Jacobs Engineering Group Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 28, 2013, compared with the corresponding periods ended June 29, 2012. The filing identifies the registrant as Jacobs Engineering Group Inc. (now associated with Jacobs Solutions Inc.). Financial statements are unaudited.
Business Context and Reporting Period
Jacobs provides technical professional services, construction, operations and maintenance services, primarily for government and commercial clients. Management reported strong awards and increased activity in Chemicals and Polymers, Oil & Gas–Upstream, Refining–Downstream, Infrastructure and Buildings.
Backlog was $17.2 billion at June 28, 2013, up 10.2% from $15.6 billion at June 29, 2012. Technical professional services backlog was $11.1 billion and field services backlog was $6.1 billion.
Financial Performance and Position
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Revenue | $3.081 billion | $2.773 billion | $8.676 billion | $8.107 billion |
| Operating profit | $168.4 million | $153.4 million | $493.8 million | $428.5 million |
| Net earnings attributable to Jacobs | $108.9 million | $97.9 million | $312.3 million | $271.5 million |
| Diluted EPS | $0.83 | $0.76 | $2.39 | $2.11 |
| Operating margin | 5.5% | 5.5% | 5.7% | 5.3% |
| Direct costs as a percentage of revenue | 84.8% | 84.4% | 84.2% | 84.2% |
Revenue increased 11.1% in the quarter and 7.0% for the first nine months. Net earnings attributable to Jacobs increased 11.2% and 15.0%, respectively. SG&A increased 6.8% in the quarter and 2.6% year to date, while SG&A as a percentage of revenue declined.
Pass-through costs were $674.7 million in the quarter and $1.795 billion year to date. These costs generally carry lower margins and can affect reported revenue and direct-cost ratios without a proportional effect on gross margins or operating profit.
Cash Flow, Debt and Liquidity
| Metric | 9M FY2013 | 9M FY2012 |
|---|---|---|
| Cash provided by operating activities | $437.2 million | $141.7 million |
| Cash used in investing activities | $105.9 million | $144.3 million |
| Cash used in financing activities | $51.2 million | $11.1 million |
| Capital expenditures | $91.5 million | $70.3 million |
| Ending cash and cash equivalents | $1.296 billion | $898.6 million |
Cash increased $263.1 million from September 28, 2012. Management attributed the improvement in operating cash flow primarily to stronger earnings, improved working-capital timing and lower pension contributions.
At June 28, 2013, long-term debt was $432.7 million, principally borrowings under the $1.21 billion unsecured revolving credit facility. The company had $761.9 million of available borrowing capacity, including $10.8 million of letters of credit issued under the facility, and was in compliance with its debt covenants. Total letters of credit outstanding were $255.5 million. Working capital was approximately $2.1 billion.
Material Changes Versus the Prior Comparable Period
- Construction revenue increased 28.7% in the quarter and 16.4% year to date, driven mainly by Oil & Gas–Upstream and Chemicals and Polymers activity.
- Chemicals and Polymers revenue increased 65.9% in the quarter and 41.0% year to date, supported by shale-gas-related projects and lower-cost natural-gas feedstock.
- Oil & Gas–Upstream revenue increased 7.8% in the quarter and 23.1% year to date, primarily reflecting stronger Canadian field-services activity.
- Refining–Downstream revenue declined 6.5% in the quarter and 9.7% year to date, principally because the prior-year comparison included substantial pass-through costs from a large U.S. project that was winding down.
- Process, Scientific, and Systems Consulting revenue declined 6.5% in the quarter and 5.1% year to date due primarily to the wind-down of a U.S. federal government project.
- Operations and Maintenance revenue was relatively unchanged overall; higher National Government Programs revenue was offset by lower Canadian operations revenue.
- The company acquired Compass Technology Services on May 28, 2013, and increased its ownership of CES in India to 87.6% on June 6, 2013.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific numerical earnings or revenue guidance in the filing. It expressed a positive outlook for nearly all served markets and expected continued strength in Chemicals and Polymers, Refining–Downstream, Oil & Gas–Upstream and selected infrastructure and private-sector buildings activity.
- U.S. federal budget sequestration had caused some near-term budget reductions and procurement delays; management stated that the longer-term impact remained unclear.
- Mining and Minerals activity faced pressure from slower Chinese growth, lower commodity prices and client capital-spending reductions.
- Customers in Pharmaceuticals and Biotechnology delayed certain projects, although management viewed the market as steady.
- Most contracts may be canceled or terminated at the client's option, subject to payment for work performed and, in some cases, allowable termination costs. Backlog can change with contract scope, funding and cost estimates.
- The company is exposed to contract-performance claims, government audits, investigations, litigation, insurance limitations, foreign-currency movements and interest-rate changes. Management believed the disclosed matters would not have a material adverse effect on the consolidated financial statements.
- Significant matters included arbitration involving Clark County, Nevada, and litigation related to the 2009 ConAgra plant explosion. Management reported adequate defenses, insurance and/or indemnification and did not expect material adverse effects.
- Effective tax rates were 33.4% for the quarter and 33.5% year to date, compared with 33.3% and 33.9% in the prior-year periods.
Important Facts for Investors to Verify
- Whether backlog conversion, client cancellations and contract funding support the reported $17.2 billion backlog.
- The sustainability of margin performance as the mix shifts toward construction, field services and pass-through costs.
- The longer-term effect of U.S. federal sequestration and procurement delays on government-program revenue.
- Cash collection, unbilled receivables and contract claims, which totaled $2.318 billion of receivables, including $1.087 billion of unbilled receivables and other amounts.
- Debt utilization, letters of credit, covenant compliance and the March 2017 maturity of the revolving credit facility.
- Integration and contribution from the Compass and CES acquisitions.
- Potential exposure from government contract audits, litigation, guarantees, insurance recoveries and indemnification arrangements.
- Foreign-currency effects, pension funding requirements and the $10.9 million of pension contributions expected during the remainder of fiscal 2013.