Business Context and Reporting Period
Jacobs Engineering Group Inc. (now Jacobs Solutions Inc.) filed this Form 10-K for the fiscal year ended September 27, 2013. The filing includes unaudited fourth-quarter data, but the primary reporting period is the full fiscal year rather than a standalone quarterly filing.
Jacobs provided global engineering, design, consulting, construction, operations and maintenance services through one reportable segment. The company operated in more than 200 offices, had approximately 66,500 employees, and served industrial, commercial and government clients across multiple markets and geographies.
Key Financial Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $11.818 billion | $10.894 billion | +8.5% |
| Operating profit | $669.0 million | $596.1 million | +12.2% |
| Operating margin | 5.7% | 5.5% | Expanded approximately 19 basis points |
| Net earnings attributable to Jacobs | $423.1 million | $379.0 million | +11.6% |
| Net margin | 3.6% | 3.5% | Improved modestly |
| Diluted EPS | $3.23 | $2.94 | +9.9% |
| Cash flow from operations | $448.5 million | $299.8 million | +$148.7 million |
| Capital expenditures | $127.3 million | $102.6 million | Higher investment |
| Backlog | $17.218 billion | $15.910 billion | +8.2% |
Fiscal 2013 pass-through costs included in revenue were $2.625 billion, compared with $2.328 billion in fiscal 2012. These costs generally carry lower margins and can affect reported revenue and direct contract costs without a proportional effect on profitability.
At September 27, 2013, cash and cash equivalents were $1.256 billion, working capital was $2.152 billion, and the current ratio was 2.14 to 1. Long-term debt was $415.1 million, while total utilization of the $1.21 billion unsecured revolving facility, including letters of credit, was $425.9 million. Available borrowing capacity was $779.1 million, and the company was in compliance with its debt covenants.
Cash increased by $223.9 million during the year. Operating cash inflows of $448.5 million were offset by $157.1 million of investing outflows, $59.7 million of financing outflows and $7.8 million of unfavorable foreign-exchange effects.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Construction services, which increased 21.6% to $3.826 billion, and Project Services, which increased 5.0% to $5.978 billion.
- Process, Scientific and Systems Consulting revenue declined 8.6% to $705.7 million, primarily because a U.S. federal government project was winding down. Operations and Maintenance revenue was relatively unchanged.
- Chemicals and Polymers revenue increased 40.3% to $2.391 billion, supported by shale-gas-related activity and increased capital deployment in the United States and United Kingdom.
- Mining and Minerals revenue increased 29.5% to $712.3 million, while Oil and Gas—Upstream increased 15.8% to $915.5 million.
- Buildings revenue declined 12.5% to $738.4 million, Infrastructure declined 6.4% to $1.016 billion, and Pharmaceuticals and Biotechnology declined 9.2% to $523.5 million.
- U.S. federal government-related revenue represented 19.9% of total revenue, down from 22.1% in fiscal 2012. International revenue represented approximately 40.8% of total revenue.
- Direct costs of contracts increased 8.8% to $9.976 billion, and the direct-cost ratio rose slightly to 84.4% from 84.1%. Management attributed the change primarily to slightly lower professional-services margins, partly offset by improved field-services margins.
- The effective tax rate declined to 33.5% from 34.1%, primarily because of a higher proportion of earnings attributable to noncontrolling interests.
- Debt declined, with fiscal-year financing outflows of $59.7 million, primarily reflecting a net reduction in outstanding borrowings.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific numerical fiscal 2014 revenue or earnings guidance in the filing. Management expected continued strength in Chemicals and Polymers, Oil and Gas—Upstream and selected refining and infrastructure markets. Buildings was viewed as flat in fiscal 2014, while Mining and Minerals was expected to emphasize smaller projects and maintenance work. Pharmaceuticals and Biotechnology was described as steady to slightly up.
Backlog included approximately $4.1 billion related to U.S. federal government work, and management estimated that approximately $8.4 billion, or 48.4% of total backlog, would be realized as revenue within the next fiscal year. Backlog is subject to cancellation, suspension, funding limitations, scope changes and cost adjustments and is therefore not a guarantee of future revenue or profit.
On September 8, 2013, Jacobs agreed to acquire Sinclair Knight Merz, an Australian professional services firm, for an estimated purchase price of approximately $1.1 billion in U.S. dollars at the reporting date. The transaction was expected to be financed with available cash and debt capacity; the filing did not reflect the transaction as a completed fiscal 2013 business combination.
- Principal risks include fixed-price contract cost overruns, project execution and professional liability, safety and environmental exposure, litigation, government contract audits and funding uncertainty.
- Government sequestration, appropriations, contract terminations and competitive task-order bidding could affect revenue and backlog realization.
- Commodity prices and client capital spending influence demand in oil and gas, chemicals, refining and mining markets.
- Goodwill was $2.023 billion, or 27.8% of total assets. Fiscal 2013 impairment testing indicated that reporting-unit fair values exceeded carrying values by more than 60%; no impairment was recorded.
- Defined benefit pension plans were underfunded by approximately $402.5 million, compared with $463.7 million at the prior year-end. Expected fiscal 2014 pension contributions were $66.1 million.
- Total contractual obligations were $3.160 billion, including $1.248 billion of purchase obligations, $919.7 million of gross operating lease commitments and $437.9 million of debt obligations.
- Management stated that pending litigation, government investigations, guarantees and insurance matters were not expected to have a material adverse effect, although the company retains uninsured and partially insured exposures.
- The company had no cash dividend and stated that it had no plans to pay dividends or repurchase shares in the foreseeable future.
The fiscal 2012 results included a one-time after-tax gain of $4.0 million, or $0.03 per diluted share, from the sale of intellectual property and related assets. Fiscal 2013 contained no comparable gain.
Investor Verification Items
- Verify the completed terms, financing and integration results of the Sinclair Knight Merz acquisition.
- Assess the quality and expected profitability of the $17.2 billion backlog, particularly unfunded government awards and contracts subject to cancellation.
- Monitor margins by service category and the effect of pass-through costs on reported revenue growth.
- Review exposure to U.S. government funding, sequestration, contract audits and the 23.8% of backlog associated with federal government work.
- Evaluate fixed-price contract exposure, project claims, litigation reserves, insurance coverage and potential cost overruns.
- Monitor pension funding requirements, goodwill valuation assumptions, foreign-exchange effects and the company’s ability to fund acquisitions while reducing debt.