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Jacobs Engineering Group Inc. (NYSE:JEC) reported disappointing operating results for the fourth quarter and fiscal 2010 with both top-line and bottom-line results reporting below expectations.

Quarter Highlights

During the quarter, Jacobs reported EPS of 61 cents, two cents below the year-ago level of 63 cents, and a penny below the Zacks Consensus Estimate of 62 cents.

Net earnings and revenues were $77.0 million and $2,343.0 million respectively, reflecting decreases of 2.9% and 8.2% from $79.3 million and $2,552.5 million in the year-ago quarter. Revenues were slightly down from the Zacks Consensus Estimate of $2,510.0 million. The decline was attributable to a not-so-significant recovery in the economic conditions and the continuous decrease in the company's backlog, coupled with higher operating costs.

Revenues from Technical professional services almost remain flat at $1,268.4 million from $1,272.1 million while revenues from Field services dropped 16.1% to $1,074.6 million.

Selling, general and administrative (SG&A) expense rose 100 basis points to 9.8%. However, costs incurred for completing contracts, a prime cost for Jacobs, as a percentage of revenue slipped 130 basis points. Thus, operating margin increased 30 basis points to 5.1% from 4.8% in the fourth quarter of fiscal 2009.

Annual Details

During fiscal 2010, Jacobs reported EPS (excluding one-time items) of $2.48, down from $3.21 during fiscal 2009. However, the reported EPS was above the Zacks Consensus Estimate of $2.45.

The above EPS excludes the one-time items of restructuring expense of $5.8 million or 4 cents per share during the first quarter of fiscal 2010 and the litigation expenses of $60.3 million or 48 cents per share during the third quarter of fiscal 2010.

During the first quarter, Jacobs stopped using one of its offices in Houston, Texas, and subleased the entire property. The restructuring expense was $5.8 million, or 4 cents per share.

On June 25, Jacobs France SAS, subsidiary of Jacobs, lost a lawsuit at the French Tribunal. The suit was filed in relation to a contract for the erection of a waste incineration plant in Sausheim, France by Serete for SIVOM de Mulhousienne. However, the contract was entered into before Jacobs had taken over Serete.

On completion of the contract, Jacobs claimed additional costs of $49 million as damages. On the other hand, SIVOM claimed that the delay in completion of the contract led them to incur additional operating costs.

Net earnings (excluding one-time items) were 312.1 million, representing a fall of 22.0% from $399.9 million in fiscal 2009. Revenues were $9,915.5 million, down from $11,467.4 million, representing a 13.5% decrease from fiscal 2009. Revenues were below the Zacks Consensus Estimate of $10,110.0 million.

Revenues from Technical professional services declined 7.7% from $5,538.5 million in fiscal 2009 to $5,113.3 million in fiscal 2010. Revenues from Field services dropped 19.0% to $4,802.2 million.

Selling, general and administrative (SG&A) expense rose 120 basis points to 9.4%. Costs incurred for completing contracts based on revenue rose 20 basis points. Thus, operating margin decreased 140 basis points to 4.0% from 5.4% in fiscal 2009.

At the end of fiscal 2010, backlog totaled $13.2 billion, down from $13.5 billion in the previous quarter and $15.2 billion at the end of the fourth quarter last year. However, the company has maintained a high level of liquidity, with a net cash position of $858.9 million compared with $847.6 million at the end of the third quarter of fiscal 2010 and $1,015.4 million at the end of fiscal 2009.

Outlook

Jacobs’ diversification across markets, geographical regions and services will also help generate growth. Jacobs’ plans to expand into the emerging markets of India, China and the Middle East, which are expected to perform much better than the developed markets in the coming years. Moreover, Jacobs’ ongoing acquisition strategy and robust liquidity position will help it to emerge stronger than its competitors like Fluor Corporation (NYSE:FLR) and Foster Wheeler AG (FWLT).

Jacobs has initiated guidance for fiscal 2011 with an EPS range of $2.30 to $2.80. However, we maintain an Underperform recommendation on the stock based on Jacobs’ continuous decrease in backlog since the beginning of fiscal 2010, which is expected to negatively affect its top-line results in fiscal 2011.

Jacobs’ business is cyclical in nature. Thus, the sluggish economic environment has reduced the spending power of clients – a major reason for the decrease in backlog. Clients are cautious about investing in these unstable market conditions. Moreover, the company faces immense risk as it operates in a highly competitive environment. The stock retains its Zacks #4 Rank (short-term Sell rating).

Disclosure: No position