Business Context and Reporting Period
Registrant: Jacobs Engineering Group Inc. (the source filing predates the Jacobs Solutions name), a global technical, professional, construction, operations and maintenance services provider. The company reports one operating segment and serves energy, government, chemicals, infrastructure, pharmaceuticals, buildings and other industrial markets.
Period: Fiscal year ended October 2, 2009. Fiscal 2009 included an additional week of activity compared with the prior year. The filing was signed November 19, 2009.
Financial Performance and Position
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Revenue | $11.467 billion | $11.252 billion | +2.0% |
| Operating profit | $620.6 million | $643.1 million | -3.5% |
| Operating margin | 5.4% | 5.7% | Down 0.3 percentage points |
| Net earnings | $399.9 million | $420.7 million | -5.0% |
| Diluted EPS | $3.21 | $3.38 | -5.0% |
| Net margin | Approximately 3.5% | Approximately 3.7% | Lower year over year |
| Cash flow from operations | $533.5 million | $313.4 million | +$220.1 million |
| Cash and cash equivalents | $1.034 billion | $604.4 million | +$429.2 million |
| Long-term debt | $0.7 million | $55.7 million | Substantially reduced |
| Working capital | $1.523 billion | $1.173 billion | +$349.3 million |
| Backlog | $15.219 billion | $16.697 billion | -8.8% |
Direct contract costs were $9.906 billion, or 86.4% of revenue, versus 84.6% in fiscal 2008. Pass-through costs increased 14.2% to approximately $4.0 billion and contributed to the higher cost ratio without necessarily producing a comparable change in margins.
Revenue mix was 85% cost-reimbursable, 14% fixed-price and 1% guaranteed maximum price. Technical professional services revenue declined 6.1% to $5.538 billion, while field services revenue increased 10.7% to $5.929 billion.
Capital expenditures were approximately $55.5 million. Investing activities used $94.9 million, including $23.3 million for acquisitions and $32.3 million for a one-third interest in AWE Management Limited. Financing activities used $39.0 million, including net debt repayments of approximately $30.0 million.
Liquidity included approximately $469.7 million of available credit capacity, including $289.3 million available under a $290.0 million unsecured revolving facility. Total contractual obligations were approximately $2.051 billion, including operating leases, pension obligations, deferred compensation and purchase obligations.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but earnings and operating margin declined as the global recession caused project delays, cancellations and slower new awards, particularly in the second half of fiscal 2009.
- National government program revenue increased 22.7% to $2.425 billion, while energy and refining revenue increased. Chemicals and polymers, pharmaceuticals and biotechnology, and buildings revenue declined.
- U.S. federal government revenue represented 20.3% of total revenue, up from 16.8% in fiscal 2008. Motiva Enterprises represented 12.2% of total revenue.
- SG&A expense declined 13.8% to $940.3 million following personnel reductions, a salary and hiring freeze, office closures and other cost-control actions.
- Backlog declined $1.477 billion, with approximately $1.9 billion removed because of project cancellations. Approximately $8.0 billion, or 52.4% of backlog, was expected to convert to revenue within the next fiscal year.
- Cash generation improved materially, primarily because of favorable working-capital changes and lower investment and acquisition spending.
- The pension deficit increased to $312.0 million from $213.5 million, and accumulated other comprehensive loss increased to $211.5 million from $129.3 million.
- The company repurchased approximately $8.3 million of equity securities and paid no cash dividend. Management stated that it had no plans to pay dividends in the foreseeable future.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative fiscal 2010 earnings or revenue guidance in the supplied filing. Management expected persistent economic weakness to continue affecting fiscal 2010 and stated that forecasting business trends would remain difficult. The company emphasized its diversified markets, geographic footprint and government exposure as factors that could support recovery.
- Economic and customer-spending risk: recessionary conditions, lower commodity prices and reduced capital spending could delay or cancel projects and reduce backlog conversion.
- Contract risk: fixed-price and guaranteed maximum-price contracts, representing approximately 15% of revenue, expose the company to cost overruns, schedule delays and potential losses.
- Backlog risk: substantially all contracts may be cancelled, terminated or suspended at the client’s discretion; backlog is not necessarily indicative of future revenue, margin or earnings.
- Government concentration: government contracts are subject to annual funding, audits, investigations, regulatory compliance and termination for convenience.
- Claims and litigation: a European waste-incineration dispute involved claims exceeding €40 million, approximately $58.2 million, with a counterclaim by the client. Management believed the counterclaim lacked merit. The company also faced claims related to the I-35W bridge collapse but did not expect a material financial effect.
- Pension exposure: the defined-benefit pension plans were underfunded by $312.0 million; fiscal 2010 contributions were expected to be approximately $38.6 million.
- Goodwill: goodwill was $929.8 million, or 21.0% of total assets. Fiscal 2009 impairment testing showed no impairment, but a decline in earnings or market valuation could result in a future charge.
- Other unusual items: fiscal 2008 included a $10.6 million gain from the sale of an operations and maintenance investment, which contributed to the year-over-year decline in miscellaneous income in fiscal 2009.
Management and Ernst & Young reported effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion. No material subsequent events requiring recognition or disclosure were identified through the filing date.
Important Facts for Investors to Verify
- Confirm the company identity: the supplied filing is for Jacobs Engineering Group Inc., not a filing titled Jacobs Solutions Inc.
- Review the complete notes for the European waste-incineration dispute, bridge-collapse claims, government audits, insurance reserves and other contingencies.
- Assess backlog quality, including cancellation exposure, unfunded government awards, expected timing of conversion and margin assumptions.
- Monitor the mix of cost-reimbursable versus fixed-price work and the effect of pass-through costs on reported revenue and margins.
- Evaluate pension funding requirements, actuarial assumptions and the potential effect of discount-rate or asset-return changes.
- Review liquidity after considering $1.034 billion of cash, minimal debt, available revolver capacity, letters of credit and contractual obligations.
- Assess customer concentration, particularly U.S. federal government revenue of 20.3% and Motiva revenue of 12.2%.
- Confirm the effect of fiscal 2009’s additional week when comparing results with fiscal 2008 and modeling future periods.