Jacobs Engineering Group Inc. Fiscal 2010 Form 10-K Summary
Business Context and Reporting Period
Jacobs Engineering Group Inc. provided engineering, design, consulting, construction, operations and maintenance services to industrial, commercial and government clients worldwide. The filing covers the fiscal year ended October 1, 2010, with comparable fiscal years ended October 2, 2009 and September 26, 2008. The company reported one operating segment.
Approximately 30% of revenue was generated outside the United States, and U.S. federal government-related work represented 25.4% of fiscal 2010 revenue, up from 20.3% in fiscal 2009. The company had approximately 38,500 full-time staff employees and 13,700 project-based field employees at year-end.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $9.916 billion | $11.467 billion | Down 13.5% |
| Operating profit | $400.1 million | $620.6 million | Down 35.5% |
| Operating margin | 4.0% | 5.4% | Down 1.4 percentage points |
| Net earnings attributable to Jacobs | $246.0 million | $399.9 million | Down 38.5% |
| Diluted EPS | $1.96 | $3.21 | Down 39.0% |
| Cash flow from operations | $197.0 million | $533.5 million | Down $336.5 million |
| Cash and cash equivalents | $938.8 million | $1.034 billion | Down $94.8 million |
| Working capital | $1.528 billion | $1.523 billion | Approximately flat |
| Long-term debt | $0.5 million | $0.7 million | Minimal |
| Total backlog | $13.202 billion | $15.219 billion | Down 13.3% |
Fiscal 2010 included $66.1 million of after-tax nonrecurring charges, or $0.52 per diluted share, related to the Houston sublease and the SIVOM judgment. Excluding those items, management reported revenue of $9.941 billion, operating profit of $487.4 million, net earnings attributable to Jacobs of $312.1 million and diluted EPS of $2.48. The corresponding adjusted operating margin was approximately 4.9%.
- Technical professional services revenue was $5.113 billion, down from $5.538 billion.
- Field services revenue was $4.828 billion, down from $5.929 billion, primarily reflecting lower construction activity and pass-through costs.
- Pass-through costs included in revenue declined 32.2% to $2.723 billion from $4.017 billion.
- Approximately 86% of fiscal 2010 revenue came from cost-reimbursable contracts; 13% came from fixed-price contracts and 1% from guaranteed maximum price contracts.
- Fiscal 2010 capital expenditures were $49.1 million, while acquisitions used $259.5 million and investment purchases used $108.5 million.
- The company had $257.1 million of available credit capacity under its various facilities, including a $290.0 million long-term revolving facility with no direct borrowings outstanding and a $79.4 million short-term facility that was fully utilized.
Material Changes Versus the Prior Comparable Period
- Revenue fell primarily because of the global recession, project completions, delayed or cancelled capital projects and lower pass-through costs. Refining-downstream, upstream oil and gas, and pharmaceuticals and biotechnology experienced notable declines.
- National Government Programs revenue increased 7.7% to $2.315 billion, and Buildings revenue increased 9.6% to $869.2 million. Revenue from American Recovery and Reinvestment Act-funded projects was $176.8 million.
- Operating profit declined 21.5% on an adjusted basis, while the GAAP decline was larger because of the Houston and SIVOM charges.
- SG&A expense decreased 1.1% to $929.8 million following cost-control actions, including personnel reductions and office closures or reconfigurations.
- Operating cash flow declined substantially because of lower earnings and less favorable working-capital changes.
- Backlog declined $2.0 billion. Approximately $390 million of negative backlog adjustments were recorded in the fourth quarter when the company determined that the full capacity of certain contracts would not be realized. Management estimated that $6.9 billion, or 52.3% of year-end backlog, would be realized within the next fiscal year.
- The company acquired Jordan, Jones & Goulding, TYBRIN, TechTeam Government Solutions and Sula Systems during or around fiscal 2010, expanding water, federal government, information technology, defense and aerospace capabilities.
Outlook, Commentary, Risks and Unusual Items
Management did not provide a specific numerical fiscal 2011 revenue or earnings forecast in the filing. Management stated that the diversified industry and geographic portfolio positioned Jacobs to benefit from a recovery in capital spending, while acknowledging that the timing and strength of recovery remained uncertain.
- SIVOM judgment: An unfavorable French court judgment resulted in a pre-tax charge of approximately $93.3 million, including a $25.9 million claim receivable write-off and approximately $9.9 million of interest expense. Jacobs appealed the judgment.
- Houston sublease: The company recorded an $11.4 million pre-tax charge, or $5.8 million after tax, after ceasing use of a Houston office and subleasing the property.
- Backlog risk: Backlog contracts are generally subject to client cancellation, termination, suspension and scope changes and may include unfunded government awards. Backlog is therefore not necessarily indicative of future revenue or profit.
- Government concentration: Government contracts are subject to annual appropriations, audits, cost disallowances, termination for convenience, compliance requirements and potential suspension or debarment.
- Contract execution: Fixed-price and guaranteed maximum price contracts expose the company to cost overruns, schedule delays, labor and materials inflation, subcontractor failures and unanticipated technical or regulatory problems.
- Market conditions: Client capital spending remained sensitive to economic conditions, commodity prices, interest rates, construction costs and access to credit.
- Litigation and contingencies: The company was involved in ordinary-course workers’ compensation, personal injury, environmental, employment, professional liability and government contract matters. Management believed these matters were not expected to have a material adverse effect, but insurance coverage is subject to deductibles, limits and retentions.
- Pensions: The defined benefit plans were underfunded by approximately $397.8 million at year-end, compared with $312.0 million in the prior year. Expected fiscal 2011 pension contributions were $38.0 million.
- Goodwill: Goodwill totaled $1.119 billion, or approximately 23.9% of total assets. Annual testing indicated no impairment, but future declines in earnings or valuation multiples could produce a material charge.
- Capital allocation: Jacobs had not paid a cash dividend since fiscal 1984 and stated that it had no plans to pay dividends or repurchase common stock in the foreseeable future.
- Controls and audit: Management and Ernst & Young concluded that disclosure controls and internal control over financial reporting were effective as of October 1, 2010. The financial statements received an unqualified audit opinion.
Facts Investors Should Verify
- Reconcile reported GAAP earnings and EPS with management’s non-GAAP results excluding the $66.1 million after-tax Houston and SIVOM charges.
- Review the SIVOM appeal, any remaining legal exposure and the effect of the judgment on future cash payments.
- Assess backlog quality, funding status, cancellation exposure and the proportion expected to convert to revenue within one year.
- Monitor recovery in private-sector capital spending, particularly refining, upstream oil and gas, pharmaceutical and construction markets.
- Evaluate government-contract concentration, annual appropriations, audit exposure and compliance requirements.
- Review cash conversion, receivables, unbilled amounts, pass-through costs and working-capital requirements after the sharp decline in operating cash flow.
- Assess pension funding requirements, lease obligations, purchase commitments and residual-value guarantees. Contractual obligations totaled approximately $2.155 billion.
- Confirm the availability and utilization of credit facilities, letters of credit totaling $139.6 million and the company’s ability to fund future acquisitions.
- Monitor goodwill and acquisition integration risk, including the $1.119 billion goodwill balance and recently acquired businesses.