雅各布工程 (J) 2010 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Jacobs first quarter 2010 conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

I will now turn today's conference over to Ms.

Patty Bruner.

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

For a description of some of the factors which may occur that could cause or contribute to such differences, the Company requests that you read its most recent annual report on Form 10-K for the period ended October 2, 2009, 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 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 John Prosser, CFO of Jacobs, will begin the discussion.

Thank you, Patty.

Good morning, everyone.

I'll spend just a few minutes going over the financial highlights, and then I'll turn it over to Craig Martin, our CEO, to give a business overview for the quarter.

If you turn to slide four, the first quarter highlights, we did report this morning, diluted EPS of $0.58, net earnings of $72.4 million.

These results included a $5.8 million or $0.04 per share charge for some consolidation of real estate down in Houston, Texas.

That charge actually shows up in our SG&A line, for any of those that were interested.

The backlog for the quarter ended at $14.9 billion, down slightly from last quarter and a year ago.

We continue to have a very strong balance sheet.

Our net cash ended at $941 million, and that's in light of the fact that we did have cash going out for the acquisition of TYBRIN, and the final payment on AWE in the United Kingdom.

So still had a good quarter for generation of operating cash, and we are reconfirming our fiscal year 2010 guidance of $2 to $2.60 a share.

Turning to slide five, while the overall chart is a little disappointing in that we're seeing a downturn in the last year and this first quarter.

If you look at the bars underneath the graph, which gives the 10 year compounded growth rate, you still see that we continue to have a very good track record, as far as our longer term growth rates in meeting our long term goal of providing a 15% return in growth to our shareholders.

Turning to slide six, our backlog, the overall backlog as I said was at $14.9 billion.

The professional services backlog was at $8.2 billion.

While the overall backlog was down a little bit from last quarter, the professional services was flat with last quarter.

With that, I will turn it over to Craig to talk about the details of the quarter.

Thank you, John.

Good morning, everyone.

I'm going to take a few minutes to talk about our strategies for growth, and I'm on slide seven now.

I'm going take the time to talk about our business model in more detail in a minute, as well as the selective market diversity, but I want to take a minute here to talk about the other three key strategies that we're employing.

We continue to focus on growing our business through our multi-domestic strategy.

We want to be local to our clients, and then apply our global know-how to the clients' projects in the locations we serve.

That's a strategy that served us very well over the years, and it will continue to serve us very well in the markets to come.

Our focus right now is expanding our domestic position in India, improving our position in China, and probably most aggressively, expanding in the Middle East.

I'm going to talk more about the markets in the Middle East later on in this call, but we see lots of real opportunity to strengthen our geographic position, become multi-domestic in more places and serve our clients better.

So we think our multi-domestic strategy will be an area where we can continue to support our growth.

The next element is to drive down costs continuously.

I think you have heard us say many times that we are committed to being the lowest cost to produce kind of company that we can be in our industry.

I think we've been very successful in doing that up to now, and I think we can continue to do that.

We had an excellent effort from our team in the first quarter of fiscal 2010.

Without that Houston write-off, we showed good reduction in costs, and we think we're going to be able to continue to improve our cost posture over the next three quarters.

It's a great position to be in as a company, to have that lowest cost to produce position, because in times of market pressure, and we think we're going to continue to see some pressure on pricing, that allows us to maintain higher profitability than perhaps some of our competition will be able to do.

The last bullet here is acquisitions.

As part of our mix, they continue to be very important to us.

We had a great quarter from an acquisition point of view.

We closed on the second part of the atomic weapons establishment deal in the defense and aerospace arena, a really good contract for us with a lot of long term potential.

And we were able to make the acquisition of TYBRIN, which is about a 1,500 person professional services company, also in the defense and aerospace business.

One of those acquisitions we've been telling you for some time we thought would be doable in this market that might not have been doable in markets in the past.

That's a strong business for us, and again I'll talk more about the market potential as we go into the markets themselves.

We're still in a strong cash position with respect to acquisitions.

We did both those deals and had very little impact on our cash balance, and we see lots of opportunity for activity going forward.

Markets-wise, there's certainly more opportunity in defense and aerospace.

We think there's opportunity for us to start into the water and wastewater business, which we think's going to be a good business going forward.

We continue to have a lot of interest in upstream, and we're making some progress in a couple areas there.

And then, of course, we have talked off and on about the possibilities of power and mining as businesses we might get into.

I think those potentials are out there.

We'll see whether they're attractive enough to make them interesting.

From a geography point of view, the Middle East is an area of real strong focus for us right now, as well as China and India.

So acquisitions look like a great time in the industry to be doing those, we're in a great position to do them and we think we could drive some significant growth as a result.

Moving on now to slide eight, I want to talk a little bit about our relationship-based business model.

I know many of you on this call have heard this over and over and over again, and I'm afraid you're consigned to hear it over and over again some more, because we are going to stick to our business model and try to continue to be the Company we've established and positioned across the marketplace.

Let me take a minute to contrast our model to the industry, and we've broken the business up into three kinds of projects, transactional projects, discrete projects and preferred relationships.

For the most part, if you look at the industry model on the right, our competition in our industry focuses first and foremost on what we think of as transactional projects.

These are lump sum turnkey jobs.

These are very price competitive.

They're generally big events, often in far away places.

It is a tough part of the business to be in.

There is usually some pretty big time risks associated with these projects it.

It is very competitive because the majority of the industry focuses here, and right now there's significant pricing pressure.

Everybody in our business also does discrete projects, and that makes up a significant portfolio of everybody's business, including ours.

It's a good business.

It's generally for customers you know.

It's generally medium sized and moderate sized projects, a good business to be in but again a business where there's a fair amount of pricing pressure right now and the competition is fairly stiff.

So discrete projects require a sharp pencil, as well as great skills to be successful, and the customer relationships factor into the equation.

And then you have your preferred relationships.

These are long term relationships with clients that are ongoing from year-to-year.

There's still some opportunity for pricing pressure in that part of the business but it's probably the lowest pricing pressure of the industry.

It's also a business where there's a good sustaining base capital that can keep your business going.

As you can see from comparing our model to the industry one, we focus very strongly on the preferred relationships.

And as a result, we have very high levels of repeat business, greater than 90%.

We have a set of core clients that contribute 50% or more of our business at any given time, and who are still the biggest spenders even in this down cycle, even though they're spending on a reduced basis.

And then we have a budget base load work here, some for core clients, some for other clients, that contributes about 40% of our business, that's very, very steady work.

We like base load work because it's associated with maintenance of assets more so than it is with new events, and the maintenance of assets is something that needs to go on year in and year out, good times or bad.

And while you can turn down your maintenance capital spending and the small asset work, you can't turn it off in the long run or you find yourselves with plants that don't run and assets that aren't returning any money.

So we think this base load business is solid.

We think there's lots of opportunity to continue to expand that for us as a Company, and we see that as an increasing part of our portfolio.

Today it's probably just a little over 40% of the business we do.

So the main message here is, we are sticking to our business model.

We're executing well.

We did a very nice job in the first quarter of this year.

We're continuing to build relationships and strengthen those relationships, and we're going to continue to avoid the sort of high risk events that we might regret in a year or two when they come home to roost.

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

Let me just start by giving an overall characterization of the market.

I would characterize the market as still slow.

We have not seen CapEx restored to its, anywhere near previous levels, and don't see it being restored to anywhere near previous levels in the near term.

We do think, though, we may be at or near the bottom.

The next few quarters are certainly going to show us the bottom absent some event that drives us into a double dip recession or some other kind of bad news.

So, slow business but probably close to the bottom or there.

Still waiting, though, to see the real CapEx expansion that will drive a recovery.

Let me go through this market by market now.

I'll start at the top of the pie with the food and consumer products, pulp and paper hi-tech business.

Business there is actually pretty good, and improving.

We're seeing a fair amount of activity in packaged foods and in beverages, and interesting enough, the uptick in pulp and paper and consumer products, specifically towel and tissue that I talked about last quarter, is coming to roost.

We are starting to see more activity and more investment in that area than we've seen in some time.

It's 4% of our business, so it's not going to be a big mover in terms of the moving the needle, but it's a nice positive and very good for our businesses here in North America in particular.

Moving on around the pie chart now to chemicals, the only real new CapEx in chemicals is in the Middle East and to a lesser extent in Asia.

The Middle East is particularly good right now in terms of projects and potential projects, and we're doing well in terms of being able to grow our business there.

More importantly, though, the chemicals business has a significant fraction of small projects work, that maintenance capital work.

In fact, if you think about it, we've maintained 11% to 13% of our revenue forever in that business, on the back frankly of lots of little projects and a few big projects now and then, and we think we're going to be able to continue to do that.

So we're not negative about chemicals, except to the extent we don't think there will be a whole lot of giant projects around the world in the near term.

Going to oil and gas, the upstream business, we told you last quarter that the Oil Sands business was strengthening.

It has continued to strengthen.

We think there's a lot of opportunity yet to come there, but it's been a nice positive last quarter.

There's significant pent up investment, we think something north of $200 billion, and we believe that the upstream business in the Oil Sands will be one of the areas that leads as we come out of this downturn.

We're also seeing a lot of activity in gas production and storage.

There's a lot going on there.

We had a number of significant wins last quarter in that area.

So it's been a real plus for us as we look forward, and we think that's going to continue.

Our relationships with key customers in that area are very positive.

So that's an area where we suspect we'll see additional share for Jacobs.

This is still a very strong market, and I know just our key and core clients spend more than $100 billion a year in this area.

So we still have a lot of opportunity to take market share in that market, and we're going to work hard to continue to do so, either through organic growth or through acquisition or both.

Moving down to refining, refining is a relatively slow business right now.

Frankly, the refiners are all losing money.

I don't know that they've reported earnings for the fourth quarter yet, but I don't think it's going to be pretty when they do, and as a result, their CapEx is down.

Now it's down outside of environmental and maintenance capital, and, of course, environmental maintenance capital are where we're most active.

So we've been able to sustain a pretty good refining business in spite of a relatively slow marketplace.

The maintenance capital looks like it's going to continue to be good.

There's a fair amount of spending on safety.

Again, the kind of spending that won't get deferred because it's right down to the question of, can we keep people safe in our refineries?

Can we keep the refineries running and avoid problems, and we think there's going to continue to be environmental work.

Air emissions are gong to continue to be a factor.

We'll still got MARPOL VI out there in terms of it coming toward us, another positive, and you would think maybe the administration will also help us here as we expect to see environmental legislation start to roll forward, once we get past the hangups with things like healthcare.

We don't think there will be any new capacity in refining anywhere, except maybe a little bit of work in the Middle East.

We're well positioned to try and take advantage of some of that, and part of what we'll see going on here is Motiva, as it works its way through the system, may pass through costs on Motiva that are obviously a factor in these numbers.

But if you had to characterize refining generally, it's a slow business but we're well positioned for what business there is.

Moving on around the bottom to infrastructure, remember that for us that's a transportation and transit business for the most part.

Stimulus has been a positive for us, and we've done pretty well actually in the part of the world that is driven by stimulus.

Unfortunately it just doesn't offset the shortfall in tax revenues, both from gas taxes and federal and state tax expenditures, and we're going to continue to see some struggle with that business in terms of the volume of work that's out there.

We need some action from Capitol Hill.

The jobs bill will help a little bit.

We need to get the transportation business kicked off and running a little more aggressively, and I think that business could come back.

We're certainly seeing a slight uptick in our business there, that I think could get stronger over time.

In the UK, we're in a better position.

We certainly have a larger market share there and therefore are able to take advantage of that.

The big question mark in the UK will be what the elections uncertainty does to the market going forward.

Certainly when we get a new government in the UK, it's going to impact spending.

We're also kind of excited about what we see in the water and wastewater business.

That's a small business for Jacobs today, but we think there's a lot of opportunity there.

We've had really good success in water and wastewater in the UK, generating some nice growth there, and we think the US represents a fairly big opportunity for us as we go forward.

Moving now to buildings, buildings is another bright spot in the markets overall.

Remember that our business tends to be hi-tech and national security-type buildings, buildings where what's on the inside and technical complexity is what really drives the project.

So it's schools, jails, hospitals, national security centers, data centers, mission critical facilities, those kinds of things.

This business is very good.

We've done extremely well off the back of stimulus and have a significant amount of business, a number of our government customers were big beneficiaries of stimulus and buildings arena.

We've got a very good healthcare business right now, we've just been winning hospital work particularly right and left.

We had a number of press releases last quarter about that, big positive from that standpoint, and it may be that unlike in the Pharma business, healthcare reform here may be a positive for our business, we'll see.

But it's a little bit of a plus and minus situation when you start talking about what healthcare reform might do.

But overall we feel really good about the buildings business and where we are and where we're going.

Moving into national governments, it's another business we're pretty excited about.

It's split into two pieces, as you'll recall.

The first part is research and development test engineering, scientific and technical services, largely defense and aerospace related.

We continue to add share and position ourselves for additional work.

We're in a great position.

We just had a major win at the Johnson Space Center.

So this business looks pretty good.

The TYBRIN acquisition allows to leverage up as well.

The administration's activities there are both a plus and a minus.

There's a fair amount of in-sourcing going on.

That's a negative from our perspective, as the government hires our people to do the work they were doing on the government payroll instead of ours.

But the big focus on organizational conflict of interest is a plus, in that it's probably driving some of our bigger aerospace and defense customers out of the business, witness the sale of Northrop's Sets business here last quarter.

So we think that part of the business is positive.

On the environmental side, the other part of our national government's business, the UK potential is still there.

We've talked ad nauseum about what we think the UK potential is.

I've told you that it's going slowly but going, and it continues to be that way.

We see a number of great opportunities that are medium to short term.

So we're pretty positive about what could come out of the UK in the next few months and quarter.

The US stimulus has been a plus for us already, and we frankly think the administration will be another plus on the environmental side.

So we expect to see some ongoing growth from environmental, maybe not in the short term but certainly in the medium term and beyond.

And then finally moving to the Pharma biobusiness, that business is driven by demographics, the aging population and by drug discovery.

Right now things like vaccines and biotech are pretty active.

We seem to be getting by the recent consolidations and that should release some more CapEx for us to address.

The question is, will there be more consolidations on top of that and what will that mean?

Healthcare reform here we think is a risk.

It's hard to judge, but we think there is some potential for the Pharma companies to pull back a bit if the healthcare reform goes through as it appears, but we continue to be pretty much the only choice in the industry, kind of the last man standing of any significance.

So our share remains high, and we think therefore the opportunities in this business are pretty good.

So that's where we see the individual markets, lots of opportunity, not the best markets in the world but certainly things that we can capitalize on as a Company.

So now turn to slide 10.

This is the one I characterize as our commercial every time I do this.

We continue to have a customer driven business model that's working, and I'm convinced, although I couldn't prove it, that we're growing our market share in almost all of our businesses as we sit here today.

We have diversified markets in geographies and services, and I think that drives our business from a local perspective to be more attractive, and I think in the longer term localness will count for a lot.

We have a great balance sheet in an advantaged time for acquisitions.

So I think that's a real plus, and we continue to commit to that 15% average annual EPS growth.

I believe we can do that, and I think that means it's a great Company for the long term.

So with that, I will turn it back over for questions.

(Operator Instructions).

Your first question comes from the line of Andrea Wirth of Robert Baird.

Good morning, gentlemen.

Good morning, Andrea.

I'm wondering if you could first just address TYBRIN.

Did it contribute to the backlog this quarter?

John?

Yes, TYBRIN obviously we closed it at the end of the first quarter.

So it did contribute.

It wasn't material in the overall sense, and so it contributed about $300 million in total backlog, almost, virtually all in professional services.

And just to kind of offset that, we also had some continued cancellations of just under $200 million kind of offsetting.

So we really, those two together kind of offset each other.

Okay.

And what is your expectations for accretion for TYBRIN?

Are we still expecting to be relatively neutral for the year or do you have any update on that?

Well, certainly as we've been saying, this is a relatively small acquisition for overall size, and with what you have to do with amortization of intangibles, there won't be any real -- any measurable accretion in 2009 -- or 2010, sorry.

And certainly as we get the synergies out of it and apply their expertise onto some of our projects and vice versa, that we would expect to see some growth going forward, just beyond just what we acquired.

It's a good company, and to John's point, we don't do deals that aren't reasonably accretive in the near term, with the amortization of intangibles it's not a big deal as we go forward.

It was also something we were pretty confident we would get done.

And so it was in our thinking about guidance when we issued guidance.

And just one last question.

Obviously you posted a great quarter this quarter, but just curious why you didn't opt to narrow the guidance range at all, maybe, why not narrow it.

And then also, what are kind of the big swing factors in your opinion, again the range is fairly wide?

Well, we elected not to narrow the guidance because we think it's premature to do so.

We had what we think was a decent quarter under the circumstances in the first quarter, but there's still a lot of uncertainty in the marketplace out there.

There's the whole issue of what's going to happen with commercial real estate, and how's that going to affect funding.

We've got some uncertainty with the administration, what they're going to do.

We just think it's premature to adjust our guidance.

So that's why we didn't narrow it.

The uncertainties in the marketplace are still low enough that we think that wide range is justified.

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

Morning, Michael.

Good morning, gentlemen.

Thanks for your time today.

When you are thinking -- just two questions.

One, when you're looking at the preliminary defense budgets for the 2011 fiscal year, does that give you some more comfort given the opportunities that you kind of talked about in your prepared remarks on the defense services side?

Yes, I would say that it does.

I think, our perspective on the situation with the new administration and spending in this area was initially one of, we were concerned about the uncertainty.

And it appears to us now that while the concerns were well placed, the outcome is not going to be negative or at least not to the extent it might have been.

I also think that, as I said in my prepared remarks, this focus on conflict of interest is a huge positive for us in terms of our ability to take share.

So we're actually feeling pretty good about that business.

My second question is, looking at some of the opportunities you mentioned, the potential investment picking up in Canada, in western Canada.

Any indication on -- two things, one, are the quality of the projects that are coming back online are investments that you guys are involved in, are they better than maybe the tail end of the last big cycle in the oil in '07, '08, and is there a shift towards more SAGD opportunities, which historically I think you guys have been much more involved in.

I think the answer to that question in both cases is yes.

I certainly think the projects that we're dealing with today have better returns and require lower oil prices to make sense, than the ones at the tail of the bubble, maybe even some of the ones that were in the middle of the bubble.

And I also think the shift will be towards SAGD, and obviously that's a big positive for us, although we're increasingly developing our skills to serve the surface mining mineral side of that mineral base as well.

I don't know, I've got Greg Landry who is the head of our operations for that part of the world.

Greg, do you want to comment?

Yes, I would say at this point in time the marketplace is much more cautious in approving projects.

So it's at a slower pace moving forward.

However, I think the market place can be better prepared as all price stays in the 70 and 80 range, and if that stays in that range there, they will be spending in the next few years.

I think collectively we're maybe not quite as optimistic as our guys are right up there in the middle of it.

So that's probably a positive when you think about it.

I would think so, Craig.

Thanks for your time, appreciate it.

You're welcome.

Your next question comes from the line of Tahira Afzal of KeyBanc.

Good morning, gentlemen, nice quarter.

Hi, Tahira.

How are you?

Fine, thank you.

Just wanted to get a sense of, first of all if you look at fiscal first quarter, how did that play out versus your internal expectations?

I'd have to say the quarter was a little better than I expected.

I'm looking around the room here at our executives.

They're mostly nodding, yes, a little better than we expected, not order of magnitude better or anything like that, but it was a good quarter in a difficult market and I was very pleased with the performance of our team.

Great.

And would you say then that's coming more on the execution element as you mentioned in your press release, or the bookings or revenue line also surprise to the positive?

I don't think the bookings line was particularly to the positive.

It's about what we thought we would do, but I do think we executed particularly well in the quarter, and I think we've got some good things going as we go forward.

So I think that was a nice positive for us.

Great.

And I guess the last question and I'll hop back in the queue, I remember as your analyst day you mentioned that really the concerning elements were as you progressed towards the fiscal fourth quarter which was a little lightly booked.

How is that shaping up as far as given the bookings you had in the fiscal first quarter and as we look at the prospects going forward?

Well, as you know, we don't give quarter by quarter guidance, so I don't want to get down to that level of detail.

I think in general, the fourth quarter is still an area where we have some uncertainty.

It is a difficult quarter and there is a lot of things that may happen between now and then.

If I had to just give a gut feeling, I'm probably a little more positive about the quarter today than I was two months ago.

Super, Craig, that's very helpful and I'll jump back in queue.

Okay.

Your next question comes from the line of Scott Levine of JP Morgan.

Good morning, guys.

Good morning, Scott.

Regarding the acquisition pipeline, can you talk a little bit about multiples that you're seeing in the industry today, and maybe elaborate a little bit more on the interest in power and mining.

Has that moved up in terms of strategic priority in any meaningful way?

Let me start with the second part of your question first.

I would not say so.

I think power and mining have been areas where we've just kind of been keeping an eye on things for some time.

We still haven't seen a specific opportunity that we would say was, one that would make it us jump into the business.

But it's two pieces of business that we're obviously not in as a Company today in a big way, although we're starting to organically grow a pretty decent power business.

And so it's two pieces of business that we're going to continue to look at because the opportunity may be right to do that, make that move soon, and the market might support that at a multiple that we could be happy with.

With respect to multiples generally, multiples are off their peak probably, one to two points.

So if the market was nine to 11 times EBITDA, today it's probably eight to ten, seven to nine, something in that range.

So certainly I'm seeing some softening in pricing, and obviously those lower EBITDA multiples give us a fair amount of leverage for our shareholders when we make the deals.

I kind of remind everybody that we don't pay the target for synergies.

Synergies belong to our shareholders.

So John's comments about our ability to improve the efficiencies in TYBRIN for example, will be things that in the long run will benefit Jacobs shareholders, not things we paid TYBRIN to get.

Would you be willing to comment regarding the multiple paid for TYBRIN?

John?

We really don't get specific on that.

It wasn't that material but it was in that market range that we've been talking about.

Understood.

And then water, wastewater, has that grown in importance in terms of strategic priority?

I think water and wastewater become a market that is much more interesting to us.

It's up there with upstream and defense and aerospace in terms of priority.

I'm pretty confident we'll be able to get a deal done in the next year or so or two that will help drive us into that business.

Water and wastewater is one of those businesses like transportation where pent up demand and problems with existing infrastructure are huge, and we think the real long term of that business is a big positive for companies that are in it.

So we're very interested in water and wastewater right now.

Okay.

One last one, if I may.

Without asking for explicit guidance, could you give some comments regarding how you see the cash flow playing out through the balance of the year?

John.

Well, certainly from the operating side, we expect to continue to see positive cash flow.

Basically our bottom line turns into cash from an operating standpoint, and obviously if we continue to focus on acquisitions and are able to get to the point where we're closing them, those will be the major draw on the cash flows.

So the inflow is probably more predictable than the outflow.

Appreciate it.

Thanks.

Your next question comes from the line of Andy Kaplowitz of Barclay's Capital.

Morning, guys.

Hey, Andy, how are you doing?

Good.

How are you?

Good.

You talked about margin pressure today, but as you look at your margins in the quarter ex the $0.04 charge, they actually stabilized and even rose a little bit sequentially, and that's after a year basically of margins going down.

So I'm just wondering, are we getting closer to where we can stabilize margins going forward or should we expect continuing margin pressure from here?

I think we're getting closer to where they'll stabilize but I think there will be continuing pressure.

So I guess that's yes to both parts of your question.

I know that's not a very helpful answer but, in fact, we are still seeing a fair amount of competition for projects.

There's, the volume clearly isn't there to support the industry in the way it was a year or two years ago, and I think that's going to continue.

I think it will get -- it won't get a lot worse than it is today, but I think it will continue.

So I think you'll see some additional deterioration of margins but not huge amount.

We told you we thought we could sustain margins at a higher level in this down cycle than we did in the previous one, and we still believe that's true.

Okay.

Craig, let me ask you one sort of follow-up to that.

So the gross margin itself went up without a lot of change in mix in your businesses, and so you obviously set a good execution in the quarter, but is that what it was?

Is there anything that we should read into a decent uptick in the gross margins?

Well, gosh.

I don't know that I would read a lot to it.

I do think good execution in the quarter was a part of it.

I also think that the margin pressure we're seeing was slower to be realized in the numbers, and we've done a pretty good job of reducing our execution costs at the project level.

So I think it's a combination of all those things.

Got ya.

I think it was John who mentioned that there was still some cancellations in the quarter, and I know that cancellations happen even in the best of markets, but it's sort of still been a little bit of a drag on your backlog here.

And I'm wondering who's still cancelling projects and do we think that these numbers should continue to peter down over time?

That's a good question.

Our sense is that we probably are close to the end or the end of cancellations for the most part.

Now, like I say, we have cancellations even in the best of times, but it feels like most of that is behind us.

Having said all that, depends a lot on what the economy does, what happens to CapEx generally.

With respect to who, we can't say.

That would be breaching the customer confidence and releasing data they don't want out there.

So that part of your question will have to go unanswered.

That's fair.

Just one other question on the CapEx.

Do you see a big difference between -- I mean I know that your business is a little bit more IOC focused, but you do deal with a number of NOCs.

Do you see a difference in attitude between the two types of customers, and has that attitude been changing over the last six months?

I can't say that I have enough data to answer that question determinatively.

I would say that some of the NOCs we deal with, like those in the Middle East, are clearly more positive and have a longer view perhaps than some of our other customers.

But I think that to generalize beyond that would be -- we just don't have that much of a relationship with the NOCs frankly.

I don't know, Andy Kremer is our head of sales here.

Andy, do you want to comment?

Craig, I confirm what you say, that I wouldn't say we've seen a material shift in the attitudes, and don't really have any better data to give more granularity around that.

Thank you, Andy.

Okay.

Well, that's fair.

I'll get back in queue.

Thank you.

Okay.

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

SG&A was up very slightly sequentially after you take out the real estate charge.

But I thought there had been some year-end items in Q4 that weren't going to be present in this quarter.

So I guess, what kept SG&A higher this quarter and can you still take it lower as the year progresses?

John?

Well, if you take the chargeout, it's actually, I thought it was down a little bit, there's also factors in there, bonus accruals, things like that that are based on how well we do and things like that.

But we continue to take action, sometimes the actions we take take a little longer to shop up than what we anticipate.

Sometimes the actions we take take a little longer to show up than what we anticipate, be it personnel actions or like we did with Houston where we consolidated offices and things like that.

But we still believe that the trend will be down and that really what we're saying I think last quarter when we were talking about it was that we certainly expect by the fourth quarter this year it will be down below where we were last quarter or where we are today.

On an absolute dollar basis?

Yes, on an absolute dollar basis.

Percentages on G&A, when you're looking at percentages of G&A versus quarter to -quarter, because of the mix and the fact that not a lot of G&A goes with the field services.

And if you look at our revenues this quarter versus last, there was a change in mix and the field services came down a little bit as part of the mix.

So it could make the percentage look higher because as that -- the G&A really follows the professional services revenue much more than it follows the field services revenue.

So we always look at it as absolute dollars because the percentages can just be influenced by too many other forces.

The percentages are a little misleading sometimes.

Yes, sure.

And on headcount, related to your comments on the SG&A reduction, it sounds like you're still reducing full-time headcount.

How should we think about that as the year progresses, and relative to where you were say 38,900 full-time people at the end of September?

Well, I think we may see a few ongoing headcount reductions over the next few quarters.

Again, that sort of relates to my question about where exactly is the bottom for the business, but it's clear that our headcount reduction has moderated significantly from where it was three quarters ago.

Okay.

And I assume it would pick up only coincident with backlog growth.

Headcount might pick up a bit ahead of backlog growth just because of the nature of backlog.

The headcount picks up when the technical professional services business kicks in, but backlog tends to be more affected, at least if you look at total backlog, by the field services numbers.

So it could be a little bit of a leading indicator in that regard.

It depends on whether you're looking at technical professional services backlog or total backlog.

Right, okay.

And then just lastly, was the currency impact on reported backlog from September to December at all material?

No, it wasn't.

Okay.

Great.

Thank you.

Your next question comes from the line of Joe Ritchie of Goldman Sachs.

Good morning, everyone.

Hey, Joe.

How are you?

Doing well, thanks.

Good.

Couple questions for you.

On backlog, we have seen backlog continue to trend down now for three quarters, despite the $200 million -- I believe it was $200 million, perhaps $300 million that you saw from the TYBRIN acquisition this quarter.

You mentioned in your commentary earlier that we're near a bottom and that we could see that bottom over the next few quarters.

Could you give us a sense on when you would expect to hit an inflexion point?

Do you have a time estimate at this point?

I really don't, but I would caution you that we have in backlog and coming out of backlog each quarter, one very substantial project in Motiva.

Yes.

And there's a substantial amount of pass through costs associated with Motiva, and that's probably going to influence backlog a little bit for the next few quarters, as that job goes to completion.

And we don't expect to replace that pass through backlog soon.

Okay.

That's fair, but can you give us some -- an update on Motiva and when you expect Motiva to be complete?

Let me turn to Greg.

We're limited a little bit by what we're allowed to say here, so -- .

Yes.

We probably have another 14 to 18 months on the project for total completion, plus start up.

Okay.

And can you give us a sense on the magnitude that's still left in your backlog from Motiva?

No.

We wouldn't be allowed to tell you that part.

Okay.

One other question I'm not sure if you can answer that on Motiva specifically.

Obviously with the backlog coming through, can you give us some kind of sense on the type of margin drag that you've seen because of the pass through nature of this project?

No, I don't think we can.

Okay.

I guess one last question on the cost side, you mentioned that over the next three quarters you'd be able to improve your costs.

Can you give us a sense for what initiatives you think you'll have in place to see the cost reduction over the next three quarters?

Thank you.

Joe, our standard approach to costs is to drive them out whenever we can drive them out, whenever we don't need them to run the business, and so we're going to be looking at reductions across the board, reducing corporate staff as appropriate.

We've done some of that and may have a little more to do.

Improving billability.

I mean there's a whole list of things that we make incremental improvements and in the aggregate that turns out to be real money, and I don't think going forward it's going to be any different than that.

I guess in terms of, I would imagine a lot of the low hanging fruit is already gone.

So I was wondering if you felt like there was still a little bit of low hanging fruit left over the next few quarters to continue to take costs out of the system.

I think there is ongoing opportunity to take costs out of the system.

I probably wouldn't characterize it as low hanging fruit anymore.

It's never that easy to do.

You're talking a lot, because of the nature of our business, mostly you're talking about people.

So even low hanging fruit is folks that you don't want to lose, and it's painful to have to cut them out.

So I think there is still opportunity for improvements in our cost position based on the kind of volumes that we're seeing going forward, and we're going to go get that improvement while we try to stay sure we're positioned to really aggressively expand out of this downturn.

Okay.

Thanks for answering my questions.

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

Hi.

Good morning.

Nice quarter.

Good morning, Jamie.

How are you?

Good.

I guess my first question, again not to dwell on the guidance, but as I look at it, a good first quarter it was slightly better than you thought.

If I think about sort of what gets us to the lower end, I mean from your opinion do you see the risk more on the revenue side or on the margin side, if the low end is where we end up?

I think --

Because your order trends and your back, they're down a little but they've been, you know what I mean, even with cancellations they haven't been horrible.

They've been somewhat good.

So I'm just wondering if it's more margin or top line.

I think it's a little bit of both.

I know that's not the answer that makes it easy for you, but I think the continued margin pressure will have some impact on the out quarters.

I also think that there could be some additional pressure on billable hours as we look forward, and the combination of the two is part of what creates the uncertainty about the out quarters and part of what creates that wide range.

And then the margins that -- I'm sorry.

The orders this quarter that went into backlog, were those margins down sequentially from the fourth quarter?

Yes.

I would say they were.

And would you care to give a range or --

No.

Okay.

And then --

Nice try, though.

I guess my other question is, one of the other -- you guys when the good and bad news is when we go into a recession, you guys seem to experience it first but coming out of it you guys tend to benefit.

One of the areas I think, I don't know if we should get more optimistic on, but when you think about sort of turnaround maintenance work on the refining type side, can you, I know maintenance work is probably 35%, 40% of your business.

How big -- is refining I guess a big part of that and can you sort of help us think about how much that is down sort of from the peak and traditionally when that business turns, because it seems to be more economically sensitive, what type of recovery we usually see?

I probably couldn't give you a percentage down from the peak or anything like that.

Certainly a significant chunk of our maintenance capital-type business is in refining and chemicals.

Okay.

And so, we certainly are seeing the effects, and part of the challenge for the recession has been turn-downs in those areas, but I actually agree with your assessment that, as we come out of this cycle, we'll see a fair amount of turn-up in those investments first.

And like I say, I believe we're taking share in that part of the business as we speak.

So I think that's going to be a plus for us when the time comes.

And have you seen any change yet in the customers' patterns?

I'm assuming no.

Some people I speak to expect to see it sort of late this calendar year.

Would that be in line with when you would expect some sort of recovery?

Well, it's certainly when I'd like to see it.

Okay.

My conversations with customers aren't quite that optimistic or that definitive.

Okay.

Okay?

Don't they always tend to be depressed, though?

Well, you know how it is with a lot of customers in our industry.

When things aren't going good, they project that they're going to go worse, and when things are going to go great, they think it's always going to get better.

And so with refining margins in particular where they are, the customers are sort of all in a depressed mood and they're tending to say negative things about the future.

That's just the opposite of what happened when refining margins were good, and obviously neither one is necessarily determinative of the future.

So like I say, I think they're being pretty pessimistic about the future, maybe more so than they need to be, maybe not, and so that causes me to respond to your question by saying maybe not quite so soon as you think based on what our customers are saying.

Okay.

Thank you.

I'll get back in queue.

Okay.

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

Hi, good morning.

Hey, John.

How are you doing?

Good.

I just want to follow up for a second on some of the cash flow numbers.

Your CapEx in the quarter, if you include acquisitions, and I think this will be in the Q but what was the total spending in the quarter?

Well, for the acquisitions we spent close to $330 million.

Okay.

And the capital spend, I think that was actually in the press release.

Yes.

For just routine stuff was relatively modest, which it always is, and particularly in this kind of an environment.

So, we also ended up borrowing a little bit.

So our debt went up about $100 million.

So that added into the financing that had to do with some overseas stuff.

So that kind of is the parameters of the acquisition.

Okay.

John, as far as the amortization now going forward, you give us the depreciation number, but with some of the things that can be written off more quickly, what's that look like, then, for the quarter and for this year?

Well, there was really nothing in the quarter for TYBRIN.

So it will be, as we go forward the amortization number will pick up over the next -- will be higher over the next three quarters related to the TYBRIN acquisition.

We're not ready at this point to give any definitive numbers because we're still working on the valuation.

Okay.

But last, the fourth fiscal quarter it was like $10 million.

Is that right?

And it should be -- and will it stay at that level?

Well, the amortization for the quarter, for the first quarter, was -- let me just get the number to make sure -- was $17 million.

That was depreciation or amortization?

I think it's both.

Okay, okay.

The capital spending for the first quarter was $7.7 million.

Right, right.

Excluding acquisitions.

Okay.

And I'm sorry, so capital spending for the whole year ex acquisitions, what kind of run rate are you at now?

Well, it's probably going to be in that rate.

So, I would expect it to be plus or minus $40 million.

Okay.

Okay.

Great.

Thank you.

That's all I needed.

Your next question comes from the line of Jeff Spittel of Pritchard Capital Partners.

Good morning, guys.

Hey, Jeff.

Just a question about the Middle East.

You talked about the growth prospects there.

Certainly I guess there was a lot of competitively bid transactional work going on there.

As you assess that marketplace, do you think that's closer to running its course or is the opportunity in projects that are more in your sweet spot under the discrete and preferred relationships side large enough where independent of kind of a mix shift, you could see some nice growth out of that business?

I think we'll see nice growth out of that business for a couple reasons.

I think we're well positioned on feed and PMC work on the bigger programs because we're not a lump sum turn key bidder, so we're not affecting the bidding slate, so to speak.

That creates opportunity for us with the customers on the front end and program management side.

And then as I think I've mentioned on this call a couple of times, there's a gigantic installed asset base in the Middle East and that's a piece of business that we are just starting to serve.

We think there's very significant growth in that maintenance capital small project business relative to the big event projects that have the international EPC contractor community all bidding against each other.

So we see the Middle East as a great growth engine for us as a Company as we go forward, driven on the back of using our business model.

Okay.

And then shifting over to the Oil Sands, sounds like things are certainly starting to ramp up a little bit there.

But people are being a little bit more cautious.

In your mind, what does that imply in terms of kind of the ramp up period from going to the front end of these projects to getting into kind of the higher revenue burn projects?

Is that still more of a 2011 event or do you think that maybe pushing it out into 2012?

No.

I think we'll start to see the higher revenue piece of this business in 2011.

We may even see a little bit of it start to show up in backlog by the fourth quarter of 2010.

Okay.

I think you're looking at six to 12 month kind of lead time on these projects before they start to move into detailed design and construction.

Okay.

So it sounds like no material change from that standpoint.

Right.

Okay.

Thanks very much.

Just before we move on, I want to clarify the answer I gave to John on the amortization.

The $17 million that's in the press release is only on normal assets.

The number that is for intangibles for the first quarter was about $5.5 million and that number will be increasing as we go through the year because of this most recent acquisition.

So I'm sorry, I misspoke on the numbers.

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

Hi, good morning, thanks for taking my questions.

Good morning.

Good morning, can you specify please where were the cancellations.

Were they in mostly field services or?

Yes.

They were all in field services?

No.

Not all.

Actually the majority was in the professional services.

Yes, you're right.

I stand corrected, you're right.

Okay.

So 60/40 roughly, think about it that way?

No.

Probably a little more than that.

Okay.

I was thinking of a different cancellation but it was in a previous quarter.

It was actually about 90% that was in the professional services.

And was it oil gas refining or was it similar to what we've seen in the past or is it --

Yes.

It was in the heavy process business.

Okay.

Thank you for that.

And also just to clarify something you said before.

You've talked about, I think in Andy's question, margins won't be down like they were in the last time, and I remember hearing from prior quarters the last time you talked about the 1990 recession, 1991 recession, how will it compare in your view to the 2001 recession or is that what you're referring to?

What I was referring to is the '91, '92 time frame.

Right.

I think it will be better than that for sure.

Sure.

In the 2001 time frame we weren't impacted as significantly just because of our mix of business.

So I don't think a comparison there is particularly relevant.

In the 2001 recession your margins were in the 3.5% to 4.5% range I think.

Right.

And remember our business mix has changed quite a bit since then.

Okay.

In what way.

A lot more public sector business today than was there in 2001.

Okay.

And speaking of business mix, I'm trying to reconcile also, you have the pass through costs on Motiva coming through and yet your direct cost line's coming down as a percent of revenues, and I'm just wondering if you can explain why.

Well, the mix, we are getting a little bit higher professional services in the mix.

So it reflects just a better mix towards the TPS side?

Yes.

Okay, and then offsetting the pass through costs on Motiva?

That's right.

And finally, you talk about competition for projects.

How does the competition -- and talking about competition of projects, how does that fit with the relationship-based business model?

I mean, how does one work with the other?

I'm trying to understand that.

For example, customers will use the existence of the potential for competition as a way to negotiate lower rates.

So you often get the sort of, well, we really like you guys and we want to continue to do this work, but your pricing is above market and so either reduce your pricing to what we think of as a market rate or we'll l have to put it out on the street for competition.

And does this mean you're paying market prices?

I mean your clients are paying market prices for your services?

Are you still getting a premium?

As a result of that, we can usually get a very modest premium, but modest is the operative word here.

Right.

And I don't think we've ever claimed that our relationship base really gives us a big premium on the margin side.

What it does is it gives us a better control of the costs side, which helps us make more on the operating margin side, because it gives us a better handle and better control of our selling costs and our staffing costs because of the consistency we get for that model, rather than getting a premium on the multiplier itself.

I mean the customers we're dealing with are very sophisticated, very smart buyers.

So they know what the market is.

All right.

I actually appreciate that color because it tied in.

It explains when you talk about the lowest cost to produce in the industry, I guess that's what you mean, keeping the selling and staffing costs low?

Yes.

It's a matter of having the lowest cost posture for a unit of work, so that we can maximize whatever profit's available against the market price.

Okay.

Thanks for the color.

I appreciate it.

Your next question comes from the line of Will Gabrielski of Broadpoint.

Thank you.

Just a couple of short questions.

You mentioned with TYBRIN that that was a deal you were expecting to close when you formulated your guidance.

Were there others that you had expected to close in your guidance that are still out there that we should look for in the near term?

There are a number of deals we are working on or that we will be working on that we think we'll close.

I don't think any of those are material to our guidance as we sit here today.

Okay.

Quick Oil Sands question.

One amplification.

You know, when we build our plan for the year, for any year, acquisitions are always a part of our strategy, and so whatever expectation we might have in terms of what we'll do in acquisitions, we try to always have that built into our guidance.

Okay.

Fair enough.

Okay?

Yes.

Absolutely.

The question I had on the Oil Sands, it strikes me that some of these bigger Oil Sands projects are coming back a little more quickly and obviously there was Husky, Conoco, Imperial, etc.

Any reason why you see some of the major or independent oil companies moving on Oil Sands before we even see them move and bring back some projects internationally, given obviously the cost (inaudible) between producing there and internationally?

I'm not sure I can give you an insight into what they're thinking.

I think the Oil Sands investments are pretty attractive right now in terms of the opportunity.

I can't speak so much for big oil projects in far away places because we really don't touch that stuff.

Do you get a sense that there's a geopolitical component or that there's just a scarcity of international reserves, and these companies are sort of chasing the reserves to replace what they're losing internationally with some of these different international deals we've seen struck over the past few months?

You know, it could be.

I think you're certainly seeing a move toward taking and making reserve investments where they look the most attractive, and if you believe the Canadian assessment of the Oil Sands, it's a 300 billion plus barrel reserve, which makes it a pretty attractive area to participate.

I'm not sure there's many places you can point to that have that same sort of reserve capacity and the technology to extract.

So it may be as simple as that, but we struggle with running our business, let alone understanding the minds of our customers' long term adjustment decisions.

So I'm not sure I can speak authoritatively for any of them.

Just curious if you had had any conversations about that.

The last question, you're hearing a lot of noise out of DC right now.

One of the things that came out yesterday was talks of a spending freeze on certain non-defense non-discretionary pieces of the budget, and one of those appears to be transportation, yet there's, transportation was a big focus in the stimulus package and viewed as a job creator.

What type of cross currents are you -- do you see impacting your business there, and what are your expectations for an actual transportation bill given some of the rhetoric we'll most likely hear tomorrow night during the state of the union address?

I think that's one of those uncertainties that we're dealing with, and it's very hard for us to predict what all that means.

You get a jobs bill that looks like it might provide some additional stimulus in that area, and then you get all this noise going on now, and the administration and the Congress in my view are unpredictable.

I guess that's the kindest thing I could say, and so I don't have a good feel for where that's going.

We've tried to prepare our business in ways that let us deal with customers who we think are going to have ongoing money to spend.

We're certainly seeing weakness in the transportation arena and like state DOTs.

That's a big challenge because they're just really struggling to figure out what they have and how to spend it, but there are others like the toll road authorities who seem to have good money to spend and that business is a pretty active one for us.

So it's a mixed bag and it's hard to predict what all that will mean.

I'm going to hide behind your answer for the next year, then.

No I appreciate that.

I wish I could give you a better one, but I think you need a ouija board to figure it out.

Likewise.

I guess we'll know more when we know it.

Thank you.

Your next question comes from the line of David Yuschak of Madison, Williams and Company.

Hey, Dave.

Congratulations on a great quarter, guys.

As far as just talking about policy and all that, your sales internationally tend to be in the last couple years, 36%, 38%, in a good robust spending environment.

Because of some of the issues coming out of Washington and the administration, do you perceive where the percentage of business internationally would materialize, and if so, are you going to need to put more resources there or how do you see that maybe playing out if there is some frustrations with domestic policy?

I would say that absent new markets and acquisitions like TYBRIN certainly the balance might shift a little bit internationally.

That's where a lot of our activity is.

It's where a fair amount of our growth will come.

Although we may execute a significant fraction of international work in domestic operations.

When you factor in, though, the potential for acquisitions, new markets, I'm not sure that means there will be that much of a shift in the mix.

So TYBRIN as you can imagine, their business is almost entirely domestic, and so that's -- you can kind of get a feel for what that means to the numbers.

So even though it would seem like the ratio should go up, I think given what we're going to do in the way of acquisitions -- balanced by what we're going to do in the way of organic growth, probably not going to change a lot.

Okay, good, and then as far as, you're talking about the pressure on margins and all that, is there any particular market segment like maybe refinery downstream where you're seeing more, or could you just give us a sense as to, is it isolated or particularly broad based?

It's across most of the private sector and heavily concentrated in the heavy process business, so chemicals, upstream and refining probably have the most pressure in the private sector, but all of the private sector is seeing some pressure.

Okay, and then one last question.

Last quarter you guys were pretty -- said something to the effect maybe we're (inaudible) here in that quarter but seem to be more positive this time around.

Is there anything in particular that maybe has given you maybe a little bit more boost in your confidence compared to some of the comments you made last quarter?

Well, we got one quarter behind us.

Okay.

That does color our thinking a little bit.

We did better in the quarter than we thought we might.

That's a positive.

There is this feeling that maybe the bottom is somewhere nearby, and so that's probably also a little bit more of a positive.

I still think you will find that we're more bearish going forward than our competition, but it will be interesting to see when they all report what they have to say.

All right.

Appreciate your answers.

Thanks a lot.

Your next question comes from the line of Chase Jacobson of Sterne, Agge.

Hi, guys.

Good morning.

Good morning, Chase.

Good morning.

Just had a quick question regarding transportation infrastructure.

You mentioned that the stimulus is having some benefit, and I was just wondering if, is that benefit actually coming from the real stimulus dollars that are actually being spent or is it coming from the stimulus dollars that have been allocated to the funds, and the states are using it as more of a long term view?

No.

I think our response is directly a response to work that we have won and are executing.

We've done I think very well on the back of stimulus over the last three quarters or so.

I think we're going to continue to do very well in terms of getting more than our share of what business is out there for stimulus.

I just wish it were more offsetting the shortfall in state DOT work, for example.

I think if stimulus had been what we intended and if the government would continue to fund transportation at quote, normal levels, the outcome for us would be very noticeably positive, because like I say, we are doing very well on the stimulus side, but unfortunately that just doesn't -- it's that half empty cup of coffee problem.

Okay.

And I guess just since nobody touched on it, just your view I would assume has held regarding a highway bill not till probably early next year?

Yes.

I think we're going to see it drag out.

Okay.

Thanks.

Your final question comes from the line of Andrea Wirth of Robert Baird.

Guys, just one last question.

Just wonder if you could address Oakridge a little bit.

I think in December the DOE decided that they're going to look for another contractor or if you can just give us a little bit of insight into why that is.

I think that contract has been a Jacobs contract for over 10 years, and what the potential revenue impact of that would be.

I'm calculating something around $200 million.

There's very little potential revenue impact going forward.

We actually expect to be a competitor for that reprocurement, and there are reasons to think we might be very effective as a competitor.

That is a very complicated project in a very complicated situation.

I can't really say a whole lot about the DOE's motives, but I think our performance as a Company has been quite good, and I think that will be reflected in the potential for new work going forward.

Got it.

Thank you.

There are no further questions at this time.

I will now turn the conference back over to Mr.

Martin for any closing remarks.

Thank you all very much, good questions.

I appreciate that you comment that we had a good quarter.

Obviously it's better than we expected but not near what we'd like to be doing.

We're going to do our best to get back on the track we'd like to be on long term.

I think we'll be able to do that, and I think your confidence in our Company will be well supported by that.

So with that in mind, thank you all very much and that's the end of our call.

This concludes today's conference call.

You may now disconnect.