Engineering firms are optimistic about growth in 2013, but their CEOs say big business risks ahead could well impact whether they achieve rosy projections of a 6.9% average boost in revenue and a record 12.2% profit margin.

Nearly 275 company leaders convened in New York City on Oct. 17 and 18 to share views on next year’s business outlook and provide a reality check to earlier results they provided in an annual survey of global market trends. The conference and the annual survey are both hosted by EFCG Inc., a financial advisor and mergers and acquisitions broker mostly to design firms.

Survey results are based on input from 210 engineering firms that represent about $90 billion in combined 2012 revenue, says EFCG President Paul J. Zofnass. While 162 of the surveyed firms have annual revenue of $250 million or less, the 24 companies Zofnass terms “mega majors” account for $68 billion of this year’s total.

The 2013 revenue growth projection would surpass the 6% increase surveyed firms estimate for this year. Zofnass says 20 firms report 2012 growth that will exceed 20%, and 33 expect revenue growth to slow, although he says that number is down from 45 in 2011. (see related survey charts in slide show)

Next year’s earnings projection, if reached, would be the highest for surveyed firms since EFCG began recording such business statistics in 1996. Firms now estimate an 11% profit margin in 2012, after projecting one year ago that the rate would rise to 11.4%. Zofnass said the surveyed firms’ projections are optimistic “but not overly so.”

Small Firms, High Profits

Small firms are driving most of the profit increase, the EFCG survey reports, with key differences in earnings and revenue growth also based on ownership structure, key markets and even geography.

Zofnass cautioned that growth can be “harder to manage” and requires capital infusions. “You can last longer without growth than without profit,” he told attendees.

Publicly owned firms and those owned by employee stock ownership plans (ESOPs) reported the slowest revenue and profit growth, according to a survey average for 2011, 2012 and 2013 projected. Acquisition financing is siphoning a larger share of public firm earnings, Zofnass says.

Non-ESOP owned firms, about 140 of respondents, and the 11 owned by private equity firms, noted the best rates in both areas over the three years. Of private equity owners, “do they invest in more profitable firms or just push those firms harder?” Zofnass asked.

One small design firm vice president lamented the challenge of continuing to provide “high end engineering” with the pressure to “grow, grow, grow. Project overhead is up tremendously.”

Tumultuous Year Ahead

Larger firms, design and design-build, also point to big challenges in 2013. “It will be a tumultuous year ahead,” said John Jumper, CEO of SAIC Corp. “We’re reorganizing and we haven’t been able to grow. This will dominate the landscape.”

Jumper points to the battle in Washington over “sequestration,” the mandated slashing of $109 billion from the federal budget in January, if Congress doesn’t act on cuts by then. It would be the first installment of a 10-year, $1.2-trillion cut that could affect all aspects of government spending.

JUMPER

“This is not just a DOD issue. It ripples through all of our businesses, and it’s not being dealt with,” he says. “None of us in this room are immune to the consequences.”

But George Pierson, CEO of Parsons Brinckerhoff, was not as concerned. "This is the new norm, not just for 2013 but for the next few years as well," he said.

Jumper also pointed to the growing “cyber-threat,” a risk he said business leaders, including those in attendance, were “putting their heads in the sand about. We now have to manage this. The risk is already here. How do we address it in energy and engineering management.”

Jacobs Engineering CEO Craig Martin said pushing a safety culture is the firm’s “single biggest challenge” in 2013 and beyond. “Every year we hurt more people, even if minor injuries,” he said. “We had to change the way we think.”

Martin said there were 774 fatalities in construction last year. Noting that fatalities did not just involve craft workers at industrial sites, he cited risks to “home office” personnel as well, mentioning the electrocution of a Jacobs engineering manager a few years ago.