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JEC > SEC Filings for JEC > Form 10-Q on 24-Jan-2014All Recent SEC Filings

Show all filings for JACOBS ENGINEERING GROUP INC /DE/

Form 10-Q for JACOBS ENGINEERING GROUP INC /DE/


24-Jan-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General
The purpose of this Management's Discussion and Analysis ("MD&A") is to provide a narrative analysis explaining the reasons for material changes in the Company's (i) financial condition since the most recent fiscal year-end, and
(ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year. In order to better understand such changes, readers of this MD&A should also read:

The discussion of the critical and significant accounting policies used by the Company in preparing its consolidated financial statements. The most current discussion of our critical accounting policies appears in Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2013 Annual Report on Form 10-K ("2013 Form 10-K"), and the most current discussion of our significant accounting policies appears in Note 2-Significant Accounting Polices in Notes to Consolidated Financial Statements of our 2013 Form 10-K, as well as the discussion of any new accounting standards issued, which is included in the Notes to Consolidated Financial Statements of this Form 10-Q;

The Company's fiscal 2013 audited consolidated financial statements and notes thereto included in our 2013 Form 10-K; and

Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2013 Form 10-K.

In addition to historical information, this MD&A may contain forward-looking statements that are not based on historical fact. When used herein, words such as "expects", "anticipates", "believes", "seeks", "estimates", "plans", "intends", and similar words identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although such statements are based on management's current estimates and expectations, and currently available competitive, financial, and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause our actual results to differ materially from what may be inferred from the forward-looking statements. Some of the factors that could cause or contribute to such differences are listed and discussed in Item 1A-Risk Factors, included in our 2013 Form 10-K. We undertake no obligation to release publicly any revisions or updates to any forward-looking statements. We encourage you to read carefully the risk factors described in other documents we file from time to time with the United States Securities and Exchange Commission. Overview
The Company's net earnings for the three months ended December 27, 2013 decreased by $5.3 million or 5.3% compared to the corresponding period last year. This decrease was due primarily to the transaction expenses and two-week operating loss from our acquisition of SKM partially offset by the resolution of an international tax matter, both of which are discussed below. The Company had a good sales quarter, particularly in the Oil & Gas - Upstream, Chemicals and Polymers, and Refining-Downstream industry groups and markets. Backlog at December 27, 2013 was $18.1 billion, an increase of 11.5% over backlog at December 28, 2012. The Company continues to have a positive outlook in many of the industry groups and markets in which our clients operate. Sinclair Knight Merz Acquisition

On December 13, 2013 the Company acquired SKM from the SKM shareholders ("Sellers"). The Company purchased SKM for approximately $1.2 billion in cash. The purchase price reflects an enterprise value of $1.1 billion plus adjustments for cash, debt and other items. Additional information related to the acquisition can be found in the Business Combinations note in the Notes to Consolidated Financial Statements. The Company expects this acquisition to significantly increase its capabilities in mining, infrastructure, buildings, water and energy, particularly in Australia, Asia, South America, and the U.K.

Included in the Company's financial results for the first quarter of fiscal 2014 were two weeks of SKM's operations and transaction-related expenses. SKM contributed a loss from operations of $3.3 million, primarily due to significant holiday and vacation impacts. These losses are not expected to continue. In addition, we incurred $9.1 million of acquisition related costs during the first quarter of fiscal 2014 which included a $7.8 million stamp duty associated with the transaction, which was recorded as an expense, $1.1 million of intangibles amortization for two weeks of operations, and $0.4 million of interest expense related to the $600 million debt incurred to acquire SKM. These items had an after-tax impact of $12.8 million or $0.10 per share.

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Results of Operations
Net earnings for the first quarter of fiscal 2014 ended December 27, 2013 decreased $5.3 million, or 5.3%, to $93.7 million (or $0.71 per diluted share) from $99.0 million (or $0.76 per diluted share) for the corresponding period last year.
Total revenues for the first quarter of fiscal 2014 increased by $309.3 million, or 11.2%, to $3.07 billion, from $2.76 billion for the first quarter of fiscal 2013.

The following table sets forth our revenues by the various types of services we provide for the three months ended December 27, 2013 and December 28, 2012 (in thousands):

                                                     For the Three Months Ended
                                                   December 27,         December 28,
                                                       2013                 2012
Technical Professional Services Revenues:
Project Services                               $     1,520,778         $    1,432,309
Process, Scientific, and Systems Consulting            152,634                179,610
Total Technical Professional Services Revenues       1,673,412              1,611,919
Field Services Revenues:
Construction                                         1,081,214                832,259
Operations and Maintenance ("O&M")                     314,265                315,463
Total Field Services Revenues                        1,395,479              1,147,722
Total Revenues                                 $     3,068,891         $    2,759,641

Project Services revenues for the three months ended December 27, 2013, increased $88.5 million, or 6.2%, from the corresponding period last year. This increase in Project Services revenues occurred primarily in the Chemicals and Polymers market, principally in our U.S., U.K., and South America operations and in our Refining - Downstream market, principally in the U.K., Europe, Middle East and Canada. Included in Project Services revenues for the three months ended December 27, 2013 are $25.7 million from the SKM acquisition.

Process, Scientific, and Systems Consulting revenues for the three months ended December 27, 2013, decreased $27.0 million, or 15.0%, from the corresponding period last year. The revenues in this service type primarily relate to science, engineering and technical support services provided to our U.S. government clients. These decreases can be attributed primarily to a reduction in spending by the U.S. federal government and impacts from the temporary shutdown of the U.S. federal government.

Construction revenues for the three months ended December 27, 2013, increased $249.0 million, or 29.9%, from the corresponding period last year. The Company continues to experience increased activity in the Chemicals and Polymers market in the U.S. and the U.K., as well as in the Mining and Minerals market in the U.S.

Our O&M revenues for the three months ended December 27, 2013 were relatively unchanged when compared to the prior year period. A decrease in our O&M revenues in our Canadian operations was partially offset by an increase in our U.S. operations. Nevertheless, we expect to see increases in our maintenance activity in our Canadian operations in fiscal 2014.

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The following table sets forth our revenues by the industry groups and markets
in which our clients operate for the three months ended December 27, 2013 and
December 28, 2012 (in thousands):

                                        For the Three Months Ended
                                      December 27,         December 28,
                                          2013                 2012
National Government Programs      $       510,041         $      553,942
Refining - Downstream                     610,536                522,239
Chemicals and Polymers                    762,062                520,611
Infrastructure                            291,490                272,545
Oil & Gas - Upstream                      207,863                221,634
Buildings                                 185,665                195,586
Pharmaceuticals and Biotechnology         110,506                139,335
Mining and Minerals                       223,783                139,000
Industrial and Other                      166,945                194,749
                                  $     3,068,891         $    2,759,641

For the three months ended December 27, 2013, revenues from clients operating in the National Government Programs market decreased $43.9 million, or 7.9%, to $510.0 million from $553.9 million for the corresponding period last year. Uncertainties over U.S. government budget issues are a key factor in this market, although the recent budget agreement should provide some funding certainty. In the first quarter of fiscal 2014, we also experienced impacts from the shutdown of the U.S. federal government. Nevertheless, we view this as an improving market and still see significant opportunities in the U.S. and, increasingly, the U.K.

For the three months ended December 27, 2013, revenues from clients operating in the Refining - Downstream industry increased $88.3 million, or 16.9%, to $610.5 million from $522.2 million for the corresponding period last year. This increase is primarily in Europe and Canada. We believe this will continue to be a strong market during the rest of fiscal 2014. Looking forward, several major European and other clients are investing to improve efficiency in their facilities, and, in the U.S., the industry is beginning to focus on compliance with the EPA TIER 3 Ultra Low Sulfur Gasoline regulations.

For the three months ended December 27, 2013, revenues from clients operating in the Chemicals and Polymers industries increased $241.5 million, or 46.4%, to $762.1 million from $520.6 million for the corresponding period last year. The effect of shale gas projects and the low price of natural gas continue to influence activity in this market. Because there is now a large source of feedstock available outside refineries which can grow independently of the refining infrastructure, we believe more projects are now economically viable and capital is being deployed to develop these opportunities. Furthermore, our clients are looking at various options to monetize natural gas. This increased activity during the first quarter of fiscal 2014 is primarily in the U.S. and the U.K. along with other increases in South America, the Middle East, and Asia. We see this as a very strong market in fiscal 2014 and beyond.

For the three months ended December 27, 2013, revenues from clients operating in the Infrastructure market increased $18.9 million, or 7.0%, to $291.5 million from $272.5 million for the corresponding period last year. We continue to view the Infrastructure market as strong globally, particularly in the U.S., the U.K. the Middle East, and Asia. We are also focusing on growing our telecommunication and regulated pipeline businesses as demonstrated by our acquisitions during the first quarter of fiscal 2014 of FHMC Corporation, Inc. and MARMAC Field Services, Inc. The SKM acquisition should significantly increase our revenue in the infrastructure market in fiscal year 2014, primarily in Australia, Asia and the U.K.

For the three months ended December 27, 2013, revenues for clients operating in the Oil & Gas - Upstream industry decreased $13.8 million, or 6.2%, to $207.9 million from $221.6 million from the corresponding period last year. The decrease was primarily due to what we believe to be a temporary decline in Canadian turnaround activities compared to the prior period. The Company believes this a very strong market and expects field services activity in the Canadian market to grow as projections continue to show a strong oil price forecast. We continue to see more opportunities in the Middle East, including unconventional gas development programs and large pipeline front end engineering and design ("FEED") projects. The market in Europe looks positive with a number of opportunities for engineering, procurement and construction Management ("EPCM") projects, FEED's for onshore terminal modifications, and long-term site-based alliances. Onshore development and production in the U.S. continues to be strong. The Australian market is being driven by the development of liquefied natural gas export projects.

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For the three months ended December 27, 2013, revenues from clients operating in the Buildings market decreased $9.9 million, or 5.1%, to $185.7 million from $195.6 million for the corresponding period last year. We view the Buildings market as improving as the buildings business continues to shift towards projects for clients in the private sector. Growth in the private sector business is coming from mission critical, education, healthcare, aviation, and corporate and commercial programs and projects. The acquisition of SKM brings new capability in this market in Asia and Australia.

For the three months ended December 27, 2013, revenues from clients operating in the Pharmaceuticals and Biotechnology industries and markets decreased $28.8 million, or 20.7%, to $110.5 million from $139.3 million for the corresponding period last year. We view this as an improving market, with potential growth prospects in the areas of biotechnology-based drug development in Europe and North America and secondary manufacturing expansion in Asia, the U.K., and South America. We continue to view China as a strong market with the government emphasizing improvement in the nation's healthcare system.

For the three months ended December 27, 2013, revenues from clients operating in the Mining and Minerals market increased $84.8 million, or 61.0%, to $223.8 million from $139.0 million for the corresponding period last year. The increased revenues in 2014 were primarily from field services projects based in the U.S. Globally, our clients in this market have been affected negatively by a general slowdown in the rate of growth in the Chinese economy; falling spot prices for iron ore, coking, and thermal coal; and weaker commodity prices - albeit these declines have occurred from prices that were generally high from a historical perspective. Despite these factors, we view this as a growing market for Jacobs, as we believe we will be able to capture additional market share. The Company will continue to focus on asset optimization and sustaining capital projects (small-cap projects and maintenance-driven work) for our clients in this market. The potential for legislative changes during fiscal 2014 in Australia could have a positive influence in this market in the later part of the year. The acquisition of SKM should result in significant revenue generated in fiscal year 2014 with their new capability primarily in Australia and South America. We made a $45 million investment in Guimar Engenharia, a Brazilian-based engineering services and project management/construction management firm, which should help in this market as well as clients in other markets seeking to do projects in Brazil. In addition, the SKM acquisition is expected to expand our capabilities beyond non-ferrous metals to iron ore and coal. We also believe the acquisition of SKM will bring together our existing hydro-metallurgy and concentrator skills with SKM's strength in materials handling and infrastructure.

For the three months ended December 27, 2013, revenues from clients operating in the Industrial and Other markets decreased $27.8 million, or 14.3%, to $166.9 million from $194.7 million for the corresponding period last year. The Industrial and Other market includes the Pulp & Paper, High-Tech, Power, and Food & Consumer Products industry groups and markets. The decreases in Industrial and Other revenues were due primarily to decreased field services activity in the Pulp & Paper market in the U.S. and the High-Tech market in Ireland.
Direct costs of contracts for the first quarter of fiscal 2014 increased $0.3 billion, or 12.5%, to $2.6 billion from $2.3 billion for the corresponding period last year. Direct costs of contracts include all costs incurred in connection with and directly for the benefit of client contracts, including depreciation and amortization relating to assets used in providing the services required by the related projects. The level of direct costs of contracts may fluctuate between reporting periods due to a variety of factors, including the amount of pass-through costs we incur during a period. On those projects where we are responsible for subcontract labor or third-party materials and equipment, we reflect the amounts of such items in both revenues and costs (and we refer to such costs as "pass-through costs"). On other projects where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not considered pass-through costs and are, therefore, not reflected in either revenues or costs. To the extent that we incur a significant amount of pass-through costs in a period, our direct costs of contracts are likely to increase as well.

Pass-through costs for the first quarter of fiscal 2014 increased $205.6 million, or 37.6%, to $752.0 million from $546.4 million for the corresponding period last year. In general, pass-through costs are more significant on projects that have a higher content of field services activities. Pass-through costs are generally incurred at specific points during the lifecycle of a project and are highly dependent on the needs of our individual clients and the nature of the clients' projects. However, because we have hundreds of projects which start at various times within a fiscal year, the effect of pass-through costs on the level of direct costs of contracts can vary between fiscal years without there being a fundamental or significant change to the underlying business.

As a percentage of revenues, direct costs of contracts for the three months ended December 27, 2013 was 85.2%. This compares to 84.2% for the three months ended December 28, 2012. The relationship between direct costs of contracts and revenues will fluctuate between reporting periods depending on a variety of factors, including the mix of business during the reporting periods being compared as well as the level of margins earned from the various types of services provided. Generally, the more procurement we do on behalf of our clients (i.e., where we purchase equipment and materials for use on projects and/or procure subcontracts in connection with projects) and the more field services revenues we have relative to technical,

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professional services revenues, the higher the ratio will be of direct costs of contracts to revenues. Because revenues from pass-through costs typically have lower margin rates associated with them, it is not unusual for us to experience an increase or decrease in such revenues without experiencing a corresponding increase or decrease in our gross margins and operating profit. For the three months ended December 27, 2013, the increase in the ratio of direct costs of contracts to revenues increased over the prior year primarily due to an increase in our field services activities and an increase in our pass through costs as well.

Selling, general and administrative ("SG&A") expenses for the first quarter of fiscal 2014 increased $33.2 million, or 12.0%, to $308.6 million from $275.5 million for the corresponding period last year. The increase in SG&A is primarily due to the SKM acquisition, both in terms of one-time transaction-related expenses and SG&A for the last two weeks of the quarter. Without SKM-related SG&A costs of $26.1 million, total SG&A would have increased $7.1 million or 2.6%. As a percentage of revenues, SG&A costs was relatively unchanged at approximately 10% for the three months ended December 27, 2013 when compared to the corresponding periods last year. Without the SKM-related SG&A costs above, SG&A would have declined to 9.3% of revenues for the three months ended December 27, 2013.

We have reported net, negative interest expense for the first quarter of fiscal 2014. We successfully resolved a tax matter involving one of our international subsidiaries which resulted in the reversal of $4.1 million of accrued interest.

The Company's effective income tax rate for the quarter ended December 28, 2012 declined from 33.1% to 32.7% for the quarter ended December 27, 2013. This decrease was the result of the resolution of the international tax liability discussed above, offset by the stamp duty related to the SKM acquisition previously described which is not deductible for income tax purposes. Backlog Information
We include in backlog the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Our policy with respect to O&M contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For national government programs (other than national government O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, excluding option periods. Because of the nature, size, expected duration, funding commitments, and the scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts.

Consistent with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client. In a situation where a client terminates a contract, we typically are entitled to receive payment for work performed up to the date of termination and, in certain instances, we may be entitled to allowable termination and cancellation costs. While management uses all information available to it to determine backlog, our backlog at any given time is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein.

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Because certain contracts (for example, contracts relating to large engineering, procurement, and construction projects as well as national government programs) can cause large increases to backlog in the fiscal period in which we recognize the award, and because many of our contracts require us to provide services that span over a number of fiscal quarters (and sometimes over fiscal years), we evaluate our backlog on a year-over-year basis, rather than on a sequential, quarter-over-quarter basis.
The following table summarizes our backlog at December 27, 2013 and December 28, 2012 (in millions):

                                 December 27, 2013      December 28, 2012
Technical professional services $          12,279.7    $          10,407.3
Field services                              5,774.5                5,782.3
Total                           $          18,054.2    $          16,189.6

Our backlog increased $1.9 billion, or 11.5%, to $18.1 billion at December 27, 2013 from $16.2 billion at December 28, 2012. Backlog at December 27, 2013 includes $0.8 billion from the SKM acquisition, new awards from clients operating in many of the industry groups and markets we serve, in particularly the Oil & Gas - Upstream, and Power industry groups and markets and expanded business in the Chemicals and Polymers industry. Liquidity and Capital Resources
At December 27, 2013, our principal sources of liquidity consisted of $1.0 billion of cash and cash equivalents and $0.2 billion of available borrowing capacity under our $1.21 billion 2012 Facility. We finance much of our operations and growth through cash generated by our operations.
During the three months ended December 27, 2013, our cash and cash equivalents decreased by $245.2 million from $1.26 billion at September 27, 2013 to $1.0 billion at December 27, 2013. This compares to a net increase in cash and cash equivalents of $209.3 million to $1.24 billion during the corresponding period last year. During the three months ended December 27, 2013, we experienced net cash inflows of $326.5 million from operating activities and $628.1 million from financing activities. These cash inflows were offset by cash outflows of $1,196.3 million from investing activities and $3.4 million from the effects of exchange rate changes.

Our operations provided net cash inflows of $326.5 million during the three months ended December 27, 2013. This compares to net cash inflows of $246.7 million for the corresponding period last year. The $79.8 million increase in cash flows from operating activities during the three months ended December 27, 2013 as compared to the corresponding period last year was due primarily to a $60.0 million increase in cash generated from our working capital accounts (discussed below).
Because such a high percentage of our revenues is earned on cost-plus type contracts, and due to the significance of revenues relating to pass-through costs, most of the costs we incur are included in invoices we send to clients. Although we continually monitor our accounts receivable, we manage the operating cash flows of the Company by managing the working capital accounts in total, rather than by the individual elements. The primary elements of the Company's working capital accounts are accounts receivable, accounts payable, and billings in excess of cost. Accounts payable consist of obligations to third parties relating primarily to costs incurred for projects which are generally billable to clients. Accounts receivable consist of amounts due from our clients - a substantial portion of which is for project-related costs. Billings in excess of cost consist of billings to and payments from our clients for costs yet to be incurred.
This relationship between revenues and costs, and between receivables and payables, is unique to our industry, and facilitates review of our liquidity at the total working capital level. The $60.0 million increase in cash flows relating to our working capital accounts was due to the timing of cash receipts and payments within our working capital accounts. Contributing to the increase in cash flows related to the Company's working capital accounts during the first three months of fiscal 2014 was an improvement in our collection of accounts receivable. Though the Company provides services in a number of countries . . .

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