Jacobs Loses Litigation – Analyst Blog

Jacobs France SAS, subsidiary of Jacobs Engineering Group Inc. (JEC) lost a law suit at the France Tribunal. The suit was filed in relation to a contract for the erection of a waste incineration plant in Sausheim, France by Serete for the SIVOM de Mulhousienne. However, the contract was entered into before Jacobs took over Serete.

 

On completion of the contract, Jacobs claimed additional costs of $49 million as damages. On the other hand, SIVOM claimed that the delay in completion of the contract led them to incur additional operating costs.

 

On behalf of the final judgment, Jacobs will now adjust the cost in the income statement for the third quarter of fiscal 2010 ending July 2, 2010. The pre-tax charge to earnings will be approximately $94 million, which includes the future cash payments of approximately $62 million.

 

However, we believe that the company’s strong liquidity position with a net cash position of $743 million will help it survive in the present economic turmoil.

 

Jacobs is one of the world’s largest and most diverse providers of technical, professional and construction services. Jacobs’ diversification across markets and services helps generate growth in the present sluggish environment.

 

The company plans to expand into emerging markets like India, China and the Middle East. Emerging markets are expected to outperform the developed markets in the coming years.

 

Nevertheless, the very cyclical nature of the company and its excessive dependence on a few large customers could be risky. In 2009, 20.3% of its revenues were generated from agencies of the U.S. federal government.

 

Jacobs is also subject to significant fluctuations due to a wide variety of uncontrollable factors, including economic conditions and changes in client spending, particularly during periods of economic uncertainty. Thus, we reiterate our Neutral recommendation on the stock.