Business Context and Reporting Period
This filing is the unaudited Form 10-Q of Jacobs Engineering Group Inc. (the historical company name associated with the requested Jacobs Solutions record) for the quarter and nine months ended June 27, 2014. The company provides engineering, design, procurement, construction, project management, technical professional, and field services.
The period includes the results of Sinclair Knight Merz (“SKM”), acquired for approximately $1.2 billion in cash on December 13, 2013.
Financial Performance and Position
| Metric | Three Months Ended June 27, 2014 | Prior Comparable Period | Nine Months Ended June 27, 2014 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $3.232 billion | $3.081 billion | $9.477 billion | $8.676 billion |
| Operating profit | $123.9 million | $168.4 million | $391.4 million | $493.8 million |
| Net earnings attributable to Jacobs | $64.8 million | $108.9 million | $242.0 million | $312.3 million |
| Diluted EPS | $0.49 | $0.83 | $1.83 | $2.39 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $485.2 million | $437.2 million |
- Quarterly revenue increased 4.9%; nine-month revenue increased 9.2%.
- Approximate operating margin was 3.8% for the quarter and 4.1% for the nine months, compared with approximately 5.5% and 5.7%, respectively, in the prior periods.
- Approximate net margin attributable to Jacobs was 2.0% for the quarter and 2.6% for the nine months, compared with approximately 3.5% and 3.6%, respectively, previously.
- Cash and cash equivalents were $772.6 million at June 27, 2014, down from $1.256 billion at September 27, 2013.
- Long-term debt was $789.4 million, compared with $415.1 million at the prior fiscal year-end. Total current liabilities were $2.170 billion, and working capital was approximately $1.6 billion.
- The company had approximately $0.8 billion of available borrowing capacity under its $1.6 billion unsecured revolving facility, which expires in February 2019. It also had $352.9 million of outstanding letters of credit.
- Backlog was $18.5 billion at June 27, 2014, up 7.5% from $17.2 billion at June 28, 2013.
Cash Flow, Acquisitions, and Capital Structure
- Operating cash flow increased $48.0 million year over year, primarily because of improved working-capital cash generation and collections.
- Investing activities used $1.343 billion, including $1.226 billion for acquisitions, principally SKM.
- Financing activities provided $380.2 million, including $669.7 million of long-term borrowings and $302.4 million of long-term debt repayments.
- The SKM acquisition added approximately $829 million of preliminary goodwill and $247 million of identifiable intangible assets. The purchase-price allocation remained subject to post-closing adjustments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by SKM, as well as increased activity in Chemicals and Polymers, Infrastructure, Mining and Minerals, Buildings, and certain other legacy markets.
- Process, Scientific, and Systems Consulting revenue declined 11.7% for the nine months, reflecting reduced U.S. federal government spending and the temporary federal government shutdown.
- Pharmaceuticals and Biotechnology revenue declined 15.4% for the nine months because of project completions and wind-downs. Industrial and Other revenue declined 13.9%.
- Direct contract costs rose 8.7% for the nine months, while their ratio to revenue improved to 83.8% from 84.2%.
- SG&A expense increased 30.5% for the nine months, reflecting SKM operations, acquisition-related expenses, and the 2014 restructuring.
- The company recorded $70.8 million of pre-tax 2014 restructuring costs during the quarter, net of a $14.2 million reduction in bonus-plan expense. The restructuring reduced nine-month net earnings attributable to Jacobs by approximately $47.0 million, or $0.35 per diluted share.
- Other unusual items included a $12.1 million gain on the sale of intellectual property, a favorable international tax matter resolution, transaction-related SKM expenses, and adverse effects from certain European projects, holidays, and weather.
Guidance, Outlook, Risks, and Contingencies
- Management expected to complete the 2014 restructuring during the fourth quarter at an additional pre-tax cost of approximately $45 million to $50 million. The initiatives included workforce reductions, office abandonments, and employee co-location; the company stated it was not exiting geographic markets, service types, or client end-markets.
- Management reported a positive outlook for several industry groups and markets, including Chemicals and Polymers, Infrastructure, Buildings, and selected mining and minerals opportunities. The filing did not provide formal full-year revenue or earnings guidance.
- Management believed cash, operating cash flow, available revolver capacity, and other facilities were adequate for operations, acquisitions, and debt service for the next twelve months.
- Principal risks include project execution and contract-loss risk, customer cancellations or terminations, government spending and contract audits, claims and litigation, insurance recoverability, foreign exchange exposure, pension obligations, acquisition integration, and estimates used in percentage-of-completion accounting.
- Jacobs settled litigation brought by Clark County, Nevada, in March 2014 and pursued insurer reimbursement. The company stated that the matter was not expected to have a material adverse effect. One personal-injury claim remained related to the 2009 ConAgra plant explosion; management cited insurance and indemnification rights and expected no material adverse effect.
- The company was in compliance with its debt covenants at June 27, 2014. Management reported no material changes to the risk factors disclosed in the 2013 Form 10-K.
Important Facts for Investors to Verify
- Whether the restructuring was completed as planned and whether the additional $45 million to $50 million of expected costs were incurred.
- The final SKM purchase-price allocation, goodwill and intangible-asset valuations, integration costs, and resulting amortization.
- Debt repayment progress, leverage, interest costs, covenant headroom, and the availability of revolving credit capacity.
- Conversion of the $18.5 billion backlog into revenue and cash, including customer funding, cancellation, and termination provisions.
- Performance of federal-government work, mining and minerals projects, and other markets with notable revenue changes.
- Resolution and insurance recovery of legal matters, government audits, contract claims, and other contingencies.
- The future effect of ASU 2014-09, Revenue from Contracts with Customers; the filing states that the company was evaluating the standard and had not selected a transition method.