UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report on
FORM 10-Q
(Mark one)
For the quarterly period ended December 31, 2005
For the transition period from to
Commission File Number 1-7463
JACOBS ENGINEERING GROUP INC.
(Exact name of Registrant as specified in its charter)
(626) 578 – 3500
(Registrant’s telephone number, including area code)
Indicate by check-mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
x Yes - ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Indicate by check-mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes - x No
Number of shares of common stock outstanding at February 7, 2006: 58,389,560
Page 1
INDEX TO FORM 10-Q
PART I
Consolidated Balance Sheets – December 31, 2005 (Unaudited) and September 30, 2005
Consolidated Statements of Earnings - Three Months Ended December 31, 2005 and 2004 - Unaudited
Consolidated Statements of Comprehensive Income - Three Months Ended December 31, 2005 and 2004 - Unaudited
Consolidated Statements of Cash Flows - Three Months Ended December 31, 2005 and 2004 - Unaudited
Notes to Consolidated Financial Statements - Unaudited
PART II
SIGNATURES
Page 2
Part I - FINANCIAL INFORMATION
JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
ASSETS
Current Assets:
Cash and cash equivalents
Receivables
Deferred income taxes
Prepaid expenses and other
Total current assets
Property, Equipment and Improvements, Net
Other Non-current Assets:
Goodwill
Miscellaneous
Total other non-current assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable
Accounts payable
Accrued liabilities
Billings in excess of costs
Income taxes payable
Total current liabilities
Long-term Debt
Other Deferred Liabilities
Minority Interests
Commitments and Contingencies
Stockholders’ Equity:
Capital stock:
Preferred stock, $1 par value, authorized - 1,000,000 shares; issued and outstanding - none
Common stock, $1 par value, authorized - 100,000,000 shares; 58,267,111 shares issued and outstanding at December 31, 2005; 58,129,997 shares issued and outstanding at September 30, 2005
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Unearned compensation
Total stockholders’ equity
See the accompanying Notes to Consolidated Financial Statements.
Page 3
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended December 31, 2005 and 2004
(In thousands, except per share information)
(Unaudited)
Revenues
Costs and Expenses:
Direct cost of contracts
Selling, general and administrative expenses
Operating Profit
Other Income (Expense):
Interest income
Interest expense
Miscellaneous expense, net
Total other expense, net
Earnings Before Taxes
Income Tax Expense
Net Earnings
Net Earnings Per Share:
Basic
Diluted
Page 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other Comprehensive Income (Loss):
Foreign currency translation adjustment
Loss on cash flow hedges
Other comprehensive income (loss) before taxes
Income tax benefit
Net other comprehensive income
Net Comprehensive Income
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net earnings
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization:
Property, equipment and improvements
Intangible assets
Stock based compensation
Excess tax benefits from stock based compensation
Net (gains) losses on sales of assets
Changes in certain assets and liabilities:
Prepaid expenses and other current assets
Other, net
Net cash flows from operating activities
Cash Flows from Investing Activities:
Additions to property and equipment
Disposals of property and equipment
Proceeds from sales of investments
Acquisition of businesses, net of cash acquired
Net increase in other, non-current assets
Net cash flows from investing activities
Cash Flows from Financing Activities:
Proceeds from long-term borrowings
Repayments of long-term borrowings
Net change in short-term borrowings
Proceeds from issuances of common stock
Changes in other deferred liabilities, net
Net cash flows from financing activities
Effect of Exchange Rate Changes
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at the Beginning of the Period
Cash and Cash Equivalents at the End of the Period
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
DECEMBER 31, 2005
(continued)
Basis of Presentation
Unless the context otherwise requires, references herein to “Jacobs” are to Jacobs Engineering Group Inc. and its predecessors, and references herein to the “Company,” “we,” “us” or “our” are to both Jacobs Engineering Group Inc. and its consolidated subsidiaries.
The accompanying consolidated financial statements and financial information included herein have been prepared pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Readers of this report should refer to our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely, with the exception of the adjustments relating to the Company’s adoption of SFAS 123R discussed below, of normal recurring adjustments) necessary for a fair presentation of our consolidated financial statements at December 31, 2005 and for the three months ended December 31, 2005 and 2004.
Our interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.
Readers of these consolidated financial statements should also read our fiscal 2005 audited consolidated financial statements and notes thereto included in our 2005 Form 10-K as well as Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 2005 Form 10-K.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued SFAS 123(R)—Share-Based Payment (“SFAS 123R”). SFAS 123R requires that we measure the value of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The computed value is recognized as a non-cash cost over the period the employee provides services. On October 1, 2005, the Company adopted SFAS 123R under the modified retrospective application (“MRA”) method. Accordingly, we have adjusted our prior financial statements to include the amounts we reported previously in the pro forma disclosures made in accordance with the provisions of SFAS 123—Stock-Based Compensation (“SFAS 123”). The effective date of the restatement was October 1, 1995 (i.e., the beginning of fiscal 1996).
The fair value of option awards has been estimated using the Black-Scholes option pricing model. Like all option pricing models, the Black-Scholes model requires the use of highly subjective assumptions. To the extent these assumptions change, the value assigned to future option awards and, accordingly, the amount of expense to be recognized in the future, will likewise change. Total compensation cost relating to stock options included in the accompanying consolidated statements of earnings for the three months ended December 31, 2005 and 2004 was $3.6 million ($2.3 million after-tax, or $0.04 per diluted share) and $5.5 million ($3.7 million after-tax, or $0.07 per diluted share), respectively.
Page 7
With respect to the issuance of restricted stock, unearned compensation expense equivalent to the fair value of the stock issued on the date of award is charged to stockholders’ equity and subsequently amortized against earnings over the periods during which the restrictions lapse. The adoption of SFAS 123R had no affect on our method of accounting for restricted stock awards. Total, pre-tax, compensation cost relating to restricted stock included in the accompanying consolidated statements of earnings for the three months ended December 31, 2005 and 2004 was $0.5 million and $0.2 million, respectively.
The cumulative effect of the adoption of SFAS 123R at September 30, 2005 caused the recognition of a long-term, deferred tax asset (included in “Other Noncurrent Assets” in the accompanying consolidated balance sheets) of $25.1 million, and a $25.1 million increase to stockholders’ equity.
Included in “Receivables” in the accompanying consolidated balance sheets at December 31, 2005 and September 30, 2005 were $561.1 million and $518.6 million, respectively, of unbilled receivables, which represent amounts earned and reimbursable under contracts in progress at the respective balance sheet dates. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project. Included in these unbilled receivables at December 31, 2005 and September 30, 2005 were contract retentions totaling $36.8 million and $36.4 million, respectively. In accordance with industry practice, we include in receivables claims representing the recovery of costs incurred on contracts to the extent it is probable that such claims will result in additional contract revenue and the amount of such additional revenues can be reliably estimated. Such amounts totaled $42.1 million and $42.6 million at December 31, 2005 and September 30, 2005, respectively, of which approximately $30.9 million and $31.3 million, respectively, pertain to one claim on a waste incineration project performed in Europe and which is more fully described in Part I, Item 3, Legal Proceedings in our 2005 Form 10-K on page 18 thereto (due to the timing of when the claim may be settled, this is included in “Other Noncurrent Assets” in the accompanying consolidated balance sheets). Although we have initiated litigation against the client and are seeking damages in excess of €40.0 million (approximately $47.5 million at December 31, 2005), there can be no certainty as to the ultimate outcome of our claim. Also included in receivables are incentive fees recognized on a contract with the U.S. Department of Energy. The terms of the contract stipulate that incentive fees may not be fully billed until the completion of the project, currently estimated to occur in 2007. The amount of deferred fees recognized on this contract at December 31, 2005 and September 30, 2005 totaled $40.5 million and $38.4 million, respectively.
Amounts due from the United States federal government totaled $202.5 million and $194.8 million at December 31, 2005 and September 30, 2005, respectively.
Page 8
Property, equipment and improvements, net in the accompanying consolidated balance sheets consisted of the following (in thousands):
Land
Buildings
Equipment
Leasehold improvements
Construction in progress
Accumulated depreciation and amortization
Revenue Accounting for Contracts / Accounting for Joint Ventures
In accounting for long-term engineering and construction-type contracts, we follow the provisions of the AICPA’s Statement of Position 81-1—Accounting for Performance of Construction-Type and Certain Production-Type Contracts. In general, we recognize revenues at the time we provide services. Depending on the commercial terms of the contract, we recognize revenues either when costs are incurred, or using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. Contract losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. We recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated.
Certain cost-reimbursable contracts with government customers as well as certain commercial clients provide that contract costs are subject to audit and adjustment. In this situation, revenues are recorded at the time services are performed based upon the amounts we expect to realize upon completion of the contracts. In those situations where an audit indicates that we may have billed a client for costs not allowable under the terms of the contract, we estimate the amount of such nonbillable costs and adjust our revenues accordingly.
As is common to the industry, we execute certain contracts jointly with third parties through various forms of joint ventures. In general, such contracts fall within the scope of SOP 81-1. We therefore account for these investments in accordance with SOP 81-1 and Emerging Issues Task Force Issue 00-01—Investor Balance Sheet and Income Statement Display Under the Equity Method for Investments in Certain Partnerships and Other Ventures. Accordingly, for certain of these joint ventures (i.e., where we have an undivided interest in the assets and liabilities of the joint venture), we recognize our proportionate share of joint venture revenues, costs and operating profit in our consolidated statements of earnings. For other investments in engineering and construction joint ventures, we use the equity method of accounting.
Page 9
Very few of our joint ventures have employees. Although the joint ventures own and hold the contracts with the clients, the services required by the contracts are typically performed by us and our joint venture partners, or by other subcontractors under subcontracting agreements with the joint ventures. The assets of our joint ventures, therefore, consist almost entirely of cash and receivables (representing amounts due from the clients); and the liabilities of our joint ventures consist almost entirely of amounts due to the joint venture partners (for services provided by the partners to the joint ventures) and other subcontractors. In general, at any given time, the equity of our joint ventures represents the undistributed profits earned under the contracts with clients. None of our joint ventures have third-party debt or credit facilities. Our joint ventures, therefore, are simply mechanisms used to deliver engineering and construction services to clients. They do not, in and of themselves, present any risk of loss to us or to our partners. Under accounting principles generally accepted in the United States, our share of losses associated with the contracts held by the joint ventures, if and when they occur, are reflected in our consolidated financial statements.
In accordance with the provisions of FASB Interpretation No. 46R—Consolidation of Variable Interest Entities (“FIN 46R”), we have analyzed our joint ventures and have classified them into two groups: those variable interest entities (“VIEs”) of which we are the primary beneficiary, and those VIEs of which we are not the primary beneficiary. In accordance with FIN 46R and our accounting practices discussed above, we apply the consolidation method of accounting for our investment in material VIEs of which we are the primary beneficiary.
At December 31, 2005, the total assets and liabilities of those VIEs for which we are the primary beneficiary were $94.8 million and $82.1 million, respectively. At December 31, 2005, the total assets and liabilities of those VIEs for which we are not the primary beneficiary were $90.6 million and $96.3 million, respectively.
When we are directly responsible for subcontractor labor, or third-party materials and equipment (“pass-through costs”), we reflect the costs of such items in both revenues and costs. On other projects, where the client elects to pay for such items directly and we have no associated responsibility for such items, these amounts are not reflected in either revenues or costs. The amount of such pass-through costs included in revenues during the first quarter of fiscal 2006 and 2005 totaled $606.3 million and $334.6 million, respectively.
Page 10
Disclosures About Pension Benefit Obligations
The components of net periodic benefit costs relating to our defined benefit pension plans are as follows (in thousands):
Three Months Ended
December 31
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized items
Net periodic benefit cost
During the first quarter of fiscal 2006, we made cash contributions of approximately $6.9 million to our plans, and we expect to make cash contributions of an additional $20.3 million over the remaining three quarters of fiscal 2006.
Earnings Per Share
The following table reconciles the denominator used to compute basic earnings per share to the denominator used to compute diluted earnings per share (“EPS”) (in thousands):
Weighted average shares outstanding (denominator used to compute basic EPS)
Effect of employee and outside director stock options
Denominator used to compute diluted EPS
Accounting for and Disclosure of Guarantees
We lease certain real property located in Houston, Texas which consists of an office building we use in our operations (“Houston Tower I”). The operating lease agreement for Houston Tower I gives us the option to purchase the real property at the end of the lease term in 2011 for $49.0 million. We also have the right to request an extension of the lease, or we may assist the owner in selling the property at the end of the lease term. The proceeds from any such sale would be used to reduce our end-of-term return payment obligation of $35.3 million.
During fiscal 2005, we entered into various agreements including a master operating lease agreement for the construction and lease of an office building and adjacent parking structure in Houston, Texas (“Houston Tower II”), and the lease of equipment and other tangible personal property. Houston Tower II will be constructed on property that is adjacent to Houston Tower I. Houston Tower II is expected to be completed in early calendar 2007 and, when finished, will be
Page 11
used by us in our operations. The lease agreement for Houston Tower II is expected to run through 2015 and gives us the option to purchase the real property at any time prior to the expiration of the lease for $47.4 million (the current, estimated cost of Tower II). We also have the right to assist the owner in selling the property at the end of the lease term. The proceeds from any such sale would be used to reduce our end-of-term return payment obligation (expected to be approximately $38.8 million).
At December 31, 2005, we had guaranteed the repayment of certain bank debt of an unconsolidated affiliate. The term of the guarantee is equal to the remaining term of the underlying debt, which is scheduled to terminate on July 31, 2006. We would be required to perform on the guarantee in the event of default by the primary obligor. The maximum potential amount of future payments we could be required to make under this guarantee at December 31, 2005 is $3.0 million.
We have determined that the aggregate fair value of the aforementioned financial guarantees is not significant at December 31, 2005.
Page 12
JACOBS ENGINEERING GROUP INC AND SUBSIDIARIES
General
The purpose of this Management’s Discussion and Analysis (“MD&A”) is to provide a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition since the most recent fiscal year-end, and (ii) results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year. In order to better understand such changes, a reader of this MD&A should also read:
In this MD&A, we may make statements that are not based on historical fact. All such statements are “forward-looking statements” within the meaning of the “safe harbor” provisions of Private Securities Litigation Reform Act of 1995. Although such statements are based on management’s current estimates and expectations, and currently available competitive, financial and economic data, forward-looking statements are inherently uncertain, and we caution the reader of this MD&A that a variety of factors could cause business conditions and results to differ materially from what is contained in our forward-looking statements. A list of some of the factors most likely to occur that could cause actual results to differ from our forward-looking statements is presented on pages 31 through 32 of our 2005 Form 10-K, and is incorporated herein by reference. That list is not all-inclusive, and we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
MD&A Overview
The following sets forth a general overview of our financial condition and results of operations for the first quarter of fiscal 2006 ended December 31, 2005 as compared to the quarter ended December 31, 2004.
13
Results of Operations
We recorded net earnings of $43.0 million, or $0.72 per diluted share for the three months ended December 31, 2005, compared to net earnings of $28.9 million, or $0.50 per diluted share, for the corresponding period last year. We adopted SFAS 123R on October 1, 2005 using the MRA method. Our results of operations for the three months ended December 31, 2005 and 2004 include $3.6 million and $5.5 million, respectively, of expense related to stock options. Consistent with our past practice on the treatment of such supplemental compensation, these amounts have been included in selling, general and administrative (“SG&A”) expenses in the accompanying Consolidated Statements of Earnings.
Under the MRA method, we have adjusted our prior financial statements to include the amounts that we reported previously in the pro forma disclosures contained in the notes to our consolidated financial statements made in accordance with the provisions of SFAS 123. The effective date of restatement was October 1, 1995 (i.e., the beginning of fiscal 1996).
The following table compares the effects of SFAS 123R on net earnings and earnings per share for the three months ended December 31, 2005 and 2004 (in thousands):
Net earnings:
As reported
Effect of SFAS 123R
Net earnings before the effects of SFAS 123R
Diluted earnings per share:
Net earnings per share before the effects of SFAS 123R
Page 14
The following table sets forth our revenues by type of service for the three months ended December 31, 2005 and 2004 (in thousands):
Project Services
Construction
Operations and Maintenance (“O&M”)
Process, Scientific and Systems Consulting
The following table sets forth our revenues by the industry groups and markets in which our clients operate for the three months ended December 31, 2005 and 2004 (in thousands):
Oil & Gas, and Refining
Federal Programs
Chemicals and Polymers
Pharmaceuticals and Biotechnology
Infrastructure
Technology and Manufacturing
Pulp and Paper
Other
Total revenues for the three months ended December 31, 2005 increased by $400.2 million, or 31.2%, to $1.7 billion compared to $1.3 billion for the corresponding period last year.
In general, the increase in revenues relates to expanded business activity from clients operating in the oil & gas and refining, and chemicals and polymers industries. A significant portion of the increase in revenues for the three months ended December 31, 2005 as compared to the corresponding period last year resulted from increased construction activity which included a $271.7 million increase in pass-through costs. As more fully-explained in our 2005 Form 10-K, the level of pass-through costs included in revenues will vary between reporting periods depending principally on the amount of procurement that clients choose to do themselves as opposed to using our services, as well as on the normal, ramping-up and winding-down of field services activities on construction and O&M projects.
As a percentage of revenues, direct costs of contracts were 87.4% for the three months ended December 31, 2005 compared to 85.3% for the corresponding period last year. The percentage relationship between direct costs of contracts and revenues fluctuate between reporting periods depending on a variety of factors including the mix of business during the reporting periods being compared as well as the level of margins earned from the various types of services provided. The increase in this percentage relationship during the three months
Page 15
ended December 31, 2005 as compared to the corresponding periods last year was due primarily to the increased level of construction activity and the related pass-through costs included in revenues. During the three months ended December 31, 2005, we experienced an increase in field services activities, particularly on projects with clients operating in the oil & gas and refining industries. Also contributing to the percentage increase was an increase in projects where we have single responsibility for design, procurement, and construction. Because these projects provide us with the opportunity to integrate our services, the margin rates realized on the project services phases of projects may be lower; however, the overall profitability of such projects is maintained because of the greater volume of project services and the margins and fees that are earned on the related field services.
Interest income for the three months ended December 31. 2005 increased $1.7 million as compared to the amount for the corresponding period last year. Included in interest income for the most recent fiscal quarter is $0.7 million received from a client in connection with a favorable resolution relating to certain outstanding claims. The balance of the increase was a result of higher cash balances maintained during the current period. Interest expense decreased $0.3 million, or 14.6%, to $1.6 million for the three months ended December 31, 2005 compared to $1.9 million for the corresponding period last year. The decline in interest expense was due primarily to a lower level of borrowing, combined with a slight decrease in interest rates.
Backlog Information
Backlog represents the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Because of the nature, size, expected duration, funding commitments, and the scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts. Our policy with respect to O&M contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For federal programs (other than federal O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, and exclude option periods.
In accordance with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client. However, we have not experienced cancellations that have had a material effect on the reported backlog amounts. In a situation where a client terminates a contract, we would ordinarily be entitled to receive payment for work performed up to the date of termination and, in certain instances, we may be entitled to allowable termination and cancellation costs. While management uses all information available to it to determine backlog, our backlog at any given time is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein.
Because certain contracts (for example, contracts relating to large engineering, procurement and construction projects as well as U.S. federal programs) can cause large increases to backlog in the fiscal period in which we recognize the award, and because many of
Page 16
our contracts require us to provide services that span over a number of fiscal quarters (and sometimes over fiscal years), we evaluate our backlog on a year-over-year basis, rather than on a sequential, quarter-over-quarter basis.
The following table summarizes our backlog at December 31, 2005 and 2004 (in millions):
Technical professional services
Total
Our backlog increased $1.0 billion, or 12.6%, to $9.0 billion from $8.0 billion at December 31, 2004. Contributing to the growth in backlog were important wins from clients in the oil & gas and refining markets.
Liquidity and Capital Resources
At December 31, 2005, our principal source of liquidity consisted of $271.2 million of cash and cash equivalents, and $196.9 million of available borrowing capacity under our $290.0 million, long-term, unsecured revolving credit facility. We finance as much of our operations and growth as possible through cash generated by our operations.
During the three months ended December 31, 2005, our cash and cash equivalents increased by $31.3 million, to $271.2 million. This compares to a net increase in cash and cash equivalents of $68.7 million, to $168.7 million, during the corresponding period last year. During the three months ended December 31, 2005, we experienced net cash inflows from operating activities, financing activities, and the effect of exchange rates of $30.3 million, $14.4 million, and $1.1 million respectively. These inflows were offset in part by net cash outflows from investing activities of $14.4 million.
Our operations provided net cash of $30.3 million during the three months ended December 31, 2005 compared to $61.3 million for the corresponding period last year. The $31.0 million decrease in cash provided by operations during the most recent fiscal quarter as compared to the corresponding period last year was due primarily to a $46.0 million decrease in cash flows relating to the timing of cash receipts and payments within our working capital accounts, offset in part by a $14.2 million increase in net earnings.
We used $14.4 million of cash for investing activities during the three months ended December 31, 2005. This compares to net cash outflows of $8.3 million during the corresponding period last year. The $6.1 million increase in cash used for investing activities during the most recent fiscal quarter as compared to the corresponding period last year was due primarily to a $3.5 million increase in additions to property and equipment, net of disposals, and $2.7 million used for the acquisition of a business.
Our financing activities provided net cash inflows of $14.4 million during the three months ended December 31, 2005. This compares to net cash inflows of $20.6 million during the corresponding period last year. The $6.2 million net decrease in cash provided by financing activities during the most recent fiscal quarter as compared to the corresponding period last year was due primarily to a $19.3 million net decrease in cash flows from borrowing activities, offset in part by a $5.0 million increase in cash flows from the issuances of common stock,
Page 17
$7.4 million relating to the change in the Company’s other, long-term deferred liabilities and $0.8 million relating the excess tax benefits from stock based compensation.
We believe we have adequate liquidity and capital resources to fund our operations, support our acquisition strategy, and service our debt for the foreseeable future. We had $271.2 million in cash and cash equivalents at December 31, 2005, compared to $239.8 million at September 30, 2005, and $168.7 million a year ago. Our consolidated working capital position at December 31, 2005 was $609.0 million, compared to $552.3 million at September 30, 2005, and $457.6 million at December 31, 2004. We have a long-term, unsecured revolving credit facility providing up to $290.0 million of debt capacity, under which $93.1 million was utilized at December 31, 2005 in the form of direct borrowings. We believe that the capacity, terms and conditions of our credit facility are adequate for our working capital and general business requirements. We also have $36.0 million available through committed short-term credit facilities, under which $9.1 million was outstanding at December 31, 2005 in the form of direct borrowings.
Page 18
We do not enter into derivative financial instruments for trading, speculation or other purposes that would expose us to market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and currency exchange rates.
Interest Rate Risk
Our only source for long-term credit is a $290.0 million unsecured revolving credit facility. The total amount outstanding under this facility at December 31, 2005 was $93.1 million. This agreement expires in December 2010, and provides for both fixed-rate and variable-rate borrowings. Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows, and to lower our overall borrowing costs. In connection with the acquisition of the Babtie Group Limited (“Jacobs-Babtie”), we entered into an interest rate swap agreement with a large, U.S. bank relating to a £34.0 million (approximately $58.8 million) loan made under our revolving credit facility. We have determined that this contract qualifies as an effective hedge under the provisions SFAS No. 133—Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).
Foreign Currency Risk
In general, our exposure to fluctuating exchange rates relates to the effects of translating the financial statements of our subsidiaries operating outside the United States, which are denominated in currencies other than the U.S. dollar, into the U.S. dollar. We follow the provisions of SFAS No. 52—Foreign Currency Translation in preparing our consolidated financial statements.
We believe our exposure to the effects that fluctuating foreign currencies may have on our consolidated results of operations is somewhat limited because, in general, our various operations invoice customers and satisfy their financial obligations in their respective local currencies. In situations where our operations incur contract costs in currencies other than their own functional currencies, we strive to have a portion of the related contract revenues denominated in the same currencies as the costs.
As more fully described in Item 7A to our 2005 Form 10-K, we’ve entered into two hedge agreements in connection with our acquisition of the Babtie Group (refer to Notes 5 and 11 to the September 30, 2005 Consolidated Financial Statements included in our 2005 Form 10-K). One agreement is a forward contract in the notional amount of £39.9 million (approximately $73.4 million). The purpose of this contract is to hedge the Company’s exposure to fluctuating foreign currency exchange rates on a £39.9 million intercompany loan between Jacobs and one of its subsidiaries. The second agreement is a floating-to-fixed, interest rate swap agreement which fixes the effective interest rate on £34.0 million (approximately $58.8 million) of bank debt incurred in connection with the acquisition of the Babtie Group. Both of these hedge agreements qualify as cash flow hedges under the provisions of SFAS No. 133.
Page 19
Disclosure Controls and Procedures: As required by Rule 13a-15(b) of the Exchange Act of 1934, as amended, (the “Exchange Act”), the Company’s management carried out an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) of the Exchange Act), as of the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the period covered by this report.
Internal Controls Over Financial Reporting: As required by Rule 13a-15(d) of the Exchange Act, the Company’s management also carried out an evaluation, with the participation of its Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s system of internal control over financial reporting (as such term is defined in Rules 13a-15(f) of the Exchange Act) to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s system of internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.
It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. The concept of reasonable assurance is based on the recognition that in any system of internal controls there are certain inherent limitations. In addition, the design of any system of internal controls is based in part upon management’s judgment as well as certain assumptions about the likelihood of future events.
Page 20
PART II - OTHER INFORMATION
Please refer to Item 3 of Part I of the Company’s 2005 Form 10-K, which is incorporated herein by reference.
Page 21
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
John W. Prosser, Jr.
Executive Vice President
Finance and Administration
and Treasurer
Date: February 9, 2006
Page 22