雅各布工程 (J) 2007 Q1 法說會逐字稿

Good day, 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 PM Eastern through January 30, 2007 at midnight.

You may access the replay by dialing 800-642-1687 or 706-645-9291 and entering the pass code 6383846. (OPERATOR INSTRUCTIONS) There will also be a webcast of this teleconference, which can be accessed by logging on to www.Jacobs.com.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS).

At this time I would like to turn the call over to [Patty Brunner] for the forward-looking statement.

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.

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 risk and uncertainties that could cause the results of the company to differ materially from what may be inferred from the forward-looking statements.

For a description of some of the factors which may occur that could cause or contribute to such differences, the company requests that you read its most recent annual report on form 10-K for the period ended September 30, 2006 including item 1, business item 1A risk factors, item 3, legal proceedings and item 7, management discussion and analysis of financial condition and results of operations contained therein.

For a description of our business, legal proceedings and other information that describes the risk factors that could cause actual results to differ from such forward-looking statements.

The company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements, whether as a the results of new information, future events or otherwise.

Now John Prosser, CFO will discuss the financial results for the quarter.

Thank you, Patty, and good morning.

I will go through the financial highlights briefly, and then I will turn it over to Craig Martin, our CEO, to give an overview of the quarter and our outlook.

Going to slide four on the webcast I just want to go through the highlights, we did have record diluted EPS of $1.01 up over 40% from a year ago first quarter.

Also record earnings of $61.3 million, again up 42.4% over a year ago.

Backlog reached a record level of $10.4 billion.

Our balance sheet continues to be strong; good, strong cash flow with our net cash, cash less bank debt, at $389.2 million.

This is up about $47 million from last quarter.

We have increased based on this first quarter performance and the outlook for the year, we have increased our guidance for fiscal year '07 to a range of $4.00 to $4.30.

Going to the next slide, slide five, this just tracks the history of our earnings growth.

You can see that the bars under the line show that over the last five years we have been able to grow above our targeted rate at 21.4% above, which is above the historic 15% rate that we feel is our long-term growth rate.

Looking at our backlog again strong growth, $10.4 billion in total backlog, $.5 billion of professional services, backlog up significantly year-over-year and also quarter-over-quarter.

In the quarter had very strong sales.

There were a couple of larger projects in the two projects that were in this 250 to 350 range.

But other than that, there were just a lot of strong growth across a number of the industries.

Now I will turn it over to Craig to talk more in detail about the quarter and the outlook.

Thank you, John, and good morning.

We're going to take our usual time to talk about our approach to maintaining our growth and the same sort of key five points that we always make.

The first three, remaining committed to our business model, our diversity of markets and our multidomestic strategy -- I will go over in a little more detail on the following slides.

As far as the last two bullets there acquisitions continue to be part of the mix and are due to driving down costs.

That remains an important part of how we're approaching the business.

We continue to seek acquisitions actively.

I think we've told you that we're particularly interested in the infrastructure business, in the upstream oil and gas business, we're looking actively for acquisitions in the Middle East and those areas continue to be our focus, and we expect to continue to put our emphasis there from an acquisitions point of view.

Although it doesn't rule out opportunistic acquisitions, as well.

In terms of driving down costs, I think the quarter results show pretty good results in terms of keeping our costs down, trying to drive our business in the direction of better profitability.

It is a commodity business in a lot of ways, and we have to be sure we keep our costs under control.

With that in mind let's turn to the next slide, which will be slide eight and I want to talk a minute about our relationships-based business model.

We talk about this a lot because it is a key difference between our company and the most of our competition out there.

If you look at the industry model, which is our way of describing our competition doesn't really reference any specific competitor.

It is more the general sort of view of the competition.

You could see the industry heavily focuses on transactional projects.

These are the lump sum, turnkey competitively bid items.

These are the big projects and faraway places for people we don't know kinds of projects.

The big event kinds of projects that become the transactional events.

And most companies in our industry grew up on and need and want a steady diet of that transactional work.

That isn't to say they don't do other kinds of work, preferred relationships work or discrete projects work but their focus is on the transactional side.

We are just the opposite.

Our focus is entirely on preferred relationships, and we get 75% to 80% of our work from standing preferred relationships with key customers that we work for day in and day out.

And that does a lot for our business in terms of the steadiness of it, in terms of our ability to understand those customers, grow the business with the customer by tailoring our services to them and increasing our share of their wallet and that is our key focus.

We also do a lot of discrete projects.

That is our way of identifying customers who could be or will be at some point in time preferred relationships, and virtually all of our discrete project work is also repeat business but we don't have a standing relationship with that customer.

And then we have just a little bit of transactional work.

Generally we take transactional work when it fits our profile.

We have an opportunity that makes a lot of sense to make a little extra money or we have a need to keep some capacity utilized that is not otherwise used.

It is a very small part of our business and continues to stay a small part.

It won't ever get very big.

So that's our relationship-based business model.

We think it reduces our risk.

We think it makes our business a steadier, more evenly growing business compared to the transactional one.

Switching now to slide nine, revenue by market; one of the things we've tried to do as a company is remain very diverse in terms of the end markets that we serve.

We believe that by doing that we can go through cycles in various end markets without damaging our ability to grow the company.

Because we find that for the most part these markets don't all cycle at the same time.

If we can get five or six of these markets doing well, we do well as a company and right now we certainly have some good strength in all of our end markets.

Let me just kind of go through the end markets and talk about them a little bit.

Petroleum is really made up of 2 pieces, one piece is the oil and gas upstream side of the business.

The other is the downstream refining side of the business.

It is about today's number 60/40, one-third two-thirds upstream versus downstream; downstream being the bigger piece.

And both of those businesses are very good.

There is lots of activity out there, lots of projects being driven in different geographies by different things.

There is plenty of capacity expansion in the Middle East driving projects in these areas, and we are becoming more active in the Middle East.

So that has been good for our growth.

In addition we are seeing lots of activity in Europe mostly in the area of environmentally driven activities like biodiesel and in the area of conversions of gasoline to diesel fuel as the demand for diesel goes up.

Good robust area in the market right now.

In North America the businesses combine between the upstream oil and gas business; doing an awful lot of work in the oil sands for Jacobs in Canada and the downstream side in refining throughout the U.S.

That business is also good.

The oil sands are being driven by what is still attractive pricing for oil.

Not as attractive obviously as it was a month ago or two months ago, but still for the most part if you got a good deposit you've got a practical project even with oil at this $40 plus level, $40 to $50 let's say.

And then in the U.S. we've got a lot of environmental work left to be done so we're doing a lot of environmental cleanup.

We're doing crude slate conversions for some of our customers and there is still a little work out there in expanding refining capacity.

So the market for the oil and gas business both downstream and upstream is pretty good.

In the chemical side, chemicals is becoming increasingly active.

We're seeing a lot of activity in the Middle East; we are also seeing a lot of activity in Europe, less in the U.S. and we are seeing some decent growth there particularly in areas where we are strong which are the polymers and plastics.

Going on around-the-clock face other, that is predominantly food and consumer products, towel and tissue kinds of work, steady business for us, not much of a story there.

We have a big brewery project going through the numbers there which helps make it look like a bigger piece of the pie and it probably is long run.

Pharma bio business is also very good right now.

There are lots of customers out there with decent new products; there is also a lot of flu vaccine work in the marketplace.

So we're seeing a lot of activity in the U.S. and in the tax advantage locations Ireland, Puerto Rico, Singapore as well as some work in mainland Europe.

So we expect pharma bio to continue to be a pretty robust market for us.

Pulp and paper continues to be a very flat market.

There is very little activity there.

We see a few things going on from time to time.

Our growth though tends to come from people exiting the business and we pick up their market share.

Moving on to national governments, you will recall that is two businesses for Jacobs, defense and aerospace business and environmental cleanup business.

On the defense and aerospace side it is a very robust market right now for the kinds of work we do.

Research and development test engineering, scientific engineering and technical services and a consulting sort of environment for our clients.

We see a lot of projects, good activity and we are in an excellent position to continue to grow the business.

We have the benefit of being a company who doesn't manufacture anything for the defense and aerospace industry.

As a result, our company is free of organizational conflicts of interest, and that puts us in a pretty good position to leverage our know-how into additional work.

On the environmental cleanup side, it is a business we've been in for a long time.

The U.S. side of the business is not growing.

In the sense that there aren't a lot of new opportunities coming on the screen; there will be a lot of environmental work in the U.S. for a long time to come.

We will get our share, but the U.S. market is probably not going to offer a lot of growth other than taking market share.

The good news there is what's going on in the UK.

They've launched a major program for nuclear cleanup, $150 billion plus in terms of their expected cost.

That's probably half enough if it goes like most of these things do, and we are very well positioned to take advantage of that market which is really just getting started.

The UK is about 15 years behind the U.S. in environmental cleanup.

As a result the contractors who do that work in the U.S. are the preferred contractors to do that work in the UK.

Add to that a very strong presence in the UK and we think we are very well positioned for good growth in the nuclear cleanup arena in the UK as we move forward.

Moving on around to the buildings business, as you will recall this is the technical building type, so this is scientific and technical facilities, it is hospitals, it is jails, it is courthouses, it's the sort of things where what's on the inside of the building is more significant than what's on the outside.

Very good business right now, lots of activity, particularly in areas like healthcare where Jacobs is very strong.

We are seeing activities support health care globally and I think that has a lot to do with the demographics that are driving that.

We are all, frankly, getting older, and we need more and better healthcare and more and bigger hospitals.

So that looks to be a very robust market for us as we go forward.

Then infrastructure, that is as you may recall, that is the business we are in predominantly focused around transportation related infrastructure so it is roads, bridges, tunnels, highways, ports, airports, it is that end of the infrastructure business as opposed to some other things.

We also do a fair amount of work in terms of program management of big water and wastewater facilities, but it is predominantly a transportation related business, and that business is good.

It's a very large business globally.

We are very well positioned in Europe.

We are still trying to get a stronger position in the U.S.

That's one of the reasons we have the acquisition activity we do.

But fundamentally the drivers there are people are just getting tired of not being able to get from where they are to where they need to be.

And when you find yourself 2.5 hours in traffic, then you are perfectly willing to vote for tax measures to get that problem resolved, and we are seeing that all over.

The counties and districts in the U.S. and UK are all voting for additional taxes in order to deal with the infrastructure problem.

So in addition to what the federal governments and the state governments are spending, we're having significant spending at the county and the city level.

All that drives what we think is going to be a very good business with a lot of growth in it for a very long time.

Then the last little sliver there is high tech.

That's really two businesses for us, supporting the semiconductor industry and supporting the wind tunnel industry, the automotive business, both those businesses are relatively small.

We have a strong market position in the automotive test area, but it is not a big market.

And the semiconductor businesses frankly very slow for us where we work cause of the nature of the business.

So that kind of gives you a sense of where the markets are.

Overall markets are pretty good, and we are looking forward to pretty good year going forward.

Turning to slide 10, our multidomestic strategy, we continue to work to be local to our clients where they need us to be.

You can see the comparison of where we were 2007 versus where we were in 1994.

And we continue to focus on finding ways to get local to our customers and increase our share of their wallet day in and day out.

One of the things that is important to us is to be there on the ground working on the assets that are in existence every day, as opposed to waiting for the big event to show up.

And we think that gives us some insulation against the downcycles when they come.

So we will continue to focus on being local to our customers where it makes sense.

Finally, turning to slide 11 that is kind of our commercial.

We do think we have a pretty unique model that works particularly well.

We are diversified, both in terms of markets, geographies and the services we provide.

We got a good, strong balance sheet, and we continue to be committed to that 15% average annual EPS growth.

With that, I will turn it back over to Patty.

Operator, we will do questions and answers now.

(OPERATOR INSTRUCTIONS) Sanjay Shrestha, First Albany.

First of all, congratulations on a great quarter here.

Got a couple of quick questions.

One, I just want to clarify, John, I think you recently mentioned that there were a lot of sales during the quarter, so given this margin performance was there anything other than that, that was sort of, let's say if you would, one time in nature?

Is it really that every single one of the market is an upswing and you are getting a better pricing, favorable terms, cost is under control and hence the performance is the way it is?

Well, clearly our gross margins have been improving steadily.

We continue to have a stronger mix toward professional services and construction.

Our construction over the last 12 months has actually not grown as fast -- they have kind of grown in parallel.

Where two years ago the construction was taking off a little bit faster than professional services, and that had an impact on our margins.

With the strong demand that we are seeing across the industries we are as we've talked about we continue to inch up margins and we get the benefit of higher salaries that translate into a little bit higher margins as we move forward.

So all those things kind of go together to show a little bit better margins and better activity.

And I think what we are seeing in the bookings that they are certainly that trend is still there, but we are not seeing anything negative, and we are seeing it across most of our markets.

So then it is fair to say that it is really sort of like the business as usual being very robust, but nothing that was sort of one time in nature in the quarter that led to the performance the way it is, right?

Yes.

That's right, Sanjay.

That's what I was trying to get at.

Great, great.

Another quick question here guys.

I know that you have always maintained your 15% average long-term earnings growth and you are able to do that even when you had five margins in the upswing as it was not too long ago at some point in time and three maybe in the downward pressure or downstream or whatever or what not.

But now the majority of your market are in the upswing; your technical professional services backlog is up still 20% year-over-year.

So when we think about 2008 at this point in time, is there any reason to believe that that earnings growth should be less than 15% year-over-year?

We are not ready to be forecasting 2008, so let's don't go there if we can help it, Sanjay.

Make a couple observations.

First off, while many of our markets are solid, not all.

We are certainly not seeing any growth on the high-tech side and do not expect any.

We are not seeing it in pulp and paper, and I really don't think the food and consumer products, the category of other, has much upside in it, as well.

It's not like everything we are doing is booming.

That being said, the markets are good, and we should continue to see some good growth out of those markets.

We certainly have upped our forecast for this year.

What it means for 2008 I think it is too early to tell.

Got it, but it is, however, though fair to say that the strength that you are seeing here in some of the markets that are strong should at least continue for next few years?

Certainly some of the longer-term markets like our share in the oil and gas business is something we think we can continue to drive for some time.

We think the environmental business offers some good growth; so yes, there are some businesses there with longer-term potential.

But there are some other businesses that could turn on us pretty quickly.

If you think about the pharma bio business or the chemicals business, either one, those customers can turn almost on a dime.

Got it.

One last question then guys.

Obviously acquisitions has been the focus, it's always been and the balance sheet is fantastic.

So any discussion internally as it relates to maybe sort of instituting a large share buyback program?

We have a share buyback program authorized, but we don't have any plans to take advantage of it at the moment.

We believe we've got enough opportunity out there in the way of acquisitions to effectively use our cash pool, and we think as the cycles of these various businesses go through there will be opportunities that come up.

So right now we are not thinking about any kind of a buyback or a dividend or anything like that.

Okay, got it, that's great.

Once again, congratulations, guys.

Jamie Cook, Credit Suisse.

My first question, if you could just speak a little bit more on the oil and gas side my question is twofold.

First, a lot of the E&P stock has traded off with oil and gas prices trading lower.

There is a lot of (technical difficulty) which obviously the quarter is suggesting something different, but there is concern out there that new projects that are -- the growth in new projects could slow down with oil and gas prices coming in.

So I guess what are you hearing from your customers, and if you were to stay -- and if you were to break it out between upstream and downstream I guess where is the biggest growth potential at this point?

First off let's talk a little bit about what we are hearing from our customers.

Most of our customers were telling us, and I think you may recall this from earlier phone calls that their are sort of benchmark price for oil in terms of where they were basing investment decisions was in the 35, 40, $45 a barrel range.

So for the most part projects that the customers have I think may had good returns, i.e. that they were willing to invest in were being based on numbers that still are valid.

But do you believe these prices are sustainable, or are they coming down more, I guess?

And that is a key question.

I have not had enough conversation recently with our customers to know if they have revised their benchmark price.

It takes a while for that to happen.

But certainly what we are seeing in terms of discussions with the customers on active projects, is a little more of what I would characterize as caution in the customer side, a little more willingness to take a little extra time to study the deal.

But not at this stage, customers coming in and saying we are just not going to do this.

Okay and what about -- sorry, go ahead.

Part of that has to do with different drivers for different locations.

If you had -- if you're up in the tar sands and you have a poor deposit, if the ore body is not particularly good you're probably starting to think about whether or not it still makes sense to spend the money.

If you are in the tar sands and the ore body is pretty good then you're still full speed ahead.

Okay.

And from our perspective that is probably all right with us because for the most part we work for the customers who have long-term positions up there, good ore bodies they are going to continue to invest.

There are some others who kind of fly in, fly out, if you know what I mean.

They tend to have deposits that aren't quite so strong.

Okay.

If you look at the -- so the oil and gas side I think is pretty good, it's going to continue to be pretty good.

Remember when oil was $10 a barrel, upstream spending was $200 billion.

And today oil is whatever it closed at, $50 give or take.

And upstream spending is forecast to be a little over $300 billion.

Okay.

We've got $1 billion of that plus or minus, so there is lots of opportunity for us.

So I guess you see your mix moving more towards upstream versus downstream if you break out the 60/40 sort of between downstream and upstream the mix of your business you see as moving more towards upstream over the next year or so?

I do, yes.

I think upstream will increase its share of the pie relative to the downstream side.

On the downstream side what we are seeing, as I mentioned earlier, is we are seeing activity in environmentally driven projects.

Whether it is the bio diesel work we're doing in Europe or whether it is the non road diesel work here in the U.S.

There is still a lot of environmentally driven work.

There is still is a deleverage between heavy sour crude and light sweet crude, and clients trying to take advantage of that, and there is still a capacity problem in the U.S. for gasoline.

And all those things are driving projects; that probably the piece of that business that is the most at risk is capacity related piece.

If the margins come down on making gasoline we may see some of those projects tighten up.

But if you were to characterize it overall what our folks are telling us about the market right now is the unrealistic stuff has gone.

And the market is more just a good, steady growth market.

Does that make sense?

That makes perfect sense.

And I guess my second question and last question, can you talk about your capacity constraints and how do you view yourself relative to your peers?

Are you turning away more projects than you had in the past, or are you actually -- I mean you are one of the companies when you talk about resources and other countries like India, I think you are farther ahead than your peers in finding that a competitive advantage.

It is absolutely.

We are really are not having trouble resourcing our work other than it is just more work to resource it than it once was.

That's backwards way of saying it, I guess, but we have to work harder to do it, but we are getting it done.

And having things like India certainly is an advantage to us.

In terms of the question of are we turning away more work, we have always been more selective about what we did than most of our competitors.

It just goes with the relationship-based business model.

And our focus has been throughout this sort of up cycle to stick to the relationship-based clients and make sure we serve them and not really look for the work for the new or one off client.

I think I told you earlier that's one of the reasons we are not doing anything on the ethanol end of the business, not that ethanol makes much sense at the moment.

But it is -- we are going to continue to be as selective as always, and I think that also probably helps us get our resources applied where they have the most benefit; both short-term and long-term, I hope.

Great.

Thank you very much.

I will get back in queue.

Steven Fisher, UBS.

You raised your guidance nicely from the forecast that you gave just a little less than three months ago.

What happened that was better than expected?

Was it better execution in this quarter, better bookings, is it a large and unexpected project, can you just kind of walk through some of the things there?

Well, I guess the things -- there weren't any large or unexpected projects.

Certainly we executed very well.

We had good control of our costs, and we did see, as I think we've been telling you, that margin creep that we thought we would be able to achieve over time as wages escalate, and as we are able to get back in there and negotiate a little better terms.

But to point to any sort of big event or big surprise I don't think there was one.

Fair enough.

And then Tyco recently disclosed it is considering selling their Earth Tech water and wastewater E&P segment, and I think you mentioned that is a smaller piece of your infrastructure area at this point.

Is water and wastewater an area that you consider growing?

How might that business fit your operations, if at all?

To this point we've looked at water and wastewater as a big projects business where some city or county is doing a very, very big program and they need construction management, program management help to get it done.

We have great strengths in that area.

An awful lot of the water and wastewater business is small jobs in small communities scattered all over the country.

And the challenges of doing that particularly in the U.S. where Earth Tech has a lot of strength is you end up with lots of little offices and lots of little places waiting for these jobs to come along.

And up to this point at least we haven't found that very attractive.

Now that model is not the same when you get into the UK and Europe where we are much more active in the water and wastewater side.

But here in the U.S. it is very fragmented, it is very difficult to be successful in the business without being geographically very dispersed and so at least to this point we don't think that's very interesting.

That's helpful.

And then lastly, obviously there are enormous amounts or work to be done in the Middle East, and you've mentioned that as an area of expansion for you.

How and when should we expect your presence to evolve there?

And is 2007 any kind of inflection point for you?

I think you mentioned essential acquisitions there.

I will ask Tom Hammond who is our head of operations over there to comment.

I think we do think 2007 is a little bit of an inflection point, and we've done some things organizationally to accelerate our market penetration in that area.

We've reorganized a little bit of our operation in Abu Dhabi in the sales, particularly on the building and infrastructure side has been very strong out of Abu Dhabi, and that will be both work that is done in the region in Abu Dhabi or Dubai or Bahrain or one of the locations in the region.

But it also is going to result in a fair amount of work that is done in the UK, in mainland Europe or in the U.S. on these large building projects.

And we are a participant in a contract with Saudi Aramco and the workload there.

We believe we can leverage into a greater penetration in Saudi Arabia on the oil and gas refining and petrochemical side.

So we are very optimistic about increasing pretty significantly our presence in the Middle East in 2007.

Great.

Thank you very much.

Richard Paget, Morgan Joseph.

I wondered if you could get back to the mix and the potential for peak margins.

You did mention that some expected sequential growth margins going up as you kind of filled those larger salaries.

But also there is a trend where once you have a bigger percentage of the technical pro services margins have tended to go up as well.

Do you think as that mix gets to be bigger proportion of that technical pro services you could exceed creep margins from the last cycle of that?

First of all we think that as we convert a lot of the things that we already doing the engineering on into construction that you are not going to see that mix stay the way it has been the last few quarters.

While that hasn't been dramatic growth, it has been slightly moving towards the professional services side.

I would expect to see that swing back as things get into the field.

So that will have an impact on the gross margins as we go forward.

I think that the margin creep on each element as long as the market stays strong and certainly what we're seeing right now we should be able to see that continue for a little bit, but it's going to be minor.

It is not going to be any dramatic kinds of mix or margin change as we move forward.

So when would you expect that peak for pro services to kind of hit their top percentage before it starts translating back into field services?

Because if I look at backlog trends, I mean that portion of the backlog is growing faster.

Just thinking about it and the way you've asked the question, I would suggest that for the most part construction work-off is probably more of a 2008 kind of timeframe and beyond than it is this year.

So that is probably as specific as we can be.

Right, okay.

Fair enough.

And then you mentioned about you are expecting upstream to grow a little bit faster than downstream.

What are the general margin profiles comparatively to each other?

Is upstream have -- can you generalize about them?

There is very little difference.

That's it for me.

Thanks.

Chris Hussey, Goldman Sachs.

Quick question.

One of the things that we seem to be seeing is that some of the cost creep that's going on in construction projects is starting to scare away customers a little bit on some projects.

Have you started to see any of that with any of your clients and what can you do to sort of counter that?

What we're seeing, Chris, for the most part is an increased emphasis on scope management.

So what you will see is as a project gets its conceptual design completed and the first really substantive estimates are available, based on where costs are going, maybe the costs are more, the project isn't as economic as the customer would like.

What they generally do is look at ways to take a little scope out to bring the thing back into line with what they can fund.

So what it generally does is it postpones the start of construction a little bit.

It increases our revenue for conceptual design work, but we really aren't seeing at least at this stage customers walking away from projects or saying this doesn't make sense.

Okay, that's encouraging.

And then on the M&A front separately, when do you think we will see a break in the logjam that you guys have had in terms of usually you are finding stuff a little bit more frequently than lately?

As you recall we did three deals last year.

I guess one of them was technically this year in this quarter, which was the Linder acquisition upstream, which is one of the kinds of deals we've been looking for and about the size deal we told you we were trying to do.

So that one kind of fits right in the equation.

On the infrastructure side we are being pretty selective about the deal we make because we are trying to make sure we have the basis for building the business.

So it is partly fit, it is partly finding the right price, it is partly the fact that people who don't sell their businesses until they are ready to sell.

And sometimes it takes a long time to get in position to do that.

I don't know, Noel, do you want to comment?

Yes, I think the deal flows, it actually looks pretty good.

Remember we took a couple years off about 2 1/2 years ago, and I think what we are seeing I think we see an accelerating deal flow.

I do think we are being very selective.

Prices are high right now because the earnings are good in most of the organizations.

But if I look at what we're doing I think we are on almost a historic pace.

Remember we don't get our earnings by buying, we get our earnings by buying somebody like Linder and then growing the business.

So Linder kind of becomes a linchpin for our E&P growth, our upstream growth, if you will here in the lower 48.

So sitting where I sit, looking at it historically we are on a pretty reasonable pace right now.

Okay.

That's encouraging.

Last question, and I apologize for asking three but the engineers -- I was just curious where you are sourcing new engineers right now.

If you had to characterize it, I've heard that Houston is a tough place but you've only just gotten down there and (inaudible) Is most of the stuff coming out of the Third Worlds, India and places?

It's interesting, we are able to source engineers into different geographies from different locations.

We've hit on a couple sources that I won't even talk about because I don't want the competition to know what they are.

But we've done very well in going to some Third World countries and getting very well-educated, very well-trained engineers with good backgrounds.

Interesting enough we are able to recruit from one country to another even though both countries seem to have a certain amount of tension in the availability.

So we may find people in the UK want to work in Canada and people in Canada that want to work in the UK.

And because of where we are geographically we are able to do that.

But even in some places like Houston we've had great success; we've more than doubled the size of that operation over the last couple years and we're getting the people we need.

Very helpful.

Thanks, guys.

Michael Dudas, Bear Stearns.

Following up on Chris' thought there on hiring, what was your total at the end of last fiscal year in professional engineering or project management talent or however you characterize it?

And what is your goal for the end of this fiscal year?

Our total was about -- at the end of the fiscal year was about 33,000 home office and just under 12,000 craft.

We don't really set goals from a staffing standpoint, so saying what the goal is for the end of next year is probably not a relevant number.

But if we're going to grow our bottom line aggressively like we've outlined then we're going to see a somewhat proportionate growth, not as much in the number of people.

So we might add another 4500 people or something like that this year.

Do you plan on opening new offices or a closing some others, how do you stand relative to where you're going to get the talent and cultivate it?

And are utilization rates throughout the organization near record levels, are there some underperforming offices that could maybe help in the resource utilization?

There are always differences in utilization from office to office and from market to market.

Some of those are structural based on the end market.

Some of those just have to do with where the workload is.

What we're doing is working very hard to make sure we can move that work around electronically, because in general where utilization is done a little bit there is a catchment for additional talent that can be applied to our work.

In terms of the question about opening and closing offices I don't think we have any particular plans to close any offices at the moment but we will be looking at opening some offices particularly in places like India to increase the number of engineers we can capture in the Indian base.

So there will be some other modest opportunities to open offices as well, but it's mostly going to be driven by our customers and where their projects are and what the volume of the type of work might be.

A follow up on the acquisition thoughts, Craig, when you're looking at the company the size and the globalness of a today versus five years ago, does that influence especially in this chosen market that you're looking at capacity, the size of the acquisition, and you did mention in your prepared remarks opportunistic -- what characterizes an opportunistic acquisition.

And does size have something to play in the part of whether to go through an opportunistic acquisition such as that?

I think, Michael, where we are at on size and I will ask Noel to comment, as well, where we are at on size is that we are willing to look at deals from very small where there is niche leverage to be had.

And as Noel pointed out earlier that's where we get a lot of our growth is by finding these niches that leverage up our business.

To I would characterize as modest size acquisitions.

We don't feel the need to go out and do great big deals.

And I would certainly consider something half our size to be a great big deal.

That is not to say we would not do it if it made sense, but we are certainly not out looking for that kind of an opportunity.

In terms of the opportunistic question, sometimes we get things from investment bankers or somebody hears Jacobs is a good place to be and they come and say we've got this business and we would be interested in being acquired by Jacobs and it turns out to be something that makes good sense.

We just didn't find it on our own.

And we've had times in the past when we were actively looking in market A and an opportunity came along in market B and it was clear that market B opportunity represented a better growth vehicle for Jacobs than the market A opportunity, so we dropped A and did B. And that is what I mean by opportunistic.

Noel, you want to comment?

No, I think you said it pretty well, Craig.

I do agree with Craig, we don't want to do too many big dog acquisitions because they really stress the system, and so there is a size limit that we generally put in place.

And our history has been and we have several businesses that have evolved out of three or four small acquisitions.

Our dominant position in the pharmaceutical business, for instance, came at a reasonably calculated plan at least for Jacobs.

We went out and made three or four acquisitions in a row, all of them small by any standard.

Today's standard, yesterday's standard and that took us to the dominant position in the pharmaceutical business during the period, the decade during the '90s.

And so we think that this continues to be a good strategy.

We have looked very hard and it's not like we haven't been approached over the years and even quite recently about companies half or two-thirds our size saying let's get together and let's really make it sing.

And we've looked at the difficulty of doing these and along with the good in a deal like that comes a lot of bad where you've got overlap and that kind of thing so we stuck to our knitting and we think the modest to midsize acquisitions are what fits our pistol and by the way, what we really know how to do well.

Do you think the robustness of the market helps or hinders an opportunity to assimilate an acquisition or to make something sing?

Would it be better to do it in a down-market, especially in this market we are in right now would that pose further challenges to make that work for shareholders and stakeholders?

Michael, I would tell you that if we have a good cultural fit, the strength or weakness of the economy probably aren't a big factor.

A good robust economy keeps you from having to do draconian things and probably in the long run makes the assimilation a little easier from a people point of view.

On the other hand you pay a little more in a good market for these companies so there is goods and bads to both.

Thanks for your thoughts, gentlemen.

Dan Khoshaba, KSA Capital Partners.

I just wanted you to clarify -- I didn't really hear the answer -- where there any asset sales or change in business ownership, joint venture, that kind of thing that led to any gains in the quarter at all?

No.

Second thing is you talked a lot about acquisitions, and if you were to do an acquisition a couple things.

First of all, are you concerned that at this point in the cycle that anything you potentially do is likely to be looked at by others?

And therefore price does matter?

And secondly how would you likely pay for let's say a mid-size acquisition?

Would you issue debt or would you issue equity?

The second part of the question, it will probably be cash because we do have a fair amount of cash on the balance sheet or some combination of cash and stock.

Although the right deal if it made sense we could use equity as well, but certainly the deals and things we've looked at over the last few years, given our cash position and our strong balance sheet, it has made more sense to do them for predominately cash or cash and debt than stocks.

So clearly that is the direction we would go.

On the first part of your question about pricing and such, we have a very focused approach, disciplined approach that we may get into situations where if a deal gets into an auction then we will just probably for the most back away from it unless maybe it would be one or two people that are looking at it.

But our experience has been that if something gets into a very big auction that distracts everybody, and you usually don't end up getting what you really thought you had there.

So we would really try and focus more on deals where the sellers are looking for a good home for their people or a good home for themselves.

And an opportunity to grow with a combined company faster than they might be able to grow by themselves.

Certainly that was the case of the last larger acquisition we did with [Bapti] a couple years ago.

This was a company that was growing very nicely but they saw the opportunity where together the opportunities, the infrastructure business could be greater joining a company like Jacobs than staying on their own.

So we are looking for those opportunities where people feel that they are looking for a good home and a good future for their people and for the shareholders.

Real quickly, do you break out anywhere -- I am looking at the presentation and press release where your new orders come from, the different segments of the backlog?

No, we don't.

Do you do that -- why would'nt you do that?

We just don't, because we feel that we really are looking at a total business and not breaking it down.

As we look at it business is business, so really it is not material the way we run the business of which markets the new business is coming into.

You don't feel it is material to investors or owners of the stock to know what is driving your backlog?

No.

You don't?

We think it is more material to know that the backlog is driving up.

Oh, okay.

Good luck.

Thanks.

David Yuschak, Sanders Morris Harris.

Congratulations, gentlemen, a great quarter there.

A question I've got for you, you generally have said in the past 60% to 65% of any quarter will come out of basically backlog, and the rest basically, I guess, is just kind of walk-in business if you want to call it that, for lack of any better term.

The sales department doesn't like that, but okay.

Would that tend to be better margin business and in a more robust market where that's kind of a consistent number, you're getting better margins?

First of all, the 65% is, we say, over the next 12 months the amount of work coming out of backlog will be about 65%, not over the next quarter.

In any given quarter, it's much higher than that that comes out of backlog, obviously.

And as to the margin question, there really isn't that much difference between the things that come in and scope changes, the growth and that which is in longer-term contracts.

Just remember that something between 85 and 95, usually something more than 90 in any given quarter of the work we get is repeat business.

So it is work for customers we are already working for.

So you wouldn't expect more than marginal expansion even in a robust market when it is the same customer.

I just want to make sure that we covered that base.

In looking at your guidance for the rest of the year then, could you give us a sense is it more margin creep with revenue burn and everything kind of consistent with what you've been seeing here in recent quarters, or are you maybe potentially seeing, because of the robust market, more revenue and burn on the businesses coming in than margin creep?

We think it's going to be -- the increase in activity is the primary driver going forward.

As we've said a couple of times, we will continue to see as the markets are robust and pricing for engineers continues to go up and things like that, we will see some margin creep as well, but a lot of it is just going to be driven by more activity.

For the quarter point of view, I think if you plug back in the option expense, you basically created a quarter here from an operating margin point of view that I think is a record, isn't it, if you make the adjustments?

Pretty close to a record if it wasn't one.

I really haven't done those calculations and gone back historically, but it is a strong gross margin and operating margin.

On the bookings, John, did you say that in the bookings you had a couple of 250 to 350 projects booked?

Yes.

Okay, is that the first time you're really starting to see some bigger projects coming in, because it would seem to me we're maybe at the cusp here of seeing some, starting to see some real acceleration in the potential for major new business coming your way.

No.

It is not unusual for us to have one or two in a quarter of larger size deals.

There are many quarters where we don't have them but there are some quarters where we have more than that.

So it is just kind of the way that projects close out.

It is one of the reasons we really focus on getting year-over-year growth and backlog rather than quarter to quarter because we don't always control the timing of when these things are awarded or when they fall into backlog when contracts are signed and such like that.

But do you think the potential exists that you might see more of those coming in just because of the robust nature of the market?

David, I would say it's going to be a mixed bag.

Some of the robust markets like oil and gas and refining upstream and downstream, the customers are metering out the projects.

So you are getting 10%, then you're getting another 20%, then you're getting another chunk and then you get a chunk after that and whey they meter it out like that you don't have the big event.

In other markets like pharma bio the customers tend, although there is more metering these days than there used to be, but there is more likelihood in something like that we might get a big chunk, and that is one of the projects we got was in that industry.

But generally speaking this metering out process would probably give us a 250 to say 400 range for most size projects as they get metered out?

Yes.

I think that is right if I understand you.

As far as the pipeline is concerned then too, how do you sense that developing here over the, today versus say nine months ago?

I would say and I will ask Tom to comment as well, but I would say the pipeline is still very good.

Very healthy, but I think I would go back to a comment I made to Jamie early in the conversation that it is more conservative and less of the wild flyer kinds of prospects that are out there.

Customers aren't talking so much about huge, long-term programs and talking more about what they can realistically accomplish in this year and next.

Tom, you want to comment?

I would say addressing the international front, I don't think we have seen a material change in the level of business activity in the last few months.

There is still ample opportunity for work.

The Middle East is clearly a growing area.

India is quite solid, and the economy is doing very well.

Our European operations are pretty solid, and in the UK where we have our largest presence internationally we actually think there is probably an uptick in public sector spending.

There may be a downtick on the industrial side of the spending in the UK, but we are well positioned to take advantage of public sector spending whether it is in facilities like schools and hospitals or in transportation systems like highways and subways and the like.

So we see a pretty robust market in most other geographies.

I feel a heck of a lot better knowing it is conservative and there is not a lot of speculative building on it.

I just want to suggest we can have a sustained outlook here for quite some time; as long as we don't have wild speculations that is healthy.

I actually think it may be good news because I think the tendency for these projects that pencil at $45 oil let's say and a more conservative view may make this cycle last a little longer, and we would be like delighted if it lasted longer.

I think I am inclined to agree that that is probably the way this thing ends up going.

So one last question on the outlook for your bookings.

Is there anything in your verticals where you think there potentially could be some pleasant surprises in the way of new business opportunity?

Versus because a lot of the positive experiences has been energy seeing some pickup in the chemicals.

I am just wondering over the course of the next twelve months where could some potential pleasant surprises be that you are not maybe not putting much emphasis on right now as far as credibility of that event happening versus some events, if they fall into place can create some positive surprises?

I am sitting here thinking about your question.

Give me a second.

Realistically I would have to say I don't think there are sort of things that would be big event surprises that would be material.

As I look at the markets that we have low expectations for I just don't have any reason to think that I should get a surprise there.

The pulp and paper market coming back with a vengeance, just doesn't, I can't get it on the screen if you know what I mean.

But the UK could be a nice, sounds like the UK on the nuclear cleanup could develop very positively for you in the course of the next couple of years to gather some momentum there, so to speak.

Absolutely could.

Remember that that is very long-term work.

Closing a nuclear site takes years if not decades, and so that could be some nice winds that would show up, but they will take a long time to work their way through the system.

That's it for me.

Thanks a lot, gentlemen, congratulations again.

Alex Rygiel, Friedman, Billings, Ramsey.

A lot of my questions have been answered already but one quick question.

As it relates to NASA can you discuss or comment on the upcoming opportunities that you see with that customer?

Let's see, yes, I guess I can.

NASA continues to be a good customer for us, and we have reached the stage where we are involved in almost all of NASA's sites around the country, not quite all so there is opportunity to add site.

But the spend for the constellation exploration vehicle is going to drive a fair amount of business through NASA and what I think we will see in addition to additional sites and additional scope, is that there will be some opportunities to expand the work we do at the existing sites.

So we are pretty upbeat about where NASA is taking us, although I don't know you will see a whole lot of -- we want another site and another site.

There aren't many sites left to win.

Great.

Thank you.

Barry Bannister, Stifel Nicolaus.

Good quarter.

Just as an interesting thought experiment if I assume that field services doesn't even exist and take SG&A and divide it by your technical professional services revenues, you've got the lowest SG&A percentage of that number in the past 20 quarters.

Last quarter was slightly lower, and this quarter was very low, the second lowest.

That is not a hall pass to go out and spend SG&A, but when I look at that something fundamental has changed, and would you point to perhaps a change in the mix towards petroleum or a change in the mix of people towards India and international as causes for that?

Because that really is an anomaly.

I wouldn't point to any one thing as a cause for it, Barry.

We are doing at every opportunity the things we can figure out to do, to continue to make our operating costs as low as possible relative to our revenue line.

And so we've done things over the last few years like outsourcing Accounts Payable and moving some of our own SG&A related costs to India and to other places doing consolidations.

We are getting the economies of scale, and you can't ignore that in our business.

It is a very scale economics driven business, and we are certainly getting those benefits, as well.

But some sort of seachange in the way we run the business or the markets we are in, I really don't think you can point to that.

You won't attribute it to the genius of the CFO are any particular thing?

It is just a whole panoply of reasons why you can't.

If there are any two people I will attribute it to it is the Chairman and the CFO.

Barry, it is an economy of scale phenomenon, almost period.

You've definitely grown large and strong.

If I look at infrastructure as an M&A idea I associate that with fixed-price lump sum turnkeys, state and local and federal work and sometimes liquidated damages.

It is not a pleasant thought.

Are you really pursuing infrastructure in the way the street defines it, or are you looking more for operator type of arrangements?

Neither of the above.

The piece of business that you are describing is the construction piece.

It is what the folks like granite do, and we have no interest in that space.

You are more in the design side?

Yes, we want to be positioned on the design side, program management side, the construction engineering and inspection side, where we are working on the same sort of cost reimbursable relationship base with the local DOTs as we work with our other customers and other businesses.

Sounds good.

And then the question would come up on your comments regarding up and downstream oil and gas.

Isn't it a standard petroleum cycle that oil will rise, upstream profits will grow, squeezing downstream margins.

But then downstream catches up because the demand doesn't go away and the capital spending trickles down.

And that tends to be a strong area for E&C as capital intensive refineries.

So are you just outlining something that is you think unique to your company or a standard cycle within petroleum when you talk about this upstream strength?

I think first off your description of a standard cycle is out there.

I don't that is inaccurate in any way.

But I think what is unique to our company is a couple things.

First off, we've never been a strong upstream player.

We had virtually no upstream business of any kind if you go back just six or seven years ago.

So part of what drives our perspective on it maybe a little differently is that it is a new market for us and we are just at the beginning stages of taking market share.

Lastly, ROIC is something that I've harped on on every call.

I apologize, but your focus on growth is good.

But have you ever considered reporting and talking more about how the return on the capital shakes out as you employ capital for the purpose of growth?

Particularly acquisitions?

Well, certainly that is one of the things we look at when we look at an acquisition is how that capital is going to be returned and how it is going to drive and help contribute to our 15% overall growth targets.

But when you get right down to it day-to-day business capital is not a huge driver in our business, and so once we bring an operation in and comparing capital needs there really isn't that much difference between the different industries we serve and the different end markets.

So we really don't internally focus on the return on capital as much as we do on controlling our costs and growing the business in a profitable fashion that will give us that return just by the very nature of the business.

So the capital requirements are more characteristic of the large transactional project mix, which is not yours?

That's right.

Thanks.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, we have no further questions.

I will now turn it back over to management for closing remarks.

We want to thank you all; we had a good quarter.

We are looking forward to a good year, and I guess we will be talking to you all again in about 90 days.

Ladies and gentlemen, thank you for participating in the Jacobs first quarter earnings conference call.

As a reminder, a replay of today's call will be available from 2 PM Eastern time today until January 30 at midnight.

You may access the replay by dialing 800-642-1687 or 706-645-9291 and entering the pass code 6383846.

This concludes the conference call.

You may now disconnect.