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JEC > SEC Filings for JEC > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for JACOBS ENGINEERING GROUP INC /DE/

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


2-May-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 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;

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 and six months ended March 28, 2014 decreased by $20.9 million and $26.2 million, or 20.1% and 12.9%, respectively, as compared to the corresponding periods last year. Excluding the positive effects of the gain on sale of certain intellectual property ($6.5 million) and the inclusion of SKM earnings ($6.6 million), net earnings for the three month period ended March 28, 2014 decreased $34.0 million primarily due to the effects of lower project margin (relating primarily to several projects performed in Europe) and holiday and weather effects. For the six months ended March 28, 2014, the decrease in net earnings was primarily due to the impacts noted above as well as the SKM loss ($12.8 million) recorded in the first quarter, offset in part by the positive impact of the resolution of an international tax matter in the first quarter of fiscal 2014 ($6.8 million).
Backlog at March 28, 2014 was $18.4 billion, an increase of 9.7% over backlog at March 29, 2013. 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. 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 three months ended March 28, 2014 were the results of SKM's operations for the full three months. Included in the Company's financial results for the six months ended March 28, 2014 were the results of SKM's operations for the three and a half month period since acquisition on December 13, 2013. The three and six months results of SKM were impacted by significant holiday and vacation impacts, transaction-related costs, intangible amortization since the acquisition, and interest expense related to the $600 million in debt incurred to acquire SKM.

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Results of Operations
Net earnings for the second quarter of fiscal 2014 ended March 28, 2014 decreased $20.9 million, or 20.1%, to $83.5 million (or $0.63 per diluted share) from $104.4 million (or $0.80 per diluted share) for the corresponding period last year.
For the six months ended March 28, 2014, net earnings decreased $26.2 million, or 12.9%, to $177.2 million (or $1.34 per diluted share), from $203.4 million (or $1.56 per diluted share) for the corresponding period last year. Total revenues for the second quarter of fiscal 2014 increased by $340.9 million, or 12.0%, to $3.18 billion, from $2.84 billion for the second quarter of fiscal 2013. For the six months ended March 28, 2014, total revenues increased by $650.2 million, or 11.6%, to $6.2 billion, from $5.6 billion for the corresponding period last year.

The following table sets forth our revenues by the various types of services we provide for the three and six months ended March 28, 2014 and March 29, 2013, respectively (in thousands):

                                            For the Three Months Ended             For the Six Months Ended
                                             March 28,           March 29,        March 28,         March 29,
                                               2014                2013              2014             2013
Technical Professional Services
Revenues:
Project Services                       $     1,710,365         $ 1,510,332     $    3,231,142     $ 2,942,641
Process, Scientific, and Systems
Consulting                                     160,722             183,797            313,356         363,407
Total Technical Professional Services
Revenues                                     1,871,087           1,694,129          3,544,498       3,306,048
Field Services Revenues:
Construction                                   992,514             822,706          2,073,728       1,654,965
Operations and Maintenance ("O&M")             312,432             318,249            626,698         633,712
Total Field Services Revenues                1,304,946           1,140,955          2,700,426       2,288,677
Total Revenues                         $     3,176,033         $ 2,835,084     $    6,244,924     $ 5,594,725

Project Services revenues for the three months ended March 28, 2014 increased $200.0 million, or 13.2%, from the corresponding period last year. Project Services revenues for the six months ended March 28, 2014 increased $288.5 million, or 9.8%, from the corresponding period last year. These increases in Project Services revenues were due primarily to SKM. Also contributing to the increases were the Chemicals and Polymers market, principally in our U.S., and U.K. operations, the Infrastructure market, principally in SKM and our U.S. operations and in our Refining - Downstream market, principally in the U.K., Europe, and Middle East.

Process, Scientific, and Systems Consulting revenues for the three months ended March 28, 2014 decreased $23.1 million, or 12.6%, from the corresponding period last year. Process, Scientific, and Systems Consulting revenues for the six months ended March 28, 2014 decreased $50.1 million, or 13.8%, 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, in the first quarter of fiscal 2014, impacts from the temporary shutdown of the U.S. federal government.

Construction revenues for the three months ended March 28, 2014 increased $169.8 million, or 20.6%, from the corresponding period last year. Construction revenues for the six months ended March 28, 2014 increased $418.8 million, or 25.3%, from the corresponding period last year, primarily in the Chemicals and Polymers market and the Mining and Minerals market in the U.S.

Our O&M revenues for the three and six months ended March 28, 2014 decreased slightly when compared to the corresponding prior year periods. 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 the future.

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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 and six months ended March 28, 2014
and March 29, 2013 (in thousands):

                                            For the Three Months Ended             For the Six Months Ended
                                             March 28,           March 29,        March 28,         March 29,
                                               2014                2013              2014             2013
National Government Programs           $       568,932         $   574,414     $    1,078,973     $ 1,128,356
Refining - Downstream                          535,067             539,368          1,145,603       1,061,607
Chemicals and Polymers                         666,880             576,101          1,428,944       1,096,712
Infrastructure                                 356,277             284,774            647,767         557,319
Oil & Gas - Upstream                           194,602             199,065            402,465         420,699
Buildings                                      215,499             176,802            401,164         372,388
Pharmaceuticals and Biotechnology              140,921             137,613            251,427         276,948
Mining and Minerals                            264,316             140,291            488,099         279,291
Industrial and Other                           233,539             206,656            400,482         401,405
                                       $     3,176,033         $ 2,835,084     $    6,244,924     $ 5,594,725

For the three months ended March 28, 2014, revenues from clients operating in the National Government Programs market decreased $5.5 million, or 1.0%, to $568.9 million from $574.4 million for the corresponding period last year. For the six months ended March 28, 2014, revenues decreased $49.4 million, or 4.4%, to $1.08 billion from $1.13 billion for the corresponding period last year. Uncertainties over U.S. government budget issues are a key factor in this market, although the budget agreement passed in December 2013 is providing some funding certainty. In the first quarter of fiscal 2014, we also experienced impacts from the shutdown of the U.S. federal government. We view this as an improving market and still see opportunities with the U.S. and the U.K. governments.

For the three months ended March 28, 2014, revenues from clients operating in the Refining - Downstream industry decreased $4.3 million, or 0.8%, to $535.1 million from $539.4 million for the corresponding period last year. For the six months ended March 28, 2014, revenues increased $84.0 million, or 7.9%, to $1.15 billion from $1.06 billion for the corresponding period last year. These increases occurred primarily in the U.K. and Europe. We believe this to be a strong market as 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 March 28, 2014, revenues from clients operating in the Chemicals and Polymers industries increased $90.8 million, or 15.8%, to $666.9 million from $576.1 million for the corresponding period last year. For the six months ended March 28, 2014, revenues increased $332.2 million, or 30.3%, to $1.4 billion from $1.1 billion for the corresponding period last year. These increases occurred primarily in the U.S., the U.K., and the Middle East offset by decreases in Canada, South America, and Asia. 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, we believe our clients are looking at various options to monetize natural gas. As a result, we see this as a very strong market in fiscal 2014 and beyond.

For the three months ended March 28, 2014, revenues from clients operating in the Infrastructure market increased $71.5 million, or 25.1%, to $356.3 million from $284.8 million for the corresponding period last year. For the six months ended March 28, 2014, revenues increased $90.4 million, or 16.2%, to $647.8 million from $557.3 million for the corresponding period last year. The increase is primarily due to the acquisition of SKM (Australia, Asia, and the U.K.) combined with increased spending in the U.S. market, partially offset by decreases in the U.K. We continue to view the Infrastructure market as strong globally. This market also includes our recent acquisitions of FHMC Corporation, Inc. and MARMAC Field Services, Inc. in the telecommunication and regulated pipeline areas, respectively.

For the three months ended March 28, 2014, revenues for clients operating in the Oil & Gas - Upstream industry decreased $4.5 million, or 2.2%, to $194.6 million from $199.1 million from the corresponding period last year. For the six months ended March 28, 2014, revenues decreased $18.2 million, or 4.3%, to $402.5 million from $420.7 million for the corresponding period last year. The decrease was primarily due to what we believe to be temporary declines in Canada partially offset by increases in the Middle East. The Company believes this to be a very strong market and expects field services activity in the Canadian market to grow. We continue to see more opportunities in the Middle East, including unconventional gas development programs

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and large pipeline front end engineering and design ("FEED") projects. We believe the market in Europe will be 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. We acquired Eagleton Engineering, LLC in February 2014 to help drive our growth in the pipeline services area which we believe is an attractive market.

For the three months ended March 28, 2014, revenues from clients operating in the Buildings market increased $38.7 million, or 21.9%, to $215.5 million from $176.8 million for the corresponding period last year. For the six months ended March 28, 2014, revenues increased $28.8 million, or 7.7%, to $401.2 million from $372.4 million for the corresponding period last year. The increased revenue is due in part to the acquisition of SKM, which brings new capability in this market in Asia and Australia. We view the Buildings market as improving as the buildings business continues to shift towards projects for clients in the private sector. We believe growth in the private sector business will come from mission critical, education, healthcare, aviation, and corporate and commercial programs and projects.

For the three months ended March 28, 2014, revenues from clients operating in the Pharmaceuticals and Biotechnology industries and markets increased $3.3 million, or 2.4%, to $140.9 million from $137.6 million for the corresponding period last year. For the six months ended March 28, 2014, revenues decreased $25.5 million, or 9.2%, to $251.4 million from $276.9 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 India and 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 March 28, 2014, revenues from clients operating in the Mining and Minerals market increased $124.0 million, or 88.4%, to $264.3 million from $140.3 million for the corresponding period last year. For the six months ended March 28, 2014, revenues increased $208.8 million, or 74.8%, to $488.1 million from $279.3 million for the corresponding period last year. The increased revenues in 2014 were primarily from field services projects based in the U.S. and the acquisition of SKM, primarily in Australia and South America. Globally, our clients in this market have been affected negatively by a general economic slowdown, particularly in Australia. We believe we will be able to capture additional market share in this growing market by continuing to focus on asset optimization and sustaining capital projects (small-cap projects and maintenance-driven work) for our clients in this market. In addition, the SKM acquisition is expected to expand our capabilities beyond non-ferrous metals to iron ore and coal and to bring together our existing hydro-metallurgy and concentrator skills with SKM's strength in materials handling and infrastructure. During the first quarter of fiscal 2014, we made a $45 million investment in Guimar Engenharia Ltda, 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.

For the three months ended March 28, 2014, revenues from clients operating in the Industrial and Other market increased $26.9 million, or 13.0%, to $233.5 million from $206.7 million for the corresponding period last year. For the six months ended March 28, 2014, revenues decreased $0.9 million, or 0.2%, to $400.5 million from $401.4 million for the corresponding period last year. The Industrial and Other market, which we view as mixed, includes the Pulp & Paper, High-Tech, Power, and Food & Consumer Products industry groups and markets. The increase in Industrial and Other revenues for the comparable second quarter periods was due primarily to increased field services activity in the Pulp & Paper market in the U.S. and the High-Tech market in the U.S. and Ireland. Direct costs of contracts for the second quarter of fiscal 2014 increased $0.3 billion, or 12.2%, to $2.7 billion from $2.4 billion for the corresponding period last year. Direct costs of contracts for the six months ended March 28, 2014 increased $0.6 billion, or 12.4%, to $5.3 billion from $4.7 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 second quarter of fiscal 2014 increased $126.9 million, or 22.1%, to $700.6 million from $573.6 million for the corresponding period last year. Pass-through costs for the six months ended March 28, 2014 increased $0.3 billion, or 29.7%, to $1.45 billion from $1.12 billion 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

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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 and six months ended March 28, 2014 was 83.7% and 84.5%, respectively. This compares to 83.6% and 83.9% for the three and six months ended March 29, 2013, respectively. 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, 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 and six months ended March 28, 2014, the ratio of direct costs of contracts to revenues over the prior year periods increased, primarily as a result of higher field services activities, offset in by SKM.

Selling, general and administrative ("SG&A") expenses for the second quarter of fiscal 2014 increased $94.4 million, or 31.5%, to $394.1 million from $299.7 million for the corresponding period last year. For the six months ended March 28, 2014, SG&A expenses increased $127.6 million, or 22.2%, to $702.8 million from $575.2 million for the corresponding period last year. The increase in SG&A is primarily due to the inclusion of SKM. SG&A costs increased to 12.4% and 11.3% of revenues for the three and six months ended March 28. 2014, respectively. This compares to SG&A costs of 10.6% and 10.3% of revenues for the corresponding periods last year. For the three and six months ended March 28, 2014, SG&A also includes SKM transaction-related costs that are not material to the consolidated results of operations for the three months and $9.0 million (including stamp duty), respectively, and $5.8 million and $6.9 million of intangibles amortization, respectively.

Net interest expense for the three and six months ended March 28, 2014 was $2.1 million and $0.1 million, respectively, as compared to $1.9 million and $4.5 million, respectively for the corresponding periods last year. The increase for the three month period is due to higher interest income earned from SKM offset by higher interest expense related to the debt incurred to acquire SKM. For the six month period, the decrease is related to the successful resolution in the first quarter of fiscal 2014 of 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 March 28, 2014 declined to 31.4% from 33.9% for the corresponding period last year. The Company's effective income tax rate for the six months ended March 28, 2014 declined to 32.1% from 33.5% for the corresponding period last year. These decreases were primarily the result of inclusion of SKM since December 13, 2013, and the $4.1 million impact of the international tax liability discussed above, offset by the stamp duty related to the SKM acquisition 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 March 28, 2014 and March 29, 2013 (in millions):

                                 March 28, 2014      March 29, 2013
. . .
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