雅各布工程 (J) 2010 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Jacobs second quarter 2010 earnings 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.

Miss [Bruner], you may begin your conference.

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 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 2nd, 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, and the most recent Form 10-Q for the period ending January 1st, 2010 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 discuss financial results.

Thank you, Patty, and good morning.

I will briefly go over the financial highlights for the quarter and then I'll turn it over to Craig Martin, our CEO, to go through an overview of the business and what we are seeing out there in the marketplace.

If we go to slide four, the financial highlights.

As was covered in our press release, the diluted EPS for the quarter was $0.62, net earnings of $77.5 million and for the year-to-date that brings us to $1.20 and net earnings of $149.9 million.

Backlog was at $14.7 billion, down a couple hundred million sequentially from last quarter, and we continue to have a very strong balance sheet.

Our Q will be filed by the end of the week, so you will be able to see the details of the financial statements at that point.

The net cash at the end of the quarter was $743 million.

This compares to $941 million last quarter.

And the decrease really is a result of a couple of acquisitions that we've made since the beginning of the year.

We revised our guidance.

The fiscal year '10 guidance is now at $2.15 to $2.65.

And so it is up slightly from the previous range.

Moving on to slide five, a track of our earnings history.

While obviously we've been disappointed in the last couple of years with the downturn, we have still shown, as you can see the bars at the bottom of the graph, that even with this downturn we still are averaging well above the 15% compounded growth rate that we talk about as our long-term target.

And if you look through the end of this last quarter, our last ten-year growth rate is at 18%.

Looking at our backlog, which is slide six, again the backlog came in at $14.7 billion for the total backlog, which is down slightly from last quarter, but the professional services backlog at $8.3 billion is actually up about $100 million from last quarter when we had a backlog of $8.2 billion.

So we are seeing a pickup, and good activity on the professional services side as we still see some weakness as we work through some of the, particularly one large project that we have in backlog on the field services side.

We did have the one acquisition this quarter, and it actually added less than $100 million in backlog because it was relatively small in all of professional services.

So with that I will turn it over to Craig to go through an overview of the quarter.

Thank you, John, and good morning, everyone.

On slide seven now, I want to take just a minute or two to talk about how we're going to continue to grow at that 15% compound rate that John mentioned.

And we've got five bullets here.

The first two bullets, remaining committed to our business model and a focus on market diversity; I'll talk about in a little bit more detail later.

So for now we'll move on to the next three bullets.

Let me talk first about growth through our multi-domestic strategy.

As we've told you many times, we believe that it is important for us to be local to our customers, and we believe there's significant opportunity to drive growth through continuing geographic expansion.

We're particularly excited about opportunities to grow in the Middle East and in China.

Particularly the Middle East shows opportunities in both the public sector and the private sector.

I ran across a data point just the other day about Middle East CapEx in the process, the private sector side of the business and there's something like $178 billion to be spent in the next five years, just in that area alone.

So we think our expansion in the Middle East area is important to us.

We're making good progress there.

And we're going to continue to keep pressure on the system to expand our Middle East presence and grow domestically.

Remember that we like to be local because that's what drives our base load work.

And that base load is very important.

I'll talk about that more in a minute.

Our next bullet here is drive down costs continuously.

We have had another good quarter in terms of cost control from the perspective, maybe the way we look at it.

You may not entirely agree when you look at the numbers but we feel pretty good about the cost control we've demonstrated.

And we are on what we think of as a pretty positive trend going forward.

So we continue to see benefits from our aggressive approach to controlling costs.

Frankly, margin pressure continues to be an issue.

I'll talk more about that in a little bit.

And so we need to continue to drive our costs down in order to maintain the good strong profitable position in this market.

And then finally the bullet on acquisitions, we've always made acquisitions a part of our growth strategy.

We continue to believe that this is a great time for acquisitions.

We've just finished the JJG deal this last quarter.

That is a water/wastewater acquisition the first in what we think will be a series of those.

We think there's lots of growth in that business and lots of opportunity to continue to grow.

As we sit here today we're focusing on acquisitions in about five or six areas.

Geographic acquisitions in the Middle East, and to a lesser extent in China, market acquisitions in the upstream business, in the water and wastewater business, in aerospace and defense, are all areas of focus for us.

We're also looking at opportunities in other markets, particularly power and mining and minerals, but that would be on an opportunistic basis.

Frankly we're doing pretty well in growing a power business on a boot strap basis.

But an acquisition would still be nice.

Moving now to slide eight, let me talk in a little more detail about our business model.

You can see that we've divided the types of business companies in our industries due to three categories.

Transactional projects, discrete projects and preferred relationships.

Transactional projects are those projects that are lump-sum turnkey, they are big events in faraway places for the most part, tend to be very competitive, lots of pricing pressure, fairly significant amount of risk associated with transactional projects in one form or another.

And that's a big part of what the industry likes to do.

The second aspect or second category that we talk about a lot is discrete projects.

These are projects, events that don't have that big event, far away place quality or the big lump sum turnkey qualities but are still fairly competitive.

So a number of engineering or construction companies like Jacobs can be competing for a piece of work, pricing could well be a factor in the selection process along with qualifications and capabilities, but the projects won't have the transactional risk of the big transactional projects.

We continue to see a lot of discrete project work out there but it is another area where pricing pressure is pretty significant.

And then we have the preferred relationship category.

And as can you see from comparing the two pie charts, ours and what we characterize as the industry model, that is our preferred area of business.

So we're quite different than most of the industry in that regard.

Preferred relationships are those relationships where we work with a customer on a continuous basis for a very long period of time, we usually have some sort of standing agreement with a customer.

It could be called a basic ordering agreement, an alliance, a partnership, a supplier of choice agreement; there's a million different names for it.

But it really involves a very high level of repeat business on established terms and conditions.

And where the competition, if there is any at all, it tends to be limited to who has the best team for the work at the time.

That preferred relationship bottle results in a high level of repeat business.

Our repeat business right now is running more than 90%.

It is a big part of our core and key client strategy.

And they tend to have the biggest spend, both in good times and bad, so the concentration of those clients is a positive.

And it also includes a lot of base load work.

And we think the base load business is particularly key right now.

More than 40% of our business is what we would characterize as base load.

And what makes that important, is base load business is the first business to recover in a down cycle.

And so as the down cycle ends, the business comes back, it will come back in the area of base load before it comes back in big projects and well before it comes back in the big events world.

There is only limited pricing competition, as I mentioned earlier, in the preferred relationships part of the business.

But there still is pricing pressure.

The customers expect that you will provide market pricing for the work you are doing in those preferred contracts, and their procurement departments are pretty effective at making sure that they get that market pricing.

So there is some pricing pressure there, although it is not as severe as it is, say, in the lump sum turnkey arena.

Basically our message here is that we're sticking to our business model.

We're executing well right now.

We had a good quarter from an execution standpoint last quarter.

We're continuing to expand our relationships with these core and key customers.

We're going to continue to avoid the high-risk transactional projects events.

And obviously as I mentioned earlier we're going to stay focused on cost control.

So we think our business model is the right one for today and the future and we're sticking to it.

Moving on now to slide nine these are the markets we serve.

One of the things we've tried to do as a company is to diversify our markets.

Let me talk about each of these markets in a little detail.

But let me characterize them first broadly.

Overall the market is slow, but I would say marginally better.

We think we're seeing a little bit stronger marketplace out there than we saw six months ago or even three months ago.

And that we may be seeing or have seen the bottom of the cycle, at least from Jacobs' perspective.

By no means has CapEx been restored.

The strength of the market is not -- I would not characterize it in any way as robust, but it is fractionally better and that is a positive.

It is a little glimmer of hope, if you want, for where the markets are going from here.

Let me talk about the markets in detail, and I will start at the top of the chart there with the pulp and paper, high-tech food and consumer products category, that is our all other segment.

That business actually is pretty good.

There continues to be continued improvement in that arena.

We're seeing lots of activity in the packaged food and beverage business where we're pretty active and have a significant share, plus some real opportunities for growth.

And pleasantly, for us at least, there's a very significant amount of increasing activity in the towel and tissue part of consumer products and in pulp and paper generally.

I think I told you last quarter that was looking up.

It continues to look up.

Investments are growing in that arena after a very long dry spell.

So we're a little more positive about this sector of our business than we have been in the past.

Moving on now to chemicals, our chemicals business is growing.

It is mostly based on fairly significant small project work, so it is base load in the way that I described it earlier, for the large part.

There's a lot of pent up CapEx that has yet to be released.

And then there's a fairly good flow of major project activity in the Middle East, India and Singapore, all places where we are very well-positioned today or are increasing our position as we go forward.

So we think the chemicals business is going to be a little bit better as we look forward to the next few quarters.

Moving on to upstream oil and gas, that's really for us two areas of focus - oil sands and gas processing in the form of both gas storage, gas production and treatment.

Both those businesses in the upstream business for us continue to improve.

Although a little more slowly than I would like, -- particularly in the area of oil sands.

Oil sands has been a little slow to come out of the block compared to the investment levels and the oil prices that we're seeing today.

But the forecast for investment in the oil sands is for CapEx to triple in the next two or three years, and there's something like $178 billion of potential backlog in the oil sands alone.

We're in a terrific position to take advantage of that.

It is just a matter of how fast will it come.

But we do think that's going to be an area that will help lead the recovery from the oil and gas business.

Our gas side is also doing well.

This is the part of the upstream business where we have some real strength.

If you looked at the last quarter, we announced four major projects in the upstream business.

And not all of our customers are willing to let us announce their projects.

There's a bulk and gas storage and gas production and treatment facilities.

It is a good, strong business for us with lots of opportunity for growth.

As I said, this is an area where acquisitions would make good sense as well, so we'll continue to look at acquisitions as a possibility.

And then we move on to refining.

The refining business is just slow.

There's no other way to describe it.

Crude prices continue to drift up.

The spread between the heavy crudes and sweet crudes has opened up again.

And crack spreads are improved, so there's some good signs for the business.

But I don't think we're going to see any major new investment in refining, outside the Middle East and maybe those projects that are driven by national governments in the near term.

For us that's probably not such bad news because we're focused mostly on environmental capital, maintenance capital, crude slate changes, those kinds of projects.

And there, we're seeing increasing spend in a number of areas; particularly maintenance capital is coming back nicely.

And that is a positive as we see it today.

We've got a lot of environmental spending, both coming out of the administration, and through things like MARPOL VI that we can see coming as well.

And so that's a plus.

And obviously with the crack, the spread between heavy and sweet crudes opening up, and the fact in general the world is getting heavier and sourer, we think that that will also continue to drive a number of small projects in the crude slate change arena.

So we're certainly not glowingly optimistic about refining but in our segment of the refining business, we think things are going to be reasonably good.

If you look at just a couple of other data points, I want to go back to the Middle East for just a second.

If you go across these markets, chemicals, upstream and refining, Aramco, for example, has announced they are going to spend $90 billion over the next five years in these areas, particularly in the gas part of the business, so we think there is again real opportunity for us to drive our growth.

Moving around the bottom of the chart now to the infrastructure business, that's about 9% of our business today.

Most of that for us is transportation-related infrastructure, planes, trains, automobiles, shipping, ports.

It is a huge market with significant backlog in demand.

We think that business is going to get better here over the next couple of quarters.

The stimulus, as I told you before, didn't do a lot for the industry.

It didn't fill up the hole created by the shortfall in gas tax, sales tax, local revenues at the state and local level.

But that appears to be changing for the better a bit.

We see some evidence now that state tax revenues are starting to go back up.

We got a higher Act pass which will help in terms of funding for SAFETEA-LU at at least the historic $40 billion level.

We can still use more support from the government in the infrastructure arena but at least in the US that is a positive.

In the UK we have similar challenges right now with the elections, and what that will mean to the business going forward.

But overall we're a little more positive about infrastructure today than we have been in the last couple of quarters.

Still not the market we think it could be or should be, because of the lack of support from the tax side of the world, but I think a little better than maybe we were saying it was a quarter ago.

And then of course the water and wastewater business where we're relatively new is a huge business with a lot of pent-up CapEx.

I think our opportunity to grow there is pretty significant.

We will do that by taking share in the near term and then finding additional acquisitions.

Moving around the chart now to buildings, you will see a little anomaly here in that we have two colors for buildings.

I guess you would call that pink or polka dot and regular red.

We've changed the way we're going to represent the buildings business going forward, and we've taken the part of our buildings business that supports the federal government, particularly the US federal government, but national governments generally, and taken it out of national governments and included it in buildings to give you a better sense of how that business compares to the rest of the Company.

When we do that it goes from about 5% to about 8%, round numbers.

And so you can see that it is a 8% plus or minus business for us today.

And as we go forward we'll report it that way.

So all of our buildings business will be in buildings, not mixed into national government.

Still a really strong business for us right now, particularly because of the part of the market that we serve.

As you will recall, we are in the healthcare business, we're in the mission-critical facilities business.

Both of those businesses are very strong, lots of activity.

This business is also a beneficiary of very significant stimulus money, so that's been a positive for us.

We also see lots of opportunity for geographic expansion.

As is typical of Jacobs there are some markets that most people have written off, like buildings and infrastructure in the Middle East, that we now think represent opportunities for us.

And we'll continue to see if we can't leverage those opportunities as we go forward.

Good business.

Good demographic drivers on the healthcare side.

And so overall I think a business that we're pretty positive about as we go forward.

The next section is our national governments business.

Remember that's made up of two parts.

Research development, test engineering, scientific and technical consulting is one part.

Environmental is the other part.

Let me talk about the environmental piece first.

We've talked for forever, until we're practically blue in the face, about the UK's nuclear cleanup program but it is really starting to show some activity.

There are a lot of major opportunities out there.

We're right in the hunt for a couple of particularly strong opportunities.

It looks to us like that that 150 billion pounds of expenditure that we've talked about for such a long time is finally going to turn into work for people like Jacobs and so we're pretty upbeat about where things are in the UK.

In addition the US environmental market is benefiting both from stimulus and, of course, from the Administration's focus on environmental.

We saw another $6 billion allocated to DOE for environmental cleanup and only about a third of that has been spent and so there's $4 billion or so and that will go to existing projects and existing sites for the most part.

So we expect to see a benefit from that, as well.

So that part of the business I think is good and in particular we're excited about the opportunities to expand the share of that market both here and in the UK.

On the research and development test engineering side, that business has been pretty robust.

We made an acquisition, as you recall, in the first quarter of this year for TYBRIN.

We've been adding share in that market pretty aggressively.

I think we had five or six awards that we were able to announce in this last quarter amounting to more than $100 million, the customer wouldn't let us say how much.

Good business for us; some real opportunities there.

Great acquisition climate, as well.

Some things going on that are both positives and negatives.

The Administration has a significant focus on an organizational conflict of interest.

And because we don't make any of the things that we test or specify or analyze, we're in a great position to benefit as the big defense contractors get pushed out of the consulting and testing side of the business, and have to go back to their base businesses of making stuff.

On the negative side, the Administration is pushing hard for insourcing, what are called inherently governmental functions and that has a negative impact on our work.

So far we've actually had it drive more hiring than we've lost in terms of insourcing of staff.

But that may or may not continue.

It is an interesting question, what will happen on the insourcing side.

The other big question mark, frankly, in that area is what is going to happen with NASA.

As you know we're a big NASA contractor.

There is lots of questions about where NASA's funding is going as it goes forward.

And it is difficult as we sit here today to say what that means for us.

In past times like this, the net effect has generally been slightly positive.

Whether that will be true as we go forward though, is some question about that.

And then finally moving to the top of the wheel here, pharmaceuticals and biotechnology.

It is a business driven by drug discovery and an aging population.

There's still a fair amount of activity in things like biotech and in vaccines.

The good news is the consolidations, the big mergers and acquisitions that have taken place in the industry over the last couple of years seem to be behind us now and those customers are starting to spend money.

Another good news point and a caution we'd had for a while now is that it does not look like healthcare reform is going to be a big issue in terms of pharmaceutical CapEx.

So the fact that we're positioned with the leading market share in a commanding position there, we think is a plus for this business long-term.

So overall if you look at our markets, there's some good news spread across the markets.

It's not as good as we would like it to be but it is certainly better than it has been, and we consider that a plus.

Moving now to slide ten, just a quick commercial for the Company.

We think our business model is working.

And that we are, in fact, increasing share.

We'll continue to diversify markets, geographies and services with a focus on being local.

The fact that we have a great balance sheet is a plus because we still think this is a very advantaged time for making acquisitions and we're confident we can continue to deliver on that promise of 15% average compound growth over the long term.

And with that, I will turn it back to the operator for questions.

Thank you.

(Operator Instructions).

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

Thank you, gentlemen.

Craig, could you comment a little bit more on pricing in the marketplace and margins that are embedded in some of the new order flow that you saw in the most recent quarter, and possibly how that compares to a year ago, or even how it compares to the prior quarter?

Sure.

The pricing pressure continues in some markets.

This is not true across all of our markets today but if you look at particularly the heavy process markets -- so, refining, upstream oil and gas, chemicals -- there is still a significant amount of pricing pressure out there.

It probably isn't worse than it was last quarter.

But it isn't better either.

So as we think about margin pressure going forward, we see it continuing but at least at the moment we don't see any further deterioration of where margins might go.

So what that means is, what is coming into backlog looks an awful lot like what is in backlog.

Remember that I told you last quarter that for some of our big alliance agreements in that sector of our market our customers are quick to get the pricing concessions that they want, and they get them effective immediately.

So backlog gets adjusted for pricing concessions more or less when it happens.

So as I say, I think that the margins and backlog in the heavy process business will continue to be under pressure but the pressures are probably not significantly different than they have been.

That's not to say we won't see some further deterioration overall of pricing but I'm not expecting it to be dramatic.

In other sectors of our market we're not seeing significant pricing pressure at all, either because of the nature of the business model or the weakness of the competitive slate.

But a heavy process is the area of focus, which still remains about half our business.

Great.

And one follow-up.

You mentioned you are seeing some more opportunities in the UK environmental marketplace.

Could you comment on the margin opportunity of that business relative to the US environmental work performed currently?

We think that the margin opportunities there are going to be about the same, that those businesses and those projects will earn about the same sorts of margins as what we earn on similar work in the US.

Does that answer your question?

Yes, it does.

Thank you.

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

Good morning, gentlemen, Patty.

Maybe this one is for Noel.

How would you characterize where we are in the cycle today relative to a light period throughout your career?

The way it feels, Mike, is that generally we bottom and I think a lot will depend on the shape of the curve.

But it does appear, the bottom is either passed or we're in it right now.

Prospects are tipping up.

It does not feel a lot different than other periods although it does appear to me, if you go back to the real comparative period which was in the middle '80s, it came out of that awfully slowly.

Our Company did better at the time because we were smaller.

But it came out awfully slow.

It feels to me like it is going to come out better this time and I think it is going to be better for Jacobs because we are just a lot more diversified.

If you go back into the middle '80s we had a very narrow market.

So in my mind it feels like it's going to come out but this is not a V-shaped recovery.

Like we've had -- the one in the '90s, the early '90s, '93, the one in 2000, those were almost V-shaped recoveries, this one is going to come out slow growth.

When you come out of this recovery, do you appreciate your business mix of public versus private sector funding?

Do you anticipate given where spending cycles may go out of this recovery that you would want to lean more towards one area or the other?

I mention that because you talk about wastewater is very attractive, A&D, but also on the power side.

Maybe if you could just follow up on power, has the model changed enough for you to get very significantly into that market?

In terms of the balance between public and private, and where we see it, we want to continue to round out our markets.

So things like water and wastewater are very attractive because we have a relatively small presence.

Good position in the UK, getting started on a position in the US.

And the demographics of that market, particularly the pent up capital demand, suggests that the business will be good and at some point it will be great.

So we're looking at each market in terms of what do we think the short-term and long-term opportunities are, and where would we like to be positioned.

And we're also then of course looking at how are those diversified.

And obviously the water and wastewater market responds to a little different CapEx cycle and taxation cycle than the transportation business does, for example.

So those things are all considerations in how we think about diversifying our markets.

I mentioned that we're keeping an eye on both power and mining and minerals, two markets that we're obviously not in.

If we go into those markets it will be in the segment and the sector that matches our business model.

So I'm not suggesting for a minute we're going to change the way we approach business, or that we're going to jump out and become a leader in the lump sum turnkey power plant design and construction business.

That's not Jacobs' way.

But I do think there are subsets of that marketplace and customers within the marketplace that are amenable to our model and if the right opportunities came along on the acquisition side, we would do that.

Certainly we're going to continue to work with those customers to try to boot strap our growth in that market.

Thank you.

And my final follow-up is when you talk about acquisitions and the ones you've made over the last six months and in the marketplace can you talk about where expectations are relative to multiples expected and visibility on getting transactions completed?

Thank you.

Sure.

In terms of multiples, the multiples are down a bit from their peak, depending on the kind of services that you are buying and the strength of the particular company.

You are probably seeing multiples on the services side in the range of 7 to 9 and on the construction side in the range of 5 to 7.

So those are pretty good multiples from our perspective today.

We've got a pretty good pipeline of deals, and we're expecting that that could result -- and I say could result advisedly -- in a nice, steady flow of actual transactions, but, of course, these things are subject to lots of ins and outs, and back and forth.

And these deals get done when they are ready to be done and not before.

So it isn't something you can rely on with certainty.

Like I say, we feel good about what is out there in the way of potential transactions and our ability to close them but it is a person to person kind of an issue when you get right down to it.

Thank you, Craig and Noel.

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

Good morning, guys.

Craig, can you talk about the level of FEED work that you are seeing.

As you've sensed a little bit of recovery in your end markets have you also seen an increase in FEED activity and how do you think that will bode for the larger projects?

When do you think they can start to come back?

Well, we are seeing a fair amount of FEED activity, and that's probably a bigger piece of the business today than maybe it has ever been because a lot of the Middle East activity for us is FEED work.

And I think that it actually is indicative of why we think the market may be firming up and why things may be getting better.

There are a number of projects that are in the FEED stage today or are just being awarded that are FEEDs that we have every reason to think will turn into major projects.

And some of those represent pretty significant additions to backlog when they do.

We're being pretty careful about putting those big projects into backlog as we sit here today because the customers are still a little schizophrenic about all this.

And so some days their projects are on, some days they aren't, some days they say we'll just push this off for about a year and see what happens.

I was talking to one of our competitors on the phone yesterday and that particular competitor was explaining to me that they had bid a couple of jobs now, and these are lump-sum, turnkey jobs, for the third time.

And they could not seem to get the project to actually get released.

And their view was that the procurement department was simply shopping and shopping and shopping and it was going to keep bidding the job until they got the price they liked.

Which I asked him, well, is it getting cheaper with each round of bids and the answer was, yes, it is.

So maybe that procurement department knows what they are doing.

But I think that is kind of indicative of the unpredictability of the market right now.

It is still a little uncertain how things are going to unfold.

And it goes in part to Noel's comment about we don't expect a V-shaped recovery here.

This is going to be one of those grueling climbs off the bottom as opposed to just a great leap.

Did that answer your question?

It does, but, Craig, would you say that the customer confidence materially improved even throughout the quarter, let alone versus three months ago or six months ago?

Oh, gosh.

I don't have enough consistent customer contact with the same customers to say that any one customer's outlook improved.

I would tell you that when I talk to the customers for the most part their attitude seems to be like the one I described for us which is things are looking better, we can see that things are improving, it feels better, it looks better, the data is a little better, and then they follow that with a -- but we're going to be careful for a while yet.

And so I think what you've got is the indicators are there, but the confidence isn't there yet.

And I think confidence is improving, it is just improving slowly.

Yes.

I understand.

If I could ask you a follow-up, actually related to your comment about cost.

You mentioned that we might not like as much as you cited that you are keeping costs down, and so obviously when we look sequentially if you exclude the charge that you had last quarter, the SG&A is up on an absolute basis pretty significantly.

The question that I have is, how much of that is due to the acquisitions that you've made over the last couple of quarters?

How would we be able to see that you are managing costs?

Well, and that's a problem because I do not know a good way of doing that for your benefit that would not get you too far into the numbers and our competition with you.

But in fact, the addition of those big chunks of overhead is a big factor in the numbers.

As I think I've told you guys before when we add business, particularly in the public side of the world, their G&A costs relative to their revenues are quite high, so those are significant adds to our overall business as we go forward.

There's also some effects of things like the holidays, which impact our G&As positively and so we've had a quarter now with very little holiday time in it so that's another factor that have you to look at when you're trying to see how well we're actually controlling the real costs of the business.

So there's a whole bunch of factors that make it hard for you to see that and hard for me to demonstrate it to you other than you might just have to take my word for it.

That's fine.

But, Craig, is it realistic to say that if you stopped doing acquisitions today and we looked at the next few quarters we should see on an absolute basis the SG&A level off or even go down if you are doing what you usually do?

I would say that, as we said last quarter, our expectation is still that we're putting pressure and keeping control on the costs.

As we start seeing an upturn, which we're still looking forward to, there will be a lagging effect between when our business picks up and when the G&A starts picking up.

So we would expect to see the G&As, if anything, to be flat or down when you are looking at it sequentially as we go through the year.

Thank you, John.

Thanks, guys.

The comparison of our first and second quarter is impacted quite dramatically by the holidays, and the Christmas season because you get a lot of people that take vacation and such.

In Europe and such there's a lot of shutdown and such like that because people just take that time off.

I understand.

Thank you, guys.

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

Yes, good morning.

Just to think about your downstream backlog and revenue lines, how should we think about backlog progressing through the year, ex Motiva, i.e., when do you guys think it bottoms?

And how should we think about revenues on downstream and that's part one of the question for now?

Well, I think -- let's break it into parts and try to talk it through.

The pro-service revenue, we think, will continue to grow but not by leaps and bounds.

Now, remember, we have always said that our backlog is lumpy.

Projects come into backlog in chunks sometimes.

And so quarter-over-quarter predictions probably are not all that valid.

But I think the general trend, if you think about it over several quarters is, we think our pro service backlog is going to grow.

On the field service side of backlog, however, you do have the Motiva effect.

Motiva is about half done as we sit here today, so there is a fairly significant amount of construction work that will pass through our books over the next four or five quarters that represents a significant headwind on the technical professional services backlog side.

So there, I think it will be a challenge to replace Motiva.

We do not really expect to replace Motiva in the backlog long term, at least not in a form like Motiva.

We do expect to replace it in more of our base load business.

But I think that headwind will exist for a few more quarters and that will impact both technical professional services and backlog overall.

Does that answer your question, Andrew?

Yes.

So is it fair to say that ex Motiva we can expect downstream backlog North America to bottom sometime over the next couple of quarters?

Yes, I think that's fair.

And the other thing, can you talk about just more about upstream opportunities.

And, yes, I understand that you are going to get maintenance CapEx from your downstream customers but how are your customers thinking about giving you more upstream work?

For example, should we see more [accelerated] contracts?

And I'm just using that as an example because you've disclosed it, where your customers are giving you more upstream work?

And is it easier to do from a technical standpoint and is there a big difference in profitability?

We think we'll be able to expand our share of the maintenance small cap business on the gas side pretty significantly over the next few years, maybe not quarter-over-quarter but over certainly year-over-year.

It is a good business with margins that are, frankly, slightly better than what we see in refinery maintenance because there are fewer competitors and it is complex in a different way, because of the geographic distribution of the work.

So we continue to believe that's a good growth area for us and that it will be a good contributor to our bottom line.

Just to make sure it is clear, when I say it's better margins than refineries, neither are numbers that would make investment bankers proud.

They are both small.

But one is slightly bigger than the other.

Final question.

What about -- I apologize if you've answered -- what about cash use in the quarter?

What drove this?

John?

Cash issues?

Cash use.

Cash use?

Well, primarily the cash is down because of the acquisitions.

We did -- one of the acquisitions was made in the first quarter but just because of year-end shuffling of some of our customers' cash and such, as they were paying their bills or we were paying our bills, it didn't show up as much in the first quarter as it did right after into the second quarter.

So you see our cash year-to-date is down a couple hundred million dollars and we spent more than that in acquisitions.

We will continue to, as Craig has said, we still see a number of opportunities out there for acquisitions.

And so the primary use of our cash will be, and continue to be, toward acquisitions and growth of the business.

Okay.

Let me follow up with you.

Thank you very much.

Your next question comes from the line of Scott Levine with JPMorgan.

Good morning, guys.

On the end market mix, gave a very robust rundown of the markets, but if we just focus on the change in tone now versus call it six months ago when you initially provided fiscal 2010 guidance, could you isolate the areas where there's been the most significant change, either positive or disappointment, versus your expectations in November for which individual end markets would you say?

Let's see.

That's a good question.

I would tell you that when we started the year we were pretty pessimistic about the world in general and so our expectations were, I would characterize it as low for a number of markets.

Places where I think we've been pleasantly surprised, pulp and paper, as a whole, and food and consumer products; chemicals, another area we've been nicely surprised.

Buildings has turned out to be a nice positive.

The Obama effect, at least to now in the research and development, test engineering business has been a plus for us.

So those markets are probably where the positives have come in.

Infrastructure and refining have turned out like we expected, maybe not quite as bad but certainly not an order of magnitude better.

Oil and gas has been a little weaker than we thought it might be.

That was a market where we weren't sure where it would go.

But our positive side, the glass half full view, was probably better than what we're actually seeing.

Our glass half empty view is probably worse than what we're actually seeing and so I guess that puts it kind of in the middle.

Pharma is about what we expected, so that hasn't changed very much.

I think I covered all of the markets.

Yes, it does.

And you mentioned that chemicals was maybe a pleasant surprise versus six months ago.

Could you talk about in a little bit more detail maybe -- we saw good numbers out of DuPont, saw a press release for the contract with DuPont this morning, maybe a little bit of thought about what is driving the difference versus expectations in that market specifically.

I put it down to underspending for a very long time.

When I look at the chemicals business, I would have told you five years ago, and probably did tell you on this call, that we expect our chemicals business to grow with GDP.

And whether you look at US GDP or global GDP the growth's been okay, at least historically, looking at that five-year kind of time frame, but the spending did not match that growth.

And I think we've finally reached that point where, from a CapEx point of view, the business growth driven by GDP has outstripped the ability to hold back capital, and we're starting to see the capital come forward.

Part of that is obviously driven by the Asian Tiger's consumption issues.

But I think it's as much as anything, it's just pent up investment and need for capacity because, again, remember most of our business is not giant brand new chemical plants in faraway places.

It is helping our customers with their existing facilities in their established venues.

But DuPont announcement yesterday was an example of that.

Got it, thank you.

One last one, if I may.

Would you characterize the UK government elections as a swing factor in your outlook for either the infrastructure market or the environmental cleanup market?

Or is that likely not much of an influence in the outlook in your view?

I think it is likely to have more impact on the infrastructure market than on the environmental cleanup market.

I really don't think it will affect the environmental cleanup side very significantly.

But I do think that looking forward, the infrastructure market funding-wise could be challenged and it will depend a lot on the government's commitment in terms of how it goes forward.

I think that is one of the uncertainties that is out there that I don't know how to handicap it, frankly.

So it is just something we're going to have to watch and try to understand as it unfolds.

But it is probably more of an impact on '11 and beyond than on '10 itself.

Yes, that is for sure.

Understood, thank you.

Either way.

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

Good morning, gentlemen.

Congratulations on a good quarter.

A lot of the questions I had have been asked.

One of the questions I still had was as you start seeing revenue on some of the shorter cycle base load activity coming back, how does that offset pricing in terms of your operating margins?

I don't know that it offsets.

What we think when we talk about what's going to happen in that aspect of the business, is we think that it's a volume-first growth.

By that I mean that volume will build for us, and we'll get more unit, even before unit margins improved, in fact unit margins may continue to decline slightly, even as volume is improving.

Got it, okay.

Second question was you talked about gas storage and gas maintenance business.

What is making you so positive and excited about this?

Is it the shale plays?

And is it something overseas as well?

I would love to hear a bit more about that.

Okay.

It's a combination of a number of things.

Gas as an energy source has been under utilized for a long time now and so what we're starting to see is the realization that there's lots of gas in the world and that it is a useful thing to do to get it and either make chemicals out of it or use it for energy purposes.

So the things that are exciting us is that increased focus on gas, whether it is tight gas, shale gas, those kinds of things in the U.S.

Or whether it is issues like making sure that there is security of the gas supply which is driving a lot of gas storage work in Europe, for example.

So, it is a mixed spectrum.

And then of course when you go to the Middle East where gas has been a waste product, either being flared or pushed back downhole, it is a tremendous source of potential resource for a chemical manufacturer, as well as power generation.

And I think we're going to see -- as well as power generation -- I think we're going to see our Middle East customers monetize their gas assets to a much greater degree than they have in the past and so all of that is driving a boom in the gas side of the upstream business.

And we're just well-positioned for that relative to a boom in the oil production side.

Okay.

Thank you very much, gentlemen.

That's all I had.

Your next question comes from the line of Richard Paget with Morgan Joseph.

Hi, everyone.

Just getting back to the cost question previously asked, how much more could you possibly squeeze out of your structure, or at this point it's all just keeping a lid on SG&A and variable costs?

Are there more offices to close or are you pretty much gone through that process and there may not be much more to squeeze out of that model?

We think that there are opportunities to continue to drive our costs down through, for example, some additional office closures is one area.

There's some ways to be a little smarter about what we spend that take a little time to implement.

There's some restructuring that results in -- that has to be done and managed, particularly in Europe, it has to be managed intelligently and carefully and takes a little time to do if you don't want to trigger all kinds of bad things.

And so we believe we can continue to push, in relative terms, push our dollars down even further from where they are today.

At some point we'll probably get more to where it is a matter of maintenance and that will be a little bit of a function of how the markets behave because at some point if the markets turn back you have to respond to that.

There is a lag time before that results in higher G&As but it is not a long lag time.

So I think we'll see continued improvement for a while yet, and then I think we will be in more of a maintenance mode.

Okay.

And then getting onto guidance, midpoint suggests that the second half of the year will be more or less similar to the first half of the year.

Without getting into not giving guidance within guidance, what sort of scenarios or risks or uncertainties on the second half being less than the first half should we look at?

Is it timing on some of your base load work coming in, is it something with Motiva, if you could just give a little color on that?

It is hard to point to any -- it is not one particular event or even one or two events but just how quickly we see this upturn.

On the negative side we really aren't sure with all of the pressure that's being put on from the federal government for insourcing jobs and the pressure on NASA and things like that, how that could affect us over the near-term, the elections we've mentioned.

Many of the things we've already talked about have both pluses and minuses to them that could push us to various parts in the range.

So it's just there's a lot of uncertainties, both on the positive side and the negative side that could affect not only the longer term growth into '11 but the balance of '10.

And that was not giving guidance within guidance.

All right, thanks.

I'll get back in queue.

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

Yes, Barry Bannister of Stifel Nicolaus.

Barry, do you ever get tired of explaining how to pronounce the name of your company?

It seems like you have to do that pretty often?

I feel stifled by it.

Anyway, the thing that concerned us last quarter was when you spoke of a 4% operating margin as a theoretical bottom but we've done really well here with a 4.75% margin.

SG&A you've alluded to being a 9%, 9.5% peak as a percent of sales despite a TPS shift.

And gross margin which has lagged a little bit looks like it certainly got some more upside than downside particularly as you go into TPS.

So are you willing to say here since you are starting to see bottoming your end markets that maybe 4.75% operating margin is going to be the bottom instead of 4% this cycle?

I hate to disagree with you, but I do not think we ever said that 4% was going to be the bottom.

What we said is we didn't expect to see it go down to what historically had been the bottom.

We didn't give a floor.

But what I think we're still looking at is that there is still the possibility of a little bit of softness in the pricing as we go forward over the next few quarters.

As Craig said we expect a volume lead to pull us out of this downturn more than a pricing jump, and the pricing will come after that.

So given that, we could see a little bit more softening in the pricing.

And we're not going to call whether that's a -- just exactly where that is, or just exactly when that might happen.

But it certainly could -- we could see it over the next couple of quarters.

The operating margins might still have a little bit of softness to them and we would hope to see that offset by volume pickups.

If we look back at TPS, going all the way up until the '08 peak, the revenues, bookings and backlog all tracked each other.

But there has been a huge divergence with falling LTM revenues and bookings and yet backlog has remained very resilient at over $8 billion.

Should we take that as a slower burn rate due to the changing mix of the TPS, perhaps more long-term supply contracts and service contracts?

What is the read on that?

I don't think there is a dramatic change in the burn rate on the TPS.

There might be a little bit as the federal programs have grown.

They would tend to be a little bit longer term.

But on the O&M side we tend to book those a year at a time anyways so the backlog reflects just a year worth of our expectation and it just rolls in quarter after quarter.

But I think drawing any conclusions over the last 12 to 18 months has been really difficult because of the cancellations and things like that, that have affected the backlog, and particularly the field services side of the backlog much more heavily than the professional services, but they have impacted the professional services as well.

But I think, as we've always said, historically, as we come out of any recession or any growth cycle, it is led by the professional services.

And I think we'll see that over the next -- certainly over the next three to five quarters, we're going to see the professional services leading before we see the pickup in the field service.

Okay.

And then lastly I don't think it gets much mention but you've made huge strides on operating cash flow as a percentage of cash collections from clients.

Your cash flow yields have been extraordinarily good, 15 year highs this cycle at the peak.

Have you made progress on DPOs and DSOs where you think you can keep the ground that you've gained?

Because since the recession your DPOs have fallen from about 19 days to about 14 days, while your DSOs have fallen from about 57 days to 49 days.

So will you be able to stretch out those payables and accelerate those receivables and keep the cash flow this high?

Certainly that's our goal.

A lot of that has to do with the mix of business as well.

We actually tend to get better cash flows off of our field services business than we do on some of our professional services businesses.

But, we think that -- we're trying very hard and we believe that we'll be able to keep most of that gain going forward.

Yes.

Well, there's lots of good in that too.

But it doesn't hurt that we're in a declining revenue cycle either.

That also helps the numbers as well.

When revenues are going the other way, it will hurt the numbers.

Did that answer your question, Barry?

Sure did.

Thank you very much.

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

Hi, good morning.

Just a follow-up on the cash.

If the deals that you want to do actually get done, where do you think the cash balance goes over the next year or so?

Do you think that you would mostly deplete the cash that you have now or do you think that you would still be left in the hundreds of millions?

We're probably going to have a few hundreds of million on the balance sheet at any time in anticipation of what's out in front of us.

We would rather not do deals with debts and so we want to have a cash balance.

But I don't think that it will continue at the kind of level that it has been.

Just remember that it's taken us a couple of years to build this up over a period of time when acquisitions were too expensive and so we will take a couple of years to spend it.

But even with that we're still generating cash and we would expect to see a favorable cash balance there because we're generating cash as we go.

Right, that makes sense.

And then what are some of the ways that you think that the NASA situation could play out, and how it might affect your revenues?

Scenarios run from business as usual which would be a positive for our company, or a shift in spend to other.

Not the Mars world but a continuing support of NASA's mission.

That would probably also be a positive.

To a complete reversal of NASA spending to strictly, what I will characterize as the the science function which would be a relatively big negative for our business.

And there about 18 zillion alternatives in between.

So long as there is, I'll say this more positively than I think it probably should be said, but so long as there is a flight component to NASA, we'll do pretty well.

Because not only do we support things like the manned space flight but all forms of NASA's support for the aerospace world.

If NASA's mission became purely science, we don't have nearly as big a role.

Does that make sense?

It does.

But does the constellation cancellation, does it have any immediate effect on revenues over the next several quarters?

Not that we see yet.

Okay.

When might you know about that?

Like I said, it's one of those big uncertainties, and it is an evolving factor.

If you stop and talk to one of our NASA customers on any given day you will get responses that range from the sky is falling and there's not going to be anybody working here in six months to it does not mean anything at all, we've got all of this stuff that we still have to get done, to put it in layman's terms since I'm not a rocket scientist.

And you could even get those two different responses from the same customer on two different days.

And so it is really hard to say when this thing is going to sort out or what it is going to mean.

It is one of those places of pretty significant uncertainty as we sit here today.

Okay, that's fine.

Just last, quickly, did you have any cancellations in the quarter?

There were no significant cancellations.

There's always little stuff.

But there was nothing significant.

Okay, great.

Thanks a lot.

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

Hi, thanks for taking my questions, I don't have too many.

You had said the JJG acquisition was less than $100 million in backlog, and I was wondering if you could just specify a little bit more closely what that was.

I think that's pretty close, it was, like, $96 million or something like that.

So roughly 100 million?

And a lot of people have asked about SG&A.

I'm just trying to get a sense of where is the SG&A.

Is it in the selling side, is it the G&A from the acquisition side?

Are you seeing a pickup in the selling costs, costs of selling?

No, we're not.

Right now the costs of selling for us, remember our business model is pretty stable from a sales cost point of view.

And so if anything our costs of selling are at a relative low given the volume of sales.

Now as we start to see more energy in the market, more opportunity, we'll probably dial that particular G&A cost up first to take advantage of the market opportunities as we see them.

And so that would be the first piece of G&A to start to rise, the operating G&A will be the last piece.

But at least right now we're not there yet.

I'm just trying to foot the difference between SG&A flat to slightly down the remainder of year with a slightly more optimistic view on revenues.

Is it the offset of the SG&A?

I'm just trying to foot that difference.

I'm not sure that I understand the question.

Is sounds like you said that SG&A would be flat to slightly down for the remainder of the year.

Is sounds like selling costs will increase with revenues.

And so I'm just trying to understand why SG&A is not going up despite, or if it implies that revenues are going to be flat to slightly down which I don't think you are saying?

I do not think that we said that selling costs were going to go up immediately.

I think that they will track as business activity picks up a little bit but selling costs are still a relatively small part of our overall SG&A.

The big component is all the labor, everything from Craig's and my salary on down through the support services and regional management and things like that.

Bull the second biggest piece is facilities and as the business picks up we won't be adding facilities immediately because we do have some added capacity in there.

And as business picks up, some of the folks that are maybe on SG&A now will also get a little bit more billable so we'll get some benefits there.

But the selling part of the business, we don't have big selling costs like big transactional folks do.

In other words, we don't go out and have these huge project specific selling costs, for the most part.

The only place that tends to be a little bit larger is when you get into the federal government because on some of their bigger multi-year programs the proposal process tends to be a little bit bigger.

But in our normal sales activity it is a fairly constant and steady cost.

And it's a small number, less than 1% of revenue.

Okay.

I appreciate the color on that.

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

Thanks for taking me in at the end.

Craig, as you look at the potential for your various segments over the next couple of years, and assuming the refining cycle is down for a while, do you have a potential for another large Motiva type project to come through?

Could we see the big surge in field services again?

I'm thinking about the chemicals, or the upstream or the infrastructure segments.

Not to say that we wouldn't see a Motiva come through, it's possible but we are certainly not planning on it.

When I talk about Motiva as a headwind and the fact we're not planning on replacing Motiva, I do not think that we will replace it in kind.

Now I say all that and yet there are the occasional opportunity comes along where we're particularly well-positioned and the numbers are still big and we could easily win a piece, or even all of a major project like that.

But it isn't something that we're going to base our business model around and I certainly don't think that we need that in order to continue to grow the business.

Does that answer your question?

It does.

And it sounds as if it also potentially could take a little bit of the volatility out of the business too that we've seen both ways over the last say, four, five years.

No.

I think that that is absolutely right.

Okay.

And so does it also suggest then that field service will not get as large again and we'll see continued growth on the TPC side?

I don't think that the contribution of field services from big EPC projects will be a big growth factor relative to where we are.

I do think that there's lots of mid-sized field services projects out there that in the aggregate, when you add them up, will be significant.

But I also think that the base load capital is still a huge opportunity for us from a growth perspective.

I think there's opportunity for us to take significantly more share in the base load world and that will bring a fair amount of field services dollars with it.

Okay.

And Craig, does that also apply too to the infrastructure side?

Because I had always assumed that you had to get larger in the field services side of that on big projects.

In the big picture, at least in the near future, the future that I can see as I sit here, field services revenue from infrastructure is a non-starter.

That business is still, for the most part, hard money and so we're really not going to participate.

And so I don't expect much contribution at all on the field services side from the infrastructure business.

Okay.

Fair enough.

Thanks.

I appreciate the help.

Your next question come from the line of Will Gabrielski with Broadpoint AmTech.

Good morning guys.

One question with ten parts.

No, just kidding.

So margins improved quarter-to-quarter.

And you guys have talked about the one big project burning through at a higher rate through completion and so could you update your completion target for that?

Will the burn be linear from here on out because if I assume that revenue was flat quarter-to-quarter your scope margin or your margin on your non-pass through work was actually up about 30 bps and I was wondering as that pass through number declines, all else being equal I assume you just continue to book at the same margins if we won't see margins get back up to high 4%, closer to 5%.

All these projects, big projects like Motiva, follow an S-curve.

An S-curve is a cumulative curve, you can think of it as a bell curve on spending if you want to look at it on a piece-by-piece basis.

We're at the peak of the bell as we sit here today.

And so being half done means that we've got about half of the construction spend left in front of us, half of it is behind us.

And so each quarter there will be a little smaller increment come out of backlog, and the last quarter the project will be very little because there will be very little backlog left.

And so it's not a linear thing for the next five or six quarters, it is more in the coming quarter than in the quarter after that one and so on.

Okay.

So which quarter would we see the peak in capacity revenue related to that project?

Probably either last quarter or the one in front of us.

Just to clarify, since we're half done, almost exactly at the end of the quarter, the two quarters are probably going to be pretty similar.

Any particular reason why you think oil sands might be taking a little bit longer to come back given the amount of activity we're seeing in terms of project sanctioning targets and FID target dates being set?

Let me ask Noel to comment.

Noel was just in Canada last week, and so he has the most current information.

Yes.

What I would say is, and I think I told Craig this after I got back, with $85 oil or whatever it is today, but it is in that range, I was a little surprised at what I would call the slowness of the rebound.

People are being quite cautious.

Now, in my own mind, that's good because it doesn't look like we're going to go through this hyperventilation we went through last time.

And so people are being cautious.

But they are certainly talking about the pickup.

And I guess the encouraging thing that I got out of the meeting last week, and I met I guess ten different CEOs when I was up there, there is more commitment to the long term of the sands today by more of the super majors and other oil companies than there has been before.

And so most people that are in the oil discovery business are seeing this as a long-term, secure reservoir, and I think that they are all convinced that the price of oil is probably going to stay at a point where it will be economic.

And so I come out of it very positive for the long term but people are being careful.

I think Craig said it before.

That they are not going to go back to the boom cycle, at least they are going to try not to go back to the boom cycle we looked at here in the last couple of years and what has been the historic boom cycle for the sands.

If that answers your question.

Yes, it does.

I appreciate it, guys.

Thank you.

Your next question comes from the line of Chase Jacobson with Sterne Agee.

Hi, guys, how are you?

I wanted to talk about the water/wastewater a little bit.

We've heard a lot of E&C companies talking about getting more involved in this market given the growth potential.

I was just trying to get a little bit more color on what your strategy is, other than acquisitions, in really going after share and keeping your margin and gaining traction with the customers on that side.

If you could just give a little color on that.

Sure.

A couple of things.

To give you a little bit of background, for a long time we were resistant to being in the water and wastewater business.

And the rationale for that at the time was that it is a very local business and many of the people who are in it feel a need to be in every little town in the United States, waiting for their once every 20-year water treatment plant.

And so they have eight people in Wichita, Kansas for 20 years, and then they do a big j ob, and then they have eight people in Wichita, Kansas for another 20 years and they lose money 18 of those years and make money two of them.

And that was not the business model that we were interested in.

As we've grown scale-wise, however, what we've found is that we have a significant presence in about 20 or 25 major cities.

And we're building relationships and engaging in the community to support the our transportation infrastructure businesses, some of other businesses that we do in those communities.

And that in those communities the leverage is very significant to also be in the water and wastewater business.

And so we're taking on these big cities like core clients, treating them just like we would treat a core client, and we believe that as we do that we'll be able to take a significant share of water and wastewater in those communities.

And we don't ever have to be in Wichita, Kansas.

I love Wichita, I spent years there, that's why I pick on it.

But 250,000 people does not represent a market for Jacob's business.

And so that's our overall strategy and we'll do that by acquisition, as we've already pointed out, and by leveraging expertise that we acquired through JJG and that we already had in the company through previous acquisition and that we have in the UK through the Baptie acquisition, into those businesses.

Because technical skills are a significant factor in the selection process.

Remember there is no price selection to speak of.

And so that's where the leverage comes for us.

One of the things that made the JJG acquisition so attractive was their huge concentration in Atlanta.

That's very unusual in our experience and that's exactly the model we're trying to follow as we develop this business.

Does that answer your question?

Yes.

It seems that you are taking a little bit more of a conservative approach, penetrating the customer deeper and the business will come to you eventually.

That's it.

All right, thank you.

Your next question comes from the line of Justin Hawk with Robert W.

Baird.

Good morning, guys.

Just a quick question.

I know that we're running a little long here.

Just on the infrastructure business, I was wondering if you could comment on the municipal bond market and the infusion we've seen with Build America bonds and if that's doing anything to buoy your confidence.

It seems like you are a little more positive this quarter than you have been.

It is and it is in part for the reasons you just described.

When we were pretty upbeat on infrastructure, we talked about the municipal bond market and the support that the local communities had for solving their infrastructure problems with or without the federal government.

We went through a cycle that was pretty hard, even if you passed a sales tax revenue bond program to get the bonds and to start the work.

And we are now starting to see, through the Build America program and otherwise, people actually going out and trying to turn those sales tax revenues into bonds so they've got CapEx money.

And that's one of the positives.

Also I just saw a report here last week, I'm going to say, that shows that tax revenues at the state and local level are finally on the uptick, they've turned back up.

That is another positive as we sit here today.

And then as you may recall, we were pushing hard for the federal government to do something about the transportation bill and the jobs bill, both got done together and I think that's another positive.

And so that really is what contributes to what is definitely a little bit more positive outlook about infrastructure than what we had three months ago.

Great.

That's very helpful.

Thank you.

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

Wow, I got in there.

How are you?

Just a quick question.

It sounds like we're getting back to the more historical Jacobs' business strategy with acquisitions.

Is there enough in the pipeline in 2010 that by 2011 we could think about Jacobs getting half of their EPS growth or a third from acquisitions and the rest organic?

Are we getting to that point yet where you've done enough where there is enough in the pipeline?

John, you want to comment?

It is the intangible problem.

Unlike historically, it takes a while for us to really realize the acquisition growth that we acquire, because of the intangibles, amortizations.

And so while we'll acquire, and I think the acquisitions will contribute a third, it takes maybe two or three years before we actually start seeing that.

And maybe even a little longer in some cases depending on the nature of the business.

But no, we don't expect to see the longer term mix change that much.

We'll still have that third, plus or minus, coming from acquisitions, and the balance coming from the organic growth and what we do with those acquisitions after we get them.

Yes, I think, Jamie, one thing to think about here is the actual acquisitions, the earnings we buy, are certainly impacted by the amortization intangibles, especially as John pointed out in the first two or three years.

But usually with those acquisitions we're able to make some things happen fairly quickly in terms of reducing their costs and expanding their market share.

And those things tend to be positive in the shorter term.

And so as you look to the out years, I believe that these acquisitions will be contributors in 2011 and 2012 but probably not at the half kind of number that you mentioned in your question.

Okay, thanks, I'll get back in queue if there are any more questions.

There are no further questions at this time.

I would like to turn the call over to Mr.

Prosser.

I'll turn it over to Craig.

Nothing much to add.

We appreciate all of your interest in the business.

We think we're finally starting to see the light at the end of the tunnel, to use a very tried and true kind of phrase.

Things are going to get better.

We are confident they will get better.

We just wish that they could get better faster so we would all be happier with the results.

And with that, everybody have a good week.

This does conclude today's conference.

You may now disconnect.