雅各布工程 (J) 2009 Q3 法說會逐字稿

Good afternoon.

My name is Syleste and I will be your conference operator today.

At this time, I would like to welcome everyone to the Jacobs third quarter earnings conference call.

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

After the speaker's remarks there will be a question and answer session.

(Operator Instructions).

Thank you.

Mrs Bruner, you may begin.

Thank you.

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 actually 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 30th, 2008, including item 1a, risk factors, item three, legal proceedings, and item seven, management's discussion and analysis of financial condition, and results of operations contained therein.

And the most recent form 10-Q for the period ending March 31st, 2009.

For a description of our business, legal proceeding and other information that describes the 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 result of new information, future events or otherwise.

Now, I would like to turn over to John Prosser, CFO of Jacobs.

Thank you, Patty.

Good morning everyone and thanks for joining us us this morning.

I will briefly go over the financial highlights for the quarter and then I will turn it over to Craig Martin, our CEO for business overview.

If you turn to slide four of the package, you will see the financial highlights for the quarter.

We did have diluted EPS of $0.76 for the quarter and net earnings of $94.9 million the year-to-date EPS was $2.58 a share and the net earnings were $320.5 million.

On the backlog reported at $15.8 billion and I will spend a little more time on that in a minute.

The balance sheet continues strong.

There was some highlight information in the press release in our 10-Q should be filed later this week.

So the details will be available at that time.

Our net cash position grew to $1 billion, this is up $254 million from last quarter and over $450 million from the beginning of year.

So our cash generation ability continues to be strong.

As you saw in the press release, we have revised our guidance, narrowed the range to $3.10 to $3.35 for the balance of the year -- through the balance of the year.

This is narrowing from $3.10 to $3.50 that we had in the previous guidance.

If you go to slide five, the history of our earnings, you can see that we have added tremendous growth over the last four years.

We are in a flattening earnings cycle this year, but even with that flattening, the compounded growth rate over the last five years continues to be just over 30%.

Going to slide six.

talking about the backlog, you see the backlog was reported, as I said, $15.8 billion.

This is down from last quarter for the year-end.

However, the technical professional services was up about $300 million from both last quarter and the last year-end.

During the quarter, we did take $665 million work out of backlog.

All by $20 million of this came out of field services.

$300 million of this was the cancellation of a project, which in the upstream market, which had previously been on hold, and the other $365 million was a shift of pass-through costs to the owners responsibility on a project in the downstream market.

Adjusting for these project, total backlog was essentially flat with the prior quarter and prior year-end, just down slightly.

And moving on, I will now turn it over to Craig to talk about the business overview.

Thank you, John.

Good morning everyone.

I'm going to take a few minutes to talk about how we're going grow this business at 15% compound over the long-term.

And you will find that very little has changed about our approach.

We remain committed to your business model and I will talk about that in more detail in a minute.

We're going to continue to keep the Company diverse in terms of the market it serves.

Again, I will talk about more on that in a minute.

And then we're going to try to continue to grow multi-domestically and let me take a moment to talk about that now.

Our multi-domestic strategy involves following our core clients around the globe to the places where they have installed assets.

That is the part that lets us get a baseload of business and creates a stable earnings for our local operations, that we can then leverage into bigger projects for those customers as those customers invest in those areas.

Today, we're expanding aggressively in India and in the Middle East.

We see lots of opportunity to grow our business there and increase our market share.

We're particularly excited about the Middle East in that context, because it appears to us there is going to continue to be a high-level of the spend and there is a significant installed base.

You may recall a couple of years ago, we bought 60% in ZATE, a Saudi Arabia engineering company and that leverage is working quite well for us.

We're seeing good growth and we see now from our customers a much higher interest in doing business with companies like Jacobs, who have a local engineering presence, than perhaps some of our competition.

So we're pretty excited about what our multi-domestic strategy is doing for us in the Middle East.

We're also starting to penetrate China in a very small way.

Again, following our clients and pharma clients making significant investments in the R&D arena.

So we're establishing ourselves in both Shanghai and Hong Kong.

So I think our multi-domestic strategy is an important part of where we're going.

That localness and serving that installed base gives us a better base of work and better long-term balance in our portfolio.

Next, let me talk a little bit about acquisitions.

As we have told you for a long time, acquisitions are a critical part of our growth strategy and we expect to get something like a third of our growth through acquisitions.

As John pointed out, we're in a great position from an acquisitions point of view with $1 billion of cash on the balance sheet and there are lots of opportunities materializing out there.

I think we suggested for some time this economic environment could start to create acquisition opportunities at lower multiples and that would be more attractive.

That is clearly starting to happen.

We're seeing some interesting deals in key markets.

Upstream, for sure.

Infrastructure, both in transportation and in water and waste water and aerospace and defense, all markets that are interesting to Jacobs.

Not suggesting that we have an imminent deal or anything of the kind, but I do think the markets are very good.

I do there are interesting opportunities and expect over the next few quarters to capitalize on those.

The next bullet on slide seven is driving down costs continuously.

We have said for a long time that we think an participate part of being able to compete and compete profitable in this market place is the ability to drive down your costs.

I think we're doing a good job of that.

I think you can see that in the numbers.

We are done from an SG&A line almost $48 million from a year-ago.

That 22.6% reduction.

We see the opportunities for continuing opportunities in your cost and we think we can remain competitive on a cost basis for some time to come and be able to weather through any margin pressure in this market pretty well.

With that, I am going to go to slide eight.

This is about our relationship business model.

It's a little bit of a idealized model in terms as we particularly point out the industry, there is no particular competitor that that represents, but we have the three categories of projects.

Let me just define those categories again for you.

We have the preferred relationship category.

That involves long-term relationships with customers and in general those are alliance agreements, strategic sourcing agreements or some other formal or informal definition of a long-term relationship.

They usually do not involve any significant price competition.

Sometimes their sole source and sometimes more than one of each EPC contractor may hold a preferred relationship.

In those cases there is limited competition on the basis of expertise and technical team availability; but it is a relatively low risk and low competition-based aspect of the business.

The second category is discrete projects.

Discrete projects tend to be for customers that we know.

They tend to go off some part price competition and some part competition on the basis of capabilities and skill and team and usually are some kind of repeat business.

The third category is transactional projects.

These are the things that are lump sum turnkey, competitively bid construction, big events in far-away places and usually involve significant risk compared to the other two categories.

When you look at the way our industry does business for the most part, our industry focuses on that last category.

Transactional projects.

That is an area which is getting very significantly increased pressure right now, in our view, as we see lots of customers going back and relooking at their estimates and looking at recompeting parts of the work, trying to drive down their costs.

So the transactional side of the project's business is certainly one that is going to be more difficult going forward.

Preferred relationships and discrete projects, I think will be more stable as we go forward, although there will be some margin pressure in those areas.

As we look at it, our model differs significantly from the industry model.

We're not focused on the transactional projects at all.

Our focus continues to be on the preferred relationships that we have with a group of core and key clients.

Our core clients still remain about half of your business, and are very strong contributors to ongoing business as we go forward.

Our baseload business represents more than a third of what we do, and our repeat business is running at about 90% of our work.

This baseload that we have in these preferred relationships, think position us very well very well well as we go forward.

Clearly there can be some risk in the baseload work.

Customers can cut back on their maintenance funding, but in the long run, the small-cap maintenance funding, alliance engineering work is the most stable part of the engineering business and the most stable part of the maintenance and construction business.

So we think our model is ideally suited for the time we're in.

There is a fair amount of uncertainty in terms of what is going on and what is going to go on.

The kind of work we do I think fits best in that regard.

If you think about a refinery, 1% of replacement value has to be spent every year, 1% to 3%, depending who you talk to.

Every year to maintain the asset.

So while you can cut that back for a little bit, you can't cut it back for long and that is probably one strongest parts of owe business.

I'm going move on to slide nine.

This is our market diversity slide.

I'm going to try to go around-the-clock, clockwise, for a change and start at the top.

I'll start by talking about pub and paper, high tech, food and consumer projects, products.

It's about 4% of our business.

It is dominated by alliance and small-cap arrangements and frankly, it's growing fairly nicely.

It's a small piece of the business growing nicely, so it may not have a lot in terms of swinging the needle, but what has been interesting about the recession is that it's driven people to eat at home, to buy more package the foods to drink beer rather than wine.

It's interesting what is happening.

So a number of our customers, particularly on the food and consumer products side of the business are seeing some nice growth and we're a beneficiary of that growth in that marketplace.

So that may be the place where the end of the recession is actually negative for the business.

I hope not.

Moving on to chemicals.

The chemicals business is still very slow outside of the Middle East, but the Middle East is strong.

There is a lot of activity there.

A lot of big projects and lots of opportunities to participate in those big projects in various roles from feed and mmc to engineering support for the various contractors and various design assignments for doing things like the outside battery limits kind of work.

There is also some activity there in polysilicon in the chemicals business, but it's clearly weaker than it was two or three-quarters ago.

Big drivers for us remain baseload work.

We have a very significant part of our business in the chemicals world that is baseload and that continues to be a good business for us, and oil prices will drive investment to some degrees, particularly in the Middle East.

If prices get really weak, we could see pull back in chemical business.

Otherwise I think that business will remain pretty steadily as we see today.

Moving on to the oil and gas business upstream.

Two or three markets that are important and let me start with the oil sands.

The oil sands business appears to be re-energized, although I will tell you it's a little bit of a bipolar business right now.

We have had a number of new awards and we continue to see lots of project activity.

We have identified some 32 projects that are plus or minus $3 billion each in scale that we think could go in the oil sands over the next few quarters.

But at the time, there is a I'm scared/not scared attitude, so we have seen some projects get canceled.

For example, the cancellation that John referred to was a project in the oil sands.

And that will probably be a little bit of the case going forward.

So we'll see some things that get to go and then we'll see some stop and see some others go.

A lot will depend on oil prices.

So as oil prices remain stable, if they move up, I think there is more strength in the oil and gas business on the tar sand side for us than not.

We're also a very strong player in gas, both in terms of gas plants and gas storage, and there is very high activity in that industry right now.

We're seeing a lot of opportunities on the gas plant side in North America and the Middle East and on the gas storage side, mostly in northern Europe.

Because of our strengths in those areas we think that part of the business is going to continue to be good for us.

We have looked at what our clients are planning to spend in the upstream arena that we think is accessible to us and we think that could get to be close to $100 billion of work that we might have access to over the next few years.

Next couple of years, I should say.

A couple of examples of what is going on.

We just won the gas storage job for GDF SUEZ.

We had a press release where we picked up reliability maintenance work for Sun Corp.

So you can see there is work being let.

Other work that we can't talk about because we can't press release it yet.

But it's a business that I think is strong and our ability to participant is more a function of us being able to take market share in the areas that we have strong credentials and capability than anything else.

Clearly, oil prices drive the business and as long as they are stable or trending up, I think we'll see the markets improving.

Moving on to refining and the downstream side of the business, our clients continue to tell us that they are going to invest.

A number of our clients have traditional invested in the down cycle, because they like the costs of doing so.

And right now, we can see from your core and key clients in the refining business, potential spin of about $30 billion on an annual basis.

Some of that is driven by environmental.

We have the MSAT, the benzene removal, we have the national point source stuff.

That is driving $5 billion to $7 billion of work.

Some of that is now in construction and some is still in engineer and we think that will continue to go forward for a while.

In particular, the point-source work under sub-part JA is positive for us because it's smaller projects, but lots of them and it fits our business model and our geographic distribution and our sort of local marketplace very well.

We have also got Marpol six coming out the chute.

Long term, $80 plus billion in investment and probably something $3 billion to $4 billion next year.

So we see that one as a positive and we continue to have a lot of active with our customer as they fine tune their refineries to accept crude slate changes.

That is gooding to go down some as we see the price difference between heavy sour crude and light sweet crude compress.

When that price difference opens up, I think we'll continue to see additional investment there.

We don't think we'll see much in the way of capacity additions.

Demand is generally down in the western world and as a result, I don't think our customers are going to be looking to do capacity expansion, but there is enough environmental work to be a pretty positive driver and frankly, the new administration looks to be a driver from our perspective.

Our customers won't like it, but it will generate significant work if the administration continues in the direction that they seem to be going.

Again, this is also a business where we have lots of baseload work.

Small-cap, maintenance-kind of work.

So our business is more stable than I think the overall industry might be.

Moving on around to infrastructure.

That is for us, largely a transportation and and transit business.

The Stimulus Bill will be more positive for us than I expected.

We went through an analysis of the work that we'll get out of stimulus in the near term, particularly, 2010 and it's a bigger positive by quite a bit than I would have thought.

The dark side of this thing though is whether or not we get the Federal Transportation Bill authorized.

I think that is very important to how much growth the industry and Jacobs can see in infrastructure going forward.

The stimulus issue and the combination of two issues become whether you warm up the cold coffee a little and it's lukewarm or refill the cup and it's hot.

I think we'll have to see what happens in Washington on the transportation bill to really where that business will go.

But right now, we're pretty positive about it.

We're positive about it for another reason.

Remember, we talked about a lot of bond issues both in the infrastructure and buildings business on several of these calls in the past of the bond issues continue to pass at a pretty high rate.

On top of that, they are now starting to fund.

We went through a period where the crisis on Wall Street pretty much put the funding of many of these bond issues on hold.

With the Build-America Program, as part of the stimulus, we're starting to see the bond issues start to get funding.

Build-America gives our customer a 35% discount on the interest rate and that is pretty significant.

There is a substantial amount of money available to help our customers get funding for their projects through this Build-America bond program.

And we think that is going to start to loosening up some of the bond work that was not moving along, like it was -- like we expected after the November elections.

So that business looks pretty solid.

It could look really solid if we get a good transportation bill out of the folks in Washington, DC.

Moving on to buildings, also affected by bond issues, just an additional comment on that.

We're a big player in schools around the US, in particular.

We have 18 bond issues on the slate for passage and we think 16 of those will pass.

16 of those have more than 60% favorable support from polling.

So there is going to be very significant bond programs out there for the schools business where we're a big player.

We're also a big player in technical buildings for government, in healthcare, in higher education and corrections, and we're seeing there, as well, a very strong stimulus effect.

In particular, the government buildings' work that we do has been pressured enormously by stimulus.

Our customers have gotten a fair amount of stimulus money and they really need help spending it and we're going to help them So that is a positive for us.

Another other positive seems to be coming out of the administration's focus on increasing the size of government.

I know they don't describe it that way, but that is what is happening and as a result, that is also driving some government buildings' programs.

Because we have to have a place to put all these civil service workers.

So we actually think that that business is going to be very strong if the administration continues along the lines that they seem to be going there.

It won't be quite as strong if there is a sudden shift back to the private sector for of these inherently governmental services.

That is certainly not the position that the administration is taking.

Moving on to national governments.

You will remember that is two parts of your business.

The first part is environmental clean-up.

That has been a positive for us, particularly, because we're seeing good stimulus funding coming into projects and programs.

We're already working on, so those are pluses.

We also still have almost all of that NDA money in the UK, that $150 billion that remains to be spent.

The NDA continues to be glacially slow in awarding new contracts, but the work is still there to be done and I think we feel pretty positive about it.

There are a number of specific prospects coming up that are pretty significant to make a real difference, move the needle a little bit.

So we see that as a positive.

We also see the administration as a potential positive for environmental long-term.

I think that is one of the priorities that we'll see some energy put in that will affect your business in both clean-up side and the greenhouse gas side of our private sector customers.

The only real issue that we see there is just timing, but I think overall, this one is going to be pretty positive.

On the other half of your business for the aerospace and defense-related work that we do with research and development, test engineering and scientific engineers and technical services, we have done a terrific job of adding share.

I will point to your press releases for the last quarter or two, you will see that we won a number of new assignments and that we have been very successful in winning recompetes of our existing work.

So we have done a good job of adding share.

A couple of things that are happening positively there, we are clearly seeing an increasing focus by the administration on organizational conflicts of interest, and these services, the bulk of our competitors who provide these services are in fact, the big defense contractors and they have an inherent organizational conflict of interest problem that the administration is placing sort of at top-center as the issue.

So we think that our competitive position is actually being enhanced by what the administration is doing So that is a positive for that market.

There is the potential of additional insourcing by government, and that would obviously be a little bit of a negative.

There is some uncertainty about where spend will go on the national government side related to research and development and aerospace and defense issues, but I think overall given our position, we're upbeat about your continuing to grow and maintain and command our share of the work that we do.

It's a good business for us.

Finally, turning to the pharma-bio market.

This business is driven by drug discovery for the most part but the vaccine business looks to us it's going to be strong.

There is a lot of fear out there and there are projects driven by governments who simply want their own national source of vaccines.

So even though there is lots of vaccine capacity in the world, everybody wants to own their own and that seems to be driving a fair amount of project activity.

We also had the privilege, I guess, of being the last man standing in this market.

We have a significant share here and commanding set of skills and that is driving a number of awards of new projects for us, none of which we can seem to get a press release approved about.

Obviously, healthcare reform could be a risk here.

The last time we had a real serious initiative in healthcare reform that people took as lately to happen, the industry cut way back.

We haven't seen them cut way back yet, but you can't ignore the possibility that that is out there.

One of the things that we liked about the pharma business and buildings business both are the demographics are pretty positive.

I will focus on these two.

The aging population that affects most of the western world is going to drive demands for drugs and healthcare, and we're positioning ourselves to be a very strong players in those markets.

We already are and we think that will result in a fair amount of long-term leverage as we go forward.

So that is kind of how we see the markets right now and what is going on.

Let me go to slide ten and give you the sort of commercial appeal.

I think we have a good business model, one that works particularly well in days like these.

Our diversification in terms of markets and geography and services continues to help us.

Our cost focus is to put this in a dominant position to make money under difficult economic circumstances.

We have got a rock solid balance sheet and we continue to believe that we can grow 15% compound over the long-term or better.

So we think that is a great story from an investment perspective.

With that, I will turn it over for questions.

(Operator Instructions).

Your first question from Andria Ward with Robert W Baird.

Good morning, gentlemen.

Good morning.

I wonder if you could address the implied guidance for Q4.

It's a fairly wide range.

Give us more color and understanding.

One, why the range is so wide and what are the key swing factors getting to the top of the range to the bottom of the range, essentially.

The range is wide because we like to keep it that way.

The market being what it is and there are so many different dynamics going on that we just feel more comfortable leaving a fairly wide range.

We started the year with a wide range and now as we get closer to the end of the range, we have narrowed it a bit, but it's still a broad range.

We realize that.

So many factors going on with so many different markets, we feel it's appropriate to keep it fairly broad.

Just given how great a job you have done in controlling SG&A costs, would you say that maybe part of the range could be more of a concern what happens on the top line versus you controlling your costs?

Would that be a fair estimation?

I would say that we probably have a better control of our costs than we do of our work through.

We certainly have a better control of our costs than our customers.

That would be a better way to put it.

So yes.

Fair enough.

On your engineering backlog.

It was up sequentially, but wondering if that is function of new orders coming through, but is it really more of a slower burn rate?

That is a function of new orders for the most part.

Great.

Great.

Thank you so much.

Your next question comes from the line of Michael Dudas with Jefferies.

Good morning, everybody.

Good morning, Mike.

Craig, if you could generally, I know you have a lot of different businesses, but the amount of incoming or proposal activity from your clients resistant to six months ago, better?

Same?

Or less?

It varies by market, Mike.

So let me just try to characterize it to broad categories.

In the public sector businesses, the level of inquiries are up mildly.

A little weaker in Europe than they are in the U.S.

This is partly a stimulus thing, but not so much because of stimulus money, but because of the pause that stimulus caused in people deciding to release projects.

So I would say pretty much across the public sector, things in terms of prospects, both prospect quality and number of prospects, are a positive.

We go to the private sector, it's more a mixed bag.

Leaving out the pharma-bio and food and consumer products kind of stuff and just focusing on the heavy-process area, there seems to be a significant number of projects.

So it's not like the number of projects has gone down, but the size is smaller and the distribution is different.

So the effect has been that there I would say the overall prospect quantity, if you consider both size and number, is done a bit from where it has been.

But the good news for us is that the smaller projects are our chances of winning go up significantly in $100 million and $200 million projects.

So I think the prospects for our company are probably better than what the list could suggest for the industry.

Does that make sense?

It does, Craig.

When you talk about your baseload and regulatory-driven business in your model, can you characterize that where you are today in looking out to 2010 and '11?

Can we characterize as your baseload business seems solid, but we need more confidence to get reasonable projects to get booked so you can start working through the next couple of years to portray where the Company's growth outlook is?

Well, let's see, starting with kind of where is the baseload business.

The baseload business is north today of where it has been historically.

Partly because we continue to add significant work to the baseload business.

Our reputation and our capability to deliver on this business has never been stronger and we're getting increasing recognition from our customers that we're really good at this business.

So the drivers going forward is that we'll see an ongoing increase in baseload work, but that will be tempered by our customers cutting back on how much they spend in the aggregate.

So I think baseload business will increase as a percentage going forward.

I think it will represent some growth for us, but it's certainly not going to drive boom-time kind of growth as we look at it today Does that answer your question?

It does, Craig.

And one final question.

Characterize the next couple years contribution from your initiatives in India and China.

Let's see, I don't think either initiative in and of itself either from the P&L derived in country will have major impact in terms of moving the needle.

Let's face it, if takes a lot of rupees to make a dollar.

Even with the very substantial presence in India and I think shortly we will be the largest engineering company in India, period, end of story, it still takes an awful lot of rupees to push through.

We're be able to leverage that presence from India predominantly on the work share perspective to take bigger share globally and with respect to China, I think we'll be able to leverage our presence there into participation into bigger projects and programs where the significant part of the work will be exports that will drive better numbers for our Company in some of our established offices.

So I like the initiative.

I think it's a positive for our Company long-term in lots of ways .

But I wouldn't expect the two countries themselves would swing the needle

Thank you, Craig.

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

Thank you.

Good morning, gentlemen.

A few quick questions.

First, as it relates to pricing, can you comment on whether or not pricing is holding up or becoming more competitive in the two public-private sectors?

Sure.

Let me start with kind of an overall comment about pricing and then I will split it out.

Overall, we're seeing pressures on margins and unit managers are declining slightly.

That is bad news.

The good news is that the decline is smaller and slower than I would have told you we would expect from previous cycles.

So it's kind of a good news/bad news kind of thing.

When you split it, and look at the private sector markets, particularly heavy-process, their margins are moving down a little more aggressively than the average, but not, as much as we have seen in the past.

That might mean the worst is yet to come or it may mean this is going to be a little softer cycle because everybody's margins were low to start with.

But we do see downward pressure in the heavy-process business, in particular.

We think that is going to continue and just a question of how low will it go?

I'm of the opinion today that it may not go as low as it did in the last cycle.

So that is the good news point as well.

On the public sector side, and awful lot of that business is not price-sensitive.

So we're getting very little pressure on margins in that area.

There is some pressure in areas, like design-build work, where we work as a designer supporting some contractor.

There is still a little pressure in the aerospace and defense arena, but not significant.

So there, I think, the margins are holding up pretty well and that I that I is part of why, overall, why the margins are declining more moderately than what we expected.

And my second question.

You identified the one upstream project of $300 million that was canceled in your backlog and you mentioned that that project was put on hold.

Can you attempt to quantify or identity any other projects that are currently on hold in your backlog.

We looked at that.

We don't have any reason to think that the remainder of the backlog would get canceled.

Of course, as I told you, some of our customers are a little bipolar about this.

But right now, we think that the things that are in backlog that I would characterize as deferred are actually starting to come back to life.

So we see that as a mild positive.

It all depends on what oil prices are and the economy does.

The other piece on the refining side actually has no financial statement impact other than the pass-through revenue is not on our books any more.

So from a P&L work hours, the things that drive our business.

That particular change was just the customer doing the procurement on their pay -- us doing the procurement for the customer on the the customer's paper, as opposed to us doing the procurement on the paper.

Very helpful.

Thank you.

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

Hi Jamie.

Good morning.

Good morning.

Just a follow-up question on your Q4 guidance.

Can you -- I know it's obviously a top-line issue, but you could speak to the one or two markets that is driving that, or is it a particular project or two that is driving that wide range?

And also, I'm just trying to think about Q4 and what the implications are for 2010.

If you take the mid-point it assumes 260, and again is another down-year.

So in order for you to have up earnings, how dependent is it?

Do we need to get more aggressive on the acquisitions, and what are your expectations for oil and gas picking up in the next quarter or so to help 2010?

Well, I will let John comment on the the wide range here in a minute.

Let me just talk about what is happening in industry from the standpoint of what we think might happen in '10 and particularly in acquisitions.

It's still an industry that is highly uncertain.

You saw must quote in the press release and we talked about this on the last conference call.

I think uncertainty is a big factor still going forward.

When I talked to our customers' CEOs and I talk to some of our competitors' CEOs, uniformly, we're still getting the response that I mentioned last time, which is my business is not so bad, but.

And the "But" always involves cutting back and being cautious and those kind of things.

So how cautious our customers are going forward.

You have some people out there declaring that the recession is over, and you have some other people declaring that we haven't even hit bottom yet.

So those uncertainties are translating into confidence problems in our customers that makes the path forward kind of murky.

With respect to acquisitions, I think we have said this before.

I'm sure we have.

You can't really make acquisitions that have significant earnings impact in the year in which they are acquired.

Because the amortization of goodwill and the way that the accounting treatment for the acquired asset works, they don't have a big impact on earnings.

You might get out of a sizeable deal.

You might get a penny or two or three, but they are not going to be a big swing.

The bigger swing tends to come when the amortization expires.

So the to the extent that acquisitions help us next year it will be more of a function of deals that we have already made than deals we will make.

Does that make sense?

That makes sense

John, you want to comment on the guidance.

The guidance, the wide range is one that we're going to probably stay with.

There is a lot of complexity in the markets.

As Craig has touched on, clients are watching their cash flows closely and so things can be accelerated or decelerated over the short-term on projects which can affect the work up and man hours, work hours going through our books.

we are seeing, even in the public sector, where there is some spending pick up or funding comes from stimulus.

Some clients are using that to accelerate their own or keep their own employees busy as opposed to putting it out to contractors or folks like us.

There is just a lot of uncertainty in how the work is released and how the work works through.

So there is a range just in the pure number of work hours put through in the quarter.

The other side of it is that we had good success at reducing G&As in line with the reductions that we have seen at the top line, the gross margin.

But as we go through that, it becomes more difficult and there are pressures on that.

So are we going to be successful in keeping the trend down as you reduce people and such.

You get some auxiliary costs, like healthcare costs and people go to the doctor, making sure things are done because they have a concern about being laid-off.

So you have an acceleration in some of those costs.

So there is a lot of complex elements and there are multiple elements moving and we thought it was appropriate to keep a fairly wide range looking at the fourth quarter.

In fact, we argued it's not a wide range, but it reflects the uncertainty of the marketplace.

I guess a follow-up question, as I think longer term, there are two things that would make me believe that if things do recover, Jacobs might be see the benefits.

One, we're seeing the markets move towards more towards fixed price.

A couple of projects that have gone ahead have fixed price and the low-bidder has gotten it.

I guess just the other question, you know on the upstream side, Jacobs is still very focused on the oil sands.

I wonder where we should focusing because that is the one area of the world that seems to have more stops than goes relative to a place like the middle east.

Does it make sense strategically to focus on other regions or to reduce your exposure to the oil stands because those seem to stop and go depending on the wind.

We like our exposure to the oil sands to be smaller because our exposure to the upstream business is bigger.

There is no reason for us to think about down-sizing our business in Canada.

It's a terrific market.

We're a dominant player in SAGD.

We have a really good reputation in that part of the world.

So there are lots of opportunities for us to grow and we'll have to learn to deal with whatever their cycles are as we go forward.

But the bigger opportunity, obviously, is the expansion of our business into other upstream arenas.

And I think we're in a great position to do that.

As to the lump sum, yes, there are a lot of work done lump sum, but somebody has to engineer it first.

By that, do the feedwork and do the front-end and as the largest EPC engineering contractor in the business, we usually benefit from that upsurge in engineering and then have less of a construction tail than some of our competition.

Okay, thanks I'll get back in queue.

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

Good morning.

On the SG&A, Craig, let's say your business is flat at current levels.

How much more SG&A do you still think you can cut?

It doesn't sound like you have reached the point that you have taken out everything material that you can.

Well, we always run a pretty tight shop.

So getting G&A out of Jacobs is is not an easy thing to do, but I believe there is still opportunity to continue to drive our G&A down significantly over the next few quarters.

If always comes harder as you get further down into the number; right?

You start facing redundancies in Europe, because you have laid off your contractors.

You start to have to deal with leases and vacancy and space that takes longer to get rid of, but I'm still confident that we can get a significant amount of money out of our G&A over the next few quarters, if that is what we need to do.

Some of the other things that we have already done don't get the benefit immediately.

Some of those have a tail that the benefit actually gets better as you go down a quarter or two.

So do you think you can offset the pricing pressure or do you still expect weakening in the operating margin level?

I think there will be some weakening in the operating margin level.

I think we'll offset a chunk of it, but there will still be a bit of a down draft there, net/net.

Okay.

Relative to your expectations were the growing markets not growing as much?

It was it both or was it something else?

I think I hinted at this in the press release, but we expected that the public sector markets would be stronger and offset a lit more what is happening in the private sector markets than they did.

It's a function of slowness of stimulus, slow starts on projects, these holdups in bond issues, things that I think now we're starting to see now release, that represented the challenge in terms of looking ahead.

Again, we're living in uncertain times.

That is fair.

And just lastly, let's say the transportation bill is delayed 18 months, but stimulus works out nicely the way you anticipate.

Does that mean you still think you can grow your infrastructure business modestly next year and how much is a factor of actual state budgets?

The health of state budgets is a key factor, so the resection impacts on taxes are an issue there.

But if we get a delay in the transportation authorization, but stimulus goes like it looks like it's going to go, I think we'll be able to grow modestly.

High, single-digits, maybe.

If If the transportation bill goes, I think queue with do a little better.

And of course, all of that depend on not having a double-dip recession.

Because a double-dip will throw what we're talking about out the window.

Okay.

Thanks a lot.

Appreciate it.

Your next question comes from the line of Andy Kaplowitz with Barclays Capital.

Good morning, guys.

Good morning, Andy.

Excluding a double-dip recession, if we're thinking about the future and we're looking at your quarter, you booked from my count, $2.5 billion in gross new awards.

Which was down a decent amount from last quarter and what I hear on the conference call is some things are good and some things are bad and I think what we're trying to figure out is, can you do that kind of new awards going forward or more?

Have things weakened enough in that 2.5 that that is sort of a baseload amount as we go forward and things could get better or could we see weaker than $2.5 billion.

First of all, we remind you of this fairly often, backlog is really lumpy.

Because it is revenue backlog, it's affected by what kind of construction dollars are getting backlog.

What kind of pass-throughs are out there.

So it's a little difficult looking at any one quarter to say, that is the bottom part or the benchmark or whatever you want to call it.

I felt like this quarter was a decent, but not great quarter for sales.

And without trying to predict the numbers, I think we ought to be able to sell in that range or better going forward.

That will depend, I think, a lot on the public sector.

I don't think there is as much construction dollars out there to get as is usual.

So that may make the backlog numbers look softer than they are.

Right?

Customers are being very careful when they award fees or even when they are talking about awarding detailed engineering they are holding back construction.

So part of why you see the nice uptick in technical/professional services backlog and the down tick overall is that exact issue.

Some some good new awards on the engineering side that don't reflect construction.

They may but I suspect it may be quarters out.

So the long-winded way of saying, I think what we're seeing in terms of business is about what we are going to see for a while.

Got you, but, Craig, is it fair to say that if oil and gas activity stays exactly as it was in the quarter and stimulus starts to kick in like we think it should eventually, that things might look better than worse in terms of awards excluding lumpiness, of course.

I think it's far to say that.

Could you go into SAGD more.

You have talked about in the past, Craig, that in the oil price for SAGD to go forward is a decent amount lower than other types of oil sands work.

So where are we?

Clients just you been certain of drifting oil right now, so they are just waiting, but they are close on these projects?

I would say that describes it very well.

Our conversations with your customers in the SAGD world, they are all talking about reinitiating or releasing investment if oil prices stay in the range where they are and appear to be stable in that range.

So the things that they are looking for and think one of the Canadian forecasters here a couple of quarters ago had said it right.

It wasn't so much the price as it was the uncertainty that drove a lot of stopping of projects.

And in order to get a feeling of certainty back, there has got to be a reasonable stability of oil prices in a solid north of 50 kind of range.

If we get that, I think we're going to see a lot of release of new project work or release of delayed project work, as the case may be.

Even if the average price of oil stays relatively high, but oscillates significantly, I think that will be a negative for investment.

Thank you.

I will get back in queue.

Your next question comes from the line Andrew Obin with Bank of America Securities.

Yes, hi.

Hi, Andrew.

In terms of the margin and I apologize for beating this sort of horse to death, but if I look at margins back in '03 into '06, which was still a pretty decent time period, they were quite a bit below versus what we are right now.

And given your comments, sort of forecasting a more mild recession in terms of contract, I guess, pricing that it's better than you think, if you go back to when things are really bad, margins were lower than '03-'06.

So where do you think the margins bottom was '03-'06 was a reference point or it's too early to tell?

I wouldn't say that '03-'06 is necessarily a good reference point and the reason I suggest that is that we made a significant number of acquisitions in the infrastructure space in that period.

'04, '07, '08, all brought big chunks of infrastructure which carries higher margins and is less price sensitive into our numbers.

So I don't think that '03-'06 would be representative of our business.

That is a very clear answer.

Thank you very much.

Your next question comes from the line of Will [Kabruski] with Broad Point.

Thank you very much.

One quick one on AWA that you closed in June, any impact to the numbers that you reported at that point?

AWA was slightly positive, but it was -- as we say, it was not a move-the-needle kind of thing.

But it will be slightly positive going forward.

Was there any backlog associated with that that in any way that was consolidated.

No.

Okay.

It's one of those things that I think there should be backlog, but the rules don't allow it.

We have a pile of projects in the Company because they are owned companies or the way in which the ownership of the actual entity doing the work works, we don't get to put any significant backlog on our books.

And so sometimes some of these big wins, things can represent real generation are no relationship to the backlog numbers.

Could you possibly provide guidance for the run rate of that business might look like.

I'm not sure if you are would be willing to do that, but that would be helpful.

I'm sorry?

The run rate what we could expect or color historically what that business may have generated.

First of all, we're one-third owner of AWA and will come through as our share of net operations.

As I say, it will be a small positive and it will be a fairly steady type of contribution, but it's not a move-the-needle.

It's in the kind of one-two cents a quarter type of thing at best.

That is really helpful.

Thank you.

The framework agreement you signed in the quarter with Abu Dabi National Chemical Company, Can you maybe give us some color beyond the press release and your expectations in the agreement in general.

What the opportunity looks like over the next few years or several years?

No, we really can't.

We're very religious about not doing anything that hasn't been approved by the customer from a press release point of view.

So what you see in the press release unfortunately is what you get.

Fair enough on that one as well.

Last one for me.

In terms of Middle East in general and obviously what you are making there, could you update on what your headcount was in the middle east and the bigger picture.

What is the competitive environment and what prices looks like right now?

There has been a lot obviously written about in the news and competition coming out of Asia and how you fit into that competitive matrix and fill your position from a pricing standpoint, things being dominated in dollars, versus some of the competitors who are not.

Headcount question, headcount has grown modestly quarter-over-quarter.

I don't have the numbers in front of me, but we are up a little bit.

There is two or three trends going on that are interesting.

There is a fair amount of work that is being competed or recompeted on a lump sum basis.

We will not be a prime competitor to that kind of work.

We enjoy a pretty good position in country and I'm talking specifically about Saudi Arabia right now.

So we're the engineering contractor for other contractors doing that kind of work, which is good business for us.

Yes, there are pricing pressures but no more so than on the Gulf Coast of the US.

In terms of what is happening marketwise, the customers there have concluded that the business model that Jacobs is using is attractive.

And we're actually seeing some changes in the procurement strategy of your customers to better utilize companies like Jacobs.

And that is a pretty small set of companies relatively speaking.

So we're actually pretty excited where had that might take us longer term.

And beyond just the pricing, maybe some of the terms in the contract that are being let right now, any color in terms of that as well of the your comfort level from a risk standpoint.

We're seeing more than an adequate supply of work that is work from a risk point of view that we would be comfortable with.

The lump sum turnkey competitively bid stuff, I couldn't tell you the terms are better or worse than they were, because we're not looking at it either way.

Fair enough.

Last one for me.

You might have addressed this already.

But could you quantify what is deferred in backlog?

What percentage of your backlog would you consider projects that are deferred or delayed today posted on the cancellations that you have had?

I don't have that data.

A range?

No, I haven't gone back to try to add that up.

I could do that, but I don't have it in front of me today.

I don't think it would be a very big number frankly.

I will follow-up you.

Thank you very much.

Your next question comes from the line of John Rogers with DA Davidson.

Hi.

Good morning.

Hi, John.

Just a little bit of follow-up.

Craig, you talked about your baseload business.

What portion of your business right now would you put into that category?

It's probably pushing 40%.

Okay.

And the rest would be more discretionary construction.

It's more specific project-related than ongoing maintenance capital kind of spending.

What is in baseload tends to be maintenance capital and small projects, small projects generally under $20 million in size.

Okay.

And then what is above that, what we don't consider baseload would be the $50 million, $100 million and $1 billion and that makes up the rest of your book of business.

A lot of those projects come to us because we have the baseload position.

So the leverage and baseload is not just volume, but positioning for whatever investment above that they are threshold level.

Looking at your backlog numbers and your bookings, you give us technical and professional services, still ramping up, but the field service, obviously, coming down pretty sharply.

Given your current mix of business compared to past cycles, down turns and upturns, do you expect the technical services to lead the cycle, lead the field services still?

Absolutely.

We find that the engineering business is really where you power out of a down turn.

Okay.

And when we talk to your folks internally, that is what we talk about to be in a position to power out of that down turn and it all comes down to the fact if you maintain share in a down cycle, you get a bigger share of the upcycle.

And one of the reasons we real lie like that baseload work as a percentage of the total marketplace, our share goes up during the down cycle.

So we really feel we come out of the cycle early and strong.

We got the people.

Yes.

And is that business what you refer to when you talk about your home office staff being about 40% public service work?

Well, the home office business, which is engineering procurement, various other kinds of services, is 40,000 people plus or minus globally and about half of those folks are involved in public sector project work or alliance work or small-cap work.

The other half are involved on the engineering of the maintenance capital, small projects, bigger projects for your private sector customers.

The field services portion is staffed in the field, and that number is always smaller, considerably smaller, than the home office side.

Okay.

But those are all out of the home office, the field services?

Yes.

Okay.

Great.

That is helpful.

Thank you.

Your next question comes from the line of Tahira Afzal with Keybanc.

Gentlemen.

How are you?

Surviving.

Just wanted to ask you in regards to your margin commentary, it seemed incrementally more positive than the prior quarter and I recall that in the last call you mentioned that you thought there might be the second quarter would be fairly critical in gaging competitive pressures on the processing side.

So could you first comment a bit on what has transpired in the bidding season in the second quarter and is your commentary incrementally better because you haven't seen the level of competition that you perhaps thought you would.

I would have to say that the margins are incrementally a little better than what we expected and that in part is from less competition than we thought we would see.

By this time in the cycle.

And also, I think by more of our baseload and alliance related work.

Remember we told you what the market was going up like gangbusters, our margins would tend not to move up as rapidly and that they thought in exchange for that, that what the market went the other way, they won't move down as sharply.

At least to this point that appears to be true.

There are lots of procurement people trying to help us fix that, but at least to this point we're doing okay.

The procurement goes down, does that help your margins as well?

Certainly as a percentage, it does, because the pass-throughs disappear from the accounts.

So long as the procurement work itself, the actual doing of the services doesn't disappear, then we're margin-incentive.

We are profit incentive if you get right down to it.

Whether or not those revenues pass through our books.

Great.

If you could just comment on Carter Burgess, how that has performed and how that is delivered versus your initial expectations.

We have been very happy with the Carter Burgess acquisition.

There are some pieces of that business that were challenged.

We had a small business supporting the real estate development side of the world.

That has not gone well.

Other aspects have gone a little better than expected.

Overall, it's meeting our expectations from when we started.

Great.

And then one last question, if you look back a couple of years back from now, how would you have used your cash, looking on a retrospective base

Well, all of it would have gone would have gone for acquisitions that were accretive and strategically smart and we would be reaping the benefit of that on the P&L.

and rapidly replacing the absent cash because we're profitable and therefore, need to continue to grow and make future acquisitions.

So three years from now, we're sitting with money on the balance sheet for future acquisitions and acquisitions that we have made that have had positive impact on the the bottom line.

If I look back to fiscal third quarter '04, would you say it's a bit of a deja vu and it did help drive a more aggressive acquisition strategy.

Would this be a bit similar?

Well, I would tell you that '04 did represent a point in time when we were able to make some acquisitions that attracted multiples, that maybe you couldn't have made three years before that or certainly couldn't have made three years after that.

So maybe you could say that acquisitions would be more attractive and more accretive in a down cycle like this than if you make them at some other time.

Again, the acquisitions is a long game.

It really doesn't do much in the short-run.

Got it.

Okay.

Thank you very much, gentlemen.

Your next come from from Avram Fisher with BMO Capital.

Good morning.

Good morning.

Capital expenditures really kind of declined as a percentage of revenues.

If you look at the trends of trailing 12-months bookings going back a few years, it suggests that you expect a continued slow down, even a steeper slow down in bookings than we have seen so far.

Wonder if could you comment on that.

Capital expenditures are driven in our business a lot by people.

It's tenant improvements and the computers and such like that.

The people have leveled off and we know longer have to spend that money, then couple elements are that with our continued drive to lower cost of doing business, any discretionary kinds of capital spending we're looking at extending lives and not putting in new equipment and new computers and those kind of things.

So our capital expenditures over the last cycle were driven just by the headcount increases.

So I would imply that you are still reducing headcount or your reductions in headcount therefore implies a steeper decline in bookings than we have seen so far.

We are not growing, so you are not having to add the incremental pcs and because the headcount has come down a little bit, we had a few people and you don't have to buy new pcs because you have the pc's, you have the desks and you have the work space to have them.

In terms of pricing pressure and I know people asked about it, but I have three specific questions on it.

In the Middle East, if you rear the industry sources and believe their scuttlebutt, it would appear there is competition on pricing.

Is Is that a way to generate relationships there?

Is that something that you are seeing?

Well, again, I think I have tried to say this earlier, but we're not -- we as a Company are not seeing significant pricing pressure on your activities in the Middle East.

We're seeing the same kind of pressure for that work that we see on the Gulf Coast or up in northern Europe.

But we don't participate in the highly competitive lump-sum business that there is a chunk of.

Somebody wrote a write-up about the activity of the Japanese and winning lump-sum turnkey assignments and what that would mean for the US?

I don't know what it's going to mean for everybody else, but for us it's irrelevant.

If you win a contract by a huge margin, 30, 40% margin, maybe that is just an industry source, industry scuttlebutt.

Well, I'm not aware of anything that -- I don't know what pricing they are getting or wins.

So there may be some significant cost-cutting going on in lump-sum turnkey contractor community as they fight it out among themselves.

I have heard of things like that happening, but not for us.

We don't compete in that space.

Specific to the oil sands, you said in the heavy-process margins holding steady, private sector.

Is that a result of wages?

Sun Corp talks about sticky wages?

Is that sort of a function of what is keeping your margins steady also?

Certainly, the fact that wages send not to decline in down cycles keeps margins stable.

We have seen a couple of our competitors in isolated markets actually cut wages for their staff.

Obviously, if you are working on a multiplier, cost reversal kind of basis, that is going to take margins down.

We haven't seen that.

We haven't seen the need to do that at this stage.

So I think the stickiness of wages, is actually, for our industry, a good thing and I could see why the customer might be complaining about.

Because all of our customers would like to go back to 2004-2005 in terms of what the industry cost to utilize.

Okay.

And then specific to pricing pressure, in your alliance work, I mean, the analogy is the pool shrinks, more people start to fish at the same spot.

Are you seeing any competitive pressure on the alliance work as people go after your customers?

No.

The key thing with the alliance work is that so long as you are treating the customer well and as long as the customer thinks they are getting pricing that is reasonable relative to what the market is, not necessarily rock bottom, they tend not to compete and allow competition.

Right?

That is really one of powers of these long-term relationships is that our customers don't go out and look for a new supplier, so long as we're doing great work for them, at a price that is somewhere around what market is.

So what we have so do is as alliance partner is understand where market is and make sure your pricing reflects that range, so that there is no incentive for the customer to go out and try to compete it.

Remember, if the customer goes out and competes, they have significant issues.

They have major problems with switching-costs.

We have become increasingly effective at delivering our services in such a way that they are customized to the customer and the customer gets the benefit of that.

When they switch contractors they lose that benefit and have to essentially retrain the whole team.

So as long as we do a good job on the work, right, because that is one reason that the customer would recompete a contract tract if you do something dumb.

Right.

As long as our pricing is in the market range where the pain and anguish of procurement cycle and switching cost is more than the customer wants to try to deal with, right?

We can defend off the procurement people who like to compete for the sheer joy of.

It we tend to keep that work without a lot of competition.

In that vein and as a to the to it, this is my last question, is there any impact from the strike at Lindsey refinery that doesn't compete next quarter.

Any comments you can make on this?

Let me let Tom Hammond, who is here with us, comment on that.

No, we don't expect any measurable impact on the overall numbers from anything going on alt Lindsey in this quarter, where it seems to have stabilized as of today, as opposed to the last quarter it was, I would say, more volatile than today.

That job is nearing completion, so we're hopefully that the stability will last and we can see the job out in an orderly fashion.

And is there any impact on the relationship with the client as far as you know or have you heard?

Certainly the whole background of the event has strained everyone's good humor, and it's been a very tough environment to operate when the local unions have elected to engage in these labor actions.

Appreciate the color.

Thanks a lot.

Your next question comes from the line of Laura Sloat.

Your line is open.

Yes, I'm sorry.

I want to know how much of your future is going to be in the foreign market as opposed to the domestic market and will that be also in the engineer and technology?

We see continuing opportunities for growth both domestically and internationally.

We're about 60/40, roughly today.

60 domestic, 40% international.

I could see that getting more to 50/50 in the reasonable near term and certainly, it includes substantial engineering presence outside the US and I would think that would continue to expand proportionately.

So I think from that standpoint, we're expecting that the balance will stay in that range from 60/40 to 40/60.

And we're expecting to see our physical presence in terms of engineering operations and technical support of our customers wherever our customers have significant assets installed.

And how much of that would be reliant on the the energy industry is?

I think our reliance on the the energy industry will be in the same range that it is for some time to come.

I expect to see significant growth in upstream oil and gas over time.

I think we'll be putting a lot of energy into the public sector side of our business as well.

You have to recall when we break out these markets by revenue, the construction revenue is significant and there is a lot more of that on the heavy process side than there is on the public sector side.

Your next question goes tot line of David Yuschak at Smh Capital.

Good morning, gentlemen.

I am just kind of curious, the way our reports have terrible throughput margins of business this morning and a lot of refiners are certainly having a lot of other problems too.

I'm wondering as you look forward, how would you see the downstream business changing in your key areas of competence, if we see the downstream business end up going to be the orphan/stepchild a few years ago when we talked about closing plants and not refurbishing them

You really need an economist to give you an answer to that question, not me.

My view is that gasoline demand is down and will stay down for a while.

The crack spread is narrow and refiners aren't going to be making money, certainly in the developed world.

And I think that is going to cause some marginal facilities to get shuttered.

So I think you may see some capacity taken out from customers that probably shouldn't have had the capacity back in in the first place.

I'm just curious, does that change the kind of things that you would do in downstream, and if we would see a more orphan market again.

I'm just curious.

I think what debts down in downstream to some degree, because I don't think you will see a lot of capacity expansion.

If you go back to the last time we had this sort of similar situation, where refinery managers were terrible, we weren't getting capacity expansion there either.

So I think what you are going to see is the continuing drivers are going to be investment sort of safety-related, investments that environmentally-related and investments that allow them to change the profitability of the refinery by changing the cost of inputs.

I think you are going to see some closures that will drive up operating rates.

But I think the refining business, it's here to stay and it will get done, but we'll see movement in who invests and what they investment and when.

In terms of major new capacity, I don't think you will see any major new capacity in the developed world.

I could see limited new capacity in the third world.

As far as your multiplier on your billable hours, how much off of your peak would you say that multiply is in last 12 months?

Hadn't thought about it that way.

Don't really pay attention to consolidate multiplier.

So I don't have a number to reference.

A little.

I'm sorry, that is a bad answer, but that is really all I can tell you is a little.

Are you seeing because what is happening in the dynamics with the hours being shifted more towards less robust multipliers then, is that a better way to look at that?

No, I wouldn't say that.

On the highway thing, we find it interesting down in Texas and there are big debates how we fund our own construction down here, because we do have heavy requirements being as big as we have.

But big debate about what it's going to be tollways, taxes on gasoline, is it going to be client-owned?

We don't seem to be getting anywhere in terms of any kind of strategy.

Is is that your kind of answer as you look at the federal programs, it's one of those things look we're seeing here, who is going to pay for it?

Do you think that is going to be a problem in trying to get that past?

I think you have a whole set of problem getting the transportation bill passed.

To go back to the earlier part your question.

I think we're going to see transportation funding come from a mix of sources and I think if has to come from a mix of sources.

There is part of transportation funding that is essentially big projects over big distances and it lends itself very well to tolling and to design-build, PPP, PFI kind of deliveries.

Required in quarters and locations that don't lend themselves to a private alternative and we're going to have to rely on gas taxes and federal funding and local bond issues to deal with those problems.

And I think what we'll find absent maybe the liquidity issues that we have been dealing with, is a lot of that non-amenable to private-public partnership kind of work will come from local bond issues and local sales tax and it will come from the reasons it's been coming already.

People are just tired of taking two hours to get to work.

Yes.

Right.

And most of those two hours to get to work quarters don't lend themselves to some sort of private investment.

I guess the issue then is just getting everybody used to accommodating that that is the way we have to go and other than what you said on a project-by-project base is the way we would have to take a look.

Your frustration with Texas is not nearly as great as mine with California.

I would suppose to.

You guys have a budget problem.

We don't have too much of a budget problem, just who is paying for what.

It starts with the leadership though.

I wish that Texans were running California right now.

I always said what people don't understand about Texas our legislature meets five months our of 24.

All right.

Thanks a lot, guys.

Thank you, David.

Your next question comes from the line of Mark Thomas from Simmons & Company.

Good morning.

Good morning.

John, first question I have, could you remind me how margins differ between technical professor services and field services.

At gross margin level, there is quite a bit of difference.

When you get down to the operating level, there is a much smaller difference.

Historically, they have been fairly narrow differences, but over this last cycle the professional services have improved.

So the margin expansion was more driven by the professional services than the field services.

So there is small margin differences at the operating level between the professional services being a little bit higher than field services.

Thank you That is helpful.

Craig, when it comes to acquisitions and how you think about them, is your focus more on geographic expansion than technology or would you make an acquisition solely to bolster your backlog.

I don't think we would ever make one for bolster your backlog purposes.

We are almost entirely focused on strategic fitting.

So markets we don't serve, geographies that we don't have are probably top of the list in terms of where we're trying to find acquisitions.

There are some industries that would benefit where we're still a small player and you could benefit from mass in the business.

And we might look at acquisitions there to increase the business to critical mass, so that we could compete effectively across the full spectrum of projects.

It's always more than anything else, a strategic business market focus.

Okay.

Thank you very much for your time.

Thank you.

Your final question comes from the line of Barry Barnster with Stifel Nicolaus.

Hi guys.

The call has gone on for a while, so I will be brief.

What were the pass-through revenues in the quarter.

I don't have that figure in front of me.

It will be in the queue when that comes out, but don't have that.

It's a pretty important number.

Yes.

I'm just trying to gage the margin.

Let me switch the gears on the same question.

Historically, TPS as a percentage of revenue correlates with SG&A.

There was a big swing in orders and even bag log this quarter towards TPS.

On the surface that would argue good support for the margin as we look out the rest of the year and into 2010.

I know you are not talking about 2010 yet, but just based on what we seeing from the swing in the backlog.

You should be able to maintain something around 13.5 on the gross margin and perhaps 8.5 on the SG&A.

So what I'm asking is structurally, Jacobs long-term average margin is not five at the operating line.

But it seems to be the new normal.

So do you feel comfortable with that sort of five as a number given the cost controls and changes in the business as a floor?

I wouldn't characterize any number as an absolute floor.

You know, our industry is still too volume-sensitive to say that, but I do think that the mix is different than it has been historically and that, therefore, the dark side of margins is also different than it has been historically.

Whether that is precisely five or not, Barry, I couldn't say.

But it does look like TPS will hug about 50% of total revs going forward, that would have implications for margin.

I know it's not a floor, but think of it as a plush carpet.

Is that the expectation.

I guess, if you want to use the plush carpet analogy, that is okay.

Nobody likes my coffee story.

All right.

Five sounds good.

Thanks.

And we have no further questions.

Do you have any closing remarks?

Well, I want to thank everybody for their interest.

This is the longest call we have had.

I assume that is a good thing in terms of your interest in the Company and the business.

I look forward to talking you a quarter or so from now.

Ladies and gentlemen, this concludes today's Jacobs third quarter earnings conference call.

You may now disconnect