Jacobs Engineering Group Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for Jacobs Engineering Group Inc., not “Jacobs Solutions Inc.” It covers the quarter and six months ended March 30, 2012, compared with periods ended April 1, 2011. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Reporting Period
Jacobs provides technical professional services, including project services and process, scientific and systems consulting, as well as field services, including construction and operations and maintenance. At March 30, 2012, the company reported 129.0 million common shares outstanding as of April 23, 2012.
Fiscal 2012 acquisitions included KlingStubbins, Inc. and Unique World Pty Ltd.; management stated these acquisitions were not material to consolidated results. The company continued integrating the larger Aker Entities acquisition completed in fiscal 2011.
Financial Performance and Position
| Metric | Q2 FY2012 | Q2 FY2011 | Six Months FY2012 | Six Months FY2011 |
|---|---|---|---|---|
| Revenue | $2.703 billion | $2.558 billion | $5.335 billion | $4.914 billion |
| Operating profit | $133.1 million | $128.0 million | $275.1 million | $231.6 million |
| Net earnings attributable to Jacobs | $83.9 million | $80.3 million | $173.6 million | $146.1 million |
| Diluted EPS | $0.65 | $0.63 | $1.35 | $1.15 |
| Operating margin | 4.9% | 5.0% | 5.2% | 4.7% |
| Net margin attributable to Jacobs | 3.1% | 3.1% | 3.3% | 3.0% |
Six-month operating cash flow was $122.0 million, compared with $63.8 million in the prior-year period. Investing activities used $107.5 million, including $69.3 million for acquisitions and $37.8 million for property and equipment. Financing activities used $9.3 million, primarily reflecting repayment of short-term borrowings.
Cash and cash equivalents were $921.5 million at March 30, 2012, compared with $905.6 million at September 30, 2011. Working capital was approximately $1.44 billion, up $336.9 million from fiscal year-end. Receivables were $2.147 billion, including $1.063 billion of unbilled receivables and other amounts.
Total debt included $285.4 million of long-term debt and $255.8 million of notes payable. The company entered into a new $1.06 billion, five-year unsecured revolving credit facility on March 29, 2012. At quarter-end, $761.1 million of borrowing capacity remained; total facility utilization was $298.9 million, including letters of credit. The company was in compliance with its debt covenants and reported $209.0 million of total letters of credit outstanding.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 5.7% and six-month revenue increased 8.6%, driven primarily by higher Project Services activity and growth in Chemicals and Polymers, Refining-Downstream, Pharmaceuticals and Biotechnology, and other markets.
- Second-quarter net earnings attributable to Jacobs increased 4.6%; six-month earnings increased 18.9%. Six-month diluted EPS rose from $1.15 to $1.35.
- Direct contract costs improved to 84.2% of revenue in the quarter and 84.1% for the six months, versus 84.8% and 85.3%, respectively, in the prior-year periods.
- SG&A increased 12.2% in the quarter and 17.1% for the six months, primarily because of expenses associated with acquired businesses, increased hiring, and temporary non-billable employee time.
- Backlog increased 7.8% to $15.10 billion at March 30, 2012, from $14.01 billion at April 1, 2011. Technical professional services backlog rose to $9.91 billion, while field services backlog declined to $5.19 billion.
- Cash flow from operations nearly doubled year over year, while acquisition-related investing cash outflows were substantially lower than in the prior-year period, when the Aker Entities were acquired.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific full-year earnings or revenue guidance in the supplied filing. Management stated that it expected adequate liquidity and capital resources to fund operations, support its acquisition strategy, and service debt for the next twelve months.
- Several planned plant “turnarounds” were deferred by clients to fiscal 2013, negatively affecting Field Services revenue and margins in the quarter.
- Higher-than-expected SG&A reflected labor costs associated with hiring and stand-by time. Management did not view these factors as indicative of long-term business trends.
- Technical Professional Services margin rates decreased slightly in the quarter.
- Contract revenue is subject to estimates, percentage-of-completion accounting, incentive fees, claims, unapproved change orders, and potential government audits or adjustments. Actual results may differ materially from estimates.
- The company is exposed to project execution, professional liability, litigation, insurance-retention, government-contract audit, tax, foreign-currency, and interest-rate risks.
- The California Administrative Office of the Courts alleged approximately $26.0 million of contract-related damages and sought disgorgement and retention of unpaid fees. Jacobs believes it has successful defenses and a valid counterclaim, but an adverse outcome could affect the quarter and year in which final judgment is entered.
- Regarding the I-35W bridge litigation, the Minnesota Supreme Court finalized dismissal of the consultant’s claim and dismissed MnDOT’s contractual indemnity claims, but allowed a reimbursement claim tied to the Victims Compensation Fund to proceed in the trial court. Management does not expect a material adverse financial effect.
- Management concluded that disclosure controls and procedures were effective at March 30, 2012, with no material changes to internal control over financial reporting during the quarter.
Key Facts an Investor Should Verify
- Confirm the issuer identity and period: the filing names Jacobs Engineering Group Inc. and covers March 30, 2012, despite the request metadata identifying Jacobs Solutions Inc. and “2012 Q2.”
- Reconcile revenue growth and margin trends against the impact of deferred turnarounds, pass-through costs, acquired-business expenses, and mix between technical and field services.
- Assess receivables quality and collection timing, particularly the $1.063 billion of unbilled receivables and other amounts.
- Review the terms, covenant thresholds, interest-rate margins, and remaining capacity of the new $1.06 billion revolving credit facility.
- Monitor the California Administrative Office of the Courts litigation and the remaining I-35W bridge reimbursement claim.
- Evaluate the sustainability of backlog conversion, given that many contracts may be terminated or canceled by clients and government backlog may include unfunded awards.
- Consider pension funding requirements: $65.1 million was contributed during the first six months, with another $24.6 million expected during the remainder of fiscal 2012.