Business Context and Reporting Period
Issuer: Jacobs Engineering Group Inc. (the filing predates the Jacobs Solutions Inc. name). This Form 10-K covers the fiscal year ended September 30, 2011; it is an annual filing, not a standalone fourth-quarter filing. Jacobs provides global engineering, technical, consulting, construction, and operations and maintenance services through one reportable segment.
The company served industrial, commercial, and government customers across energy, infrastructure, buildings, chemicals, mining, pharmaceuticals, and national government programs. Approximately 38% of revenue came from customers outside the United States, and U.S. federal government work represented 24.4% of revenue.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $10.382 billion | $9.916 billion | 4.7% increase |
| Operating profit | $518.9 million | $400.1 million | 29.7% increase |
| Operating margin | 5.0% | 4.0% | Improved |
| Net earnings attributable to Jacobs | $331.0 million | $246.0 million | 34.6% increase |
| Adjusted fiscal 2010 net earnings, excluding SIVOM | — | $306.3 million | Fiscal 2011 increased 8.1% |
| Diluted EPS | $2.60 | $1.96 | Increased from $2.44 excluding SIVOM |
| Net margin | Approximately 3.2% | Approximately 2.5% | Improved |
| Cash flow from operations | $236.5 million | $221.1 million | Increase of $15.4 million |
| Cash and cash equivalents | $905.6 million | $938.8 million | Decrease of $33.2 million |
| Backlog | $14.290 billion | $13.202 billion | 8.2% increase |
Direct contract costs were $8.822 billion, or 85.0% of revenue, versus 86.6% in fiscal 2010. SG&A expense increased 11.6% to $1.041 billion, primarily because of the acquired Aker operations; excluding Aker, SG&A declined by approximately $4.9 million.
Revenue mix shifted toward technical professional services, which increased to $5.886 billion from $5.113 billion, while field services revenue declined to $4.496 billion from $4.802 billion. Pass-through costs declined to $2.119 billion from $2.723 billion, which helped reduce the reported cost ratio but generally carries low margins.
Financial Position, Debt, and Liquidity
- Working capital was $1.099 billion and the current ratio was 1.53 to 1, down from $1.528 billion and 2.23 to 1, respectively.
- Notes payable were $566.0 million, and long-term debt was $2.0 million, compared with notes payable of $79.4 million and long-term debt of $0.5 million in the prior year.
- Most new borrowing funded the Aker acquisition. The company reported $568.1 million of bank indebtedness at September 30, 2011.
- The $290 million unsecured revolving facility had $171.8 million of direct borrowings and $28.7 million of letters of credit outstanding, leaving $89.5 million of available capacity. The facility expired in May 2012, and management was negotiating renewal.
- Additional bilateral facilities had approximately $392.1 million outstanding. The contractual-obligations table showed $1.812 billion of obligations due within one year, including $566.0 million of debt, $150.2 million of operating leases, $109.3 million of pension obligations, $7.0 million of deferred compensation, and $979.8 million of purchase obligations.
- Fiscal 2011 investing cash outflow was $801.8 million, including $711.4 million for acquisitions and $98.7 million for property and equipment. Financing activities provided $556.9 million, largely through borrowings.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the Aker acquisition and higher activity in mining and minerals, infrastructure, chemicals and polymers, and upstream oil and gas. Mining and minerals revenue increased to $449.2 million from $26.2 million, principally because of Aker.
- Refining-downstream revenue declined to $2.256 billion from $2.876 billion, while pharmaceuticals and biotechnology revenue declined to $404.7 million from $589.8 million.
- Backlog increased $1.1 billion to $14.3 billion, including approximately $1.0 billion attributable to Aker. Approximately $7.7 billion, or 54.2%, was expected to be realized as revenue within the next fiscal year, subject to funding and cancellation risk.
- Jacobs acquired Aker’s Process and Construction business in February 2011 and its China operations in April 2011. The transaction was funded with approximately $909.6 million of cash and borrowings. A preliminary $434 million of goodwill was recognized.
- Fiscal 2010 results included a $93.3 million pretax SIVOM judgment charge, producing an after-tax reduction of approximately $60.3 million, or $0.48 per diluted share. Comparisons excluding this unusual item provide a better operating trend.
- Receivables increased to $2.077 billion from $1.660 billion. Management cited customer mix and customer billing-system changes that delayed processing and increased receivable aging, but stated that it did not view the situation as a significant cash-flow risk.
Guidance, Outlook, Commentary, and Risks
The filing does not provide formal fiscal 2012 revenue, earnings, or margin guidance. Management stated that it believed available cash, revolving capacity, and other facilities were adequate to fund operations, acquisitions, and debt service for the next twelve months, and expected to complete credit-facility renewals early in fiscal 2012.
- Substantially all contracts may be cancelled, terminated, or suspended at the client’s discretion. Backlog therefore is not assured revenue or profit and may not indicate future margins.
- Government work represented a material concentration: U.S. federal government revenue was 24.4% of total revenue and federal-related backlog was approximately $3.6 billion, or 24.9% of total backlog. Funding depends on annual appropriations, and government clients may insource, reduce, or terminate work.
- Fixed-price and guaranteed-maximum-price contracts represented approximately 19% of fiscal 2011 revenue. Cost overruns, labor and material inflation, schedule delays, subcontractor failures, claims, and performance issues could reduce margins or result in losses.
- Key exposures include economic and commodity-price cycles, international political and currency risks, safety and environmental liabilities, government audits and compliance, litigation, joint-venture and subcontractor performance, bonding capacity, employee retention, and information-technology disruption.
- Goodwill was $1.746 billion, or 28.9% of total assets. The annual impairment review found substantial excess fair value, but a sustained decline in earnings or market valuation could result in a material impairment charge.
- Defined-benefit pension plans were underfunded by approximately $421.0 million in aggregate at year-end, and anticipated fiscal 2012 cash contributions were approximately $109.3 million.
- Management and the auditors concluded that internal controls were effective, but the assessment and audit excluded the acquired Aker operations, which represented 11.2% of total assets and 6.6% of fiscal 2011 revenue.
Most Important Facts for Investors to Verify
- Verify the company identity and period: the source filing is for Jacobs Engineering Group Inc., fiscal year ended September 30, 2011, rather than a current Jacobs Solutions Inc. filing.
- Reconcile fiscal 2011 earnings growth with the fiscal 2010 SIVOM judgment adjustment and distinguish GAAP from management’s non-GAAP comparison.
- Assess whether the Aker acquisition generated the expected revenue, backlog, synergies, and returns relative to the approximately $909.6 million acquisition funding and increased debt.
- Review refinancing and maturity risk for the revolving facility and bilateral loans expiring primarily in 2012.
- Evaluate receivable aging, working-capital deterioration, cash conversion, and the ability to realize the $14.3 billion backlog.
- Review government-contract funding, fixed-price exposure, pension funding, litigation and guarantees, and the excluded Aker internal controls before relying on reported outlook or margins.