowing capacity under the 2014 Facility at April 1, 2016. In addition, the Company had $235.9 million issued under separate, committed and uncommitted letter-of-credit facilities for total issued letters of credit of $238.4 million at April 1, 2016.
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 April 1, 2016.
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
Page 11
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
become known, without regard to the percentage-of-completion. Fo
r 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 add
itional 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 d
uring fiscal 2015 can be found in Note 1—
Description of Business and Basis of Presentation
of Notes to Consolidated Financial Statements included in our 2015 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.
The following table sets forth pass-through costs included in revenues for each of the three and six months ended April 1, 2016 and March 27, 2015 (in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
Pass-through costs included in revenues
|
|
$
|
601,129
|
|
|
$
|
615,336
|
|
|
$
|
1,271,460
|
|
|
$
|
1,322,166
|
|
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 (e.g., 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
Page 12
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
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 six months ended April 1, 2016 and March 27, 2015 (in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
Component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
8,504
|
|
|
$
|
8,261
|
|
|
$
|
17,180
|
|
|
$
|
16,836
|
|
Interest cost
|
|
|
15,207
|
|
|
|
16,103
|
|
|
|
30,909
|
|
|
|
32,761
|
|
Expected return on plan assets
|
|
|
(18,926
|
)
|
|
|
(20,365
|
)
|
|
|
(38,433
|
)
|
|
|
(41,415
|
)
|
Amortization of previously unrecognized items
|
|
|
5,579
|
|
|
|
5,108
|
|
|
|
11,312
|
|
|
|
10,436
|
|
Settlement (gain) loss
|
|
|
(169
|
)
|
|
|
15
|
|
|
|
(332
|
)
|
|
|
159
|
|
Net periodic benefit cost
|
|
$
|
10,195
|
|
|
$
|
9,122
|
|
|
$
|
20,636
|
|
|
$
|
18,777
|
|
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 cost accounting standards. The underfunded amount for this pension plan is included in “Other Noncurrent Assets” in the accompanying Consolidated Balance Sheets at April 1, 2016. Net periodic pension costs for this pension plan for the three and six months ended April 1, 2016 were $3.3 million and $6.7 million, respectively, and three and six months ended March 27, 2015 were $1.5 million and $2.9 million, respectively.
The following table presents certain information regarding Company cash contributions to our pension plans for fiscal 2016 (in thousands):
Cash contributions made during the first six months of
fiscal 2016
|
|
$
|
18,266
|
|
Cash contributions we expect to make during the remainder
of fiscal 2016
|
|
|
16,256
|
|
Total
|
|
$
|
34,522
|
|
Page 13
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
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 six months ended April 1, 2016 and March 27, 2015 related to the Company’s defined benefit pension plans (in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
Amortization of Defined Benefit Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses
|
|
$
|
(4,307
|
)
|
|
$
|
(5,191
|
)
|
|
$
|
(8,768
|
)
|
|
$
|
(10,602
|
)
|
Prior service cost
|
|
|
59
|
|
|
|
23
|
|
|
|
120
|
|
|
|
47
|
|
Total Before Income Tax
|
|
|
(4,248
|
)
|
|
|
(5,168
|
)
|
|
|
(8,648
|
)
|
|
|
(10,555
|
)
|
Income Tax Benefit
|
|
|
1,015
|
|
|
|
1,454
|
|
|
|
2,061
|
|
|
|
2,962
|
|
Total reclassifications, after-tax
|
|
$
|
(3,233
|
)
|
|
$
|
(3,714
|
)
|
|
$
|
(6,587
|
)
|
|
$
|
(7,593
|
)
|
Income Taxes
The Company’s consolidated effective income tax rate for the three months ended April 1, 2016 declined to 29.9% from 31.7% for the corresponding period last year. The decrease in the tax rate for the three months ended April 1, 2016 as compared to the corresponding period last year was primarily the result of a change in the Company’s geographic income mix due to international restructuring efforts, which increased the operational effective tax rate. This increase, however, was offset by certain discrete tax benefits recognized during the second quarter of fiscal 2016. The Company realized benefits associated with certain federal tax refunds received during the quarter as well as benefits associated with the release of a foreign tax reserve due to statute expiration. In connection with the release of the foreign tax reserve, the Company also reversed accrued interest expense of $2.7 million of accrued interest expense and $5.1 million of accrued penalties, which is recorded in Other Income (Expense) in the Consolidated Statements of Earnings.
The Company’s effective income tax rate for the six months ended April 1, 2016 declined to 23.3% from 31.5% for the corresponding period last year. Contributing to the decrease was the release of a valuation allowance of $11.2 million in the first quarter of fiscal 2016 related to certain foreign net operating losses combined with the discrete benefits realized during the three months ended April 1, 2016 as described in the preceding paragraph, partially offset by the change in geographic income mix.
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 six months ended April 1, 2016 and March 27, 2015; (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 six Months Ended
|
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
|
April 1,
2016
|
|
|
March 27,
2015
|
|
Shares used to calculate EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(denominator used to compute basic EPS)
|
|
|
120,216
|
|
|
|
125,992
|
|
|
|
120,554
|
|
|
|
127,283
|
|
Effect of stock options and restricted stock
|
|
|
927
|
|
|
|
1,174
|
|
|
|
1,000
|
|
|
|
1,247
|
|
Denominator used to compute diluted EPS
|
|
|
121,143
|
|
|
|
127,166
|
|
|
|
121,554
|
|
|
|
128,530
|
|
Antidilutive stock options and restricted stock
|
|
|
3,714
|
|
|
|
4,379
|
|
|
|
3,651
|
|
|
|
4,376
|
|
Shares of common stock issued from the
exercise of stock options and the release of
restricted stock
|
|
|
228
|
|
|
|
243
|
|
|
|
515
|
|
|
|
639
|
|
Page 14
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
Share Repurchases
On July 23, 2015, 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
|
|
|
$
|
40.10
|
|
|
|
1,803
|
|
|
|
1,803
|
|
(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 July 22, 2018. 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 share repurchases may depend upon market conditions, other uses of capital, and other factors.
Commitments and Contingencies
In the normal course of business, we are subject to certain contractual guarantees and litigation. The guarantees to which we are a party generally relate to project schedules and plant performance. Most of the litigation in which we are involved has us as a defendant in workers’ compensation, personal injury, environmental, employment/labor, professional liability, and other similar lawsuits.
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 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 insurance-related claims that are known and have been asserted against us, and for insurance-related claims 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.
The Company 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 (“Motiva”). The arbitration is pending in Houston, Texas before the International Institute for Conflict Prevention and Resolution and is currently scheduled to begin on September 26, 2016. In 2006, Motiva contracted with Bechtel-Jacobs CEP Port Arthur Joint Venture (“BJJV”), a joint venture between Bechtel Corporation and Jacobs to perform professional services in connection with the expansion project at the Motiva Port Arthur, Texas refinery. On March 1, 2016, Motiva submitted an amended Notice of Arbitration, asserting the same causes of actions in its original notice (fraud and breach of fiduciary duty) and is seeking entitlement to monetary relief in excess of $8 billion of alleged actual
Page 15
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
April 1, 2016
(continued)
damages, and presently unquantified punitive damages, attorneys' fees and interest. BJJV has denied
liability and is vigorously defending these claims, but the Company cannot provide assurance that BJJV will be successful in these efforts as litigation is subject to inherent uncertainties and unfavorable rulings can and do occur. Based on the information
currently available to management, the Company does not expect this matter to have a material adverse effect on the Company’s business, financial condition, results of operations and/or cash flows.
On September 30, 2015, Nui Phao Mining Company Limited (“NPMC”) commenced arbitration proceedings against Jacobs E&C Australia Pty Limited (“Jacobs E&C”). The arbitration is pending in Singapore before the Singapore International Arbitration Centre. In March 2011, Jacobs E&C was engaged by NPMC for the provision of management, design, engineering, and procurement services for the Nui Phao mine/mineral processing project in Vietnam. In the Notice of Arbitration and in a subsequently filed Statement of Claim and Supplementary Statement of Claim dated February 1, 2016 and February 26, 2016, respectively, NPMC asserts various causes of action and alleges that the quantum of its claim exceeds $167 million. Jacobs has denied liability and is vigorously defending this claim. No hearing date on the merits has been set. The Company does not expect this matter to have a material adverse effect on its financial condition, results of operations and/or cash flows.
On December 7, 2009, the Judicial Council of California, Administrative Office of the Courts (“AOC”) initiated an action in the San Francisco County Superior Court against Jacobs Facilities Inc. (“JFI”) and Jacobs Project Management (“JPM”). On June 6, 2011, AOC filed an operative Second Amended Complaint, which added Jacobs as a defendant. The action arises out of an assignment and assumption agreement between AOC and JFI pursuant to which JFI agreed to provide regular maintenance and repairs at certain AOC court facilities. AOC alleged three causes of action: (i) breach of contract based on the expiration of JFI’s contractor’s license before the assignment and assumption agreement was executed; (ii) disgorgement of all fees paid to JFI and JPM under the contract pursuant to California’s Contractors’ State License Law (“CSLL”); and (iii) breach of Jacobs’ parent guarantee agreement. JPM cross-claimed for unpaid sums for services that the licensed JPM had performed pursuant to the assigned contract between August 2009 and November 2009. A jury trial was held on the parties’ CSLL claims in April 2012 and, on May 2, 2012, the jury returned a special verdict in favor of the Jacobs entities finding, among other things, that JPM was owed approximately $4.7 million in unpaid fees and that JFI was not required to disgorge the approximate $18.3 million that AOC had paid for its work under the contract. AOC subsequently dismissed its cause of action for breach of contract, and JPM dismissed its cross-claims other than those for its unpaid invoices. AOC’s third cause of action for breach of the parent guaranty was resolved by a stipulation, which provided that if AOC obtains a judgment against JFI, the judgment will also be against its parent, Jacobs. The trial court entered judgment in the Jacobs entities’ favor. On August 20, 2015, the California Court of Appeal for the First Appellate District reversed the jury’s verdict, holding that JFI had violated the CSLL. The Court of Appeal remanded for an evidentiary hearing to determine whether JFI and JPM had “substantially complied” with, and may therefore avoid disgorgement under, the CSLL. The evidentiary hearing on “substantial compliance” is scheduled to commence in San Francisco Superior Court on June 20, 2016. The Jacobs entities have contested, and will continue to vigorously contest, the AOC’s claims and will vigorously litigate JPM’s claim for unpaid sums. The Company does not expect this matter to have a material adverse effect on its financial condition, results of operations and/or cash flows.
Page 16
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES