Jacobs Engineering Group Inc. — Fiscal 2012 First-Quarter 10-Q Summary
Reporting period: Three months ended December 30, 2011, compared with the three months ended December 31, 2010. The filing identifies the registrant as Jacobs Engineering Group Inc.; it does not use the later name Jacobs Solutions Inc. Financial statements are unaudited.
Business Context and Reporting Period
Jacobs provides technical professional services, construction, operations and maintenance, engineering, procurement and related services across government and commercial markets. Fiscal first-quarter results included the acquisitions of KlingStubbins, Inc. and Unique World Pty Ltd., completed in November and December 2011. The acquisitions were not material individually or in aggregate to the reported consolidated results.
Key Financial Metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $2.632 billion | $2.356 billion | +11.7% |
| Operating profit | $142.0 million | $103.6 million | +37.0% |
| Operating margin | 5.4% | 4.4% | +1.0 percentage point |
| Net earnings attributable to Jacobs | $89.7 million | $65.8 million | +36.3% |
| Diluted EPS | $0.70 | $0.52 | +34.6% |
| Net margin attributable to Jacobs | 3.4% | 2.8% | +0.6 percentage point |
| Cash flow from operations | $146.2 million | $145.8 million | Approximately flat |
| Capital expenditures | $20.1 million | $6.7 million | Higher |
| Acquisitions, net of cash acquired | $65.8 million | $58.0 million | Higher |
Technical professional services revenue increased 27.7% to $1.538 billion, driven by higher legacy business volume and contributions from the Aker Entities acquired in fiscal 2011. Field services revenue declined 5.0% to $1.094 billion, primarily because of project wind-downs and the timing of procurement activity.
Direct contract costs were 84.0% of revenue versus 86.0% in the prior-year quarter. Management attributed the improvement mainly to a greater mix of project services relative to field services. SG&A increased 22.7% to $279.1 million, primarily because of acquired businesses. Interest expense increased to $3.7 million from $0.8 million, principally due to debt incurred for the Aker acquisition.
Cash and cash equivalents increased to $959.2 million from $905.6 million at September 30, 2011. Operating cash flow was $146.2 million. Investing activities used $85.8 million, primarily for acquisitions and capital expenditures, while financing activities used $12.4 million, largely reflecting repayment of borrowings.
At December 30, 2011, current liabilities included $535.7 million of notes payable, and the balance sheet reported no material long-term debt. Management separately disclosed approximately $369.3 million outstanding under bilateral facilities and other borrowing arrangements, including $170.6 million utilized under the $290.0 million unsecured revolving credit facility. Available capacity under the revolving facility was $119.4 million.
Working capital was approximately $1.14 billion. Receivables were $2.027 billion, including $955.7 million of unbilled receivables and other amounts and $57.6 million of retentions receivable. Backlog was $14.482 billion, up 11.5% year over year, including $9.530 billion of technical professional services backlog and $4.953 billion of field services backlog.
Material Changes Versus the Prior Comparable Period
- Revenue increased $275.6 million, with the largest contribution from technical professional services, Chemicals and Polymers, Mining and Minerals, and Pharmaceuticals and Biotechnology.
- Operating profit grew faster than revenue as the direct-cost ratio improved and the business mix shifted toward project services.
- Net earnings attributable to Jacobs increased $23.9 million, and diluted EPS rose $0.18.
- SG&A and interest expense increased because of acquired operations and acquisition-related debt.
- Operating cash flow was essentially unchanged despite higher earnings, while investing cash use increased due to acquisition activity.
- Backlog increased $1.494 billion year over year, partly reflecting inclusion of the Aker Entities.
- Stockholders’ equity increased to $3.453 billion from $3.323 billion at September 30, 2011, while cash increased by $53.6 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that it expected to have adequate liquidity and capital resources for the next twelve months to fund operations, support acquisitions and service debt. The company was negotiating a new multi-year revolving credit facility expected to close during the second or third quarter of fiscal 2012 and intended to refinance outstanding bank borrowings and provide additional capacity. This was a stated expectation, not a completed transaction as of the filing date.
Management cautioned that backlog timing can vary substantially and that substantially all contracts may be canceled or terminated at the client’s option. Backlog may change with contract scope, funding and cost estimates. Interim results are not necessarily indicative of full-year results.
Key operating risks include contract performance, cost estimates, incentive fees, claims and unapproved change orders, government contract audits, allowable-cost determinations, foreign currency movements, interest-rate changes and customer termination rights. Contract-related litigation, guarantees, insurance claims, government investigations and tax audits were described as part of the normal course of business. Management believed these matters would not have a material adverse effect on the consolidated financial statements.
The company continued to face litigation related to the 2007 I-35W bridge collapse. The Minnesota Supreme Court finalized dismissal of the consultant’s claim and dismissed MnDOT’s contractual indemnity claims, but allowed MnDOT to pursue reimbursement under the Victims Compensation Fund legislation. The matter was remanded to the trial court, and management did not expect a material adverse effect.
The filing reported no material changes to the risk factors in the 2011 Form 10-K. Management concluded that disclosure controls and procedures were effective as of December 30, 2011, with no material changes to internal control over financial reporting.
Investor Verification Items
- Verify the identity and corporate lineage of the registrant, because the filing is for Jacobs Engineering Group Inc., not the later-named Jacobs Solutions Inc.
- Verify completion, terms and capacity of the proposed replacement revolving credit facility and the maturity or refinancing of facilities expiring in fiscal 2012.
- Assess how much revenue and backlog growth was attributable to the Aker Entities versus organic growth.
- Review the quality and collectability of the $2.027 billion receivables balance, particularly unbilled receivables, retentions and claims receivable.
- Monitor contract margins, pass-through costs, project cost estimates, incentive fees and potential losses under percentage-of-completion accounting.
- Track the MnDOT bridge-collapse reimbursement claim and other government audits, litigation, guarantees and partially insured liabilities.
- Reconcile disclosed borrowing amounts across the balance sheet, revolving facility and bilateral facilities, including letters of credit.