雅各布工程 (J) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Jacobs first quarter earnings conference call.

This call is being recorded.

Today's presentation will be available for replay at 2:00pm Eastern time through February first at midnight.

You may access the replay by dialing 719- 457-0820 and answering the passcode 218684.

Again 719- 457-0820 and passcode 218684.

There will also be a webcast of this teleconference, which can be accessed by logging onto www.jacobs.com.

At this time for opening remarks and introductions, I'd like to turn the call over to Patti Bruner.

Please go ahead.

Good morning.

The company requests that we point out that any statements that the company makes today that are not based on historical fact are forward-looking statements.

Actual results may differ materially from the forward-looking statements.

For information concerning factors that could cause such differences, the company requests that you read its most recent annual report on Form 10-K for the period ending September 30, 2004, including the management's discussion and analysis of financial condition and results of operations contained therein.

The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Now to start the call, I will turn it over to John Prosser, CFO of Jacobs.

Thank you Patti.

Good morning.

As we usually do I will be going through the financial highlights and then I will turn it over to Noel Watson, our Chief Executive Officer for discussion of the general business overview and our markets as we gone through.

As you noticed in the slides, we have streamlined the slide presentation slightly in trying to be cognizant of your time issues and allow more time for question and answers.

To go to slide four, it is just an overview of the highlights of the quarter.

Our diluted EPS was $0.56 per share and our net earnings of 32.5 million.

These were in line with expectations and were up nicely from the September quarter.

Our backlog was at a record $8 billion on very strong sales for the quarter.

Our balance sheet continues strong, and our net cash position increased to a balance of $55.1 million, so it continues to grow.

As we had indicated in our press release, guidance for the year remains up to 2.40 to 2.70 range, and for our second quarter, we have instituted a range of $0.58 to $0.63.

We go to slide 5, this is the slide we show at every one of our conferences and such.

It does show a very nice consistent earnings growth, and while we have been disappointed in this last year's performance, I think with the growth this quarter over last quarter, you can see that we have returned to the growth pattern of our history.

We go on to slide 6, what we've done is a little more detail in comparing are the first quarter of '05 to the fourth quarter of '04.

I think it highlights the fact that our revenue and operating profits are up nicely.

The interest income and interest expense has changed slightly from last quarter.

That reflects having the Babtie transaction in for a whole quarter versus only the two months of the fourth quarter, so our interest income was down a little bit because of the cash we used and the interest expense was up because of the debt being outstanding for the whole quarter.

Other income, net was actually an expense for this quarter compared to the income last quarter, one of the results are from the sale of some equities investment we had in another company.

The other change from both last quarter, and a change looking forward to this year is that our tax rate did increase to 36% up from 35% last year.

The outlook for the year is that the tax rate, while it will vary a little bit quarter to quarter and fluctuate, will probably be somewhere around that 36% for the year.

The increase really results from two things, primarily because of the intangibles related to the Babtie transaction that aren't deductible for taxes in the U.K. and also the change in mix between, you know, both between income earned in the U.S. and outside, but also between the various countries outside and the different tax rates that are applicable to those different income streams.

Going on to slide 7, this is something we're very enthusiastic about, our backlog did grow to the $8 billion, as I indicated earlier, and just as important, the technical professional services grew to $4.5 billion.

This is not only a nice gain from a year ago, but it's a nice gain from the year-end September 30 backlog when the total backlog was $7.5 billion and professional services were $4 billion, so it shows both a nice gain for the quarter, as well as the year over year.

With that, I will now turn it over to Noel Watson to discuss the actual business activity.

Good morning, folks.

I'm going to go to slide 8 and we're going to talk about strategies to maintain 15% growth.

And we departed from past practice, I'm just going to touch on the business model a little bit here.

Our business is still driven around a relationship-based business model and 80% of our business is derived from long-term client relationships.

That is the focus of business, and that's how we're trying to grow the business, its to continue to add more business in the long-term client alliance-type business.

Acquisitions will always be part of our mix when people ask, you know, what part of acquisitions -- fuel our growth.

It's normally about half our growth comes from acquisitions and half come from internal growing, taking market share and that type of thing.

As with all services businesses, costs are a big issue.

Those of you that follow the company know that our margins, that we're on the low end of the margin scale, so the one way that you can continue to grow your business and grow your profits is to keep your costs under control, and we work that very strongly throughout the system.

We work it not only on the Jacobs side, but we work it for our clients also.

The other strategy that we will talk a little bit more about is our focus on selective market diversity, and if you will roll to slide 9, we will talk a little bit about the different markets.

We are very diversified company both geographically with offices in the US and in Europe and in Southeast Asia, and in Australia, and so our geographic diversity has continued to grow over the years.

And as you look at this pie chart I've got here, you can see that we're in a wide variety of markets and what I'll do is just take a minute to talk about each one of these markets.

Starting on the right hand side with petroleum, it's very strong.

It's very strong both upstream and downstream.

We are seeing many opportunities starting in the downstream with the clean fuels program that have have been ongoing for several years.

But those markets have expanded themselves now, and we're also looking at modifying the refineries across the globe for different crude slates as the crude gets heavier and more sour and we're also looking at capacity increases, particularly here in the US where we're basically out of gasoline.

So talking to some of our key clients in the refining market it is clear that we're going to have a good run in this market.

Some of them say for the rest of the decade.

I certainly hope that's true, but that's the way it's starting to look to us.

If you move down to the high-tech market, the semiconductor part of this has been relatively slow over the past year.

The automotive market where we design test facilities and operation facilities not only for big auto companies but for race teams has been very robust here for the last year.

It is a small piece of business, but it is very steady.

Infrastructure and buildings, both representing 8% of our revenues last quarter are modestly better.

It seems like with the rebound in the economies both in the U.S. and Western Europe that we are seeing more opportunities in this business.

As you know, for the a while in the U.S, both of these businesses were impacted by the lack of funds at state government level and while the state governments are still struggling, as you can see here, where we're located in California, it seems like there's more money available and the number of prospects and opportunities seems to be growing.

If we move on to the green part of the pie chart, we have federal programs, and we participate in federal programs in the defense arena and aerospace arena and in the environmental arena and other places, and the federal programs business for us both in the U.S. and overseas where we're starting to grow that business is strong right now.

We have numerous opportunities.

We've had several big wins over the past few months, and the prospect list is long.

If you look at pulp and paper of 1%, it is still at 1%.

It is still a very mixed market.

The pulp and paper companies are not spending heavy capital right now.

We do have a steady stream of work, albeit small.

The pharma/bio-market is in turmoil, as you know from reading the press.

We have got all the issues going on with the COX-2 inhibitors and that type of drug, the kinds of problems it is giving to some of our clients.

We do have a lot of opportunity in this business.

I think the recent upsets, we'd have to say that the market is not quite as vibrant as it has been, but that will sort itself out in time because we still have aging populations.

Some of our clients still have huge new pipelines for their drugs, so we view this as a very strong market for a very long time, but there isn't any doubt it has taken some setbacks recently.

In the chemicals business, which has been one of my favorites for many years since I'm a chemical engineer, I can say with confidence now that it is slowly re-surging, and everybody around the table here is smiling at me, but that's true.

We have seen a definite uptick in prospects over the past, let's say, 12 months, and while nobody would say this is a boom market now, it is certainly stronger as it was a year ago.

And that's a rundown on the markets in general.

I would say that if we look at it on a macro basis, we are seeing more prospects today than we were a year ago and that's probably a general reflection of the economy itself.

We are going to move on to slide 10 then, and I'll close up the formal part of the presentation.

We continue to focus on a relationship-based business model.

It is the engine that drives this company, and will continue to drive the company into the foreseeable future.

We really want our customers to have a competitive advantage by working with Jacobs, and we drive that very hard.

We will continue to diversify our markets and our geographies and to some degree our services.

All three of those diversification's give this company a good balance and allow us to ride through both strong times and tough times in a real stable business climb.

The balance sheet, as John talked to you earlier, is strong.

We continue to build cash, and we continue to project a 15% annual growth rate as we come out of this dip we had in the middle of '04.

What I will do now is turn this question and answer back over to Lars and we will take all questions.

Thank you.

The question and answer session will be conducted electronically.

And if you would like to ask a question you may do so by pressing the "star" key followed by the digit "one" on your telephone key pad.

For those of you joining us on speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again if you would like to ask a question, please press "star one" at this time.

We will pause for just one moment to assemble a roster.

We will take our first question from Michael Dudas with Bear Stearns.

Good morning gentleman, Patti.

First question, John.

A pretty impressive cash flow generation.

Could you give us or determine how that going to continue over the next balance of the three quarters?

Is some of that cash locked in international areas and is that going to preclude you from taking down some of your debt or could you just give a little sense of how that is going to work out?

Actually, it is the other way around.

Most of our debt is international and our cash is heavily weighted toward the U.S..

That's what I meant, John.

Because of the, you know most of the more recent acquisitions have been overseas.

We don't forecast cash, per se, but, you know, basically our business is one that generates, you know, cash from operations.

We don't have a lot of capital needs and such, so basically our bottom line normally turns into cash.

And I wouldn't see anything that would change that for the balance of the year, or short of other acquisitions or, you know, the startup costs maybe in a large project or something like that.

Second question for Noel.

Could you highlight a little bit more about some of your big wins in the past few months in the defense, and the federal programs work, and some of the prospects going forward?

I assume that Johnson Space Center win was a pretty huge one, you know, for the -- a pretty surprising one, I guess, for the market place.

How is that going to position you for further opportunities down the road?

Well, we've been very successful in a thrust into NASA over the past, say, three to four years.

It was a conscious strategy on the part of the company, starting I guess sitting in this room about three years ago and I think we have won what, Craig, four significant NASA programs over the past 18 to 20 months.

Kind of capped with the Johnson win, it probably was a big surprise to the market.

We thought we had a good shot going in all the way.

We were going up against a very good incumbent, who was doing well, and in that way, it probably had a little bit of a long shot to it, but we thought we had a good opportunity and we were very pleased to have won that contract.

But the NASA programs are just starting to evolve and get started like Johnson, you know, we're even through transition yet.

That will be about the first of February.

As you might remember, we had the Stennis contract, which got protested for a year and that finally got released, what, 5, 6 months ago.

Four, 5 months ago, something like that.

Middle of last year

Yes, middle of last year.

That's right

I think we won in '03 and we finally got going in the middle of '04.

So, those programs have done very well in the aerospace side of it.

As we look ahead, we have always had the defense business, which is very strong, and of course the environmental business, both here in the U.S. where it's been flat for years, but still it's a big business for us, and it's starting to evolve very strongly overseas in the U.K. and places like that where there's going to be strong environmental cleanup opportunities over the next, say, 5 to 10 years.

As they move forward, and their department of energy, which doesn't operate under that name, but as their department of energy starts to clean up some of their facilities.

So, we are looking at all those federal government businesses as being very strong for a very long time, by the way, Mike.

Fair enough.

One final question, Noel, If you look at the eight segments that you put forth in your pie chart and historically you have given us -- for quite awhile, five good ones and three poor ones are you willing to push chemicals up into the good markets or possibly pharma into the more fattish market over the next 12 to 18 months?

I would say chemicals is better and pharma isn't quite as good, but I'm not ready to project chemicals into the strong market yet, but I will answer that question in 3 to 6 months and I think we will be there, and nor take pharma out,-- we are not ready to take pharma out, absolutely not.

We will take our next question from Sanjay Shrestha with First Albany.

A couple of quick questions here.

First one, you know, with the technical profession service of 28% year over year, I mean what do we need to see here for Jacobs to sort of narrow the guidance range for 2005, and two, is this that lot of this more for long-term in nature and the majority of the benefits are really going to be in fiscal '06?

Well, I think, if you're talking about narrowing the guidance, you are talking about the 2.40 to 2.70 Sanjay, is that right?

Right.

Well, we've left it there because as you know, we're coming out of a trough.

We argued long and hard about this guidance issue sitting here for the last few days.

As you might imagine we decided to leave it where it was.

We're definitely way out of the trough, okay?

Okay.

And if you look quarter-over-quarter, which is very encouraging, and all the numbers are positive quarter-over-quarter, we need to see another good quarter and then we will know the range.

Okay.

So, some of the things that you did expect that if they fall early enough in the year that numbers could more likely be in the middle to the upper end of the range, and we did see some of that, you know, there has been a flurry of press release out of you guys, is that a right way of looking at it?

Well, I'm not going to get into where in the range we're going to land but there isn't any doubt that sales results in the first quarter are positive.

Okay, perfect. great, great.

One other quick question here Noel, about the SG&A line that stayed flat as a percent of revenue, but it has actually moved up quite a bit on a sequential basis on an absolute dollar.

Is there anything particular there, the Babtie integration or is there a lot of room that we can actually bring that down, you know, gradually trend towards more of a 10%, you know, 10% of the sales?

Well, looking at it quarter-over-quarter, part of that it is just the fact that Babtie was in for a full quarter versus two-thirds of a quarter.

As a professional services company, they tend to have a higher ratio of G&A to revenue.

But there is also playing in that, you know, the continued strengthening of some of the exchange rates of foreign currencies that have added a slight impact on that as well.

So, those two combinations, if you look at our unit cost of the G&A's, it really hasn't changed that much.

We do have some costs in there for the, you know, on 404 activities, I think, well we didn't have to comply with this year, we are on the road, and that is adding a little bit to the G&A's is something that, you know, comparatively last year we didn't have that kind of expense, so it's a combination of things.

Okay.

But, John is it fair to assume that, you know, assume that, you know, obviously you guys are always focused on taking the cost out, so, you know, probably the ideal, you know, number is still somewhere around 10%?

Yeah.

I would say that, but you know, it takes time to get it out of an acquisition mode.

Absolutely.

Great.

One last question, out of the $8 billion in backlog; how much is that do we expect to be burned over, next 12 months?

Typically, we have had, you know, it has been somewhere around 50% of the backlog that burns.

The other way of looking at it about, you know, between 60 and 65% of the work that we burn off in the next 12 months comes out of backlog, so those are two.

But actually looking at it, I don't think it has changed that much.

We look at our work, as we do our forecast, what work, how much of it is coming out of backlog versus how much is of it new, and that ratio of 60 to 65% coming out of backlog hasn't changed, you know, very much over the last couple of years.

Okay.

That's great.

That does it for me.

Thank you.

We take our next question from Jamie Cook with Credit Suisse First Boston.

Can you just remind me how much of Babtie is in the backlog?

When Babtie came in it was between 3 and 350 and it hasn't changed significantly.

It would almost all be in professional services.

Okay.

So I mean even backing out Babtie, you guys had nice growth.

Well Babtie was in the end of the fourth quarter.

Okay.

But anyway, I guess my point is, you know, you made a comment to suggest that, you know, in order to narrow the guidance that, you know, need to see similar -- I'm just trying to get a feel for in the second quarter do we need to see the same magnitude of growth in backlog for you guys to narrow your range?

No, it is not as much that -- we got all the backlog in the world, Jamie.

We just got to work through the system and make sure it is moving.

Okay.

We wouldn't expect this kind of backlog growth to come in a quarter.

That would be amazing if that happened.

We have had a $500 million jump quarter-over-quarter, $900 million year over year, if you take out the Babtie, $600 to $700 million year over year, but I wouldn't expect that kind of jump this coming quarter.

What we need to do is to see the stuff going through the program, and we do have some big prospects sitting out there, that if they dump in on us in the next 50, 90 days, which they might, we could see a big backlog, but that's not what we need to narrow the range.

We just need another quarter of good operating performance and increasing profitability and we will narrow the range.

Okay.

And then my second question, can you just update us on what is going on in the acquisition front?

Is there anything that we're looking at that we can see ahead in 2005?

We continue to search for both a good upstream acquisition, and that will be a small acquisition if we can get it together, and we don't have anything pending right now, let me tell you.

Okay.

And we continue to look at an infrastructure acquisition, which would be larger.

We continue to want to push in that, and that probably would be domestic.

Now that we've really solidified our position in the U.K, which we will move into the top at once we get Babtie integrated and everything, we would think the next infrastructure acquisition would probably be in North America.

Again, we continue to look and talk but nothing has developed.

There isn't any doubt we have the cash.

You can see that we have got the cash in hand to go do another acquisition, so we are not waiting.

We are just hunting.

But you also don't need one of these acquisition, to follow through for you to narrow your guidance as well?

No

Okay, great.

Thank you very much.

[Operator Instructions].

We will take our next question from Lorraine Maikis, Merrill Lynch.

Hi, Lorraine.

The technical professional bookings looked very strong in the quarter.

What impact do you expect to have on margins going forward?

We're pondering that question, okay.

Just give us ten seconds.

I think it might have a slight uptick in margin.

It won't have the significant -- it won't make a significant change at the bottom line, because the professional service backlog, while it generally carries higher margin, it also carries higher G&A, so when it all sorts its way down to the bottom, there is not a lot of difference in the business, but the gross margin, per se, if you get more and more professional services, it should drive it up.

However, we are on a kick to try to drive more field services through the books, so I don't think as we look forward to margin percentages in the coming years are going to change significantly, even though that backlog percentage looks really good on the professional service side.

It is the precursor of the field service business.

We need to sell the professional services before we get the field services in the door, but as a company, we would like to see more field services.

I think we have discussed that before.

Looking at the technical professional bookings, is there an average you can give us in the lead time between when you book that technical professional and then when you bid for the construction, 6 months later, 9 months later?

Craig, you want to try that?

Well, it kind of varies by the market and the nature of the work.

I guess, in general, for the bigger programs, you're probably looking at 9 to 12 months.

Okay, thanks.

And then finally, you mentioned oil and gas and refineries as being two of the three major drivers of your quarter.

Can you talk about what types of oil and gas projects you're working on outside of the refining market?

Well, the significant activity, and we have press released quite bit of it, is up in the oil stands in Canada.

We also continue to work in the North Sea, and we continue to work with Aramco, so those areas are probably the most active.

Is that what you view as your best potential going forward?

Well, certainly the oil stands are going to be a very promising area as long as oil prices stay where they are.

And we have a good position up there.

We have a growing business in a market that has lots and lots and lots of activity.

That is one very positive area.

The North Sea, frankly, I don't think that's a big growth business.

There is work going on.

There are platforms changing hands and plans for different kinds of programs and projects, but the level of investment there will not be as significant, as compared to the tar sands.

And then obviously the Middle East is an area that we are beginning to develop relationships in and beginning to develop some positions in starting with Aramco.

Thank you.

Moving on to Alex Rygiel, with Friedman Billings Ramsey.

Thank you very much.

Two quick questions, gentlemen.

First with regard to the tax rate step up from 35% to 36%.

Is that a long-term step up, or is that an issue that should only affect the business for the next year or two?

It really will depend on two things.

One is as the Babtie amortization of the purchase intangibles starts ramping down after the first couple of years, it will have less impact, but it really gets down to where we're active internationally versus the US and how much of that is coming from the maybe favorable tax countries versus some of the higher tax countries.

It will depend on just how the business mix, but certainly over -- it would appear over the next couple of years it will be in that 36 range and then we will have to see what the impact is, you know. the Babtie amortization comes down, and where our business mix is.

Secondly, with regard to your other income line item, you can help us to better understand what is flowing through that so that we can more accurately forecast it going forward?

Except for some unusual sales like we had last year, where we might sell some real estate or an investment, which impacted positively last year, it will typically be a little bit of an expense.

You know, a various part of that is the minority interest we have, and you know, flowing out of -- because of our Indian operation where we only own 70%, so there is a little bit of there that flows through there for the minority interest, and some other, you know types of expense, but most of it is -- it should be in this kind of a range, you know, $400,00 or $500,00 of expense, unless we have an unusual income item.

Great, and lastly, with regard to the recent NASA project win, can you talk about the timing of how that contract will hit your P&L and the timing of how those revenues will impact our profitability?

That project is one of those where the transition period is fairly short.

We expect the transition to be complete by the first of February, and the work will then start to flow through the P&L immediately.

The only issue from there on is just what is the overall workload, quarter-over-quarter, year over year, because it does vary a little bit.

And what kind of visibility do you have on that right now?

Do you have 3 months, 6 months, 9 months of visibility?

We think we have reasonable visibility for the next 12 months.

Now, remember, this is government funding, so nothing is certain.

Of course.

Great.

Thank you very much.

Tom Ford from Lehman Brothers has our next question.

Thank you.

Good morning.

Hey Craig, sticking with you on the NASA.

Was that in the awards in the quarter or is that going to be in the next quarter?

Well, it is include included in the backlog -- it is in the backlog.

We only float one year's worth of backlog, a rolling 12 months because of the nature of the work and the forecast.

We still haven't put the full five years of the contract on because of the nature of the work.

Okay.

Does that answer your question.

Yeah, no, that's fine.

I'm just curious, I mean, if you just take the total dollar number and divide by five, do you get kind of close, or is it something where, you know, year to year that number could fluctuate notably?

The forecasted amount of backlog on that, based on, as Craig said, the visibility we have for 12 months was about $240 million.

Okay, great.

And that's what the client told us.

Okay.

We took their number and ran.

Noel, over the last 3.5 months, you had 4 pharma awards.

It is kind of interesting to hear you say it is an okay market.

I would love to see it strong then.

The question I had is, it seems like you had pretty good activity there just recently.

Is that more than just sort of rebuilding the pipeline or timing related then as opposed to indicative of the spending trend in pharma?

Well, the spending trend, I think if you go to the pharma business, it varies by company and they do spent in cycles.

The cycles had nothing to do anything except their pipelines or whether they are in a merger activity or one of those things that follow a merger activity.

We see these companies go up.

They go down, but I would say that even though we had some nice awards, and we've got, you know, one of the guys is telling me we got 14 really solid prospects staring us in the face, that it probably -- the size of the project isn't what it was 24-36 months ago, and we do have a couple of big spenders that basically aren't spending like they were.

We do have some guys whose spend something ramping up dramatically, and we are riding that horse, so-- but it just doesn't have the kind of vibrancy it had 24 months ago.

Okay.

I think part of that is the fallout that's going on across the system whether it's healthcare or some of the merger issues, but I think some of these issues like COX-2 inhibitors have got a couple of them gasping for breath.

Okay.

On the last call, you had indicated that if we go back to the '04 issues, one of the things was the cancellation and delayed contracts by or projects by one of your customers, and I think you guys had indicated that one of those delays was going to restart in January, and just wondering if that was still the case.

Yes, it is.

That project, we do expect to move back into design sometime in the next 60 days.

Part of it started already.

It will probably be a smaller project, however.

Okay.

And then, Craig, just is that the second of the 4, right?

Yes.

So any idea on the other two?

Well, I think the other two will resume in the next 60 days.

Again, the mix is going to be a little different and the size of the projects will be a little different than what they were 7, 8 months ago.

Okay.

Okay, great. and I had one other question with respect to -- John, I was curious about the working capital numbers because it seemed to be pretty solid, if I looked at it sequentially.

I was curious about the drivers there.

Anything unusual or just, you know, is it seasonality or --

Well, it's primarily the build-up of cash.

I mean, converting our income into cash.

We had a $32 million income.

As we make the transmission with Babtie, we are getting some improvement in their collections.

We are focuses on how we make payments and try to match payments to collections.

It is just a continued focus on, you know, trying to improve and continuing to improve our practices to improve the working capital.

Now, those vary a little bit quarter to quarter, just depending on payment schedules and on projects and how the income builds up or the receivables build up, but -- and also the mix between pro services and construction, because we seem to collect construction faster than our professional services, just by the nature of the contracts, and such, so a lot of things enter into it, but while -- it will vary quarter to quarter, the trend, I believe, will continue to be positive.

Okay.

And then just lastly, idea on a CapEx number for the first full year?

Probably in the $30 to $35 million range.

That's like where we have been.

A lot will depend on how fast some of this other business picks up because most of our CapEx is related to PC's and furniture and partitions and such like that.

So as our business picks up, and we have to add space and, you know, equip those people with the PC's and various other tools that really is what drives most of our capital spending.

Okay, great.

Thanks very much.

We'll take our next question from John Rogers from DA Davidson.

Good morning.

Noel, earlier you were talking about margins and I think I have this right.

You made this comment that given the mixed business that you see right now, you might see some upward movement in margins and I just want to be clear, is that at the gross level or the operating level?

That's at the growth level.

I think I tried to say at the operating level, it isn't going to change much.

Okay.

And that's regardless of the mix between the technical and the field service?

At the operating level it is regardless.

At the gross level, it's not if.

But at the operating level, see if we follow and we have to add a lot of staff to eat up the professional service backlog, it also means we're going to have to add space and overhead to go with it.

So when it sorts itself all the way down to the bottom, it's going to be about the same.

Okay.

In terms of the technical or field services as hopefully that ramps up going forward, should the margins come in that fairly steadily, or do they build through the projects, in your experience? (indiscernable).

They generally build through the project, because a lot of the margin comes in the form -- excuse me -- a lot of the margin, particularly the net operating margin comes in the form of fees, and quite often the fees are incentive fees or award fees or something like that.

And so you've got to work your way through the project, and they tend to build toward the end of the project.

We try to accrue these fees as best we can through the project, and that's the accounting standard, by the way, that you need to accrue them on a cost-cost basis whatever you think they're going to be, but we're on a cost plus piece of work generally on construction.

And probably there is some lump at the end that we didn't accrue if we did the work well.

Of course, the converse is true once in a while you have to give a little money back at the end if you did the work poorly, but it does tend to be a little more weighted toward the end of the project, but we work like crazy to take it on a cost to cost basis throughout the project.

Okay.

Just one other question, if you could characterize some of the projects you're looking at in terms of size, the chemical business, the petroleum business, I guess pulp and paper, to some extent, typically, are those larger projects than you've been working on over the, say the past couple of years pharma, bio, and high-tech projects?

The answer varies a little bit again by market.

When you look at things like the petroleum market and the upstream oil and gas business, the refining business, these are generally pretty large projects.

There's a base load of work that we try to do for our customers that are small projects, alliance businesses but layered on top of that is generally good-sized projects and we're talking sizes from $150 million to say $300 million, something in that range.

Does it spread them out over more periods?

Well certainly.

Bigger projects take longer, but then there is more work hours as well.

So it's a good new story in that sense and the bad sense new story in that sense.

If you look at projects in pharma/bio, they have been historically been sizable jobs, not unusual for the pharma jobs to be north of $250 million.

In other businesses the buildings, infrastructure, high-tech that varies by the customer, but in most of that work, we're in a professional services only mode.

So the project sizes can be quite large, but we can have fairly small participation by comparison.

The federal programs you know about, I think.

Okay. great.

That helps a lot, thank you.

Moving on to Richard Rossi with Morgan Joseph.

Good morning, everybody.

Just a couple of things.

One final thing back on the gross margins.

I don't recall you ever getting over 15% on the gross margin side.

I may be wrong.

Looking out at that backlog, and it looks like the volumes are going to start to pick up here, you know, can we expect in maybe '06 for you to break that 15% level?

I really doubt it, because I think what we will see is a lot of construction on this, queen fuels and petroleum related projects we have coming in, and some of these others, so, if anything, we're going to be trying to, you know, as we said before, drive more into the field services which will bring that gross margin down, bring the G&A percentage of revenue down but it will still have about same impact on operating margin and hopefully we will be able to continue through cost containment and synergies and such like that to keep moving that up, but we're talking, you know, in only, you know, small numbers of bases point movement at that level to see improvement.

Also, backlog, could you give me an idea of how much of your backlog is in the federal area and how much on the chemical side.

I'm sorry, the petroleum side?

We don't break our backlog down by market, so I really don't even have that figure right off the top of my head.

The business that is in the federal area that a long term, even the more recent wins we've had both in Tennessee and now the Johnson we backlog a year at a time and we try to do that to put a little better perspective on it.

There is quite a bit of refining backlog there, but we don't have the number, Rich.

Okay.

One final thing, you know, several quarters ago, you had the cancellations or at least the shutdown of starting up some projects.

We talked about having to reemploy some people and maybe get rid of some people at least temporarily.

Backlogs building again.

I presume you're building up staff is there.

Is there any problem in getting the people you need at this point?

Not really.

I mean, isolated locations, I mean the big build up in -- let's go to Canada for a minute, which looks like it's just going to break wide open.

There will be staffing problems in Canada, and work will have to be moved out of Canada to get it done well, and that can be moved to the states, and maybe a more likely source would be outsource big pieces of it into third - you know, India or someplace like that, depending on who has the work.

If we have the work, we will have to move some of it to India.

So there will be a problem in Canada, because Calgary has been a boom-bust town and we've got a boom going, just really getting started.

If you come in to the US, there are lots of resources in the US we're always -- you know, you're always looking for the right person and struggling for that, but there's still a lot of resources in the US, even though the business is pretty good, because there's been a lot of consolidations in the industry.

While our business is absolutely booming, we have less competition today than we had even three years ago, and so there is still -- we're still able to hire good people and bring them in, particularly in the gas and oil business.

Then if you look in Europe, the story is about the same.

Okay.

Thanks very much.

We will take our next question from David Yuschak from Sanders Morris and Harris.

Congratulations on a great quarter.

Neol, last quarter you commented on the last conference call that you would need to see some pretty good new business coming in the next 90-120 days to really feel good about the outlook.

As you reflect on that statement and the bookings that you did achieve, did you get anywhere near what you thought you could get there or is there still a lot of things from that quarter when you made the comment to where you're at today, that there's more yet to come or has a lot of that been achieved as far as what you thought you could achieve in that 90-120 days?

Well, David its an interesting question.

I haven't thought about it but that's an easy question to answer.

Yeah, we got a little more than I was hoping for.

It came in different places than I was exactly hoping for.

So some of this stuff I thought we were going to get, we didn't, and then a whole bunch of stuff came in that I thought was may be a little lower probability, but in the end, in an absolute basis, yeah, we achieved all my expectations and then some.

So back then, when you were looking at that, the pipeline was still strong and it sounds like it still remains very robust.

Oh, yeah, pipeline is just fine.

As far as going back to that quarter ago, was chemicals a part of that thought process that could be there too or not?

No I'm still praying for chemicals but I'm not basing a lot of our forecast on that.

But you know everything you looked at.

There is a lot of promise there, so I think that that may well be on your top performers in the next quarter, too.

I hope so.

I have been hoping for a long time.

Looking at the backlog, John, is there any scenario where you would think that that 60 to 65% burn could ever slow because business does get a lot more robust here in the course of the next 18-24 months?

Because there is a potential is that there could be a lot of infrastructure energy, a lot of spending out there of course in the next two years that could begin to put these things on a slower burn.

Well, that's why I kind of gave a range.

You get some of that fluctuation, because as markets heat up, you have more expectations of what might come in,.

So while you still have a good base load coming out of backlog, it might not be quite same as high of a percentage as what's going to be worked off, because you expect more, but yeah, I'm just going by history and rule of thumb.

That's where we've been.

As far as that 60-65, is that because you do have longer line things like the federal government, you can kind of count on that you can move in there that can keep that at a consistent 65?

Is that primarily because of that process, moving it in there one year at a time, keeping that consistency?

Well, that's a little of it, but if you look at curve, obviously, if you look at it quarter by quarter over the 12 months, the percent is higher for the next quarter and lower when you go out and look at what is coming out of backlog today for 4 quarters from now, but you know, when you look at the full 12 months, you know, that ratio has stayed pretty constant.

We've gotten to a size where I was just thinking about it, where we sell a bunch of work and have it revert into, you know, revenue and significant profits immediately, and the answer is probably not.

There is a little longer string on it.

And while we have to sell work everyday to keep the operations busy.

We are really driven by a backlog.

Now, that look ahead in 12 months, we're looking at 60-65% today that, could drop as low as 50, which means we have a lot of new work coming in everyday that could knock that percentage down, but it didn't going to vary beyond that range.

I mean, we have never, even when we were a smaller company, survived in a 12 months with much less than 50% of the revenue for -- margin coming out of backlog so we are working in that range.

On the expectation -- I'm going back to that comments quarter ago, was petroleum pretty high on those expectations and were those pretty much met then, too, or is that further out there may be as far as other things coming in to petroleum?

I think the thing that's evolved on petroleum, and I can't tell you exactly when it evolved in our mine, but there isn't any doubt that somewhere in the last three to six months we have moved from clean fuels dry run petroleum to capacity and crude slate changes.

That's all happened.

I can't tell you when that bounced into our consciousness, but it's certainly more certain today than it was 90 days ago that we are going to have action expanding presence in the downstream market because of all these big crude slate changes, and there isn't any doubt that today, Canada is a lot stronger than it was even 90 days ago.

And then as you looked at the bookings in this quarter, maybe the mix what you got in the quarter versus what you may have thought a quarter ago was a little bit different.

Was there anything that gave you the wins that you had versus the ones that you thought you had that you didn't get or were some of them pushed out that you didn't actually get?

Oh, no, actually a lot of work got adjudicated.

A couple of jobs I thought we'd win, we didn't, and a couple of jobs that I thought I had as a lower probability, we did, but there was nothing significant in that you know we're in a competitive market and so we aren't always able to project what is really going to happen.

Okay, one last question.

As you mentioned, because of the strong bookings in this quarter, you would expect the same thing happening in the third quarter.

Was some of that borrowed from the third quarter into the second quarter so some things got moved up sooner than later, you were able to book there or --?

No.

Was it because of the strength of the quarter you wouldn't expect it to be that strong initially?

Strength of the quarter, and if you go look at our backlog, historically, I think we probably had a record quarter of backlogs or close to it, in backlog additions.

I would think so.

And what we see is we normally get one or two good quarters near and then it levels down to the run rate, and so even though the prospects looking at us in the face right now are just as good as they were 90 days ago.

Okay.

Appreciate your comments.

Take care.

We'll take our next question from Stuart Sharp with Standard and Poor.

Good morning.

Most of my questions have been answered.

Do you expect synergies of $0.10 a share from Babtie?

Yes.

Okay.

Thank you.

Moving on to Steven Pheno (ph) with Imperial Capital.

Good morning.

Congratulations on the quarter.

Quick question for you, Noel.

With respect to the acquisitions you mention add couple of markets that are hot, one being in Canada, and you mentioned that you are into the UK for infrastructure market.

Where do you anticipate your next acquisitions to be?

I know you mentioned infrastructure in the US, but beyond that, can you elaborate the business areas and business geographies, where you'd like to be?

I think if we were to look -- we need and I think I have said this, in fact those of you who know me well probably I think I've said it at least 1000 times.

We need to continue to drive into the upstream oil and gas market.

That's going to be a global business.

We are going to have to do that on the backs of our internal growth.

There are certainly no big acquisitions out there that will just jump us into the market like a Babtie would jump us into the UK infrastructure market.

There aren't any 2000, 3000, 4000 person firms out there we can go acquire.

There are around the globe a bunch of 100, 200, 300-person firms we could go acquire, if we can make them fit.

So what we'll have to do on the acquisition road in the upstream, is this will probably a systematic process of trying to build, but what I think Craig and the guys are trying to do right now is have the first building block is the US.

The upstream oil and gas business for all intents and purposes, a Houston dominated business.

I'm talking about globally.

Most of the upstream oil companies in the globe have big, big operations down in the Gulf Coast.

And so we'll move into the upstream oil and gas business that way and in the infrastructure business, we are woefully undersized in North America and we need to fix that And so that's something we will do when we find the right opportunity, the price is about right and it's a win-win for both sides.

Okay.

Thank you very much.

And that does conclude today's question and answer session .

I would like to remind everyone that you may listen to a rebroadcast of this conference at 2pm Eastern time today through February first at midnight by dialing 719-457-0820 and enter the confirmation code 218684.

I will turn the conference back to Noel Watson for closing remarks.

Thank you, Lars and thank all of you for coming.

We did have a good quarter.

We continue to forecast that we're going to grow this business 15% a year in to the future, and that's all I've got to say.

Thanks.

And that does conclude today's conference.

We thank you for your participation.

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