UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report on
FORM 10-Q
(Mark one)
For the quarterly period ended March 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act of 1934).
Number of shares of common stock outstanding at May 6, 2005: 57,364,526
INDEX TO FORM 10-Q
PART I
Financial Statements
Consolidated Balance Sheets –March 31, 2005 (Unaudited) and September 30, 2004
Consolidated Statements of Earnings - UnauditedThree and Six Months Ended March 31, 2005 and 2004
Consolidated Statements of Comprehensive Income - UnauditedThree and Six Months Ended March 31, 2005 and 2004
Consolidated Statements of Cash Flows - UnauditedSix Months Ended March 31, 2005 and 2004
Notes to Consolidated Financial Statements - Unaudited
Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
PART II
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Exhibits
SIGNATURES
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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
Other
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 Interest
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; 57,339,418 shares issued and outstanding at March 31, 2005; 56,698,514 shares issued and outstanding at September 30, 2004
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Unearned compensation
Total stockholders’ equity
See the accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share information)
(Unaudited)
Revenues
Costs and Expenses:
Direct costs of contracts
Selling, general and administrative expenses
Operating Profit
Other Income (Expense):
Interest income
Interest expense
Miscellaneous income (expense), net
Total other income (expense), net
Earnings Before Taxes
Income Tax Expense
Net Earnings
Net Earnings Per Share:
Basic
Diluted
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other Comprehensive Income (Loss):
Relating to marketable securities:
Unrealized holding losses on securities-
Less: reclassification adjustment for gains realized in net earnings
Unrealized losses on securities, net of reclassification adjustment
Foreign currency translation adjustments
Minimum pension liability adjustment
Loss on cash flow hedge
Other Comprehensive Income (Loss)
Before Taxes
Income Tax Benefit Relating to Other
Comprehensive Income (Loss)
Total Comprehensive Income
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2005 and 2004
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
Net (gains) losses on sales of assets
Changes in certain assets and liabilities:
Prepaid expenses and other current assets
Other, net
Net cash provided by operations
Cash Flows from Investing Activities:
Additions to property, equipment and improvements
Disposals of property, equipment and improvements
Purchases on investments, net
Net increase in other, non-current assets
Net cash used for investing activities
Cash Flows from Financing Activities:
Proceeds from long-term borrowings
Repayments of long-term borrowings
Net repayments of short-term borrowings
Proceeds from issuances of common stock
Net cash provided by financing activities
Effect of Exchange Rate Changes
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
MARCH 31, 2005
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 also read our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of our consolidated financial statements at March 31, 2005 and September 30, 2004 and, where applicable, the three and six month periods ended March 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 2004 audited consolidated financial statements and notes thereto included in our 2004 Form 10-K as well as Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in our 2004 Form 10-K.
Stock-Based Compensation
We account for stock-based employee compensation plans using the intrinsic value method, in accordance with Accounting Principles Board Opinion No. 25—Accounting for Stock Issued to Employees (“APB 25”).
In accordance with Statement of Financial Accounting Standards No. 123—Accounting for Stock-Based Compensation (“SFAS 123”) and Statement of Financial Accounting Standards No. 148—Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”), we compute a pro forma option expense amount using the Black-Scholes option pricing model.
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(continued)
In accordance with SFAS 148, we present the following table to illustrate the effects on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS 123, as amended (in thousands, except per share data):
Three Months Ended
March 31,
Six Months Ended
Net earnings, as reported
Fair value of stock-based compensation, net of tax
Pro forma net earnings
Earnings per share:
Basic:
As reported
Pro forma
Diluted:
In December 2004, the Financial Accounting Standards Board issued SFAS 123(R)—Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) requires that we measure the value of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The computed value will be recognized as a non-cash cost over the period the employee is required to provide services in exchange for the award, usually the vesting period. SFAS 123(R) provides for two methods of transition: the modified retrospective method (whereby a company may restate compensation cost previously reported), and the modified prospective method (whereby there is no restatement of compensation cost reported on a pro forma basis in prior fiscal years, although a company may restate prior interim periods of the fiscal year in which SFAS 123(R) is adopted).
Adoption of SFAR 123(R) was initially required as of the beginning of the first interim or annual reporting period beginning after June 15, 2005. However, in April 2005 the Securities and Exchange Commission adopted a new rule deferring the effective date of SFAS 123(R) to the first fiscal year beginning after June 15, 2005. The Company is evaluating the potential impact of SFAS 123(R) and the transition method that we choose to apply.
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Included in “Receivables” in the accompanying consolidated balance sheets at March 31, 2005 and September 30, 2004 were $533.2 million and $450.8 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 March 31, 2005 and September 30, 2004 were contract retentions totaling $39.3 million and $44.9 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 $39.9 million and $38.7 million at March 31, 2005 and September 30, 2004, respectively, of which approximately $33.8 million and $32.5 million, respectively, pertain to one claim on a waste incineration project performed in Europe. Although we have initiated litigation against the client and are seeking damages in excess of €43.4 million (approximately $56.3 million at March 31, 2005), there can be no certainty as to the ultimate outcome of our claim. Other than costs relating to this claim, we anticipate that a substantial portion of our unbilled receivables will be billed and collected over the next twelve months.
Amounts due from the United States federal government totaled $186.1 million and $154.5 million at March 31, 2005 and September 30, 2004, respectively.
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
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Revenue Accounting for Contracts / Accounting for Joint Ventures
In general, we recognize revenues at the time services are performed. On cost-reimbursable contracts, revenue is recognized as costs are incurred, and includes applicable fees earned through the date services are provided. On fixed-price contracts, revenues are recorded using the percentage-of-completion method of accounting by relating contract costs incurred to date to total estimated contract costs at completion. This method of revenue recognition requires us to prepare estimates of costs to complete contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule, the cost of materials and labor, and productivity; and the impact of change orders, liability claims, contract disputes, and achievement of contractual performance standards. Many of our engineering and construction contracts provide for reimbursement of costs plus a fixed or percentage fee. In some of the markets we serve it is not uncommon for cost-reimbursable contracts to include incentive-fee arrangements. In certain instances, we base our incentive fees on achievement of target completion dates, target costs, and/or other performance criteria. Failure to meet these targets or increases in contract costs can result in unrealized incentive fees or non-recoverable costs, which could exceed revenues recognized from the project. We provide for contract losses 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.
Most of our contracts with government customers as well as certain contracts with commercial clients provide that contract costs (including indirect costs) are subject to audit and adjustment. For all such contracts, revenues have been recorded at the time services were performed based upon those amounts expected to be realized upon completion of the contracts.
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 AICPA Statement of Position 81-1—Accounting for Performance of Construction Type and Certain Production Type Contracts (“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.
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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 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. Our share of losses associated with the contracts held by our joint ventures, if and when they occur, has always been reflected in our consolidated financial statements.
In accordance with the provisions of FASB Interpretation No. 46R—Consolidation of Variable Interest Entities (“FIN 46”), 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 46, we apply the consolidation method of accounting for our investment in material VIEs of which we are the primary beneficiary.
At March 31, 2005, the total assets and liabilities of those VIEs for which we are the primary beneficiary were $114.4 million and $95.9 million, respectively. At March 31, 2005, the total assets and liabilities of those VIEs for which we are not the primary beneficiary were $24.5 million and $28.2 million, respectively.
When we are directly responsible for subcontractor labor, or third-party materials and equipment, 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 three and six months ended March 31, 2005 and 2004 totaled $377.2 million and $711.8 million, and $219.6 million and $501.9 million, respectively.
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Disclosures About Pension Benefit Obligations
The components of net periodic benefit costs relating to our defined benefit pension plans are as follows (in thousands):
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost
Most of the increase in net periodic pension cost for the three and six months ended March 31, 2005 as compared to the corresponding period last year relates to Babtie Group Limited (now, “Jacobs-Babtie”), a business we acquired during the fourth quarter of fiscal 2004.
During the six months ended March 31, 2005, we made cash contributions of approximately $15.5 million to our plans, and we expect to make cash contributions of an additional $15.9 million over the remaining two quarters of fiscal 2005.
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
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Accounting for and Disclosure of Guarantees
At March 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, 2005. 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 March 31, 2005 is $4.0 million.
Prior to fiscal 2004, we leased certain real property located in Houston, Texas (property consisting of office space which we use in our operations) from a VIE, which property was later sold to an unrelated third party that is not a VIE. Our lease agreement with the new owner of the property 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.
We have determined that the aggregate fair value of the aforementioned financial guarantees was not significant at March 31, 2005.
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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(s) as compared to the corresponding period(s) 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 2004 Annual Report on 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.
Overview
We recorded net earnings of $35.7 million, or $0.61 per diluted share, for the second quarter of fiscal 2005 compared to net earnings of $34.8 million, or $0.61 per diluted share, for the second quarter of fiscal 2004. For the first six months of fiscal 2005, we recorded net earnings of $68.2 million, or $1.17 per diluted share, compared to net earnings of $68.6 million, or $1.20 per diluted share, for the corresponding period last year.
Total revenues for the second quarter ended March 31, 2005 increased by $259.3 million, or 23.1%, to $1.4 billion compared to $1.1 billion for the second quarter of fiscal 2004. Total revenues for the six months ended March 31, 2005 increased by $407.5 million, or 18.0%, to $2.7 billion compared to $2.3 billion for the corresponding period last year. In general, the increases in revenues were due to increased business activity from clients in the oil and gas and refining, federal programs, and chemicals and polymers industry groups and markets, combined with the additive effect of Jacobs-Babtie (discussed below). These increases were partially off-set by a decline in revenues from clients operating in the pharmaceuticals and biotechnology industries.
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Our results of operations for the three and six months ended March 31, 2005 include the results of operations of Babtie Group Limited (now, “Jacobs-Babtie”), a business we acquired during the fourth quarter of fiscal 2004. For the three months ended March 31, 2005, Jacobs-Babtie contributed approximately $83.5 million of revenues and approximately $22.9 million of selling, general and administrative (“SG&A”) expenses. For the six months ended March 31, 2005, Jacobs-Babtie contributed approximately $162.4 million of revenues and approximately $45.2 million of SG&A expenses. Included in Jacobs-Babtie’s SG&A expense for the three and six months ended March 31, 2005 is approximately $1.8 million and $3.6 million, respectively, of amortization expense relating to intangible assets. These intangible assets were acquired at the time of acquisition and were recorded in accordance with Statement of Financial Accounting Standards No. 141—Business Combinations.
Our income tax expense for the three and six months ended March 31, 2005 reflects a consolidated effective tax rate of 36%, one percent higher than the rate for all of fiscal 2004.
Our backlog increased $1.0 billion, or 13.0%, to $8.2 billion from $7.2 billion at March 31, 2004.
Our net cash balance (i.e., cash and cash equivalents less bank debt) decreased $21.2 million during the second quarter ended March 31, 2005, from $55.1 million at the beginning of the second quarter to $33.8 million at March 31, 2005. However, our net cash balance at March 31, 2005 was $13.8 million higher than the September 30, 2004 balance of $20.1 million. We believe our cash balances combined with a borrowing capacity of $290.0 million under our long-term, unsecured revolving credit facility provide sufficient capital resources for us to help fund our on-going operations as well as support our acquisition strategy. Strategic acquisitions have been and will continue to be an important part of maintaining our long-term growth.
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The following table sets forth our revenues by the various types of services we provide for the three and six months ended March 31, 2005 and 2004 (in thousands):
Project Services
Construction
Operations and Maintenance
Process, Scientific and Systems Consulting
Certain amounts for fiscal year 2004 have been reclassified to conform to the current year presentation.
The following table sets forth our revenues by the industry groups and markets in which our clients operate for the three and six months ended March 31, 2005 and 2004 (in thousands):
Oil & Gas and Refining
Federal Programs
Pharmaceuticals and Biotechnology
Chemicals and Polymers
Infrastructure
Technology and Manufacturing
Pulp and Paper
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Results of Operations
Our results of operations for the three months and six months ended March 31, 2005 include those of Jacobs-Babtie, a business we acquired during the fourth quarter of fiscal 2004. As more fully discussed in our 2004 Form 10-K, Jacobs-Babtie is a leading provider of technical and professional services to clients in a number of industries including infrastructure, facilities, environmental and defense.
Results of Operations Excluding the Effects of Jacobs-Babtie:
We recorded net earnings of $35.7 million, or $0.61 per diluted share, for the second quarter of fiscal 2005 compared to net earnings of $34.8 million, or $0.61 per diluted share, for the corresponding period last year. For the first half of fiscal 2005, we recorded net earnings of $68.2 million, or $1.17 per diluted share, compared to net earnings of $68.6 million, or $1.20 per diluted share, for the corresponding period last year.
Total revenues for the second quarter ended March 31, 2005 increased by $259.3 million, or 23.1%, to $1.4 billion compared to $1.1 billion for the second quarter of fiscal 2004. Total revenues for the six months ended March 31, 2005 increased by $407.5 million, or 18.0%, to $2.7 billion compared to $2.3 billion for the corresponding period last year. Jacobs-Babtie contributed $83.5 million and $162.4 million of revenues during the three-month and six-month periods ended March 31, 2005, respectively.
Also contributing to the increase in revenues during the three-month and six-month periods ended March 31, 2005 as compared to the corresponding periods last year was an increase in the level of pass-through costs. As more fully explained in our 2004 Form 10-K, 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 our services, as well as on the normal ramping-up and winding-down of field services activities on construction and O&M projects. For the three months ended March 31, 2005, pass-through costs were $157.6 million higher than the amount for the corresponding period last year. For the six months ended March 31, 2005, pass-through costs were $209.9 million higher than the amount for the corresponding period last year.
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As a percentage of revenues, direct costs of contracts were 85.4% for both the three and six months ended March 31, 2005. This compares to 85.1% and 85.4% for the three months and six months ended March 31, 2004, respectively. 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. The increase in this percentage relationship during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004 was due primarily to the increase in pass-through costs described above.
Operating profit for the second quarter ended March 31, 2005 totaled $57.6 million (or 4.2% of revenues) compared to $52.8 million (or 4.7% of revenues) for the corresponding period last year. For the six months ended March 31, 2005, operating profit totaled $110.4 million (or 4.1% of revenues) compared to $105.2 million (or 4.7% of revenues) for the corresponding period last year. The decline in operating profit as a percentage of revenues was due primarily to the change in our business mix and the increase in pass-through costs, combined with the level of SG&A expense added by Jacobs-Babtie.
SG&A expenses for the three months ended March 31, 2005 increased $28.7 million, or 24.9%, to $143.8 million compared to $115.1 million for the three months ended March 31, 2004. For the six months ended March 31, 2005, SG&A expenses increased by $54.9 million, or 24.4%, to $279.9 million compared to $225.0 million for the six months ended March 31, 2004. The operations of Jacobs-Babtie contributed approximately $22.9 million and $45.2 million of SG&A expenses during the three months and six months ended March 31, 2005, respectively.
During the six months ended March 31, 2005, interest expense totaled $3.5 million compared to $1.6 million for the six months ended March 31, 2004. This increase is due primarily to the increased level of borrowings associated with the acquisition of Jacobs-Babtie. Amounts outstanding at March 31, 2005 under our $290.0 million long-term, unsecured revolving credit facility totaled $109.3 million bearing interest of 4.4%.
Our income tax expense for the three and six months ended March 31, 2005 reflects a consolidated effective tax rate of 36%; one percent higher than the rate for all of fiscal 2004. The higher tax rate takes into account the non-deductibility of the amortization of certain intangible assets we acquired with Jacobs-Babtie as well as a shift in earnings among our overseas operations.
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Backlog Information
Because certain contracts that we are awarded (for example, 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 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 March 31, 2005 and 2004 (in millions):
Technical professional services
Field services
Total
Our backlog increased $1.0 billion, or 13.9%, to $8.2 billion from $7.2 billion at March 31, 2004. Included in backlog at March 31, 2005 was approximately $379.0 million relating to Jacobs-Babtie. Also contributing to the growth in backlog were significant wins from clients in the oil and gas, U.S. federal programs, and infrastructure markets.
Liquidity and Capital Resources
We endeavor to finance our operations primarily through cash provided by operations. At March 31, 2005, our principal source of liquidity consisted of $155.1 million of cash and cash equivalents, and $180.7 million of available borrowing capacity under our $290.0 million long-term, unsecured revolving credit facility.
During the first half of fiscal 2005, our cash and cash equivalents increased by $55.1 million, to $155.1 million. This compares to a net increase of $45.8 million, to $172.0 million during the first half of fiscal 2004. During the first half of fiscal 2005, we experienced net cash inflows from operating activities and financing activities of $43.4 million and $40.9 million, respectively. These inflows were offset in part by net cash outflows from investing activities and the effect of exchange rate changes of $26.4 million and $2.9 million, respectively.
Our operations provided net cash of $32.0 million during the six months ended March 31, 2005 compared to $51.8 million during the corresponding period last year. In comparing the six months ended March 31, 2005 to the six months ended March 31, 2004, the timing of cash receipts and payments within our working capital accounts accounted for a $24.6 million decrease in cash flows from operations. Also contributing to the decline in cash flows was a $1.2 million change in deferred tax assets and a slight decrease in net earnings. These declines in cash flows from operations were partially offset by increases in certain non-cash expense items, principally a $1.8 million increase in depreciation of property, equipment and improvements and a $3.9 million increase in amortization of intangible assets, most of which relates to the acquisition of Jacobs-Babtie.
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We used $26.4 million of cash for investing activities during the six months ended March 31, 2005. This compares to net cash outflows of $18.5 million during the corresponding period last year. Additions to property and equipment (net of disposals) for the six months ended March 31, 2005 totaled $22.4 million compared to net additions of $13.0 million for the corresponding period last year. The increase was due primarily to costs associated with certain office expansion activities within the United States.
Our financing activities provided net cash inflows of $52.3 million during the six months ended March 31, 2005. This compares to net cash inflows of $13.1 million during the corresponding period last year. The $39.2 million net increase in cash provided by financing activities during the current fiscal period as compared to last year was due primarily to increased borrowing activities, net of repayments.
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 $155.1 million in cash and cash equivalents at March 31, 2005, compared to $100.1 million at September 30, 2004, and $172.0 million a year ago. Our consolidated working capital position at March 31, 2005 was $497.8 million, compared to $397.6 million at September 30, 2004, and $450.9 million at March 31, 2004. We have a long-term, unsecured revolving credit facility providing up to $290.0 million of debt capacity, under which $109.3 million was utilized at March 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 $39.9 million available through committed short-term credit facilities, under which $12.0 million was outstanding at March 31, 2005 in the form of direct borrowings.
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 March 31, 2005 was $109.3 million. This agreement expires on January 29, 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.
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 Statement of Financial Accounting Standards No. 52—Foreign Currency Translation in preparing our consolidated financial statements.
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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 required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures 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 end of the period covered by this report. As required by Rule 13a-15(d), the Company also carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s system of internal controls over financial reporting to determine whether any changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s system of internal controls 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. 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.
PART II - OTHER INFORMATION
Please refer to Item 3 of Part I of the Company’s 2004 Annual Report on Form 10-K, which is incorporated herein by reference.
The Company’s 2005 Annual Meeting of Shareholders was held at its headquarters on February 8, 2005, as previously announced in its Notice of Annual Meeting of Shareholders and Proxy Statement dated January 3, 2005, copies of which have been filed with the Commission pursuant to Regulation 14A.
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There were three matters voted upon by the stockholders at the Annual Meeting. Those matters were: (i) the election of three directors to hold office until the 2008 annual meeting; (ii) the approval of an amendment to the Company’s 1999 Stock Incentive Plan (the “1999 SIP”) increasing the number of authorized shares by 2.0 million and providing that no more than 50% of the increase, and any subsequent increase in the number of shares authorized under the plan, may be awarded in the form of restricted stock; and (iii) the approval of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending September 30, 2005.
The results of the shareholder voting were as follows (all shares voted were voted by proxy):
1. Election of Directors:
Dr. Dale R. Laurance
Linda Fayne Levinson
Craig L. Martin
2. Approval of the amendment to the 1999 SIP
3. Ratification of the Appointment of Ernst & Young LLP
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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: May 4, 2005
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