Business Context and Reporting Period
This summary covers Jacobs Engineering Group Inc.’s fiscal 2012 Form 10-K for the year ended September 28, 2012, including fourth-quarter results. The company provided global engineering, design, consulting, construction, operations and maintenance services through more than 200 offices and approximately 63,400 employees and field personnel. Operations were reported as one segment.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $10.894 billion | $10.382 billion | +4.9% |
| Operating profit | $596.1 million | $518.9 million | +14.9% |
| Operating margin | 5.5% | 5.0% | +50 bps |
| Net earnings attributable to Jacobs | $379.0 million | $331.0 million | +14.5% |
| Diluted EPS | $2.94 | $2.60 | +13.1% |
| Cash flow from operations | $299.8 million | $236.5 million | +26.8% |
| Cash and equivalents | $1.032 billion | $905.6 million | +$126.8 million |
| Long-term debt | $528.3 million | $2.0 million | Increase from refinancing |
| Working capital | $1.865 billion | $1.099 billion | +$853.5 million |
| Backlog | $15.910 billion | $14.290 billion | +11.3% |
Net margin attributable to Jacobs was approximately 3.5%, and operating cash flow was approximately 2.8% of revenue. The current ratio was 2.07 to 1, compared with 1.53 to 1 in fiscal 2011. Jacobs had $664.6 million of available borrowing capacity under its $1.21 billion unsecured revolving credit facility at year-end; total facility utilization was $540.4 million, including direct borrowings and letters of credit.
Revenue Mix and Fourth Quarter
- Project Services revenue increased 12.3% to $5.693 billion; Process, Scientific and Systems Consulting revenue declined 5.3% to $772.0 million.
- Construction revenue increased 2.8% to $3.145 billion, while Operations and Maintenance revenue declined 10.6% to $1.283 billion.
- Strongest market growth came from Pharmaceuticals and Biotechnology, up 42.4% to $576.3 million; Mining and Minerals, up 22.5% to $550.1 million; and Chemicals and Polymers, up 16.7% to $1.705 billion.
- National Government Programs revenue was essentially flat at $2.273 billion and represented 22.1% of total revenue. Approximately 38% of revenue came from outside the United States.
- Fourth-quarter revenue was $2.786 billion, operating profit was $167.6 million, net earnings attributable to Jacobs were $107.4 million, and diluted EPS was $0.83, compared with $2.723 billion, $147.9 million, $94.3 million and $0.74, respectively, in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability improved despite continued weakness in several end markets. Management attributed growth primarily to hydrocarbons, chemicals and polymers, mining and minerals, and pharmaceuticals and biotechnology.
- Operating margin improved because of better Project Services margins. Direct contract costs declined to 84.1% of revenue from 85.0%, although SG&A increased 8.7% to $1.131 billion, principally due to acquired businesses.
- Operating cash flow increased $63.3 million, supported by higher earnings and favorable working-capital changes. Investing cash use fell sharply to $181.1 million from $801.8 million because acquisition spending declined.
- Pass-through costs increased 9.9% to $2.328 billion, which increased reported revenue and direct costs but generally carried lower margins.
- Fiscal 2012 acquisitions included a Sydney consulting project-management business, a majority interest in DM Petroleum Operations Company, Unique World and KlingStubbins. These acquisitions were not individually material to consolidated results; acquisition-related costs were $5.8 million.
- The company refinanced acquisition-related borrowings through a new five-year $1.21 billion revolving facility. Fiscal 2011’s short-term and bilateral borrowings were largely repaid or refinanced.
Guidance, Outlook, Risks and Unusual Items
No formal quantitative fiscal 2013 earnings or revenue guidance was provided in the filing. Management expected refining, upstream oil and gas, buildings’ private-sector work, pharmaceuticals and biotechnology, and selected mining opportunities to remain constructive. Management also expected government spending uncertainty and potential sequestration to affect the National Government Programs business, potentially beginning in late fiscal 2013.
- Fiscal 2012 included a one-time after-tax gain of $4.0 million, or $0.03 per diluted share, from the sale of iron ore pelletizing intellectual property and related assets. Excluding this gain, management reported approximately 13.3% net earnings growth.
- Backlog of $15.9 billion included approximately $8.6 billion expected to be realized within the next fiscal year, but substantially all contracts could be cancelled, suspended or modified by clients. Approximately 22.9% of backlog related directly or indirectly to the U.S. federal government.
- Approximately 85% of revenue was generated under cost-reimbursable contracts and 15% under fixed-price contracts. Fixed-price work exposes Jacobs to cost overruns from labor, materials, scheduling, technical, regulatory and subcontractor issues.
- Major risks include cyclical client capital spending, commodity-price volatility, government funding and procurement rules, competition, international and foreign-exchange exposure, employee retention, project execution, safety and environmental liabilities, litigation, claims and audits.
- Defined-benefit pension plans were underfunded by approximately $463.7 million at year-end, compared with $421.0 million a year earlier. Expected fiscal 2013 contributions were $63.1 million.
- Goodwill was $2.010 billion, or 29.4% of total assets. Fiscal 2012 impairment testing indicated that each reporting unit’s fair value exceeded carrying value by more than 30%; however, future impairment remains sensitive to operating performance, market conditions and valuation assumptions.
- Outstanding letters of credit totaled $224.9 million. Operating lease commitments totaled $871.9 million, and contractual obligations totaled $3.130 billion.
- Management reported no material adverse effect expected from disclosed litigation, guarantees, government audits or investigations. The filing identified a pending arbitration involving Clark County, Nevada, and an appealed $52 million verdict involving Carter & Burgess; management expected insurance coverage or other circumstances to prevent a material consolidated impact.
- Management and Ernst & Young reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether backlog converts to revenue and earnings at expected levels, given cancellation rights, funding requirements and potential margin variability.
- The sustainability of the 5.5% operating margin and the contribution of Project Services versus lower-margin field and pass-through work.
- Debt reduction, interest-rate exposure and compliance with covenants under the 2012 revolving credit facility.
- Exposure to U.S. government sequestration, appropriations and contract competition, given the government’s 22.1% revenue contribution.
- Funding requirements and sensitivity of the $463.7 million pension deficit to discount rates and asset returns.
- Potential liabilities from fixed-price contracts, claims, litigation, government audits, environmental matters, guarantees and underinsured risks.
- The effect of acquisitions, goodwill of $2.010 billion and related integration or impairment risks.
- The amount and collectability of receivables, including $1.110 billion of unbilled receivables and other amounts at September 28, 2012.