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JACOBS ENGINEERING GROUP INC. - 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Jacobs Engineering Group Inc. for the period ended March 31, 2009. The company is a large accelerated filer incorporated in Delaware. The report covers the second quarter of fiscal 2009 and the first six months of the fiscal year.

Key Financial Metrics

Note: Revenue margins (Operating Profit/Revenue) were approximately 5.7% for the quarter and 5.7% for the six-month period.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 11.7% ($310.7 million) for the quarter and 20.9% ($1.1 billion) for the six months compared to the prior year periods.
• Profitability: Net earnings rose 10.0% for the quarter and 14.1% for the six months. The prior year six-month period included a one-time gain of $5.4 million from the sale of an interest in an operations and maintenance company.
• Segment Performance:
  • Construction: Revenues surged 40.4% (quarter) and 49.1% (six months), driven by energy & refining-downstream projects.
  • Project Services: Revenues decreased 9.4% for the quarter due to a general business slowdown and project cancellations in energy, oil & gas, and chemicals sectors.
  • Operations & Maintenance (O&M): Increased 7.7% (quarter) and 14.3% (six months), largely due to U.S. federal government test facilities.
• Cost Structure: Direct costs of contracts increased 15.3% (quarter) and 24.4% (six months). The Direct Cost percentage (DC%) of revenue rose to 86.4% (quarter) and 86.5% (six months) from 83.7% and 84.0% respectively, attributed to higher pass-through costs and a shift toward construction services.
• SG&A Expenses: Decreased 16.9% for the quarter and 7.2% for the six months due to tight cost controls and a strengthening U.S. dollar.
• Cash Flow: Operating cash flow improved dramatically to $201.1 million for the six months ended March 31, 2009, compared to only $6.4 million in the prior year period.

Guidance, Outlook, and Risks

• Backlog: Total backlog increased 2.5% to $16.6 billion at March 31, 2009, driven by new awards in energy, national government programs, and buildings.
• Liquidity: The company maintains strong liquidity with $772.7 million in cash and $265.0 million available under a $290.0 million revolving credit facility. Management believes resources are adequate for the next 12 months.
• Market Risks: The company is exposed to interest rate and foreign currency fluctuations. While access to capital has not been severely affected by the global credit crisis, borrowing costs may increase in the future.
• Legal Proceedings:
  • European Waste Incineration: Jacobs is seeking damages in excess of €40.0 million (~$53.7 million) from a client regarding a waste incineration project. A counterclaim has been filed by the client.
  • I-35W Bridge Collapse: Lawsuits have been filed against Jacobs by a consultant and contractor regarding the 2007 Minneapolis bridge collapse. Jacobs has filed motions to dismiss and does not expect a material adverse effect.
• Accounting Changes: New standards (SFAS 141R and SFAS 160) regarding business combinations and noncontrolling interests will be effective October 1, 2009, and could materially affect financial statements.

Investor Verification Checklist

• Verify the sustainability of the 40%+ growth in Construction revenues versus the 9% decline in Project Services.
• Monitor the resolution of the European waste incineration litigation and the potential impact of the counterclaim.
• Assess the impact of rising Direct Cost percentages (DC%) on future operating margins as the mix shifts toward construction.
• Review the status of project cancellations in the energy and chemicals sectors mentioned in the MD&A.
• Confirm the company's ability to maintain strong operating cash flows given the economic slowdown in certain industry groups.