雅各布工程 (J) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the first quarter 2008 Jacobs Engineering Group earnings conference call.

My name is Maria.

I will be your audio coordinator for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

At this time, I would now like to turn the presentation over to Ms.

Patty Bruner to read the Safe Harbor Statement.

Please proceed.

Thank you, Maria.

The Company requests that we point out 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 risks 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 ending September 30, 2007, including Item 1A -- Risk Factors, Item 3 -- Legal Proceedings, and Item 7 -- Management's 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 result of new information, future events or otherwise.

Now we'll turn the call over to John Prosser, CFO of Jacobs.

Thank you, Patty.

Good morning, everyone.

I'll briefly go over the financial highlights for the quarter, then I will turn it over to Craig Martin, our CEO, to go through a discussion of the -- our growth strategies and current business outlooks.

If you're following on the slides, I'm on slide four of the presentation package.

Clearly, we had a very good quarter with the results before the one-time gain of $0.75 per share and net earnings of 93%, $93 million for the quarter.

If you add back in the one-time gain, the results were $0.79 per share, and $98.4 million, so either before or after it was clearly a very good quarter.

The one-time gain, just we will touch on it briefly, results are from the sale of our interest in a business that was a very transactional highway maintenance and operational business that really did not fit our business model.

It's one that came to us through an acquisition a number of years ago, and it just was an opportune time to dispose of that.

Our backlog reached a record $15 billion, so very strong growth continues in our backlog.

We have a strong balance sheet, net cash of $361 million, and we are revising our guidance upward to a range of $2.95 to $3.25 per share including the one-time gain.

So that includes the $0.04 from the one-time gain here in the first quarter.

Moving on to the next slide, slide five, just tracks our earnings over the last decade.

Very strong growth.

If you look at the bars underneath the graph, and that graph excludes the one-time gain, our trailing, our compounded growth rate over the last five years is just under 26% which clearly is above the 15% growth target that we like to talk about over the long term.

Moving on to slide six, our backlog growth, again, another strong quarter.

Very strong growth over last year reaching $15 billion.

Included in that $15 billion is about $390 million that came from the backlog that we've added from the acquisition of Carter and Burgess.

Carter and Burgess closed early in the quarter, so two months of their operations are included in the quarter while they were not material to the quarter as they did represent a contribution in the backlog at the end of the quarter.

Even without that, still had a backlog growth of over $1 billion for the quarter.

With that, I will turn the mic over to Craig Martin to go through our gross strategies and outlook of the markets.

Thank you, John, and good morning, everyone.

We're going to talk a little bit -- I'm on slide seven at the moment-- about our strategies to continue to grow at 15% on a long-term basis.

There's nothing that's really changed about our approach.

We remain committed to our unique business model.

We are going to continue to try to diversify our business.

We're going to grow as a multi-domestic company, so we are going to be local to our customers where we work; and we are going to continue to make acquisitions as a part of our growth strategy; and obviously we're going to drive down costs.

I am going to spend a little time on the first three things on that list.

I don't plan to spend any extra time on acquisitions or cost control in this discussion.

So let's talk about our relationship-based business model.

I think we've talked about this many times in the past and differentiate our approach to the market from what we think of as an industry model.

I'm on slide eight now and you can see the industry model on the right.

Generally our industry is very transactional in its approach to businesses.

So there's a lot of pursuits of lump sum turnkey work, there's a lot of big events in faraway places that drive, for the most part, our competitor's business models.

We take the opposite tack.

We look for the local work, the ongoing business and we develop preferred relationships with our clients that last year in and year out.

We continue to get about 80% of our business from those kinds of relationships, and that's what drives our growth as a company.

Frankly, in what is a very good business market, our strategy works very well for us, and we're finding ourselves growing our share of our customers' wallets by growing our relationship with those customers.

Moving on to slide nine, this is our market slide.

You can see the business is continuing to be pretty diverse in terms of the markets where we get work.

I'm going to try to take a minute or two on each one of these markets and talk about what's going on in the market place and how we see things going forward.

Let me start with refining the downstream market.

Very robust.

You can see it is about 31% of our business.

It is growing nicely for us.

There's a tremendous volume of projects up there.

Still a lot of work in the early conceptual stages.

A very significant amount of work as we look forward.

Not only are we still doing clean up of fuels and capacity expansions both here and in Europe, we see a lot of work ahead for things like benzene removal of gasoline, and even getting into the removal of sulphur from bumper fuel.

So, there's a lot of opportunities out there and a very long tail on this business as we see it, in terms of opportunities for continuing growth and continuing business.

Good market to be in.

Oil and gas, the upstream business, about 11% of our business today.

Another really good growth opportunity.

I would just happen to be up in Canada with the folks in the Oil Sands and they talk about programs lasting out 10, 12 years in terms of money they're going to spend.

Obviously the oil price as it is today makes all those projects very attractive and very economic, but they continue to be pretty economic even at lower oil prices.

So there's a lot to be excited about in that business if you look at just the Oil Sands alone.

Globally it's still a very large business and we're still a very small share player, so it's also a share growth opportunity for us.

Chemicals businessm about 14%, continues to be a good business for us.

We're seeing a lot of activity, most of it in the Middle East, and we're positioning ourselves to take advantage of FEL and PMC work in the Middle East on a number of projects.

We're already doing some of that kind of work.

We continue to see modest little expansions and additions in Europe, in Asia and in the U.S.

Pulp and paper, high-tech, food and consumer products, 3% of the business.

That's the part of the business there's not much story around.

Not a lot of growth right now, although we continue to find ways to add to our business now and then.

On the pharma-bio side, the business is steady, we don't see it growing as rapidly as some of these other businesses; but there is a steady volume of work particularly in places like Singapore and Ireland where we are well positioned.

We also see some activity in mainland Europe and in the U.S., but not as robust as what we see in Ireland and in the Asian and Singapore business.

National government, 18% of our business.

Another area where we're seeing lots of activity.

I'll talk about a couple of major project wins later on.

But there's just a tremendous activity in both the research and development test engineering side of that business, and in the environmental side.

We continue to see lots of activity.

The work in the United Kingdom that I've talked about many times before continues to be out there.

It's moving a little slower than we expected, the two originally-- in terms of awards.

But $150 billion of spend is still out there to be had, and we're pretty excited about what that market represents.

And then, like I say, the research and development side, we're doing extremely well in terms of growing our business.

A lot of good programs out there both in the U.S.

and the UK.

Our buildings business, 6%; also very strong for us; particularly strong in government buildings.

By that, I mean things like healthcare, hospitals, schools, jails.

Healthcare, in particular, is a very, very active market for us, and we're very well positioned around the globe.

We continue to see a lot of growth, both in mainland Europe, in the UK and in the U.S.

And then last of all, the infrastructure; another good strong business as we see it today.

Obviously there's some issues out there with the tax situation and deficits to some of the states but for the most part, it's still a very robust market for us, and we expect to see continued growth both from the standpoint of just project growth but also in our ability to take share from our competition.

So, we're pretty excited about that market as well.

Turning now to slide 10, our multi-domestic strategy.

As you can see, we continue to grow the business geographically, and we continue to focus on being local to our clients.

The strategy here is to have a local operation that understands how work gets done in that area and couple that with global expertise in the project type.

So far for us, that seems to be working very well.

We've developed a number of strong relationships in various countries around the globe that are helping us to build our business and increase our share of our customers' wallet.

Moving on to slide 11, just to touch on a few highlights from the quarter.

John has mentioned the acquisition of Carter and Burgess.

This is a combination of infrastructure and buildings businesses here in the U.S.

A really good fit with Jacobs, both geographically and strategically.

We're excited about that and what we think it will do for us in the long run.

Obviously we sold our interest in the transactional-based highway operations company.

Just wasn't a great fit.

Snow removal and pavement maintenance on a long-term hard-money basis just isn't for us.

We did have a couple of really nice wins last quarter that I thought were worth highlighting.

The Air Force Engineering and Technology Acquisitions Support Services, ETASS, up in Boston, really good contract on the IT and Communications Command, C4ISR kind of work.

We won a recompete of our test and evaluation support contract at Aberdeen.

Another really good contract that represents another long-term relationship for us.

I think the interesting thing about these two projects and several others like them that we can't talk about is the long-term nature of the business and the fact that they represent good diversification for us.

So we continue to avoid being utterly dependent on any one market.

So all and all, we'll turn now to the commercial on page 12.

We think there are a lot of reasons to think highly of Jacobs right now.

We've got a good customer-driven basis model that is very much different than our competition.

We have the diversification that will help provide steady growth.

Our balance sheet is in great shape, and we continue to believe we can continue to grow this business at 15% forevermore.

And with that I will turn it over to Maria for questions.

(Operator Instructions).

Your first question comes from the line of Michael Dudas with Bear Stearns.

Please proceed.

Good morning, gentlemen, Patty.

Good morning, Michael.

First question, Craig, a little more color on your recent trip to Canada.

Certainly cost issues, concern about crude oil prices and potential tax issues in the province, potential consolidation that occurred up there.

How well positioned are generally contractors up there, and you in particular, to maybe weather maybe some of those issues if those things come about?

Well, I think what we heard from most of the customers I talked to, and I probably visited five of our major customers up there in the two or three days I was there, what I heard from most of those customers were two or three things.

One, that their investment plans are pretty firm for the long term and that they are long-term looks at where the business is going.

So they're pretty insensitive to relatively minor variations and crude prices.

I didn't talk to anybody who thought there was any risk to any of their project work at crude prices above $60.

The second area we talked a lot about what the new royalty program might mean to these customers.

Frankly for the Oil Sands, I don't think it has much impact.

There's a lot of whining about it, but very little evidence that that actually changes the economics of these projects significantly, relative to current crude prices.

There was a lot of complaining about what it does to gas, and there's some reasons to think that the gas side of the business up there will be affected negatively by the royalties.

But that didn't seem to be a big issue.

The biggest thing the customers talked about was the supply of -- not so much supply of engineering, but supply of construction, labor, and equipment, materials to those sites because of the volume of work that is going on.

All of them have constructed plans to deal with that for the most part, frankly, by extending the duration of their programs.

So instead of trying to do $4 billion program all at once, they're doing 10 $400 million programs.

That seems to be a common approach to how these folks are dealing with those issues which, from my perspective, our perspective, I think is very, very positive.

Do you find that other customers are thinking along the same lines with different end markets?

I'm not sure I understand your question, Michael.

Just looking at, like again, with the attraction of the labor and contracting time and such, do you think in the refining side or maybe even in the billing and infrastructure side are the customers looking trying to see through maybe some of the near-term blips we're all reading about on the paper, seeing on TV looking a bit longer term and feeling that they're going to need to be involved and continue their spending plans?

I would say that the private sector companies for the most part are taking that perspective.

So whether it's refining, upstream, chemicals -- there tends to be a little bit of a longer view here and the belief that these programs have got to get done, fee stock driven or otherwise.

When you look at the buildings and infrastructure business, they're not looking at this quite as long term.

I think they are, in fact a little more short-term oriented in their outlooks.

But I think also there's a lot of just a huge backlog of need out there, and an awful lot of it is being driven by secured funding.

By that I mean things like bond issues that have been underwritten by sales taxes.

Other kinds of commitments.

You hear a lot about California.

We have this big infrastructure initiative in California.

It's actually independent of the problems and the money that causes our $14 billion deficit.

So, those programs are going to go forward.

We're seeing that to some extent in a lot of the infrastructure business around the globe.

On the building side, as I said, we're mostly driven by things like healthcare and the needs there don't seem to be affecting the business.

The money's there and the need is there, so the work's getting done.

Craig, I appreciate your thoughts.

Thanks.

Your next question comes from the line of Andy Kaplowitz with Lehman Brothers.

Good morning, guys.

Nice quarter.

Good morning.

Thanks.

So looking at your margins, your gross margins in 1Q '08 were very strong.

Your SG&A as a percent of sales were a little higher.

And I guess, a couple of things come to mind.

One is how much of the growth margin strength was a result of maybe mix or better pricing or maybe even Carter and Burgess coming into the mix?

And how much of SG&A is sort of ticking up a little bit was that you just did a -- it's not a small acquisition, certainly not a big one.

But it's certainly a little larger than usual.

I mean, the mix in this quarter was very similar to the mix last quarter.

As far as the mix is concerned, while Carter and Burgess coming in is all professional service, the amount they contributed particularly since they were only in for a couple of months was not a significant amount.

It was somewhere around $80 million.

That may have had a little bit of an impact on the gross margins.

But it did have a bigger impact on the G&As because -- not so much from their own G&As which they tend to be higher than ours anyway -- but also because of the purchase price allocation and such.

So early on, you know, for the first 12 to 18 months, you know, we don't expect them to be on an operating margin basis much of a contributor because of the purchase price allocation and amortization and intangibles that have to be worked off in that.

So they had a little bit of impact, but it would only -- it'd be majored in probably the last two digits, not in the -- it didn't make, you know, a big impact one way or the other.

That's great, John.

I guess what I'm trying to figure out is that 15.7% seems very nice.

Is it sustainable based on better pricing, a better pricing environment?

I know you mentioned in the past that as you ramp up a little bit in the field services you might have a little bit of pressure there, but it beat my forecast by a wide margin.

As I've said, you know, we are going to be looking at margins drifting down a little bit as - the revenues growing as we move more and more into the field services, but that's going to be later this year and into 2009.

I guess this is the first quarter I've been fairly -- I've been correct in saying we're reaching a kind of a peak in our operating margins.

I've been saying that for probably the last four or five quarters and we're reaching it this year.

My comments from last quarter actually came true.

So maybe I'm finally getting smart or something.

I think that at this mix level, this is sustainable, that as we move the mix more toward field services later this year into 2009, you'll see the volumes increasing even faster, But you'll see the gross margins coming down, the SG&A percentages as a percent of revenue coming down.

You'll probably see a little bit of softening in the operating margins.

I guess, John, is it fair to say that in 12 to 18 months when C&B sort of is integrated and you have less amortization of intangibles and whathaveyou, that we can get better SG&A as a percent of margin while still having a relatively high gross profit margin?

I guess that's what I'm getting at.

No.

There's not going to be that big of an impact, one way or another.

They aren't big enough to prop that percentage up, and I think the factors of moving toward field services will be a much stronger factor than their contributions.

Obviously as the amortization, which will be running probably about $1.5 million a quarter, which runs off in 18 months and steps down a little bit, that's a little bit of a contribution.

But that compared to our overall size is -- still is not a material amount.

I understand.

Just one more question, on backlog growth for the quarter.

That also came in very strong.

I know you mentioned a couple projects, Craig.

Anything besides those projects that sort of contributed to it?

I mean, as a very strong number X Carter and Burgess?

No, there's not anything I can point to in terms of an individual event that was just a huge effect on backlog.

Obviously these two projects contributed some nice chunks of money.

But we had an awful lot of wins across the whole system.

It was just a very robust quarter in almost every market and so we had a nice backlog growth.

Very nice.

I'll get back in queue.

Your next question comes from the line of Jamie Cook with Credit Suisse.

Good morning and congratulations.

Thank you.

John, not to beat you up too much on the margin front.

I know margins will change, gross margins, and operating margins will fluctuate, depending on whether it's technical, professional services or field services; but even if you look at it on a net margin basis, you're hitting a 4% operating net income margin.

which I haven't seen in the years that I've followed you.

So I guess is this the new sustainable level or was there anything unusual why we can't have at least a 4% net income margin going forward?

Well, I mean, given our current mix of business, I think we're in that kind of a market right now.

As the mix changes it's going to have an impact on it going down.

And as of the market, whatever that is, comes back to a little bit more rational activity level so we're not working as much overtime, we're not growing the hours as fast as we are right now, you'll see a little bit of coming back to more long-term sustainability.

But on a mix issue, are you talking between technical professional services and field services?

Is that what you mean by mix?

Because I always thought at the bottom - on the bottom line that really there wasn't much difference between the two.

Maybe a change between the gross and operating market, but not on the net income basis.

Historically, we've always said there isn't a lot of difference but with the growth we've had and the professional services marketplace and particularly the way it's priced off a multiplier as we grow there, you get an improvement in the margin percentages where you get the growth in the field services which are much more priced off of a percentage of revenue.

As the revenues go up, the margins go up; but they don't go up as a percent.

So we've gotten -- the two have drifted apart a little bit just because of the strong market.

I think over time, though, we wouldn't anticipate that long term that the historic patterns will change but right now we're just in a little bit of an anomaly.

And things, because of the strong growth in salaries, the strong growth in demands, in the amount of overtime and things like that that we're doing, we're getting a much higher level.

And because of this heavy mix towards professional services where that's over 50% of our business, all those things have kind of formed a perfect storm to get us to a - probably a little bit higher than what is long-term sustainable percentages.

But, as we grow volume, certainly on the absolute dollars and such, well, should offset any bit of reduction in the percentage relationships.

My next question just to drill down a little bit more, I think, on an earlier question you had.

When I think about the infrastructure market and the highway business concerns over state and local spending drawing up, I guess is there any states in particular where you're starting to see a pullback in spending?

And is there any reason to believe why this cycle might be different from the one we experienced, I think, in 2002 because I know when that market dropped off, I think it caught everyone by surprise.

I'm just trying to get a feel for a chance of further deterioration and if there is anything that might be different this cycle to sort of insulate a potential falloff in that business if we fall off into a recession.

I think if we go off into a recession, and a lot of people think we will, that we will see some falloff.

I don't think there's any doubt.

And I think the falloff could be like it was in 2002.

The one thing I'm not sure that I can factor in today as compared to 2002 is all this [pre] sort of fixed bond money that's out there.

I just can't tell you how many jurisdictions have a $1 billion or a $500 million bond program that's already authorized and funded.

And I think that may have some impact in terms of how deep the cuts might be in infrastructure this time compared to 2002, but I couldn't quantify that for you.

So we certainly-- as we see the tax revenues go down and we drift into some kind of recession, you're going to see some softening in infrastructure, without a doubt.

But I suspect that it may not be quite as bad as 2002 because of this sort of backlog of prefunded bond programs.

The other aspect of that I think that we have to think about is whether or not we are going to get a tax and spend regime here, we get a lot of money put into infrastructure as a stimulus measure and what that might do for the business overall.

I guess from our perspective, we're not too worried about it.

We're still a small share player with a lot of opportunity for growth.

Okay, great.

Thanks.

I'll get back in queue.

Thanks, Jamie.

Your next question comes from the line of Steven Fisher of UBS.

Please proceed.

Good morning.

In terms of the costs on a dollar basis, your SG&A was up about $44 million sequentially.

How much of that was acquisition-related and could the $247 million you actually spent come down in the near term as maybe you integrate Carter and Burgess?

We don't give a lot of the details but a significant part of that increase was Carter and Burgess just -- their costs.

The other thing that has an impact on both our margins and our gross margins and our revenues and everything is the fact that the weaker dollar gives us a little bit of growth.

So the same Euro G&A and same Sterling G&A that we had last quarter was a little more expensive as the dollar gets a little weaker.

So you get some changes.

The net basis of that isn't all that significant, but on the individual lines, it has a little bit of an impact.

So, over time, we will get a little bit of synergy out of consolidation, but we don't go into these acquisitions expecting to lay off lots and lots of people.

What we're buying is people.

So the vast majority of the people that we bought are engineering, technical staff that are being built out on an hourly basis and being the reason we bought the company in the first place.

There will be some synergies and some savings in some of the G&A functions as we integrate them to our business.

On the other hand, as we grow, there's an awful lot of need for additional people.

So rather than seeing big cutbacks, it might just be that it stems having to go out and hire some additional people as we move people around.

But there's always a little bit of that, but that's not the reason we do acquisitions and we don't expect great big synergies coming out of acquisitions.

So it sounds like kind of bottom line, the dollar number might continue to creep up from here.

It'll creep up in line with inflation in line with the growth as we add more people and add more space and things like that.

They drag along a little bit of SG&A with them.

Got it.

In terms of the cutbacks potentially in state spending, I guess the bond issuance aside, what types of projects do you think would likely face cutbacks?

Is it highway projects, is it transit systems, water?

Where do you think the first cuts might be?

My guesstimate would be that it would hit water and waste water first.

There will be more impact because the programs are hard to scale.

I think you'll also see some reduction in what I would characterize as curb and gutter work.

So a lot of the little infrastructure work may not go forward or may be [even] strung out a bit.

I think major programs have a long enough tail that most of those will move forward.

You know, it takes as much as 10 years to build a new highway section.

Those programs tend not to be affected too much by short-term changes in tax revenues or in the economy.

So I think you'll see the bigger programs tend to continue, I think the smaller stuff and some of the water and waste water things will perhaps turn down first.

Okay.

Lastly, I know you went around the wheel of your different end markets, but back in November you gave a few different growth classifications to the end markets.

Would you say, that conditions have changed at all since November that would warrant kind of a different characterization in any of the markets?

No, I wouldn't say so.

If anything, we're finding the markets to be surprisingly robust.

Given the capacity concerns in the industry and the cost concerns, I would have thought three months later we would have had precisely the same view as we did in November.

I think we are actually upbeat about most of our markets today, compared to November.

Great.

Thanks a lot.

Great quarter.

Your next question comes from the line of Andrew Obin with Merrill Lynch.

Please proceed.

Yes, hi.

Most of my questions have been answered, but not to beat the dead horse here, what would you be watching, what will you be watching over the next six to 12 months to gauge the state of the infrastructure/nonresidential market?

On another point, I know that you are very positive on the oil and gas sector, but are we seeing cancellations related to cost escalations?

Because that was a concern earlier in '07.

Let me answer the second question first.

We aren't seeing cancellations related to cost issues, we continue to see sort of what I'll call retreading of some of these projects when the numbers get out around, go back through another FEL phase, change the scale of the project, eliminate some of the scope in order to get the budget into a manageable level.

But in terms of just people saying, we're just not going to do that.

that hasn't been any kind of a significant issue.

I can't think of any major cancellations.

I am looking around the room here at the guys to see if anybody can recall one.

Nobody is saying yes.

So, we haven't seen that.

(multiple speakers) Based on my discussions some of our customers the last couple of weeks, I don't really expect to.

Was that surprising in any way?

What's that?

Was that surprising, no cancellations?

No, I don't think it is, given how good the returns are on a lot of these projects.

These customers want to find ways to make them work and in some ways their concern is if they don't find ways to make them work now, things won't be better two years from now.

A lot of them are seeing a very long tail on the business right now.

I mean, longer than we've seen in at least recent memory.

Going back to the first question in terms of what would we be looking for in terms of a tail down or a recession driven; obviously we follow the general macroeconomic factors like everybody else.

But frankly, the thing that shows up first is the falloff on the number or quality or both of our prospects.

That's when we start seeing issues.

Competition tightens up.

There are more bidders for individual projects.

Those are -- tend to be better indicators of what's happening in the marketplace frankly than the macroeconomic numbers are.

I take it you're not seeing that yet?

Right?

Not yet.

Quite the contrary.

Thank you very much.

Your next question comes from the line of Barry Bannister with Stifel Nicolaus.

Please proceed.

Hi, Craig, John.

How are you?

Good, Barry, how about you?

All right.

Attributing the operating margin strength to professional technical services seems like to me, it may be incorrect.

If I were to chart the percentage of your revenue attributable to energy and chemicals -- which is now over 60% on one axis and then on the other axis invert your margin, then for decades, they line up.

In other words, the energy chemical refining seems to be very profitable.

If it's an anomaly it's an anomaly that has lasted for decades.

There's no problem with making money in energy chemicals and those markets tend to spend money about once every generation, so making money when the times are good seems like a logical thing.

So, how much of the margin strength do you think is TPS strength?

And how much is the fact that is energy chemicals is up?

Actually, those two go hand-in-hand because in the energy and chemical business, we do both professional services, we do a lot of technical professional services and we do a lot of the construction.

Probably the biggest part of our - particulary our direct hire or our full construction has done in those markets.

So the strength of those markets certainly has a correlation historically to how well we've done.

It's probably not as much today as it was 10, 20 years ago because if you go back 10, 20 years and that was 60, 70, even 80% of our market where today it's at currently 40%, 50%.

So I mean it's still very strong.

It's still a very good part of our business.

But what I was attributing to more of the technical professional services was the creeping up of the operating margins from the more traditional range of, say, 4% to 5% where we're approaching, now it's 5.7%.

So that's really where the current strength of the market is seeing its impact.

But it's not just the oil and gas.

It's across all of our markets.

Or most of our markets.

In one sense, Barry, we wouldn't want to kid ourselves.

The energy and chemical is a very robust business.

We're certainly benefiting from that.

If it all goes away, we'll have a big hole to dig out of.

You still there?

Looks as though that he dropped from the line.

We're going to move on.

Your next question comes from the line of Alex Rygiel with FBR Capital Markets.

Please proceed.

Thank you.

Good morning, gentlemen.

Craig, I have two questions.

Two questions for you, Craig.

First, can you comment on the perceived risk level of your backlog today, relative to maybe three years ago or five years ago?

And then can you also comment on the developments in the UK as it relates to some of the nuclear cleanup activity over there?

Sure.

Start with the backlog itself.

Frankly, I think the risk level in our backlog is as low as it's ever been.

Is that fair, guys?

It hasn't changed.

Yes, really, if anything, it's gone down a little bit because it's probably just a little less lump sum working backlog than there might have been five or 10 years ago.

It's pretty much the same otherwise.

Contract risk is down a little bit as I think we have mentioned on this call.

We've worked on renegotiating agreements, these long-term agreements to get our contract risks down.

I think we've made some improvements there.

So, if I think about our risk portfolio today, it's probably slightly better than it's been in the past.

With respect to the nuclear clean up in the UK, the good news is there is still $150 million at tier one level to be spent.

Very little of it is being spent.

The NDA is proceeding very slowly.

I think they're proceeding slowly to encourage more competition.

Their issue seems to be that they have so much work and there are so few qualified firms that they're trying to get more competition rather than less.

We'll see how that unfolds.

So things like the Magnox recompetes have been delayed a little bit.

That's probably good news for us, in a number of ways as we continue to participate pretty aggressively at the tier two and tier three work, and that money is still getting spent.

That helps us also increase our position and leverage for the bigger programs as they come.

In terms of individual things, we didn't compete for [Sala] Field.

We're expecting some sort of announcement in the next few months.

AWE has not yet been competed and we're still very much interested in that opportunity.

And the Magnox recompetes and some of the other programs have yet to come up.

So we remain just as excited as we have been collectively on -- for the market.

We're just disappointed it's moving a little slower than we thought it would.

Perfect.

Thank you very much.

Your next question comes from the line of Tahira Afzal.

Please proceed.

Good morning, gentlemen, and congratulations on a good quarter.

Thank you.

Just to start off with, in terms of the new guidance range, would you indicate what has specifically helped you push this range up?

Is it because your backlog is coming in stronger or the margins seem to have come in a little stronger than you assumed and hence probably have a longer deal than you anticipated?

I think, Tahira, it's a combination of the things you mentioned.

Backlog is strong and continues to be strong and we feel pretty good about backlog and where it is going.

Our sales team is doing very well.

And we're doing quite well in terms of sales compared to our plans.

Obviously, the strength in the margins is a positive as well.

So all of those things contribute to why we've upped the guidance.

Then if you move up, you know, between the guidance range, what would be the key drivers we should be looking out for that could push it out towards the top of that range?

Well, we don't typically give guidance within the guidance, so I'm not going to comment a lot on that, but clearly if we continue to see the strength as we go, you know, into the next three quarters that will help move it toward the top of the range.

If the economy does weaken and we start seeing that impact in any of our markets, that could be the things that would tend to maybe have it trail off a little bit.

So kind of in a macro sense that's the two kind of extremes.

Thanks.

Just one last question.

You know, you mentioned earlier on that in terms of Canada and the Oil Sands sponsor, talking about $60 oil being kind of the crossover point for them.

I know that earlier on, we talked about 45 to $50 as being the breakeven point.

Would this be like a $10 cushion, in essence, people are building in?

Or have the costs risen to push up the bar to around $60 oil?

I think a couple of things are affecting why it's $60 today and not $45.

One, the strength of the Canadian dollar is a factor.

Interestingly enough, all of the people who told me about this $60 boundary or $60 price point, we're talking about somebody else's projects, not theirs.

Fair enough.

So I think, in fact, there's a general belief that almost, that virtually everything that's getting done makes sense at $60 and above, but there are a number of people whose projects probably make sense at lower numbers.

And I do think there's probably a little bit of cushion because of the royalty issues and because of the strength of the Canada dollar that's being built in these days that wasn't there six months or a year ago.

Fair enough.

That's all I had.

Thank you very much.

Thank you.

Your next question comes from the line of Avram Fisher with BMO Capital Markets.

Please proceed.

Hi, good morning.

Thanks for taking the question.

Your TPS burn rates appear to be trending upwards, even though backlog is growing and revenue is growing.

Could you give a little color?

Are these projects getting shorter in nature?

Are you getting more productivity out of your workers in that market?

Not sure I understand the question.

When you say the TPS burn rate, the volume for the quarter in technical professional services compared to prior quarters?

That's the revenue divided by prior quarter backlog.

It was like 21.4% this quarter.

It's been trending upward.

It's how much revenue you're burning off of prior period backlog.

Okay.

Hadn't really thought about it.

So I'm not sure I can give you a good answer right now.

Okay.

Let me defer an answer to that question till I've had a chance to look at the numbers a little bit and make sure I understand the implications of the question.

I can circle back with you a little later on.

If that's all right.

If you just give us a call and talk to John, let me just look at the numbers.

I don't want to speak here without having an understanding of what I'm speaking about.

For sure.

No problem.

I have another quick question, though.

Sure.

You've talked about in the strength of this market you've been able to not necessarily get pricing because that's not your model, but getting better terms, and I wonder if the so-called pendulum sort of swings if there's weakness in other end markets, how those terms may change.

And more specifically if there are any issues with payments from owners, or to drill down if we can get any color on receivables and DSOs?

Well, our DSOs are remaining fairly steady.

So I don't think there's any real big swing there.

They'll change, you know, a day or two from quarter to quarter just because of when the quarter ends and of course, first quarter you've got the holidays and get involved with people shut down their operations.

So sometimes first quarter tends to extend a little bit just because people take all of their vacations not just here in the U.S., but around the world, It seems like there's an awful lot of vacations that goes on the latter part of December.

So some of the collections go on, but I don't see that as - there's really no significant changes in our business.

If you look at receivables, our biggest part of our balance sheet, but, you know, they grow and are pretty much in line with just the business growth.

Could you give us the receivable number or do I have to wait for the 10 Q?

The Q will be out Friday or early next week.

Appreciate the questions.

Thank you.

Your next question comes from the line of David Yuschak with SMH Capital.

Please proceed.

Congratulations, gentlemen, on a great quarter.

Help us a little bit maybe on -- get a little deeper on managing the costs of project inflation today, guys, because I'm -- .

We've got a situation down here in Dallas with our mass transit authority gone on a major expansion program and they'd commented here just recently because of the cost inflation of projects that we're going to go ahead with one project but going to have to defer on another expansion because of what happened in cost.

And I am just kind of curious, as you work with your customer today, trying to manage through some of that inflation and project investment costs, what are the things that's on their mind as far as -- as you said earlier wanting to make this project

I think the critical issues that they asked us to help them address in terms of forecasting the cost of these projects are really labor availability and material supply, particularly engineered materials.

So things like vessels, pipe, that sort of stuff.

Not so much these days steel or copper.

And what we've done is develop what I would characterize as models based on what's happened with the marketplace, based on current inquiry into what the local conditions are, to help us forecast what those costs are going to be.

Then obviously clever owners and clever contractors make sure they put in some allowances for escalation and some contingency.

Then generally if the project pencils, it goes forward.

Just a follow-up on to help them manage that cost, is it coming up an E&C company today to maybe look at some of the extra costs, those kind of pass-through costs on booking that business so less EBITDA in there?

Just help us try to explain, to to capture that knowing that your owner is a little bit concerned about that inflation projects?

For the most part, all those costs are pass-through.

They have relatively little effect on the bottom line numbers except to the extent that fees are a percentage of pass-through costs.

Sometimes that's the case.

But the issue really tends to be one of predicting things accurately and getting the right amount of money authorized.

Once the right amount of money's authorized, managing the process is just a matter of doing good business, good procurement, global sourcing, those kinds of things, to bring the project in under budget or on budget.

Sadly, that isn't always the case.

Sometimes, projects come in over budget.

There's no particular trick to it from how it affects the numbers' point of view.

Thanks a lot then.

Appreciate it.

Your next question comes from the line of John Rogers of D.A.

Davidson.

Please proceed.

Good morning.

Most of the market stuff you have talked about but I'm curious if you could comment just what you're seeing in terms of acquisition opportunities, I mean with some of the equity valuations coming down.

Are you seeing more opportunities out there?

What are you hearing from the private owners?

It kind of depends a little bit on the market in terms of what kind of behaviors you're seeing and how the owners are looking at things.

In places like infrastructure, we're seeing a - still a lot of activity, very robust, you know, I think that --

You mean, in terms of thinking about selling or looking at -- ?

Yes.

Thinking about selling.

We're in a cycle in some of these businesses where sort of what I characterize as the middle-sized players.

These are folks in the revenue range from a couple hundred million in revenue to maybe just under $1 billion are getting squeezed.

They have retiring shareholders.

They've got shortages of money and there's a lot of energy right now going into thinking about what the path forward looks like.

So we're seeing a good robust level of activity in terms of acquisition that can be done.

Pricing's down probably a little bit from where it has been in recent memory, mostly as a result of private equity not being as aggressive.

But it's not like things have gotten suddenly very cheap.

If you move into other markets, like upstream oil and gas, everybody sees a really long tail on the business, so everybody's flying pretty high.

There still are opportunities for acquisitions but pricing on those in some cases just isn't sensible.

Okay.

Great.

That helps.

Thank you.

Your next question is a follow-up from the line of Andy Kaplowitz with Lehman Brothers.

Please proceed.

Good morning again.

Quick question, Craig, on front end engineering design projects.

Are you still seeing the amount of projects like you were last quarter in front end engineering design, especially in downstream and upstream oil and gas?

Yes.

Absolutely.

The new prospects are, you know, every bit as strong as they've been any time probably the last 12 months..

Great and then a follow-up to that is you can notice when you look at some of the Middle East contracts that there's more Asian [E&C] competitors out there.

Then just I guess given the strength of the overall cycle Is that just because there's so much work to go around and we shouldn't worry about contract terms with these other guys coming into the market?

I don't think there's much concern about contract terms.

I certainly think that the volume of activity's attracting lots of people from lots of places.

Interestingly enough what the most of the Asian contractors seem to be most focused on is the actual execution of the work in terms of doing the detail design and construction in country.

Yes.

And those contracts historically have been more onerous than the front end and project management contracts have been, probably continued to be more onerous relatively speaking.

What we don't see is much competition from those Asian companies, the Japanese, the Koreans for the front end and PMC work.

That continues to be the province of the European and U.S.

majors.

That's helpful.

Thank you.

(Operator Instructions).

Your next question is a follow-up from the line of Barry Bannister with Stifel Nicolaus.

Please proceed.

Hey, Barry.

Hello.

Sorry, I got cut off earlier.

There was news recently of an equity offering by Jacobs.

I don't remember hearing anything about it, and I may have missed it.

Did you say anything about the timing of that or is that still on?

No.

We didn't have an equity offering.

What we did was, we filed a shelf registration and it's on the shelf.

What we have found is that, you know, each one of these acquisitions we've done have involved a little bit of equity.

And it just makes it much more expedient to have the shelf registration out there.

It's not an active offering or anything like that.

So it wasn't an implicit judgment about having a higher earnings yield on the acquired companies in 2007's bolt-ons versus the cost of funds in terms of the equity yield of the stock offered?

No.

Barry, in fact, our reason for using stock is to try to get the key people in the business to have some ownership of the Company coming in.

Years ago, we might have used options for that.

Given the costs of options today we prefer to put the stock in the purchase price.

I think it actually reduces our costs for these deals a little bit, and still makes owners out of the acquired company.

And the targets have a reason for taxes, particularly [ESAPS], for having equity, right?

For the most part, the equity is really driven by us.

It's always a point of negotiations, because in a lot of cases they'd rather have all cash.

It tends to be a small percentage of the overall so it's not driving the tax incentives for tax deferrals.

Yes, it's a modest number compared to this other purchase price.

Okay.

Thank you.

At this time, there are no further questions in queue.

I will now turn the call over to Craig Martin for final remarks.

Thank you all for joining us.

We had a really good quarter.

We're pretty excited about that.

We look to have some good quarters out in front of us as well.

We feel very good about the business as we sit here today.

I hope we continue to feel that way for several more quarters to come.

Thank you, everyone.

Thank you for your participation in today's conference, ladies and gentlemen.

All parties may now disconnect.

Have a great day.