Jacobs Engineering Group Inc. — Fiscal 2014 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 28, 2014, compared with the periods ended March 29, 2013. The filing is for Jacobs Engineering Group Inc.; the supplied metadata identifies the company as Jacobs Solutions Inc.
Business Context and Reporting Period
Jacobs provides technical professional services, construction, and operations and maintenance services across government, infrastructure, energy, chemicals, mining, buildings, pharmaceuticals, and other markets. The company completed its approximately $1.2 billion cash acquisition of Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited (“SKM”) on December 13, 2013. SKM contributed approximately three months of results in the second quarter and approximately three and a half months in the six-month period.
Backlog was $18.4 billion at March 28, 2014, up 9.7% from $16.8 billion at March 29, 2013.
Financial Performance and Position
| Metric | Three months ended March 28, 2014 | Prior-year period | Six months ended March 28, 2014 | Prior-year period |
|---|---|---|---|---|
| Revenue | $3.176 billion | $2.835 billion | $6.245 billion | $5.595 billion |
| Operating profit | $122.4 million | $165.2 million | $267.5 million | $325.5 million |
| Operating margin | Approximately 3.9% | Approximately 5.8% | Approximately 4.3% | Approximately 5.8% |
| Net earnings attributable to Jacobs | $83.5 million | $104.4 million | $177.2 million | $203.4 million |
| Diluted earnings per share | $0.63 | $0.80 | $1.34 | $1.56 |
- Second-quarter revenue increased 12.0%; six-month revenue increased 11.6%.
- Second-quarter net earnings declined 20.1%; six-month net earnings declined 12.9%.
- Direct contract costs were 83.7% of revenue in the quarter and 84.5% for the six months, compared with 83.6% and 83.9%, respectively, in the prior-year periods.
- SG&A increased 31.5% in the quarter and 22.2% for the six months, primarily because of SKM. SG&A represented 12.4% and 11.3% of revenue, respectively, versus 10.6% and 10.3% in the prior-year periods.
- The effective tax rate was 31.4% for the quarter and 32.1% for the six months, compared with 33.9% and 33.5% in the prior-year periods.
Cash Flow, Debt, and Liquidity
- Six-month operating cash flow was $195.7 million, down from $252.7 million in the prior-year period.
- Investing cash outflow was $1.288 billion, including $1.198 billion for acquisitions, principally SKM.
- Financing cash inflow was $538.4 million, including $642.7 million of long-term borrowings, partly offset by $132.0 million of long-term debt repayments.
- Cash and cash equivalents declined to $691.3 million at March 28, 2014, from $1.256 billion at September 27, 2013.
- Long-term debt was $932.2 million and current notes payable were $64.2 million, compared with $415.1 million and $22.8 million, respectively, at fiscal year-end.
- The company had a $1.6 billion unsecured revolving credit facility, approximately $700 million of available borrowing capacity, and $335.4 million of letters of credit outstanding. The facility expires in February 2019.
- Management stated that cash, borrowing capacity, and other facilities were adequate for operations, acquisition plans, and debt service over the next twelve months. The company was in compliance with debt covenants at March 28, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by SKM, construction activity, and stronger Chemicals and Polymers, Infrastructure, and Mining and Minerals markets.
- Profitability weakened because of lower project margins, particularly on several European projects, higher SG&A, holiday and weather effects, SKM-related costs, and higher field-services activity.
- Excluding the gain on intellectual-property sales and SKM earnings, management estimated that second-quarter net earnings decreased by approximately $34.0 million.
- The second quarter included a $12.1 million gain on the sale of intellectual property. The six-month results also benefited from a $6.8 million favorable resolution of an international tax matter.
- Process, Scientific, and Systems Consulting revenue declined 12.6% in the quarter and 13.8% for the six months, primarily because of reduced U.S. federal government spending and the prior federal government shutdown.
- Construction revenue increased 20.6% in the quarter and 25.3% for the six months. Mining and Minerals revenue increased 88.4% and 74.8%, respectively.
- The SKM acquisition generated $9.0 million of transaction-related expenses in the six-month period; the filing also identifies acquisition-related intangible amortization and interest expense.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific quantitative full-year earnings or revenue guidance in the filing. Management expressed a positive outlook for several markets, including Chemicals and Polymers, Infrastructure, Refining–Downstream, Oil and Gas–Upstream, and selected buildings and mining opportunities.
- Key operating risks include project margin pressure, contract cost estimates, incentive fees, claims and change orders, pass-through-cost volatility, and the timing of project awards and execution.
- Most contracts may be cancelled or terminated at the client’s option, generally subject to payment for work performed and certain termination costs.
- Government-related risks include budget uncertainty, contract audits, investigations, pricing and cost-allocation reviews, and procurement claims.
- The company faces foreign-currency and interest-rate exposure, although it reported no exchange-rate-sensitive instruments expected to have a material effect on consolidated results.
- Legal matters include a Clark County, Nevada settlement paid in March 2014, for which the company is seeking insurance reimbursement, and one remaining personal-injury matter related to a 2009 natural-gas explosion. Management did not expect these matters to have a material adverse effect.
- The company made a $45 million investment in Guimar Engenharia Ltda. and completed several smaller acquisitions during the six-month period.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting. No material changes were reported to the risk factors in the 2013 Form 10-K.
Investor Verification Checklist
- Verify the sustained impact of SKM on revenue, margins, cash generation, integration costs, intangible amortization, and leverage.
- Assess whether lower project margins in Europe and the higher SG&A ratio are temporary or structural.
- Reconcile the sharp decline in cash with the SKM acquisition, debt financing, working-capital movements, and future acquisition spending.
- Review backlog quality, funding status, expected conversion timing, and termination provisions, particularly for government programs.
- Monitor receivables, unbilled amounts, claims receivable, billings in excess of costs, and contract-estimate changes.
- Track U.S. government spending, federal contract audits, insurance reimbursement for the Clark County settlement, and the remaining explosion-related litigation.
- Confirm the final purchase-price allocation for SKM, including goodwill, identifiable intangibles, deferred taxes, and any measurement-period adjustments.