雅各布工程 (J) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen.

And welcome to Jacobs Engineering third quarter conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Patty Bruner to read the forward statements.

Thank you Peter.

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 managements 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 conditions and results of operations contained therein.

And the most recent Form 10-Q, for the period ended March 31, 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.

And now John Prosser, CFO, will begin the discussion.

Thank you Patty, and good morning.

First, I'll briefly go over the financial highlights and then turn it over to Craig Martin, our CEO, to give an overview of the business conditions and what we're seeing today.

As we reported -- if you go to slide 4, as we reported, the EPS was $0.15 for the quarter, $19 million year to date, $1.35 or $169 million for the nine months.

Those numbers do not reflect or do reflect the impact, I should say, of the charge we took in the quarter for the adverse judgment that we received on the litigation in France.

Also includes the impact on the first quarter of the Houston sublease that we took a charge for.

So, if you take those out and look at just the operating results, if you go to slide five.

The diluted EPS for the quarter was $0.63, that's earnings of $79.3 million, and for the year to date it's $1.87 or $235.1 million.

Our backlog, which I'll go into in a little bit more in a minute, was disappointing.

It was down to $13.5 billion, however we still have a very strong balance sheet.

Our net cash did increase from last quarter.

It is now sitting at $848 million, that's up over $100 million from the prior quarter.

And we have revised our guidance to $2.30 to $2.65 from the old guidance range of $2.15 to $2.65.

And that guidance does exclude the France litigation and the Houston sublease charges.

If we go to slide six, just the history of our earnings.

The last couple of years have been disappointing.

If you look at the blue bars under the curve, it still shows on a 10 year trailing, we still are meeting that guideline that we talk about of 15% [compounded] earnings growth that comes in at 17.2 through the year ended - - or, the period ended here July 2nd.

That also does exclude those special charges.

Going to backlog as I said, the numbers were disappointing coming in at total backlog $13.5 billion, the professional services backlog was at $7.8 billion.

Those are down from a year ago.

They're also down from the last quarter.

There was really nothing unusual in the quarter either in any big wins or any significant cancellations.

We have cautioned you folks in the past that backlog can be lumpy.

And, while it's been fairly consistent the last few quarters, we did have a slow booking period.

We don't always have the ability to control when things are actually put into backlog.

I'd also remind you that we do have the effective Motiva working through the backlog, which continues, and will continue, for another at least 12 months.

And, also, we had some scope reductions, scope adjustments in some of our NASA work, although that was not a significant impact.

But, it does show in most of the NASA backlog we just book one year at a time, so we don't see the full impact of the multi-year awards that we have with NASA.

I would say though, that as we've gotten through the quarter, it does appear that our prospects are improving.

And we would hope to be able to reverse this trend soon.

With that, I will turn the call over to Craig to talk about the overview.

Good morning, everyone.

I'm going to talk about five things in terms of how we're going to continue to grow the Company.

The first two, our business model and our market diversity, I'm going to talk about in some more detail on subsequent slides.

I'm on slide eight right now.

But I thought I'd talk a little bit about the other three while we're here.

We continue to believe that our multi-domestic strategy is the appropriate way to approach the market.

And we continue to expand it geographically.

We think being local drives a significant base load of work and then that base load gets you leverage for larger projects as they come along.

Our focus right now, in terms of that multi-domestic strategy, is to expand our position in the Middle East.

Both to address the public sector projects, the infrastructure related and buildings related work, as well as the process work in the private sector.

Those are both important because the spending there is very significant in both categories.

Right now, Saudi Arabia has about a $200 billion, five year CapEx program, of that about $130 billion is not process work.

It's other work.

So you can see that's a very significant opportunity for us.

And we have not yet penetrated that business in any significant way in the Middle East, although we have a foothold in Abu Dhabi and opportunities to grow in Saudi Arabia.

And then, of course, the private sector spend in the Middle East gulf wide is going to be huge as well.

The process industry span and we're continuing to position for that.

We also want to expand our geographic presence in China.

Get positioned on the ground with permanent operations.

We're in the progress of doing that now.

That'll probably be driven in part by an acquisition.

And we continue to expand our position in India, as we see India as both a great market locally and a tremendous leverage opportunity for our business across the globe.

Our multi-domestic strategy is working.

It's one that we think will continue to work into the future.

And we're keeping the pressure on our growth in terms of being local to our clients.

The next bullet - drive down costs continuously.

You've heard many times from us that we believe that driving your costs down helps you serve this industry effectively and increases profitability in times when margins can be pretty tricky to obtain.

I think we demonstrated we had a very good quarter from a cost control point of view.

Those benefits continue.

They are offsetting the margin pressure to some degree.

Although, the margin pressures in the industry are ongoing and some markets are still pretty weak and effecting us from a margin point of view as well.

And then acquisitions-- we always talk about acquisitions.

It continues to be a very important part of our growth strategy.

This last quarter we announced the acquisition of TTGSI.

That's the government IT services arm of TechTeam.

That's subject to shareholder approval.

That process is in progress.

We don't expect any problems with that and expect to be able to close that deal here in the next couple months.

We think that leverages us further in the government services IT it's a very large market.

Just the services part of that market, domestically, we think is north of $25 billion.

And, that means it's a great opportunity for Jacobs to come in and take market share.

It's a place where we think our strong cost posture will help us considerably in growing share against some of our less disciplined competition.

So we're pretty happy with that acquisition.

We think there'll be opportunity to leverage that acquisition with additional acquisitions as we go forward.

But there are a number of other areas where we see opportunity as well.

We continue to see terrific opportunity in the aerospace and defense arena.

Both in the US, largely driven by the organizational conflict of issues - interest issues that the administration is pushing.

But, also in places like the UK where we see opportunities to increase our position and expand our role with the Ministry of Defense.

We also see geographic opportunities in the Middle East and China.

I've talked about those.

And we see service expansion opportunities in water and wastewater, in infrastructure generally, and in the upstream business.

So, those are all - remain areas of interest for us and there are a lot of good opportunities developing in those markets.

And there remains an interest in our part, although I can't point to any specific acquisitions, to expand in to the mining minerals business and in to the power business as new business lines for Jacobs.

Those are the two businesses that, when you look at our pie chart, are the most obviously missing.

With that in mind, let me turn to slide nine and talk just a little bit about our relationship based business model.

We talk about this every time because we think it's important to differentiate Jacobs from most of our competition.

And let me go to the industry model on the right-hand side of this slide first.

The industry is driven around transactional projects.

These are big events in far away places.

They're lump sum, turnkey, competitively bid work.

It's how the industry has for the most part gotten business over the years.

And it can be -- it can create a lot of opportunity to build a backlog.

The challenges are it is very competitive.

Pricing is extremely tight right now.

The big events are fewer and far between.

And, so there's more risk being taken.

And we think this is a very tough business going forward.

And, in fact, we think it's been a tough business for some time as well.

So, it isn't a business that we're particularly excited about.

The industry model also includes a fair amount of discrete project work.

This is engineering and service based work, as well as some EPC and EPCM work.

This is probably where we're seeing the heaviest pricing pressure right now.

There are not as many of these projects out there.

They are more attractive than the big lump sum turnkey work.

But, there's lots of competition.

And, so, the pricing pressure on discrete projects is probably as high as we've seen it in some time.

That really brings us, though, to our model, which is focused, almost entirely, on preferred relationships.

It continues to be a repeat business business.

And we're doing well.

We're still getting about 90% plus of our business in any given quarter for customers we worked for in the last 12 months.

And we're continuing to develop a broad slate and a deep relationship with our core and key clients.

In some cases, those clients have reduced their CapEx overall and that's affecting us a little bit.

And in all cases it seems like our core and key clients are being more cautious about their spending.

I think that's true whether you're in the preferred relationship mode or the discrete projects mode.

But, it's clearly something, when we talk to our clients, we see more of than we have in the past.

Our preferred relationship business still drives our base load.

It's still greater than 40%.

And that base load business continues to recover although a little bit slowly.

So the spending is coming back in that arena.

That's a positive from our perspective.

But it's not coming back rapidly.

Overall, we remain committed to our business model.

Our execution remains very strong.

I'm very pleased with our project execution right now.

We continue to expand our relationships.

We're doing a great job of controlling costs.

And we continue to avoid the high risk events that we would be apologizing for later, if we were to take on today.

Moving on now to slide 10, let me talk a little bit about our multi-domest -- I mean our market diversity.

And I'll just kind of give you an overall view and then go through these markets -- market by market and give you a sense of what we thinks going on.

Overall, the markets, the business is gradually better.

And we're seeing a little more confidence, a little more spending, but it is -- it is very cautious kind of an approach for most of our customers.

The good news about all that is, though, it seems very likely, at this point, that we have seen the bottom of the cycle.

And, that we're looking at the upslope going forward.

Moving around the pie chart now in terms of markets, I'll start at the top of the chart again with pulp and paper, high tech, food, and consumer products.

That business is very good frankly and improving.

Partly, I think, that's because we have a unique position in the industry both in food and beverage, consumer products, and pulp and paper.

And, so, those customers are spending are coming, largely, to Jacobs.

We are winning work consistently and seeing very nice growth.

I wish it were 30% of that curve, instead of 3%.

We'd have a really interesting story to tell.

Unfortunately, at 3% it probably doesn't move the needles very far.

But the story is quite good in that business.

In the chemicals business, the story is actually surprising in that it continues to show modest steady growth.

There's a lot of small project work out there.

There's a lot of deferred CapEx that's finally being released.

And then, on top of that, you've got some larger projects in the Middle East, in India, in Singapore that are driving the business as well.

We're, actually, pretty upbeat about the chemicals business both short term and long term in terms of what it might offer for Jacobs.

Moving on to oil and gas.

That, for us, is the oil sands and the gas business.

Both are strengthening nicely.

Oil sands continues to be a strong market.

The 10 year CapEx is somewhere north of $150 billion.

The numbers I'm seeing are in the $180 to $200 range.

But our customers continue to be pretty cautious compared to the last up cycle in the industry.

They're not moving as fast and they're releasing projects in increments.

We have a very strong position in the oil sands and, frankly, I think we're winning a lot of work, but an awful lot of that is still in the early stages.

FEED work and the conceptual design kinds of things that don't do a lot for backlog.

On the gas side, we continue to grow nicely.

Our gas business is dominated by two areas, production and treatment of gas and then the storage of gas.

Both businesses are pretty robust and we continue to have a pretty good share of those businesses.

We're also beginning to penetrate the tight gas market and we think that'll be another positive for Jacobs going forward.

This is still an area where we would really like to make a clever acquisition or two and drive our business growth up a bit.

We'll see if we can find those acquisitions as we go forward.

It's clearly been tough up to now.

Moving on to refining.

Good news, I guess, is that relative to what we've seen in the past, crude has kind of stabilized a little bit.

It's somewhere north of $70.

I think it's running about $79, $80 right now.

That's a positive.

On the not quite so positive side, the WTI-Maya crude, so this is the spread between heavy and sweet crudes, has closed a little bit.

It's still about $10.

That's not terrible.

That spread is good for our customers who are prepared to spend the money to switch their refineries to treat heavier, sourer crudes.

Also, the fact is crack spreads are a little bit better and that also is good for our refining customers.

But they're still pretty cautious and, so, we're not seeing a lot of new cap investment.

We think it's going to be very slow for a long time in the developed sort of refining centers around the world.

Mostly driven by environmental, maintenance capital, and safety related projects.

There are a couple of things on the screen that could start to drive work here in the next 12 to 18 months.

Phase two of the ultra low sulfur diesel program is coming along.

That's probably $2 billion to $3 billion.

In addition to that, there's the second phase of ultra low sulfur gasoline.

Again, another $2 billion or $3 billion of work, all in the context of the near term - next two, three years.

Disappointingly, the Marpol 6 work, which we think would drive a huge amount of CapEx in the industry, continues to not get legs.

There just doesn't seem to be enough drivers to get agreement on that, so that parts going to be slow.

However, there's still a lot of activity in the Middle East and we continue to expand our position in the Middle East.

So, while refining is not what we like it to be, I think we'll be able to continue to generate a decent book of business there.

Moving around now to infrastructure.

That really has two major parts for us.

The first is sort of what I think of as planes, trains, and automobiles.

It's the transportation related infrastructure market.

The good news there is that we are winning share and it is a very large market.

The bad news there is that government spending -- and when I say government spending, in this context, I mean both federal, state, and local government spending or counties and national government spending when you get outside the US -- still a little uncertain and there's a lot of instability in that spending profile.

Things appear to be improving at the state and local level in the US.

Things appear to be getting a little weaker in the UK.

So overall, there's still a lot of uncertainty about just how much spending there'll be in the marketplace and our growth will depend on our continuing to take market share from the competition.

On the water and wastewater side we're just getting started there.

We're a relatively small player in the market.

We are starting to build significant momentum and we're to take share away from the bigger competitors.

I think we'll continue to see some nice growth in that business but it's a small sliver at the moment.

It is another huge market like transportation and it has a lot of pent-up CapEx that will need to be spent.

So longer term we think that's a very important market for us as a company.

Moving now to buildings.

You'll see there's two parts to the building graph.

The dark red and the, sort of, polka dot red.

What we're trying to do there is show the part of our buildings business that's also in the national government arena.

We're going to classify those two together so those will all be shown in buildings as we're going forward.

That makes buildings about 8% of our business.

It is a very robust market for us right now.

Our focus, as I think you know, is in technical buildings.

It's buildings where the complexities of the building outweigh other issues.

So, it's things like hospitals and healthcare related facilities, it's data centers, it's mission critical facilities, such as national security related work.

Labs and particularly the biosafety related laboratory work.

That kind of project.

We're doing very well there.

We're taking share.

We've seen nice growth.

We think that's going to be a positive in the next several quarters at least.

Moving on around now to national governments, remember that's also two pieces of business, almost three now.

The first part is our RDT&E, research and development test engineering and SETS, scientific, engineering, and technical services.

A very strong market, surprisingly given the market.

We had seven awards in the quarter.

So that's a positive.

We are taking share in that marketplace.

And it is a really solid market for acquisitions right now.

I think I've mentioned the fact that the administration is taking a very strong position on conflict of interest.

That's created a lot of acquisition opportunities as the big defense contractors divest themselves, their services businesses, and, as we see, smaller companies realize they're going to have to be part of a bigger organization to be successful.

We've made a couple nice acquisitions there already.

We think there'll be continuing opportunities to do that.

NASA, as John mentioned, is a little bit of a conundrum.

We did have to give up some backlog on the NASA contracts and it was not as bad as it might have been.

The first announcements were sort of like, oh, my goodness.

And after we actually sorted through, they weren't quite that bad.

But it continues to be a highly uncertain part of the business.

The administration has one view; Congress clearly has a different one.

And we'll have to sort of wait and see how that all sorts out.

I think in the long run, NASA will continue to be a very important part of our business and it will continue to contribute in a very significant way.

So we're looking really at the margins in terms of what NASA may or may not do.

But it was a little bit of a painful quarter from that standpoint.

We talked about the IT services business.

Told you, I think, how big the government IT services business can be -- $25 billion in the US alone.

Something like $70 billion including hardware in Europe.

We're just getting our toe in the water there.

We made this acquisition.

Well, we haven't really completed it yet, but we're making this acquisition.

We have some capability of our own that we sort of boot strap grew.

I think the combination makes a credible competitor for government IT work in a variety of arenas.

And, I think that'll be an opportunity to leverage up some significant growth.

Partly because it's a nicely growing market, 4% or so a year.

And partly because I think we'll be able to take significant market share, partly because of our cost posture and partly because we really are engaged in some of the more interesting, more complex technical side of the IT services business.

The other part there is the environmental business.

Also, a nice positive.

A lot of activity both in the UK and the US.

We are starting to take back market share and we see that as a positive.

We're having some success in the UK in those markets.

They are finally starting to spend.

We've talked about that more than once.

And it really does look like there'll be some decent sized projects released in the near future.

In the US, the administration continues to be a driver in environmental work, and we're excited about that business longer term.

Finally, going to our pharma bio business, is the last part of the pie.

We continue to have a very strong position.

This is a little bit like our position in the food and beverage consumer products world and we're sort of the last giant standing.

Our prospects there are improving.

We're seeing more activity.

The consolidations of the acquisitions that took place here in the last 24 months seem to be behind us and those customers are now moving to spend money.

We also seem to have gotten by health care reform.

I think I told you a number of cases that we were concerned that health care reform could shut down the pharma business.

It has not done so and doesn't look like it's going to do so going forward.

So, that's another market where we're optimistic about what we see better.

So, again, kind of summing up, things all look better but not wildly better.

This kind of goes to my comment about the recovery in general.

It's going to be a slow recovery, not a V shaped recovery or a U shaped one.

More like a bathtub shape, frankly, and we're just past the drain at this point in time.

That brings me to the commercial for Jacobs.

We're going to continue to operate under our customer driven business model.

It remains relatively unique in the industry and we are able to drive up our market share as a result.

We're happy about that.

We're going to continue to be diversified.

We think the combination of local capability and global skills is the winning position to be in.

Obviously, we have a very strong balance sheet and we've got the advantage therefore in doing acquisitions.

And I think we're going to be able to continue to deliver on that long term 15% compound growth as we look forward to the next decade.

So, with that, Peter I'll turn it back and we'll take questions.

(Operator Instructions)

And our first question will come from Michael Dudas.

Good morning, everyone.

Good morning, Mike.

Craig, just a couple thoughts.

First, talked about the Middle East opportunities, especially in the maybe public works or infrastructure sector.

How competitive are you finding it - getting into that arena looking at existing companies or building organically?

How many other western contractors are focused their sites on that marketplace?

Is there enough room for Jacobs' business model to do it without increasing the risk profile of the Company?

It is a market that is relatively competitive already.

But frankly, I would tell you most of the western buildings and infrastructure competitors who are coming to the Middle East are coming with a relatively high cost structure.

And that a lot of the work is true service based pricing.

So they bring their historic public sector pricing to that market.

We think that represents an opportunity for some leverage.

An awful lot of them are also coming into the market looking for export business, looking to do the work in their home country, home office.

And it's pretty clear the customers are increasingly interested in having that work done domestically.

So I think the opportunities are pretty significant there.

Now, I believe that acquisitions will be an important part of how we'll approach that and get our sort of in country presence up.

I don't think boot strapping in and of itself will get us where we want to go as fast as we want to get there.

Although, we are making some progress on the boot strap side.

The work we're looking at is largely free from the lump sum turnkey risk.

Like every piece of business that Jacobs addresses, there's always a chunk of that business that's lump sum turnkey.

Fairly high risk and we just make the choice not to do that part of the work.

But in a $4 trillion market, globally, we just don't really need to do all of everything.

So that's kind of our approach in the Middle East.

I think it'll be successful.

I don't see any major impediments to us being able drive some significant growth there.

My second question is relative to -- and you did a good job explaining some of the customer hesitancies.

But, if you could break it down to maybe public and private sector funds that come through to Jacobs Engineering.

Is it just the more clarity from the public works side on regulation and government and things going on in the Congress that will help break the log jam?

Or is there something else that's holding back?

And on the private side, is there a pause in the cautiousness?

Or is there a ramp up and people are just like stepping back?

Or is it a gradual turn to get people more comfortable that 2011 and '12 will be what they think it will?

Let me start on the public sector side.

In the public sector what we're seeing is a lot of uncertainty and delays in terms of expanding CapEx.

Mostly related to where's the money?

So it's a combination of issues with getting bonds out there and funded, with tax revenues, both gas tax and sales tax at the local level and gas tax at the federal level, it's a function of the Congress and their reluctance to commit.

There's this idea that we did stimulus so we don't need to do anything else.

And, frankly, if you do stimulus and you don't do anything else, stimulus didn't fill up the hole you left by not doing the things you would have done anyway.

So there's a whole combination and that's true here in the States.

It's also true in the UK.

I mean there's a significant budget problem in the UK as well.

There's a move out there to turn down budgets by 20%.

That's bound to affect both the government spending and the national government basis and at the county level.

And so it's a market where it's really a funding uncertainty.

Where is the money going to come from and to a lesser extent, a revenue uncertainty.

How are we going to tax enough money to get what we need that's driving the numbers.

On the private sector, I think it's a more just good business or maybe not so good business.

Maybe I'll call it a crisis of caution or a crisis of pessimism.

But most of the customers I talk to have a significant number of projects that make financial sense at current oil prices or depends on what market they're in obviously.

But who are going to commit to those projects very slowly because they don't have confidence that the recovery is real.

You know, and I think we all suffer from that to some extent.

We see what the street and the press more the media than anybody is saying about the growth numbers and you don't feel it in the economy.

And so I think a lot of our customers are being pretty cautious.

I think particularly when you get up in the oil sands, you're seeing a customer sit up there that sort of once burned twice shy.

And they're all collectively very reluctant to get all their projects up and going and find out they're all doing things at the same time and have the market runaway from them again.

And so, I think that's also driving a stepwise approach and a fairly cautious CapEx plan going forward.

Does that answer your question, Michael?

Gives great color.

Thanks, Craig.

I appreciate it, I'll move on.

And moving on let's go to Tahira Afzal.

Good morning, gentlemen.

Good morning.

First question was in regards to your fourth quarter guidance, which is sort of implied.

Seems fairly wide for this point in the fiscal year.

Would love to get a sense of the moving parts there or perhaps the uncertainty of visibility that's causing the wide range.

Well, I think as we've talked about all year and actually the last couple of years, we are intentionally keeping the guidance fairly broad.

And I think that reflects from the fact that there's a lot of uncertainty in the marketplace.

And we would rather keep it broad and not be too specific and we will continue to do that even as we go out into the probably over the next couple of years.

I think this uncertainty will continue for a while.

Okay.

And then the second question is in regards to the bookings and awards.

As you've said they were fairly light in the quarter versus your own internal expectations, could you talk a bit more about outside of NASA which areas might have come in a little weaker than you thought?

I would tell you Tahira that the quarter didn't feel as weak as the numbers suggest.

And I think we've said before, backlog is lumpy and there are lots of factors that affect the numbers.

And so we, as John pointed out earlier in his prepared remarks, we were kind of disappointed that the backlog numbers came in where they did.

In terms of the things that impact them, we've said for the some time that Motiva has to be worked through and we don't expect to replace that.

So, that's going to be a drag on backlog for several more quarters.

The NASA thing while it wasn't a huge impact was certainly an impact in the quarter and we had to adjust our numbers going forward to reflect what we now think we're going to do.

Depending on what happens we may have to adjust them again and could go back up or down further.

The NASA issue is still pretty fluid.

So those are kind of the two things I'd point to most of all.

With expected more direct commitments in some of the bigger projects and programs that we're working on in terms of commitment of a bigger scope and the customers, as I pointed out a couple times already on the call.

They're holding back on those commitments.

So in terms of the big backlog additions, in particular the ones that go with detailed design and construction, those things are pushing out a little bit.

So, I think those are kind of a combination of factors that influence the backlog number.

And like I say, the quarter didn't feel as weak as the backlog might suggest.

Thank you.

That's very helpful.

And our next caller is Steven Fisher.

Please go ahead.

Hi.

Craig, I think you mentioned in the prepared remarks about seeing some improving spending at the state and local level.

And I guess I'm just wondering what is driving that and is that sustainable?

What seems to be driving it -- and it's a state by state sort of conversation -- but what seems to be driving it is that some states are starting to see a little rebound in their tax revenue.

Both sales tax and property tax - the kinds of things that drive projects.

And that little bit of rebound is increasing their confidence.

So a couple of very big states have had very erratic CapEx programs for the last 18 months.

And those seem to have stabilized.

And so that's what we see.

And I think in those states, it's sustainable.

Now whether it will spread to other states, it's not so clear.

There's reasons to think it would, again if you believe the media about the markets and about the recovery then it will spread over time.

If you're a little more pessimistic, then it may take a little longer for that to happen.

So, that seems to be what's driving things.

Another thing that's helped is this Build America program on the bonds.

So there is some money to be had that otherwise wasn't available, if you look back.

And, so, that's probably a little plus as well, but it's one of those gradual improvement kinds of conversations.

Okay.

Can I ask you to quantify what the currency impact was in the quarter on backlog and NASA?

Currency on NASA is -- doesn't have any impact.

Separate, separate - currency and NASA.

Oh, currency.

-Well we're not going to quantify NASA any more than we've said.

But - and the currency has not -- wasn't as big this quarter as it has been in the past because we've actually seen the euro come down and then come back up a little bit.

So the currency impacts on backlog and such were not all that material.

Okay.

I guess I'll take a crack at this.

Still early but I'm guessing, at this point, you have some early view on whether earnings could grow in 2011.

How high would you say the hurdles are at this point to be able to grow earnings next year?

First of all, we're not giving any guidance or any projections into 2011 at this point.

We'll save that for our year end which has been our custom.

But I think as we've said in the comments, there is a - the prospects out there seem to be getting a little bit better.

But it's still very -- lot of uncertainties and conflicting kinds of trends.

And a lot will depend on just how the economy moves and how the confidence of our customers moves.

These large projects that Craig referred to that were in either early preliminary design or FEED or things like that.

As the customers get some confidence, those will move more quickly then things will be better.

If they continue to be at a very slow and steady pace, then the impacts will be later.

But having said all that, we're not making any forecasts for next year.

Fair enough.

If you'll recall the notes in our press release.

I said we were guardedly positive.

That's about as much as you're going to get.

I figured I could try.

Thanks a lot.

And, thank you.

Our next caller is now Andrew Kaplowitz.

Morning, guys.

Good morning.

Craig, just to follow up on the backlog for a second.

You've given -- or you've talked about indicators in the past, like billable hours and overtime, and you mentioned that those indicators turned positive for you maybe early this year.

Were they still positive in the quarter?

And that gives you more confidence that the backlog is lumpy, or can you talk about those other indicators?

I can.

Let's talk about the billable hours one first.

We told you a couple of quarters ago -- I guess last quarter actually -- that billable hours had flattened and it looked like we were in that period of oscillating hours that indicated a change.

That's still true.

We still don't see a strong uptick in billable hours.

But it's pretty clear that the down -- the steady downward pressure on billable hours is behind us.

That sort of flat wobbly billable hours is usually an indicator of a positive change upward.

But we really don't see that yet in the hours.

So, there's no strong growth in billable hours yet.

In terms of hires, we're starting to see that we're having net hiring as a company.

So that also is a positive indicator for going forward.

So we're adding net staff for the first time in this last quarter, or so, and for the first time in a while.

So, I think that's another thing that gives us -- part of why we're guardedly positive in spite of a weak backlog quarter.

Does that answer your question?

Yes.

That's helpful, Craig.

If I could shift gears just going into your relationship based model again.

I know it's worked very well for you in the past.

The interesting thing though is over the last couple of years, maybe 18 months, as you know, your customers have been in significant cost cutting mode.

And even in sort of the base load, I think you would agree.

And, so, I guess the question is, do you need to sort of change your strategy a little bit as you go forward?

And maybe are you doing that and more aggressively pursuing these new markets?

How much of a subtle change will you have going forward?

Or is it just we're just seeing sort of a slowdown that will run its pace and things will get better?

I think our view is that the business model is working.

It continues to work.

I think the critical comment I made in the prepared remarks is that it's fairly clear to us that we're gaining share.

And while that doesn't necessarily manifest itself in big backlog increases or even right away in the P&L.

I think what it means to us in terms of long term position in the marketplace is a very, very strong positive.

I wish I could point to how this quarter or next quarter is going to reflect that very strong positive.

But we're in a longer game.

So we don't think we need to do any significant tweaking to our strategy.

We're always looking for a little nuance ways to be more effective, to win more work.

But in terms of changing our risk posture going out and trying to be another one of the thousands of lump sum turkey contractors out there whacking away for work.

That's not on the screen.

So we really do believe that maintaining our current risk posture, maintaining our current client centric approach and just taking incremental share bit by bit will ultimately result us in a very strong if not dominant position in the industry.

Okay, that's fair, Craig.

Thank you.

Barry Bannister now has our next question.

Yes, hi.

A couple of quick but detailed modeling questions.

Of the $25.894 million of litigation effect on the revenues, how much effected TPS and how much effected field services?

It was actually all field services.

And of the $8.725 million effective litigation on the net interest income line and expense line, could you give us a breakout of what was interest and what was expense?

No.

No, you don't have it?

Or will it be in the Q?

I don't have it right here in front of me and I'm not sure whether it will be in the Q or not.

Okay, what was the pass through revenues in the quarter?

Again, I don't have those figures.

Those will be in the Q.

Okay.

Q is tomorrow?

No, it will be the end of the week or possibly early next week.

Okay.

Thanks.

Alex Rygiel, please go ahead.

Good morning, guys.

Hey, Alex, how are you doing?

Not too bad.

First, you did mention that you were taking market share in both the infrastructure transportation segment and the water wastewater segment.

Could you comment again on who you're taking that market share from?

Is it smaller mom and pops, is it larger regionals, is it larger public companies?

It varies a little bit by market and geography.

On water and wastewater business at this stage, it's largely from competitors of our scale or slightly smaller.

But remember we're starting from such a small base there, both in the UK and the US, that incremental market share at this stage doesn't have to be very much to be a lot as percentage.

So you wouldn't find one of our competitors whining, just yet, in water and wastewater that we're killing them.

On the transportation related side, that's a little stronger story where we really are aggressively taking share.

Percentages are not any bigger but we're in a bigger base business.

And, there I think it's a combination of squeezing out some of the mom and pops, and taking a little bit of work away from the majors.

If you don't consider us a major.

I don't yet consider us a major.

So, that's where that share is coming from in those two businesses.

Perfect and, then, I can appreciate your lack of wanting to quantify your reduction in the NASA backlog.

But I was wondering if you could help us to maybe fully quantify the total cancellations in the quarter and/or reductions in the quarter associated with your backlog at the end of the prior quarter?

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

I would guess if you took all of those things together, they were -- I don't know -- somewhere in the $100 to $200 million range.

That's great.

Thank you very much.

And Scott Levine has our next question.

Good morning, guys.

Good morning.

Craig, at the risk of maybe micro analyzing your guardedly optimistic comment and maybe comparing what your comments are in sentiment of the market relative to what they were last quarter, is it safe to say no change?

And if you could also maybe make the same comment relative specifically to your outlook on the downstream market versus what you saw maybe three to six months ago.

Is there really no change in either?

Or is there a move either way.

Let me answer the second part of that question first.

With respect to the downstream market, I'm pretty much of the same view I was 90 days or 180 days ago.

I still see our position to be good.

I still the opportunity - I still see small projects coming back first.

And the weight of those things is probably slightly different than I expected but it doesn't change my opinion about where it's going or how soon it will get there.

In terms of my overall market view, I said on the last quarter, I thought we had a bathtub style recovery here.

Very slow and gradual recovery.

I don't see it any differently.

I don't think it's a shallower or flatter bathtub, if that makes any sense.

Nor do I think it's a steeper more positive bathtub.

So I don't think for the most part my view of the recovery has changed a lot.

It is going to be slow.

Our customers are going to be cautious.

I think in a couple of markets, they've been more cautious than I expected and in a couple of markets they've been less so.

Overall, it's probably about what we should expect.

Got it.

And, then, if we were to roll together on the acquisitions you've done call it the last nine months year to date fiscal.

Could you give us a sense of maybe what type of accretion you might be expecting from that bucket combined for 2011?

Or maybe give us a sense in terms of order of magnitude maybe?

Well, we don't break out the acquisition contributions.

Historically, the first year or two, it's relatively small because of the amortization of intangibles.

They are positive and they will continue to be positive.

But the real benefits from the acquisition itself -- now we're getting some benefit from the combination like we talk about in the water.

The fact that we now have better credentials here in the US to sell.

We're seeing opportunities in areas outside of where just JJG was to pursue those.

And, so, we'll see that kind of benefit.

But that's kind of organic growth now because we've brought them in.

But purely from the acquisitions, they will be positive.

I think all of them -- but they are individually and collectively relatively minor.

And the real benefit from the historical business won't show up probably, for two to three years as the amortization starts rolling off.

Just to second John's comment.

The real leverage on these acquisitions, they really start contributing is in that 30 and 36 month kind of time frame.

Those that we made in the last nine months are a ways away yet.

Individually positive but not collectively enough to really move the needle financially, strategic more than financial in terms of impact.

Probably going to move the needle in their own right but not for a while.

Understood.

Thanks, guys.

And our next question comes from John Rogers.

Hi, good morning.

Hey, John.

John, do you have what total amortization was in the quarter?

We got depreciation.

Sorry.

I don't have that with me.

That'll be in the Q.

Okay.

And then in terms of acquisitions, Craig, you mentioned the government services business.

Are there potentially some pretty large transactions coming?

Well, there are some potentially large transactions --

Whether you are involved or not, but, yes.

There where some potentially large transactions out there.

Sitting here, I'm not sure which ones are covered by confidentiality agreements and which ones aren't.

So, I'm not going to name any names.

But I can think of six or seven significant sized acquisitions that could get done.

Yes.

What happens with -- who does them and what they cost is something that is still an unknown or an uncertainty.

But certainly, they're things that we're looking at.

Okay, and what about outside of -- especially outside of the US and the UK?

Are there large acquisition or multiple acquisition opportunities for you there?

Well if you're talking about the government services space --

And beyond that.

Your other markets as well.

I think there are significant acquisitions out there in the private sector business and in infrastructure and buildings, but I don't think the government services business -- because so much of it involves national security.

Our ability to be in those businesses pretty well limited to the US, the UK, Canada, and Australia.

Okay, Okay.

Fair enough.

That's all I needed.

Thank you.

And now let's go to Will Gabrielski.

Thanks, guys.

Couple of follow-ups on some of the comments you made earlier.

I guess I wanted to push you guys in your conviction here.

You had said it's very likely we've seen the bottom.

And I'm wondering what is really driving that view, because if your look at the tops down macro numbers that we can all look at and then you listen to earnings season, you know that clearly you're seeing international demand is there, not just from the big projects but just in general.

But domestically you've certainly heard a different story and I'm wondering what internally is giving you that conviction and then combined with that, what about that trend has you hiring people here when your backlog is down [16%] year on year?

Well I guess to start with the second part of the question first, backlog has lots of revenue dollars in it that are pass-throughs and doesn't always come down when the work does.

Remember we're first and foremost technical professional services oriented.

And so those adjustments in staffing took place sometime ago.

And that's why we're in a position where we're rebounding ever so slightly in terms of hiring.

And that's part of what gives us comfort.

Part of what gives us comfort is the billable hours.

And part of what gives us comfort is looking at our forecasts for out quarters in terms of what we think the business is going to be able to do, looking at prospect lists, looking at relative likelihood of our ability to win those prospects and what kind of prospects they are.

And all of that adds together the causes to say we think it's likely we've seen the bottom.

Nothing about the business out there today has certainty around it, however.

So we could be wrong about that.

We just don't think we are.

So if you look -- if you were to assume just hypothetically the next quarter or two continue to run below trend as this quarter did versus your internal plans.

Would those hires be underutilized or are you hiring and putting people to work, and that's the only time you're making hires.

We only hire people when we have work for them.

This is very much a just in time hiring environment.

The exception of that obviously is people who can help us win work.

But that's a relatively small number.

And our history is when we hire those kind of people, they get to work really quick.

Fair enough.

When you look at the employment trends in the US and you guys are essentially a company that offers labor, skilled labor at a multiplier.

What type of pricing are you seeing now versus what you may have expected?

It depends a lot of the market.

For the most part what we're seeing in pricing is what we expected and I think what we've been telling the market for some time is going to happen.

Private sector pressure on pricing remains high, particularly in heavy process business.

In other businesses, it's much more gentile.

So, businesses like infrastructure and buildings, there's virtually no pricing pressure.

In fact, there is none, not virtually no, there isn't any.

So it varies very much by market.

I think we're benefiting in this cycle pretty significantly from our diversity.

And we haven't seen the effects on multipliers in the aggregate basis on unit margins that we saw say in the early 90s.

Okay.

Last question, just on the state and local, it sounds like you're feeling a little better as we've seen some of the revenue numbers increase.

Have you guys given any thought to what impact the state and local governments are going to see as that entitlement stimulus funding that was there rolls back and I site New Jersey as an example of where they took $2 billion hit or I think it was a $1.7 billion hit in federal money that they're losing in next year's budget.

And, I know, at least I think half the states out there are still assuming that money in their budget.

So I'm curious if you have any insights into that and whether or not you think that's a risk to state and local spending, even ignoring the top line revenue trends.

It absolutely is a risk.

Continued sort of lack of engagement at the federal level.

A continued failure to recognize that stimulus wasn't stimulus and that it's over.

I think could have a negative impact on state and local spending.

And that's one of those risks that is out there on the dark side.

Okay, thank you.

And next let's go to Chase Jacobson.

Good morning, guys.

Good morning.

Could you give us an approximation of the geographic mix of your backlog currently?

I'd say the geographic mix of our backlog is not much different than the geographic mix of our revenue.

Okay.

You can kind of look at one and they'll both be very similar.

Okay.

I was just trying to figure out if it's changed in the last three quarters.

I don't think it's changed significantly.

Ok.

So if you look at that and you talk about expanding into the Middle East or more in the Middle East and China and India, what is your internal target for a percentage of exposure to those markets compared to where you are now?

Well we really don't think of it that way.

So I couldn't tell you that we have an internal target.

We think there's a pretty significant growth opportunity in the Middle East.

We think we can expand our in country presence by a factor of five over the next five years.

And so that's going to drive a good business.

But this isn't a business that wants a lot of strategy.

It's a business that wants to be very client focused and opportunistic in areas like acquisitions and in what geography you attack.

And that's going to continue to be the way we run the business.

So we're going to take market share where we can do so effectively and reap the best rewards from a P&L point of view.

And that really drives us much more than we want 30% of our business in the Middle East or 20% of our business in Asia or any kind of conversation like that.

Okay, and then kind of a modeling question.

When we think about the lag between backlog growth and sequential revenue growth, how should we be looking at that in terms of quarters or months or however you want to state it?

That's a difficult modeling question because it depends on the kinds of revenues.

Your technical professional services tends to book and burn fairly quickly.

Construction when we -- as we book that, as we get close to a construction phase, it gets a big lump that then takes 12, 18 months, 24 months to work off.

The government services arena, particularly the O&M side of it and such.

We might get a five year contract but we only recognize that one year at a time on a rolling 12.

Even when you get a very large program it doesn't have a big impact on the current backlog because it just has that one year but it's kind of got assumed backlog that'll go out for five years or even longer

But if you look at it the other way, about 60% of our business, 65% of our business at any given time tends to come out of backlog.

So that's -- and levels of backlog we have -- one or two quarters up or down doesn't really make it a really good story or a really bad story.

You really have to look at the longer trends.

And you know, that trend has been clouded over the last the 12 months, 18 months because we've had cancellations.

We've got Motiva going through that we aren't replacing that are things that certainly are in the current business but are not things that we're banking on or that'll be there for -- as we come out.

What we're booking now and we've booked over the last couple of quarters are the things that will start driving the business up.

And as those early phases of the FEEDs and things like that get into the detailed design and then in to construction, you'll start seeing the backlog moving up -- should start seeing the backlog moving up fairly dramatically, as those move through the transactions.

On the public sector, buildings and infrastructure, that tends to be more of a book and burn business because it is mostly professional services.

So it doesn't have as -- typically have as long a duration kinds of activities.

But there's a lot of different moving parts.

And I guess that goes back to both, I think, Craig's comment and my comment that there's a lot of uncertainty and a lot of moving parts into the outlook over the next 6 to 12 months.

That was helpful.

Thanks.

And a question now from Hobe Fisher.

Hi, good morning.

Thanks for taking my questions.

When I look at your revenue mix and you reported on a trailing 12 month basis, so if I back out the last -- the prior three quarters, it looks like upstream has grown pretty significantly from last quarter?

Is that -- I guess I want to check if that's accurate.

And if so, sort of what's driving that?

I think it's accurate.

Quarter over quarter it's nice growth.

I think that's being driven by two of the things that Craig talked about.

One is Canada is starting to come back.

And with some sanity maybe as opposed to what we we've seen in some of the past bubbles.

But, also, the upstream gas business that we've got going, particularly here in North America and northern Europe, and gas storage and such, those markets are improving.

Okay.

And is that something that we should continue to see mix shift in that area?

Or more generally, you talked about where the markets are as you see them today.

Where, where -- do you see any material changes in mix looking out over the next -- going forward?

What markets should do well?

I think you'll see in all -- and this isn't a quarter over quarter discussion.

But a longer term discussion.

I think you'll see significant growth in the share that is upstream relative to the share that's downstream.

I think you'll see kind of modest growth in chemicals.

I think you'll see some significant growth in infrastructure.

Relative to the maybe the other businesses.

Those are a couple of areas where we see probably above trend growth.

So you'll look -- as opposed to the coming out of the last cycle where, it'll all look kind of similar to that where you were heavy -- I guess last cycle you were heavy industrial.

This cycle you'll be heavier on the infrastructure side?

I think that's probably heavier is right.

It's not going to swamp the heavy process business partly because of where all the construction revenue comes from.

Got you.

And then one thing I'm a little bit confused about.

Your CapEx was up in the quarter.

I like to look at book to bill on a trailing 12 month basis because it cancels out some of the fluctuation and the lumpiness in bookings.

But your CapEx has grown, as a percentage of revenues, back to levels where you normally see trailing 12 month book to bill well above one.

So, book to bill is trending down.

CapEx as a percent of revenues is back to "normal" levels.

Apparently, you've, if the press reports are accurate, you've let go of some people on the NASA side.

I'm trying to kind of foot what seems to be contradictory signals with the guarded rebound, it looks like your -- and your CapEx would suggest you're adding people more robustly and looking for more than a guarded rebound.

There was a little bit of an anomaly in this quarter in that we were finishing up a major office move in the UK that -- we actually committed to well over two years ago.

And as you get closer, you got just expenditures tend to be back end loaded as you do the final furniture and all the stuff that goes into it that are our nickel as opposed to the building's nickel.

So I think that was probably part of it.

And we did have some -- we continue to roll out things like our financial systems with the acquisitions.

You have on the cost of rolling out the financial systems and other support business systems to those new acquisitions and such.

So I think there was a little bit of that in there.

Got you.

It's a simple answer I asked a complicated question.

It's just a simple answer.

I believe so.

And finally can you give any update -- I'm not sure if this was asked for on how the Tiburon acquisition is going?

In the broadest sense it's going very well.

Integration is good.

We've resolved most of the integration issues that we have to deal with.

We have seen a modest reduction in G&A expense that should benefit the P&L and we think we'll continue to see some additional reduction.

On the prospects and winning works side, things are going well, just right in line with our expectations.

So if we were sort of toting it up as okay, good, or great.

It would be somewhere in the good plus range.

Got you.

And margins what you expected them to be?

Yes, no we're doing fine.

Super, thanks very much.

(Operator Instructions)

Sounds like we're done.

Thank you all very much for your interest and attention.

We're going to continue to try to build the business that we've committed to over the years.

And we hope you'll all see that as a positive and stay with us.

Thanks very much.

Ladies and gentlemen, that does conclude our conference call for today.

Thank you again for your participation.