Business Context and Reporting Period
Jacobs Engineering Group Inc. (now identified in the request metadata as Jacobs Solutions Inc.) filed this unaudited Form 10-Q for the three months ended December 27, 2013, the first quarter of fiscal 2014. The comparable period ended December 28, 2012. The company provides technical professional, construction, operations and maintenance services across government, industrial, infrastructure, energy, mining and other markets.
The quarter included approximately two weeks of operations from the December 13, 2013 acquisition of Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited (“SKM”).
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $3.069 billion | $2.760 billion | Up 11.2% |
| Operating profit | $145.0 million | $160.3 million | Down 9.5% |
| Operating margin | 4.7% | 5.8% | Down approximately 110 bps |
| Net earnings attributable to Jacobs | $93.7 million | $99.0 million | Down 5.3% |
| Diluted EPS | $0.71 | $0.76 | Down 6.6% |
| Net earnings margin attributable to Jacobs | 3.1% | 3.6% | Lower year over year |
| Cash flow from operations | $326.5 million | $246.7 million | Up $79.8 million |
Revenue growth was led by construction, chemicals and polymers, refining-downstream, mining and minerals, and project services. Process, scientific and systems consulting declined primarily because of lower U.S. federal government spending and the temporary federal government shutdown.
Direct contract costs increased 12.5% to $2.615 billion, and rose to 85.2% of revenue from 84.2%. Pass-through costs increased 37.6% to $752.0 million, contributing to the higher cost ratio. SG&A increased 12.0% to $308.6 million, primarily because of SKM-related costs; excluding $26.1 million of SKM-related SG&A, the increase was approximately 2.6%.
At December 27, 2013, cash and cash equivalents were $1.011 billion, compared with $1.256 billion at September 27, 2013. Current assets were $3.944 billion and current liabilities were $2.162 billion, producing working capital of approximately $1.782 billion. Receivables were $2.690 billion, including $1.113 billion of unbilled receivables and other amounts.
Total notes payable and long-term debt were approximately $1.095 billion, including $1.0 billion outstanding under the $1.21 billion 2012 revolving credit facility. Approximately $152.7 million of borrowing capacity remained under that facility, and the company had $271.5 million of letters of credit outstanding. The company stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased $309.3 million, or 11.2%, while operating profit declined $15.2 million and attributable net earnings declined $5.3 million.
- The SKM acquisition added $25.7 million of reported revenue for the two-week post-acquisition period but contributed a $12.8 million after-tax impact, or approximately $0.10 per share, from acquisition expenses, operating losses, amortization and interest.
- SKM was acquired for approximately $1.2 billion in cash. The preliminary purchase-price allocation included $727.4 million of goodwill and $331.1 million of intangible assets; these amounts remained subject to adjustment.
- Operating cash flow increased to $326.5 million from $246.7 million, primarily because of improved working-capital cash generation and receivable collections.
- Investing cash use increased sharply to $1.196 billion, principally because of the SKM acquisition, compared with $25.4 million in the prior-year quarter.
- Financing provided $628.1 million, including approximately $600 million of additional borrowing used to finance the SKM acquisition, compared with a $10.5 million financing outflow in the prior-year quarter.
- Backlog increased 11.5% to $18.1 billion from $16.2 billion, including approximately $0.8 billion attributable to SKM.
Guidance, Outlook, Risks and Unusual Items
Management described sales activity as strong, particularly in oil and gas upstream, chemicals and polymers, and refining-downstream. It viewed chemicals and polymers, refining-downstream, infrastructure, mining and minerals, and several government and energy markets as attractive. Management expected SKM’s two-week holiday-related operating loss to be nonrecurring and anticipated increased fiscal 2014 activity from SKM in Australia, Asia, South America and the U.K.
The filing does not provide explicit full-year earnings or revenue guidance. Management stated that it expected to have adequate liquidity and capital resources for the next twelve months, including cash, remaining revolver capacity and other letter-of-credit facilities.
Key risks include contract cancellations or termination by clients, cost and revenue-estimation risk under percentage-of-completion and incentive-fee arrangements, contract audits and claims, government budget uncertainty, foreign currency exposure, acquisition integration, pension obligations, and potential uninsured or partially insured litigation and guarantee exposures. The company stated that no material changes occurred to the risk factors in its 2013 Form 10-K.
Unusual items included $9.1 million of SKM-related acquisition costs in SG&A, including a $7.8 million nondeductible stamp duty; a $3.3 million SKM operating loss; a $4.1 million reversal of accrued interest related to the resolution of an international tax matter; and a $24.0 million SKM shareholder-plan settlement included in pro forma results.
Management believed pending litigation, government contract audits, tax examinations and other contingencies would not have a material adverse effect. Specific matters discussed included Clark County, Nevada litigation and claims arising from the 2009 ConAgra plant explosion; the company reported that it did not expect either matter to be materially adverse.
Investor Verification Priorities
- Verify the final purchase-price allocation, goodwill and intangible-asset values for SKM, which were expressly preliminary.
- Assess whether SKM integration delivers the expected geographic, industry and operating synergies after the temporary acquisition-related costs and holiday-period losses.
- Monitor operating margin, pass-through costs and contract mix, given the increase in direct costs as a percentage of revenue.
- Reconcile acquisition funding with cash balances, approximately $1.095 billion of debt, remaining revolver capacity and $271.5 million of letters of credit.
- Evaluate backlog quality, funding status and expected conversion timing because many contracts may be cancelled or terminated at the client’s option.
- Review exposure to U.S. government spending reductions, contract audits, claims, litigation, pension contributions and foreign currency movements.