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JACOBS ENGINEERING GROUP INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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, readers of this MD&A should also read: • The discussion of the critical and significant accounting policies used by the Company in preparing its consolidated financial statements (the most current discussion of our critical accounting policies appears on pages 34 through 37 of our 2010 Annual Report on Form 10-K (the "2010 Form 10-K"), and the most current discussion of our significant accounting policies appears on pages F-8 through F-14 of our 2010 Form 10-K), as well as the discussion of new accounting standards included in the Notes to Consolidated Financial Statements of this Form 10-Q; • The Company's fiscal 2010 audited consolidated financial statements and notes thereto included in its 2010 Form 10-K (beginning on page F-1 thereto); and • Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2010 Form 10-K (beginning on page 34 thereto). In addition to historical information, this MD&A may contain forward-looking statements that are not based on historical fact. When used herein, words such as "expects", "anticipates", "believes", "seeks", "estimates", "plans", "intends", and similar words identify forward-looking statements. You should not place undue reliance on these forward-looking statements. 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 involve risks and uncertainties that could cause our actual results to differ materially from what may be inferred from the forward-looking statements. Some of the factors that could cause or contribute to such differences are listed and discussed in Item 1A-Risk Factors, included in our 2010 Form 10-K (beginning on page 19 thereto). We undertake no obligation to release publicly any revisions or updates to any forward-looking statements. We encourage you to read carefully the risk factors described in other documents we file from time to time with the United States Securities and Exchange Commission. Overview Acquisitions of TechTeam, Sula, DSWA, Magellan Consulting, Alpha Telecom, and CES In October 2010, we acquired TechTeam Government Solutions, Inc. ("TechTeam"), formerly a wholly-owned subsidiary of TechTeam Global, Inc. TechTeam is a 500-person information technology ("IT") solutions company that provides support to U.S. federal, state and local government agencies, including the United States Department of Homeland Security, U.S. Army and U.S. Army Corps of Engineers. The firm's core competencies include systems integration, enterprise application integration, ERP implementation support, IT infrastructure support, network operations management, and call center operations. The primary purpose for acquiring TechTeam was to expand the Company's IT, modeling, and simulation services capabilities with the U.S. federal government. Page 16 -------------------------------------------------------------------------------- Table of Contents JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES Also in October 2010, we acquired Sula Systems Ltd ("Sula"), a 70-person professional services firm headquartered in Gloucestershire, England. Founded in 1996, Sula provides systems engineering and technical services on large, complex programs and projects to clients in the United Kingdom's defense and aerospace markets. Sula is also involved in a number of major defense programs in areas such as armored vehicles, complex weapons, test and evaluation, submarine nuclear propulsion, and capability and network level systems engineering. Sula also provides services relating to civil airliners and space-based subsystems. In December 2010, we acquired the assets of Damon S. Williams Associates, L.L.C. ("DSWA"). DSWA is a 50 person professional services firm headquartered in Phoenix, Arizona specializing in water and wastewater facilities, with expertise in planning, design, construction administration and operations services. Also in December 2010 we acquired the assets of two other, smaller niche firms; (i) Magellan Consulting which provides services to clients in the education market, and (ii) Alpha Telecom Services Company which provides services to clients in the telecommunications industry. In May 2011, we acquired a majority ownership interest in Consulting Engineering Services (India) Private Limited ("CES"). CES is a leading power, infrastructure, and civil engineering company in India, headquartered in Delhi. CES employs 2,000 people and provides a range of solutions in infrastructure, development, planning, engineering, and construction management. The results of operations of the acquired businesses have been included in the Company's consolidated results of operations commencing with the dates control of the acquired businesses were obtained. The Aker Solutions ASA Transaction On February 1, 2011, the Company acquired certain operations within the process and construction business of Aker Solutions ASA (the "Aker Entities"). The Company's results of operations for the three and nine months ended July 1, 2011 includes the results of operations of the Aker Entities since the date of the acquisition. For the three and nine months ended July 1, 2011, the Aker Entities contributed approximately $252.9 million and $425.2 million, respectively, of revenues; $40.5 million and $70.0 million, respectively, of selling, general and administrative ("SG&A") expenses (which includes approximately $1.6 million and $5.1 million, respectively, of costs associated with due diligence and integration activities); and net earnings of $12.7 million and $18.1 million; respectively. The SIVOM Judgment During the third quarter of fiscal 2010, the Company received an unfavorable court judgment relating to a waste incineration project in France for the SIVOM de Mulhousienne (the "SIVOM Judgment"). The SIVOM project was performed by a consortium of contractors that was led by one of our subsidiaries under a contract that was entered into in 1996, prior to our acquisition of that subsidiary. As a result of the judgment, we recorded a pre-tax charge to earnings of approximately $93.3 million. Net of the effects of the charge on the Company's long-term incentive bonus plan and income taxes, the effect on net earnings attributable to Jacobs for the three and nine months ended July 2, 2010 was approximately $60.3 million, or $0.48 per diluted share. The $93.3 million pre-tax charge is reflected in the accompanying, unaudited Consolidated Statements of Earnings for the three and nine months ended July 2, 2010 as a $25.9 million reduction in revenues; an approximate $58.7 million increase in direct costs of contracts; and an $8.7 million increase to interest expense (which is net of certain interest the SIVOM was ordered to pay to the Company). In addition, the SIVOM Judgment resulted in a $6.4 million reduction to the Company's incentive bonus plan (the cost of which is included in SG&A expenses). Page 17 -------------------------------------------------------------------------------- Table of Contents JACOBS ENGINEERING GROUP INC. AND SUBSIDIARIES In this MD&A, we discuss and analyze certain elements of the Company's results of operations for the three and nine months ended July 1, 2011 as they compare to the corresponding periods last year before and after the effects of the SIVOM Judgment. Although such fiscal 2010 information before the effects of the SIVOM Judgment is non-U.S. GAAP in nature, it is presented because Management believes it provides a better view of the Company's operating results for the readers of this Quarterly Report on Form 10-Q to assess the Company's performance and operating trends. The following table reconciles (i) the Company's consolidated results of operations for the three months and nine months ended July 2, 2010 presented in accordance with U.S. GAAP to (ii) the Company's consolidated results of operations for the three months and nine months ended July 2, 2010 excluding the effects of the SIVOM Judgment (in thousands, except earnings per share): |