Business Context and Reporting Period
The filing is a Form 10-Q for Jacobs Engineering Group Inc. (now associated with Jacobs Solutions Inc.), covering the quarter and nine months ended July 2, 2010. The company provides engineering, construction, operations and maintenance, and process, scientific and systems consulting services.
The filing presents unaudited results for the third quarter and first nine months of fiscal 2010, compared with the corresponding periods ended July 3, 2009. The company reported 125.7 million common shares outstanding as of July 22, 2010.
Financial Performance and Condition
| Metric | Q3 FY2010 | Q3 FY2009 | 9M FY2010 | 9M FY2009 |
|---|---|---|---|---|
| Revenue | $2.508 billion | $2.707 billion | $7.572 billion | $8.915 billion |
| Operating profit | $45.1 million | $146.7 million | $280.6 million | $498.4 million |
| Net earnings attributable to Jacobs | $19.0 million | $94.9 million | $169.0 million | $320.5 million |
| Diluted EPS | $0.15 | $0.76 | $1.35 | $2.58 |
| Operating margin | 1.8% | 5.4% | 3.7% | 5.6% |
Excluding the SIVOM judgment and, for nine months, the Houston sublease charge, management reported Q3 revenue of $2.534 billion, operating profit of $123.3 million, net earnings of $79.3 million and diluted EPS of $0.63. The corresponding adjusted Q3 operating and net margins were approximately 4.9% and 3.1%.
Direct contract costs were 85.9% of revenue in both the quarter and nine-month period, versus 86.3% and 86.4%, respectively, in the prior-year periods, reflecting a more favorable mix and improved project performance. Pass-through costs declined to $705.6 million in Q3 and $2.155 billion for nine months.
Net cash provided by operating activities was $236.2 million for the first nine months, down from $481.2 million in the prior-year period. Investing activities used $395.6 million, including $258.8 million for business acquisitions and $104.2 million for investments. Financing activities provided $101.7 million.
Cash and cash equivalents were $941.7 million at July 2, 2010, compared with $1.034 billion at October 2, 2009. Working capital was approximately $1.4 billion. The company reported $264.3 million of available capacity under a $290.0 million long-term unsecured revolving credit facility and approximately $93.3 million outstanding under a separate short-term facility associated with the AWE investment. Long-term debt was $0.5 million; current notes payable were $93.6 million.
Backlog declined 14.9% year over year to $13.5 billion, comprising $7.8 billion of technical professional services backlog and $5.7 billion of field services backlog.
Material Changes Versus the Prior Comparable Period
- Q3 revenue decreased 7.4% on a GAAP basis and 6.4% excluding the SIVOM judgment. Nine-month revenue decreased 15.1% on a GAAP basis and 14.8% excluding the judgment.
- Q3 GAAP net earnings attributable to Jacobs fell 79.9%, while nine-month earnings fell 47.3%. Excluding unusual items, Q3 net earnings declined 16.4% year over year.
- The company received an unfavorable judgment related to the SIVOM waste-incineration project in France, resulting in a $93.3 million pretax charge and an approximately $60.3 million after-tax charge, or $0.48 per diluted share.
- The SIVOM charge reduced Q3 revenue by $25.9 million, increased direct contract costs by approximately $58.7 million, increased interest expense by $8.7 million and reduced the incentive bonus accrual by $6.4 million.
- The company recorded an additional $11.4 million pretax charge in the first quarter for ceasing use of a Houston office and entering into a sublease; the after-tax impact was approximately $5.8 million, or $0.04 per diluted share.
- Cash from operations fell primarily because of lower earnings and unfavorable working-capital timing. Investing outflows increased substantially because of acquisitions and investments.
- Jacobs acquired Jordan, Jones and Goulding, Inc. in February 2010 and also acquired TYBRIN Corporation and completed its investment in AWE during the first nine months. JJG had approximately 500 employees and contributed approximately $37.3 million of goodwill at quarter-end.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal numerical earnings or revenue guidance. Management stated that strict SG&A control supported sequential improvement in Q3 adjusted operating profit and net earnings. Management also said the company was positioned to withstand the recession, while acknowledging that no assurance could be given.
Management identified potential opportunities in government programs, the Middle East, India, China, aerospace and defense, water and wastewater, upstream oil and gas, power and minerals. The company intended to continue pursuing strategic acquisitions and monitoring work associated with the American Recovery and Reinvestment Act, although the timing and scope of such opportunities were uncertain.
Key risks include recession-related demand weakness, declining backlog, project execution and contract-margin risk, government contract audits and claims, client cancellation or termination rights, foreign exchange and interest-rate exposure, litigation and contractual guarantees, and acquisition integration risk.
Jacobs intends to appeal the SIVOM judgment. The estimated cash impact was approximately $61.4 million, subject to timing and interest. Other legal matters included claims related to the I-35W bridge collapse; management did not expect these matters to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Management concluded that disclosure controls and procedures were effective as of July 2, 2010, with no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the ultimate outcome, appeal status and cash settlement of the SIVOM judgment, including any interest or additional costs.
- Reconcile reported GAAP results with management’s non-GAAP results and confirm the treatment of the SIVOM and Houston sublease charges.
- Assess whether the 14.9% backlog decline and lower revenue reflect temporary project timing or a sustained reduction in demand.
- Review acquisition purchase-price allocations, goodwill, intangible assets and integration performance for JJG, TYBRIN and AWE.
- Monitor operating cash conversion, receivables, unbilled amounts and working-capital movements following the decline in operating cash flow.
- Confirm actual borrowing capacity, letters of credit, short-term facility obligations and covenant terms under the company’s credit arrangements.
- Evaluate exposure to government audits, project claims, litigation, contract guarantees, pension obligations and foreign-currency movements.