Jacobs Engineering - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Quarterly Report on

FORM 10-Q

(Mark one)

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 - o No

Indicate by check-mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act of 1934).

x Yes - o No

Number of shares of common stock outstanding at August 12, 2003: 55,449,184

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JACOBS ENGINEERING GROUP INC.

INDEX TO FORM 10-Q

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Part I - FINANCIAL INFORMATION

JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)

See the accompanying Notes to Consolidated Financial Statements.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Months Ended June 30, 2003 and 2002
(In thousands, except per share information)
(Unaudited)

See the accompanying Notes to Consolidated Financial Statements.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended June 30, 2003 and 2002
(In thousands)
(Unaudited)

See the accompanying Notes to Consolidated Financial Statements.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2003 and 2002
(In thousands)
(Unaudited)

See the accompanying Notes to Consolidated Financial Statements.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2003

In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position at June 30, 2003 and September 30, 2002, its consolidated results of operations for the three and nine months ended June 30, 2003 and 2002, its consolidated comprehensive income for the three and nine months ended June 30, 2003 and 2002, and its consolidated cash flows for the nine months ended June 30, 2003 and 2002.

The Company’s interim results of operations are not necessarily indicative of the results to be expected for the full year.

As allowed by SFAS 123, the Company has elected to continue to account for stock issued to its employees and outside directors in accordance with APB Opinion No. 25 – Accounting for Stock Issued to Employees (“APB 25”). Accordingly, compensation cost is measured based on the excess, if any, of the market price of the Company’s common stock over the exercise price of a stock option, determined on the date the option is granted.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2003

SFAS 123 prescribes an optional, fair-value based method of accounting for stock-based compensation plans. The following table illustrates the effect on net earnings and earnings per share if the Company determined compensation cost under SFAS 123 (in thousands, except per share data):

The fair value of each option was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Like all option-pricing models, the Black-Scholes model requires the use of highly subjective assumptions including the expected volatility of the underlying stock price. Since the Company’s stock options possess characteristics significantly different from those of traded options, changes in the subjective input assumptions can materially affect the fair value estimates of the Company’s options. The Company believes that existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

The effects of applying SFAS 123 for these pro forma disclosures are not likely to be representative of the effects on reported earnings for future years as options vest over several years and additional awards are generally made each year.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2003

Amounts due from the U.S. federal government included in “Receivables” in the accompanying consolidated balance sheets totaled $132.7 million and $141.2 million at June 30, 2003 and September 30, 2002, respectively.

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2003

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2003

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JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
JUNE 30, 2003

As is common in the industry, the Company executes certain contracts jointly with third parties through partnerships and joint ventures. The Company is currently in the process of assessing whether any of its project-specific joint ventures constitute a VIE under FIN 46.

The Company has a contractual relationship with a VIE acquired prior to February 1, 2003. This VIE owns real property in Houston, Texas which the Company leases for office space (“Houston VIE”). In the event that the Company is required to consolidate the Houston VIE, any difference between the carrying values of the Houston VIE's assets (i.e., the real and personal property it owns and leases to the Company) and liabilities (i.e., the long-term debt the VIE incurred to finance the construction of the facility) would be recognized as a cumulative effect of an accounting change.

The Company is actively pursuing certain restructuring solutions that will enable the Houston VIE to meet the criteria of non-consolidation under FIN 46, and expects to complete a restructuring arrangement during the fourth quarter of fiscal 2003. However, if the Company is required to consolidate the Houston VIE, it anticipates that such consolidation will result in the recognition of additional fixed assets and a comparable amount of long-term debt of approximately $50.0 million.

At June 30, 2003, the Company had guaranteed certain financial liabilities, the majority of which relate to debt obligations of unconsolidated affiliates. The term of each of the guarantees is equal to the remaining term of the underlying debt, which ranges from five to thirteen months. Payment by the Company would be required upon default by the unconsolidated affiliate. The maximum potential amount of future payments, which the Company could be required to make under these guarantees at June 30, 2003, is $7.6 million. Additionally, the Company had guaranteed the residual value ($35.3 million) of the synthetic lease agreement associated with its offices in Houston, Texas. The guarantee extends through the maturity of the lease in 2011.

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General

The following discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (incorporated by reference from pages F-5 through F-13 of Exhibit 13 to the Company’s 2002 Annual Report on Form 10-K).

Results of Operations

The Company recorded net earnings of $32.9 million, or $0.58 per diluted share, for the three months ended June 30, 2003, compared to net earnings of $27.9 million, or $0.50 per diluted share for the same period last year. For the nine months ended June 30, 2003, the Company recorded net earnings of $94.5 million, or $1.68 per diluted share, compared to net earnings of $80.7 million, or $1.46 per diluted share, for the same period in fiscal 2002.

Total revenues for the third quarter of fiscal 2003 decreased by $38.0 million, or 3.3%, to $1.1 billion, compared to total revenues of $1.2 billion for the third quarter of fiscal 2002. During the first nine months of fiscal 2003, total revenues increased by $208.5 million, or 6.2%, to $3.6 billion, compared to total revenues of $3.3 billion for the first nine months of fiscal 2002.

The decrease in revenues during the current fiscal quarter compared to the same period last year was primarily attributable to a $137.2 million, or 30.3% decline in pass-through costs. The amount of pass-through costs included in revenues during the three months ended June 30, 2003 totaled $315.3 million compared to $452.5 million during the three months ended June 30, 2002. On a year-to-date basis, the amount of pass-through costs included in revenues remained relatively unchanged from the prior fiscal year. The level of pass-through costs included in revenues and costs will vary between reporting periods depending principally on the amount of procurement that clients choose to do themselves as opposed to using the services of the Company, as well as on the normal winding down of field services activities on construction and operations and maintenance (“O&M”) projects. See Note 8 of the Notes to Consolidated Financial Statements for a discussion of pass-through costs.

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As more fully discussed in the Company’s 2002 Form 10-K, the Company’s business is focused exclusively on providing technical, professional, and construction services to a large number of industrial, commercial, and governmental clients around the world. The Company’s services can be generally classified into four broad categories: project services (which includes engineering, design, architectural, and similar services); construction services (which includes revenues earned from traditional field construction activities as well as modular construction activities); O&M services (which includes revenues from contracts requiring the Company to operate and maintain large, complex facilities on behalf of clients, as well as contracts involving process plant maintenance services and activities); and process, scientific, and systems consulting services (which includes revenues earned from providing a wide variety of scientific and consulting services to clients).

The scope of services the Company can provide its clients, therefore, ranges from consulting and conceptual design-type services (which are often required by clients in the very early stages of a project) to complete, single-responsibility, design-build-operate contracts.

The following tables set forth the Company’s revenues by type of service for the quarter and nine months ended June 30 of each fiscal year (in thousands):

Three months ended June 30:

Nine months ended June 30:

Beginning with the second quarter of fiscal 2002, the Company classified certain elements of revenues as Construction that had been previously classified as Project Services. Consequently, the Company reclassified approximately $110.4 million of project services revenues in the first quarter of fiscal 2002 to construction revenues.

As a percentage of revenues, direct costs of contracts was 86.0% and 86.8%, respectively, for the three and nine months ended June 30, 2003, compared to 87.3% and 87.1% for the same periods in fiscal 2002. The percentage relationship between direct costs of contracts and revenues will 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 by the Company.

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Selling, general and administrative (“SG&A”) expenses for the third quarter of fiscal 2003 increased by $3.0 million, or 2.9%, to $107.6 million, compared to $104.6 million for the third quarter of fiscal 2002. For the first nine months of fiscal 2003, SG&A expenses increased by $16.9 million, or 5.5%, to $322.1 million, compared to $305.3 million for the same period last year. The increase in SG&A expenses during the nine months ended June 30, 2003 as compared to the same period last year was primarily attributable to growth in business volume. The increase in SG&A expenses also included the impact of the operations of McDermott Engineers & Constructors (Canada) Limited (including Delta Catalytic and Delta Hudson Engineering; collectively “Delta”) for a full nine months in the current fiscal year-to-date period compared to only eight months in the same period last year, since the Company completed the acquisition of Delta on October 31, 2001. Had Delta’s operations been included for a full nine months for the year-to-date period ended June 30, 2002, SG&A expenses would have been higher by an additional $0.9 million. On a sequential basis, SG&A expenses during the third quarter of fiscal 2003 decreased by $2.8 million, or 2.5%, from $110.3 million recorded during the second quarter of fiscal 2003.

As a percentage of revenues, consolidated SG&A expenses increased to 9.5% during the third quarter of fiscal 2003 compared to 8.9% during the third quarter of fiscal 2002, but remained unchanged during the first nine months of fiscal 2003 at 9.1% compared to the same period in fiscal 2002, reflecting the Company’s continuing efforts to control costs.

During the third quarter ended June 30, 2003, the Company’s operating profit (defined as revenues, less direct costs of contracts and SG&A expenses) increased by $7.0 million, or 16.1%, to $50.6 million, compared to $43.5 million during the same period last year. For the nine months ended June 30, 2003, the Company’s operating profit increased by $19.0 million, or 15.0%, to $145.9 million, compared to $126.9 million for the same period last year. On a sequential basis, operating profit during the third quarter of fiscal 2003 increased by $2.0 million, or 4.2%, from $48.5 million during the second quarter of fiscal 2003. Operating profit as a percentage of revenues also increased to 4.5% and 4.1%, respectively, in the third quarter and first nine months of fiscal 2003, compared to 3.7% and 3.8%, respectively, in the third quarter and first nine months of fiscal 2002. The increases in the Company’s operating profit were due primarily to an increase in business volume during the first nine months of fiscal 2003 as compared to the same period last year, and to a slight improvement in margins during the third quarter of fiscal 2003.

Interest expense decreased by $1.2 million, or 67.5%, to $0.6 million during the third quarter of fiscal 2003, compared to $1.7 million during the third quarter of fiscal 2002. During the nine months ended June 30, 2003, interest expense decreased by $3.2 million, or 55.8%, to $2.6 million, compared to interest expense of $5.8 million for the same period last year. On a sequential basis, interest expense during the third quarter of fiscal 2003 remained relatively unchanged from the second quarter of fiscal 2003. The decreases in interest expense during the current fiscal periods were due to significantly reduced borrowing levels. The Company continues to pay down its debt under its revolving credit facilities, which had an outstanding balance of $32.5 million at June 30, 2003 (bearing interest of 3.7%), compared to $115.8 million at June 30, 2002 (bearing interest of 3.4%), and $85.7 million at September 30, 2002 (bearing interest of 3.8%).

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The Company’s revolving credit facilities will terminate on January 11, 2004. Accordingly, all outstanding balances under these credit facilities were classified as current liabilities beginning January 2003. The Company is currently in negotiations for a new, long-term revolving credit facility and expects this new facility to be in place by the end of fiscal 2003. Management of the Company believes that the capacity, terms and conditions of the new facility will be sufficient for the Company’s working capital and general business requirements.

Backlog Information

The following table summarizes the Company’s backlog at June 30, 2003 and 2002 (in millions):

Liquidity and Capital Resources

During the nine months ended June 30, 2003, the Company’s cash and cash equivalents increased by $61.5 million, to $110.0 million. This compares to a net increase of $1.0 million, to $50.3 million, during the same period in fiscal 2002. During the nine months ended June 30, 2003, the Company experienced net cash inflows from operating activities and the effect on cash of exchange rate changes of $116.4 million and $4.4 million, respectively, offset in part by net cash outflows from investing and financing activities of $6.0 million and $53.3 million, respectively.

Operations resulted in net cash inflows of $116.4 million during the first nine months of fiscal 2003. This compares to net cash inflows of $136.2 million during the same period last year. The $19.8 million decrease in cash provided by operations in the current fiscal period as compared to last year was due primarily to a decrease in inflows relating to the timing of cash receipts and payments within the Company’s working capital accounts and to deferred income taxes of $27.8 million and $5.9 million, respectively, partially offset by an increase in net earnings of $13.8 million.

The Company’s investing activities resulted in net cash outflows of $6.0 million during the first nine months of fiscal 2003. This compares to net cash outflows of $71.3 million during the same period in fiscal 2002. The net decrease of $65.3 million in cash used for investing activities during the current fiscal period as compared to last year was due primarily to a decrease of $43.5 million in net cash used for acquisitions, a net decrease in other noncurrent assets of $12.6 million, a decrease of $5.9 million in additions to property and equipment, net of disposals, and an increase of $4.8 million in proceeds from sales of marketable securities and investments.

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The Company’s financing activities resulted in net cash outflows of $53.3 million during the first nine months of fiscal 2003. This compares to net cash outflows of $58.4 million during the same period in fiscal 2002. The $5.1 million net decrease in cash used for financing activities during the current fiscal period as compared to last year was due primarily to decreases in repayments of long-term borrowings and in purchases of common stock for treasury of $209.5 million and $2.0 million, respectively, and to an increase of $3.5 million in proceeds from issuances of common stock. These inflows were partially offset by decreases in proceeds from long-term borrowings, net reductions in short-term borrowings, and other deferred liabilities of $134.7 million, $72.9 million and $2.3 million, respectively. The outstanding balances under the Company’s long-term credit facilities were classified as current liabilities in the second quarter of fiscal 2003. Total borrowing activity, combining debt that is classified as short-term and long-term, during the first nine months of fiscal 2003 resulted in net repayments of $65.9 million, compared to net repayments of $67.8 million during the same period last year.

The Company believes it has adequate liquidity and capital resources to fund its operations during the next twelve months. The Company’s consolidated working capital position was $288.3 million at June 30, 2003. The Company has $46.0 million available through committed short-term credit facilities, and $275.0 million available through its revolving credit facilities. At June 30, 2003, $2.0 million and $32.5 million were outstanding in the form of direct borrowings under the $46.0 million and $275.0 million credit facilities, respectively.

Borrowings under the $275.0 million credit facilities were previously classified as long-term debt. Because the $275.0 million credit facilities are scheduled to terminate in January 2004, all outstanding borrowings under these facilities have been classified as current obligations at June 30, 2003. However, the Company is currently in negotiations for a new, long-term revolving credit facility and expects this new facility to be in place by the end of fiscal 2003. Management of the Company believes that the capacity, terms and conditions of the new facility will be sufficient for the Company’s working capital and general business requirements.

Forward-Looking Statements

Statements included in this Management’s Discussion and Analysis that are not based on historical facts are “forward-looking statements”, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current estimates, expectations and projections about the issues discussed, the industries in which the Company’s clients operate, the geographic areas in which the Company conducts its operations, and the services the Company provides. By their nature, such forward-looking statements involve risks and uncertainties. The Company has tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and words and terms of similar substance in connection with any discussion of future operating or financial performance. The Company cautions the reader that a variety of factors could cause business conditions and results to differ materially from what is contained in its forward-looking statements including the following:

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The preceding list is not all-inclusive, and the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Readers of this Management’s Discussion and Analysis should also read the Company’s most recent Annual Report on Form 10-K for a further description of the Company’s business, legal proceedings and other information that describes factors that could cause actual results to differ from such forward-looking statements.

There have been no material changes in the information provided under “Item 7A. Qualitative and Quantitative Disclosures About Market Risk” included in the Company’s 2002 Annual Report on Form 10-K.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-14(e) and 15d-14(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) to ensure that information required to be disclosed by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

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PART II - OTHER INFORMATION

(a)        Exhibits

(b)        Reports on Form 8-K

On April 17, 2003, the Company filed with the Securities and Exchange Commission a Form 8-K dated April 16, 2003, announcing the Company’s earnings results for the second quarter of fiscal 2003.

SIGNATURES

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.

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