雅各布工程 (J) 2010 Q4 法說會逐字稿

Good day, and welcome to the Jacobs Engineering fourth quarter conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Ms.

Patty Bruner.

Please go ahead, ma'am.

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 certainties 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 ending October 2, 2009, including item 1-A, 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 June 30, 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.

Please note that there will be a webcast replay of today's call available on Jacobs' website starting at 1PM Eastern today.

The webcast will be available through the end of this quarter, December 31.

And now I'll turn it over to John Prosser, CFO of Jacobs, to discuss the financial results.

Thank you, Patty.

I'll go through the financial highlights for the quarter and then I'll turn it over to Noel Watson -- to Craig Martin.

Sorry about that, Craig Martin, our CEO to go through a business overview.

Great start.

We go to slide four, that gives the financial highlights.

We did report earnings of $0.61 for the quarter, net earnings attributable to Jacobs of $77 million.

For the year, the GAAP reported earnings EPS were $1.96, and the net earnings attributable to Jacobs were $246 million for the year.

We continue to have a strong balance sheet.

Our net cash position was at $858.9 million.

This is up slightly from the third quarter, but during the quarter we did have the large payment related to the settlement in judgment on the SIVOM case, so that was just over $60 million.

So with that cash outflow, we still had growth in the cash.

Backlog at the end of the quarter was $13.2 billion.

I'll talk about that a little bit more on a later slide.

And we're initiating our fiscal year 2011 guidance as a range of $2.30 to $2.80 per share.

If you exclude the SIVOM judgment and the Houston sublease which we discussed earlier that affected both our first and third quarters, the EPS for the year was $2.48, and the net earnings attributable to Jacobs was $312.1 million.

Turning to slide five, this is the earnings history.

The last two years we've been affected by the recession.

But even with that decrease in earnings over the last two years, if you look at the bars underneath the graph which give you the compounded growth rate over the prior 10 years through '10, we still are exceeding the goal that we have of the long-term growth rate in excess of 15%.

So, we are at 16.8% for the 10 year compounded growth rate, so longer term, we still are meeting that goal.

Moving on to slide six, spend a little bit more time on the backlog.

For the quarter, the backlog, as I said, was 13-point -- ended at $13.2 billion.

Professional services backlog ended at $7.6 billion.

During the quarter, we made adjustments to a number of our contracts, mostly in the public sector, mostly related to indefinite quantity capacity kinds of contracts, IDIQ kinds of contracts where we did a review and in some cases, it just became clear that we were not going to be able to use the full capacity.

This isn't a case where contracts were cancelled, it's just a case of as we evaluate what the utilization of that would be over the expected life, there were a number of things that needed to be adjusted downward, and that amounted to $390 million in adjustments to the pro services part of the backlog.

So, if you adjust our sales rate for that, our bookings for the quarter were good.

We're actually a little bit higher than the work off, which is a very positive sign and a good sign going forward for the booking trends and the backlog trends.

With that, I will turn it over to Mr.

Martin to go over the highlights, the strategies.

Thank you, John, I'm glad to know we're not making a leadership change like some of our competition.

You had me nervous there for a minute.

We're going to talk about our strategies for growth.

For those of you who have been on this call any time in the last four, five years, none of these have changed.

And I'm going to talk about each one individually, so I won't go through them on this slide.

Let's go on now to slide eight, and I want to talk about our relationship based business model.

I know you've heard about this from us over and over again, but I think it's important to understand the differences in the way we run our business from the way much of our competition runs theirs.

Let me start with the industry model on the right.

As we've said I think more than once, most of the industry focuses on transactional projects.

And by transactional projects we mean big events in far away places, we mean lump sum, turnkey, competitively bid assignments, we mean the big elephants that some of our competitors describe.

Over the last few days, I've read the transcripts from most of our competitors' webcasts, and I was struck by the degree of which almost every one of our competitors characterize their business in terms of the big transaction that were going to affect the next quarter or the next year or the next couple years.

And I think that's a fine business model.

There's nothing wrong with it, but it's not ours.

Our business model is much more focused on long-term relationships with our customers.

You'll recall that we get about 90% of our business from customers we've worked for in the last 12 months.

We continue to grow our business with preferred relationships.

Those are long-term basic ordering agreements, alliances, partnerships, supplier of choice agreements.

There's a lot of different names for them.

But we get about 80% of our business through those kinds of arrangements with our customers and in fact, of those preferred relationships, about little over 50% of our business comes from core client relationships where we have a very strong relationship and a very significant share of the customer's wallet.

So, that's the basic differences in our business.

A focus on big events versus a focus on the long-term preferred relationships kinds of business.

That means we do lots of small projects and not so many great big ones.

That means that we tend to grow our business by doing progressively larger jobs as part of our portfolio of work as opposed to waiting for the giant event and trying to win it in a highly competitive environment.

You'll notice in both models we also have discrete projects.

Everybody has some of that kind of work.

In fact, everybody has all three categories of work for the most part.

Discrete projects are generally for customers we know, but there's some form of price competition or competition on the basis of the team and price that takes place in those projects.

It's discrete projects that we generally mine for additional preferred relationships.

And then as you can see, we've got a little sliver of transactional projects there.

There are occasionally opportunities for us to make a lot of money or keep a resource busy or help develop a client relationship that can start from a transactional position, and we take advantage of those things.

But it remains a very small part of our business, and we'll continue to do so.

Moving on now to slide nine, I'm going to take you through the markets.

I think these next two slides we're going to spend a fair amount of time on, because I want you to have an understanding of how we see the markets broadly and our position in them.

Let me start as sort of an overview.

We've always said that out of the eight markets that we serve, if five are doing reasonably well, then we'll do reasonably well.

And frankly, right now I think at least five of our markets are starting to hit.

So, you could argue that our eight cylinder motor here has at least got spark in five cylinders, maybe a little better.

We're particularly positive about oil and gas, infrastructure, buildings, food, consumer products, high tech, pulp and paper and national governments work, and I'll talk about each one of those in more detail.

Let me start with the pulp and paper business which is -- and its related markets.

So, this is a top of the pie, that little 4% sliver right at the top.

Interestingly enough, pulp and paper is finally strong.

It is better than last year, and last year was pretty good.

And we think looking forward, it will be the best year for the pulp and paper business since '96.

A lot of our customers are spending, and we're in a very dominant position in pulp and paper.

One of the places that I'll talk about where we're sort of the last man standing, and I think that's a plus for us.

Interestingly enough, the semiconductor business, the high tech side is coming back.

Our prospects are better and frankly, we have a higher go get for those prospects than we've had in the past.

And I think semiconductor might add to our book of business going forward in ways it hasn't for almost a decade now.

And then we have the food and consumer products business.

That business is growing very rapidly.

We're pretty excited about what's going on there.

In particular, there seem to be a number of major alliance opportunities with key customers in those industries.

And the frameworks that we already have, the partnerships and alliances that we already have, the volume is up.

So, while it's a small sliver of our business, we're pretty positive about what's going on there.

Moving on around the clock clockwise, let me talk about chemicals next.

The prospect quality and quantity in chemicals is up.

We've been through a long dry spell in the chemicals business.

I think it's been about 12% of revenues forever, and we think it's going to improve some as we go forward.

We had six wins that we announced in the fourth quarter and obviously, we don't get to announce everything we win, so we think there's a good business there.

The economics are better for our customers.

We're seeing lots of investment in energy savings and capacity creep, drive to get a little more capacity out of the system.

So, the chemicals business probably is positive as it's been in five years.

It's still not buoyant by any means, but it's a good business.

And if you add to that things like polysilicon and cellulosic ethanol which do have some considerable opportunity in them, I think the chemicals business could be pretty good to us for the next few years.

Moving on to the oil and gas business, I would characterize oil and gas, the upstream part of oil and gas at least, as improving everywhere.

As you know, we're a major player in the oil sands business, and the oil sands are very good.

We have had an absolute tear of winning feeds, and we're pretty positive about what that could mean.

There is a little bit of a fly in the ointment, however, in that costs are already beginning to rise a bit up in the oil sands arena, and that may affect the customer's' pace of spending in terms of when projects get released.

But certainly, the basis we see in terms of the feeds that are out there, the customers who say they're going ahead with significant CapEx makes the oil sands business look very good to us right now.

Gas business is also looking pretty good.

As you know, we have some strength in shale gas and gas treatment and in gas storage.

All those businesses have some strength, although the gas storage business will not be as strong next year as it has been.

I think that will be more than overcome by the shale gas business, gas treatment business.

So, that's a positive for us.

As well, the business of heavy oil and sour oil generally around the world is improving, and that plays to a lot of our strengths because of what we've learned in the world of SAGD and mining of oil sands.

And the frankly, oil recovery is also picking up and in particular, we're seeing a lot of activity in the area of CO2 flood.

That happens to be a particular strength of Jacobs, and so we think we're going to benefit disproportionately as the oil recovery business, particularly tertiary recovery, continues to expand.

Moving on now to refining.

Refining is still not great.

I guess that's as kind as I can be about it.

Even though the crack spread has improved, distillate demand is up a little bit, and there's a fair amount of activity in smaller projects.

It is still not a great market.

It is better, but it's better from what I would characterize as a pretty weak base.

We do see a few drivers beyond the ordinary.

There is certainly be some push in ultra low sulphur diesel in the form of desulfurization of fuel oil.

We think that's going to drive a couple, three billion dollars worth of projects starting in the Northeast US and working its way to the West.

We also think there will be a little additional ultra low sulfur gasoline, but that's probably more of a 2012 play as we look forward.

We're also seeing a fair amount of drivers in terms of sustainability, energy efficiency, those sorts of things.

That's particularly strong in Europe, but I'll come back to the geographic markets in a minute.

Moving now to infrastructure.

I'm going to split the infrastructure discussion into two parts.

I think there are really two different things going on there, and so let me address them separately.

First, let me talk about the US business.

The US business is good, and we expect it to get better.

The water business is probably the strongest, followed by rail and highway.

But there's a lot of activity out there, and the business feels like it's got some strength to it.

We actually think the new congress will help.

We believe we can get some authorizations for spending and things like replacements for safety lube that will be a positive for us.

So, we're pretty upbeat about the US infrastructure business.

On the UK side, which is the other big part of our infrastructure business, that's more of a mixed bag.

Mostly it's up except for highways, and highways are probably going to be pretty weak.

Water and sustainability driven businesses are going to be pretty strong, but the comprehensive spending review hit the highways the hardest, so that will be a negative.

But we're really excited about what we see in particular in the AMP5 part of the water business.

AMP5 is the Asset Management Plan 5.

These are long-term contracts with the water companies.

A lot of good programs there, and we're doing quite well in the business of bidding and winning those.

We think that represents a strength.

So, we're hopeful that the strengths there will offset the weakness in highways business, and the UK will still be a modest grower.

Overall, though, we think the infrastructure business is going to be a good contributor to our business going forward.

Moving around now to buildings.

Buildings looks to continue up.

We had a good, strong year last year in the buildings business.

We think it's going to be about the same in terms of overall opportunity.

But frankly, the projects and prospects that we see are more in the Jacobs sweet spot.

So, we're a little bit more upbeat about the buildings business going forward.

The, interestingly enough, the ERA spending, the stimulus bill is still a positive for the buildings business.

We see money that has yet to be spent that will affect us positively.

We also see pluses in healthcare and high tech, although there will be some sorting out of the healthcare reform bill in terms of how it affects our healthcare customers.

But almost all of the sub-markets that we serve in the buildings business are showing some strength.

The markets that we don't serve much are not so strong, so things like commercial buildings aren't a positive, but that's really not a business that we have much interest in.

Moving on around to national governments.

Let me start with the aerospace, defense and IT part of that business.

Frankly, the prospects are very good.

It's a business that prospects are pretty clearly identifiable.

They tend to be relatively large compared to our other businesses, and we see that as a plus going forward.

We think the new congress is a plus.

We think there will be a lot of support for the war fighter over new investments in new systems.

And generally, that will be a positive for our businesses, not everywhere, but probably more positive than negative.

The IT programs remain very strong, and I'll talk a bit about our acquisition in a minute, but our IT acquisitions are giving us some leverage there.

And then interestingly, we see an uptick in nuclear weapons programs.

As you know, we're very strong in the UK with the atomic weapons establishment, but we're now seeing DOE in the US support additional investments and upgrades of our nuclear weapons systems, and we think we're in a great position to take advantage of that.

And then finally, a bit of an uncertainty has been what's going to happen with NASA.

We think that has mostly sorted itself out, absent some reversal in direction somewhere along the way.

And it's proven to be about what we thought, which is it isn't going to be a big negative or a big positive as we go forward.

So, we think our NASA business is solid.

Probably not much of an opportunity for an uptick, but probably not a lot of downside either.

The other half of our national governments business is environmental.

I'll start there in the UK.

The Nuclear Decommissioning Agency retained its budget in the comprehensive spending review.

That's a real positive.

And we think the deconstruction, decommissioning business is going to continue to have a lot of opportunity in it.

That's a pretty good business for us, both Tier II and Tier III.

We think we'll be able to continue to take advantage of that.

Other environmental work in the UK, probably going to be a little bit weaker.

So overall, probably okay in the UK, not particularly great.

In the US, we think there's probably not a lot of change in the environmental market.

Spending's going to be fairly constant, but we are not a big share player, and we think we have pretty significant opportunities to capture share.

And then finally, moving to the top of the chart with the pharma bio business.

We're seeing pharma bio improving.

Not at a great rate, but still doing what we like to see it do in terms of growth.

There aren't very many big drugs, but there are a couple big pharma companies starting to spend.

There's an upswing in retrofits and expansions of existing facilities, and the vaccines business is cycling up.

So, we think that's probably a slight positive to the pharma business.

Moving on now to slide 10, let me talk about our geographies a little bit.

We've always believed that our geographic diversity was an increasing strength.

We continue to try to diversify geographically, and we continue to make progress in that regard.

Let me talk just briefly about what's going on in the geographies, and I'll start again up in Canada.

There are great opportunity in SAGD and mining business.

We managed to penetrate the mining business more recently on the mining side of the business as opposed to on the upgrading and washing side.

We continue to be the leader in SAGD, and both those businesses, either oil sands and mining or oil sands and SAGD remain quite strong.

There's a lot of continuing gas work in Canada as well.

So, we see our position in Canada as a real growth area.

There are a number of undeveloped markets for us in Canada as well, and we'll be looking at those as we go forward.

Things like infrastructure probably represent a good longer term opportunity.

In the US, the building and infrastructure business is good.

I talked about that.

Federal programs, also good, the federal government work.

Pulp and paper, semiconductor, food and consumer products, all very good.

A lot of activity there in small projects work that we really like.

We have an improving position upstream.

Not a big position, but we are improving our position, particularly in things like gas and CO2 flood.

The chemicals business is improving and refining, I think, will be okay for us as a business, but not great.

Moving over to Europe.

We see Europe as being pretty steady.

One of the nice things is that for the most part, we're the last man standing again in Europe in a number of markets, in refining, in chemicals, in pharma.

Jacobs is sort of emerged as the preeminent provider of services.

Not that we don't have any competition, but they don't have the strength that we do in Europe, and that's a plus for us.

We have a growing buildings business in Europe.

And we have a mixed bag in infrastructure as I've described, but probably more plus than minus.

Interestingly, a market we don't talk about globally that we do need to talk about in Europe is power.

And Jacobs is boot-strapping into a significant position in the power businesses in Europe.

We're pretty excited about it, we think it represents some leverage in other places of the world.

That's not to say we still wouldn't want to do an acquisition.

We do.

But I think this is one of those places where we're showing some real strength in our ability to boot-strap the business.

Moving on around now to China and Asia.

We're starting to become a factor, and it's starting to become a factor for us.

Our core clients are starting to move into China, particularly pharma clients and food and consumer products clients that are long-term relationships with Jacobs or developing ones.

So, we see China as becoming a more significant part in our business, along with Southeast Asian countries in general.

So, our positioning there will be steadily increasing.

Then moving over to India.

India's a really interesting market for us.

There are a lot of big local markets that we think we can take advantage of, refining and chemicals business for example.

We've got an infrastructure acquisition that we expect to close here in the next couple months.

It's previously announced as a staged deal.

I think that will put us in a great position to leverage what is a booming infrastructure market.

And then we're finding it very interesting that a large number of our customers, core clients and other customers, are very interested in developing engineering centers in India.

And we clearly are an industry leader in how to do that and the ideal partner to do that with, and we see that as another area of significant growth for us in India and as a Company in pharma, in chemicals and in food and consumer products.

And then finishing up in the Middle East, we think our local strategy there is working.

There's a lot of activity in the Middle East, upstream, downstream, chemicals, we're in a position to take advantage of a lot of that.

Alliances, interestingly enough, are becoming a rapidly escalating part of the potential business there and a major factor in what we think will be our long-term role.

We also see lots of opportunity to penetrate the infrastructure of buildings business, and that's another area of significant activity.

Moving on to slide 11, this is our driving down the cost slide.

I think the slide for the most part speaks for itself.

We've done a terrific job over a very long period of time of driving up unit margins while we've held G&As at a constant level, and I think we're going to continue to do that.

So, I think the -- our ability to manage costs and be a low cost producer in this industry continues to be a big plus for us.

Finally, moving to the acquisition slide, slide 12, first let me comment on the acquisitions we made last year.

The three big ones, Tiberian, JJG and TechTeam, and then we made a couple other smaller acquisitions.

The Tiberian acquisition has been very successful for us.

It's continued to expand our position in the aerospace and defense industry.

We're really happy with the way that's worked out.

The TechTeam deal, which technically closed, I guess right after the close of the fiscal year, we're just starting to get energized around, but I think the IT business looks like a real positive going forward.

Of course, we've talked a lot about the JJG acquisition and its impact in the water business.

JJG was one of these companies that sort of punched above its weight, and we're seeing a lot of opportunity to expand our capability across the water business in the US on the back of some strong technical expertise and a great reputation through JJG.

We also made a small acquisition in the aerospace and defense business in the UK that closed this last month, and we made a small acquisition in the telecom industry, all to lever up our existing businesses.

All very positive, although some of them pretty small.

In terms of looking forward on the acquisition side, there are a number of opportunities out there we're still excited about.

We continue to look for upstream acquisitions, pretty tough business to find an acquisition in, but we continue to look.

We continue to like the mining and minerals business, the infrastructure business, the power business, and aerospace and defense and IT.

And I think we're seeing some opportunities in almost all those businesses, power probably the weakest of those last four.

Geography-wise, we continue to be interested in the Middle East, in the US and mainland Europe, particularly in infrastructure and buildings related businesses.

China and India will continue to be a focus of ours and think there's opportunities to continue to grow there.

And we're keeping an eye on Australia as a potential.

From a services point of view, in addition to the traditional E&C businesses and aerospace and defense businesses that we bought, we've got a strong focus on trying to find growth in the maintenance arena.

We think that's going to be an important backbone business for Jacobs with our business model.

And we also think there's opportunities to grow in the consulting business.

So, with all that having been said, we get to the slide that has the commercial at the end, all the good reasons that you want to own our stock for the long-term.

I won't go through the list, but I do believe that we're in a good position, things are looking up.

We're not going to see hysterical growth rates anytime soon, but the business is started in the right direction, and I feel pretty good --maybe pretty good's an exaggeration.

I feel good about where we are and where we're going.

And with that, Operator, I'll turn it over for questions.

Thank you.

The question-and-answer session will be conducted electronically.

And we'll take our first question from Avi Fisher from BMO Capital Markets.

Hi.

Good morning.

Good morning.

You included in your press release pass-through costs.

I think it was the first time you put it on the press release.

And when you look at it, when you look at margins excluding pass-through costs, they seem to, before and after the oil gas cycle, they seem to be re-basing on a significantly higher level than they were before the cycle.

I'm curious what's driving that and if it's sustainable?

Well, I would argue that what's driving it is that we continue to change our mix and reduce our dependence on the refining and chemicals part of the business as a part of the overall total.

And that's probably what supports -- not probably, I know, that's what supports a slightly better margin profile going forward and I think covers, addresses the issue that you've raised.

We're going to continue to do that.

We want to continue to build a diversified market portfolio and a diversified geographic one because we think that will provide more sustainable margins long-term.

Does that include the acquisitions like the Tiberian and TechTeam?

TechTeam hasn't had any impact, Tiberian's had very little.

But it certainly includes acquisitions like those.

It also includes things like JJG, Carter and Burgess, Edwards and Kelcey, [Badsey].

Those have had a significant impact on our margin profile going forward.

Okay, and just one other quick follow-up.

You said in Europe you're boot-strapping the power.

What did you mean by that, and what kind of power markets are you getting into Europe?

What we're doing is building our business on the back of making key hires, winning relationships with customers, doing really good work and expanding those relationships.

And it's both in the conventional power world and in the nuclear power world.

We're not trying to be an EPC contractor doing the power island.

We're trying to be an owner's engineer, utilities and off sites, support our customers.

Tom Hammond, who is one of our EVPs of operations is here with me, and I'm going to ask Tom to comment.

Tom?

Yes, one of the interesting aspects of our power business in Europe is that besides the conventional generating facilities and the conventional power part of it, the steam turbines and the generators, any one of these facilities, whether it's a nuclear plant or a coal-fired plant, has ancillary facilities that could be quite substantial, a new facility might have as much as a $500 million worth of ancillary facilities, and we're seeing a lot of opportunities to work with the power companies.

It plays into our strengths with our infrastructure business, environmental business, water treatment business.

Particularly in the UK where a considerable amount of money is going to be spent both on nuclear new build and other power generating facilities.

Appreciate it.

Thank you.

I'll get back in queue.

And our next question comes from Jamie Cook from Credit Suisse.

Hi, good morning, gentlemen.

It's actually [Peter Chang] for Jamie.

You don't sound like Jamie.

My question is on guidance.

You've got a lower backlog than a year ago, but your guidance has the potential to actually be -- your EPS has the potential to actually be up year-over-year.

How should we think about this difference?

I know you've spoken about margin pressures in the past from stiffer competition.

If you could just expand a little bit about that.

Does this mean that margins in your current backlog are higher than they were a year ago?

It doesn't mean that.

The margin mix that Craig mentioned on the first question is certainly there.

The balance between the public sector, private sector, but also the mix between professional services and field services.

And as we look forward over the next 12 to 18 months, the field services will probably be flat to down as we kind of grow on the professional services coming out of recession we've been through.

The professional services always are the leading service indicator and in the public sector, they are much more heavily weighted toward the professional services, so we'll get a double benefit from the mix.

But the actual margins per unit on any of those particular markets are still under significant pressure, and we don't see that pressure abating, certainly in the near term.

If I could make a small adjustment to that comment, the private sector margins continue under considerable pressure.

Public sector margins, not so much.

Got you.

Okay, great.

And I guess a follow-up.

On the $390 million removed from backlog in your reassessment, how often do these reviews occur?

Do they happen once a quarter?

And is there any chance that these actually reverse?

We make a review of backlog every quarter.

But periodically, we just -- we get in and do sort of a detailed scrub, and that's what we did in the fourth quarter.

So, do they occur with any specificity?

No.

Sometimes it might happen twice in a year, sometimes once.

It's just one of those things where every so often it's time to really peel back and get down to the very detail.

Some of it probably will come back.

Quite often, we reduce backlog on an IDIQ contract and then find out that we get to do more business than we expected.

In other cases it won't.

I don't think the coming back going away conversation will have much long-term impact on our numbers because that will also be true of stuff that's in backlog.

But it's not something we do every quarter at this level of detail.

Okay.

Thank you for taking my questions.

And our next question comes from John Rogers from DA Davidson.

Hi, good morning.

Hello, John.

Hello.

Just in terms of the growth outlook for 2011, you've given us a range that, essentially flat typer earnings.

But are you expecting business to ramp as we go through the year?

Is that what you're sort of indicating there, Craig?

I'll let John speak to this.

I think that we will expect a long-term slow growth coming out of the -- this -- the last two years recession.

So, I don't think it's going to happen overnight.

I don't think it's going to be a strong V-shaped recovery.

I allude back to Craig's bathtub.

So, I guess we've come down the wall.

We're past the drain, and now we're looking at kind of working our way up the bottom of the bathtub.

Has a slight slope but it certainly is not dramatic.

So, I think that having said that, and we aren't giving quarter by quarter guidance, but --

Sure.

But we would expect to see the end of the year better than the beginning of the year.

Okay.

But you're going to have to get there to get to the 15% long-term growth.

At some point, it's got to ramp.

And we believe it will, John.

Yes.

Whether you'll see much of that ramp in FY 2011 I think is open to some discussion.

Sure.

John alluded to the bathtub curve.

But we do believe that our business will re-energize and that we will achieve above 15% kinds of rates in some out years that will keep us on our long-term curve.

Okay.

And then just lastly, Craig, in your comments, you referred to what's going on in the rest of the industry, people talking about large projects out there.

Is there any movement by customers to try and take advantage of weaker pricing or if they're worried about inflation, to lock in more discrete project terms?

What we're seeing in a number of our customers, particularly oil and gas and by that broadly, I mean the energy side of the oil and gas, so downstream, upstream, mid-stream, all that.

On bigger projects and programs, there's clearly a focus on trying to lock down costs.

And so on bigger projects and programs, we're seeing a little bit of a push toward EPC.

I think the Kellogg people talked about that in their conference call on a fixed price basis.

But these are generally for the bigger programs.

And frankly, we know of a few programs where that effort has not paid off particularly well for the customer.

So, I'm not sure how long that will last, but there are some customers out there, particularly on the construction side, who are pushing big time EPC or more just C lump sums.

Okay.

In terms of -- that doesn't really affect us, though.

That's just not an arena that we play in.

Okay, but you're not losing share to that?

No, not at all.

Okay.

It's basically business we never had.

Okay, great.

Thank you.

Next we'll hear from Andrew Kaplowitz from Barclays Capital.

Hi, good morning, this is actually Jiong Shao in place of Andy.

Can you update us again on the level of billable hours and overtime in 4Q?

I think you've mentioned in the past that we've seen positive indications on those metrics, and I wonder if those continue to show some improvement in 4Q.

Well, Q4 is a difficult quarter from that standpoint because we have the vacation season in Europe, and we have a substantial number of billable hours in Europe.

So, it's very difficult to look at the fourth quarter from a billable hours standpoint and tell what's going on.

You really have to wait until we get into the timeframe we're in now, October, November, to look at billable hours.

When we do that, I'm not ready to make a pronouncement about the quarter.

One of the problems with this quarter is we've got a lot of holidays in it.

But it looks like the billable hours are going in the direction we thought, that we're seeing a strengthening.

Slow, but a strengthening in our billable hours.

Okay.

That's fair.

Can you talk about the sizes of the projects?

Have you seen any hints that customers might be moving closer to making decisions on larger projects?

Larger as in the higher end of your typical scope of work.

We think we're seeing an increase in the number of projects in the south of $200 million range.

So, $200 million under.

So, we've seen activity pick up first in the zero to $50 million range, and now we're starting to see it pick up in the $50 million to $200 million range, and that's really all our sweet spot.

So, we're seeing an improvement in prospects and an improvement in the number of prospects and the quality of prospects.

By quality I mean the likelihood that they'll go and the likelihood that we can win them.

So, I'd say that's a positive at this point.

Okay.

And can you also comment on the pecking order for uses of cash?

It looks like you're still focused on a number of M&A opportunities, but have you thought about share repurchases?

Our pecking order for cash continues to be what it's been for quite a while, and that is acquisitions have the top priority and probably have the top 10 of the top 10 slots as far as order of priority.

So, we still believe, as Craig said, that there's opportunities out there and that our best deployment of cash is for use in those acquisitions and growth.

So, we periodically talk about other uses of cash, both at the management level and the board level, but the consensus continues to be that acquisitions are our primary focus.

Okay.

Thanks.

And next we'll hear from Richard Paget from Morgan Joseph.

Good morning.

Good morning.

I wonder if we could get back real quick to the $390 million in backlog revisions.

Now, I know you have said you do this periodically.

But was, A, that $390 million number relatively larger than you have had in the past?

And if so, were there a couple of particular projects that took the lion's share of that $390 million?

And I guess internally, was this something that maybe you took a little bit more conservative view on given the environment, or was there -- some people have talked about a scaleback in federal spending.

Did that have any impact on it?

Just wondering if you could give us some more details.

Well, I guess I could say yes to all of those.

No, we -- this is probably a little bit larger than what we would normally see, and I think some of that's just because of the continued volatility in the marketplace and in these contracts and some of the skittishness in some of our public sector clients as far as what they're going to spend, what they're not going to be spending within the contract capacity that we have.

And so I don't think we took any more of a conservative approach than we would normally take, as we do this, but it's all in the eye of the beholder.

But no, I think that this is something, as Craig says, we do routinely, periodically and as we did it, that's the number that came up.

There is no one or two contracts that dominated.

I would -- trying to think, I think the largest adjustment probably was in the $20 million range.

So, as far as any individual contract or something, it might have been a little bit higher than that, but certainly there wasn't anything that was 10%, 15% of the total.

It was just made up of a lot of small adjustments across the board.

Okay.

Thanks.

Primarily in the public sector part of our business, because that's where a lot of these kind of indefinite capacity contracts materialize.

Okay.

And then moving to your infrastructure business, you said you had a decent outlook for the US.

Given some of your acquisitions, could you just remind us of what the mix between water, rail, highway, just so that as we pay attention to the various demand drivers and funding drivers in those particular businesses, which ones kind of move the needle for you.

We're dominated by the transportation side of it, transit, highway, rail.

Let me ask our EVP of Operations, George Kunberger, to comment on that.

George?

Yes, well, that's an evolving picture.

And as the revenue is available to fund infrastructure, notwithstanding Craig's long view of the infrastructure business, certainly most of the projects today that are on our short-term radar screen are projects that are driven by revenue that are generated on and to themselves.

So those absolutely have a tendency to be transit.

As Craig said, more transit would be rail, light rail, heavy rail as well as water and tolling systems.

So, that's the predominant number of projects.

Now, as far as our skill sets are concerned, certainly highways and transit has been our big skill set, but we have been proactively and aggressively growing our water business in all parts of the country as well as our light and transit systems in all parts of the country.

So, those are our future in the short -term and what we continue to pursue both from an acquisition -- people acquisition as well as project acquisition.

Alright, thanks.

I'll get back in queue.

And next we'll hear from Scott Levine from JPMorgan.

Hi, good morning.

Good morning.

It sounds like your take on the implications of the elections in the US in general are positive in terms of spending impacting your business.

I was wondering if you could provide some additional color as to whether your view of the outcome -- or is it really just that we're past the elections, we have more certainty?

Or any other color on the US.

And then also conversely, I interpret your comments on the UK to be certainly in comparison more muted.

Any additional color coming out of this spending review in the UK market, infrastructure and beyond?

Sure.

In terms of the US, I think the biggest issue is that we believe we've seen a stabilization of the executive branch, the legislative branch in Washington that will be a positive for predictability of outcomes.

We think there will be a positive, to go to George's comment earlier, for programs that can fund themselves, PPPs, PFIs, those kind of things are going to be an upbeat segment of the market.

We think there's more support for transportation authorization, for money to fund transportation.

We think that will be a positive as well.

So, as we look at it, there's a lot of reasons to think that the congress will be slightly more positive going forward in the US.

In the UK, the comprehensive spending review was less negative overall for our business than we expected that it might be.

But it was really tough in the highways business, and I think that's where you're hearing my concern about where that business is.

I think our water business in the UK will do very well, but I think we're going to struggle in the highways business.

And that's why I think overall the UK is at best a mild plus and probably more just a -- we'll do good to stay even in the UK.

Got it.

Thank you.

And turning to -- following up on a comment earlier about the earnings growth without asking for quarterly guidance, it sounds like your expectation is that things will probably accelerate as you exit the year.

If you could provide us an update on the status of Motiva and maybe preliminarily, would that there be any reason or how might that impact expectations on earnings growth accelerating beyond 2011, dependant on when that project is expected to wrap up.

Let me ask Greg Landry, EVP of Operations for our heavy process business to talk about Motiva briefly in terms of the -- what it looks like going forward.

Hello, Scott.

This is Greg.

Hi.

On Motiva, we're still looking at a end of 2011 completion, probably completely demobilize within the first quarter of 2012.

As we stand today, we're going to peak on craft count probably in the next five or six months and then start on a downhill turn.

So, that project will be coming online sometime the first quarter of 2012 or at the end of the first quarter of 2012.

Got it.

Great.

Thank you.

And one follow-up, if I may.

Do you have an estimate for the impact, is there any meaningful impact on reported backlog from foreign currency fluctuations in the quarter?

There's always some ups and downs because of currency, but we don't see any material change in backlog because of the currency.

We just take that as that's part of doing the business, so we don't really break those out.

Got it.

Thanks, John.

And next we'll hear from Steven Fisher from UBS.

Hi.

Good morning.

Good morning.

2010 was a pretty active year for M&A for you, at least compared to 2009.

And Craig, you mentioned a number of prospects and areas of interest.

So, would you say at this point that the M&A accelerating in 2011 in terms of the dollars you'll spend?

Well, it's hard to judge.

A deal's not a deal until it's a deal.

But it certainly to our eye looks like there's a lot of really good opportunities out there.

And they run the full gamut from very small deals, $2 million, $3 million kind of acquisition costs all up in the multi hundred million dollar kind of deals.

There is lots of competition in the marketplace.

Private equity is back in our business in a fairly big way.

So, it's difficult to judge what the outcome might be, but I think this next year will be a very active year for Jacobs.

And whether it's a bunch of little deals or a big deal or two and some small deals, probably too soon to say.

But I think in the aggregate, it's probably going to be a bigger year than last year.

Okay.

That's helpful.

And just near term, can you give us the number on what TechTeam will add to backlog?

I didn't see it in their filings.

They won't come in until this quarter.

John, do you have an idea?

Not a big number for sure.

It's a very small number.

I don't recall right off the top of my head, but I believe it's something under 100.

Under 100, I'm pretty sure.

It is.

Yes.

Okay.

It really won't show up significantly.

Okay, great.

Can you just discuss your hiring in the quarter and what you see for 2011?

Sure.

Hiring in the quarter was kind of a mixed bag.

We went through some of the nasty things that you saw published big time.

So, in some areas we had some losses.

In other areas, interestingly enough, in places like refining, hiring actually turned positive.

So net-net, it was not a particularly strong quarter from a hiring point of view ,but it wasn't a particularly weak quarter either.

As we go forward, we think all of next year will probably be relatively positive for hiring.

We don't keep extra people around so as we grow, our opportunity is first to add some overtime and then we have to add people, and that's kind of what we see happening in the FY 2011.

Okay.

That makes sense.

Then just lastly, there were a couple of earlier questions about infrastructure financing.

But I'm wondering how closely are you watching the Build America bond reauthorization, and how meaningful are munis and Build America bonds to your business at this point?

I'm going to ask Bill Birkhofer who heads up our infrastructure sales to comment on the Build America.

Yes.

The Build America bonds authorization is pretty important to the funding of infrastructure projects, particularly in the context of our focus on major metro areas in the United States.

There's been fairly creative use of those bonds.

We think that the government will be very supportive, both in the executive branch and the congress, to extending the reach of those bonds, and we see those as being an active part of our business strategy going forward this next year.

Thanks, Bill.

And on the muni side, similarly?

Well, the muni side, frankly, over the past decade or so has shown on an exception basis pretty strong prospects for us.

Generally speaking, where muni bond issues are well-publicized in well advanced in our major metro areas, whether it's for schools or water utilities or transportation transit related activities, we continue to see those bond issues faring very, very well with the voters.

So again, I would look to them to be a steady source of capital funding for our projects going forward.

Okay, great.

Thanks a lot.

And next we'll take our question from [Justin Hawkin] from Robert W.

Baird.

Good morning.

Good morning.

Most of my questions have been answered, but I did have one just on the lower pass-through costs.

I can't remember if you mentioned this in the call, but with those continuing to steadily fall down and that kind of helping sustain the margins here, is there anything that's driving that other than just kind of Motiva falling off?

Or why is it the pass-through costs continue to slip?

It's generally driven by a reduction in the construction spend across the system, Motiva being the biggest part of that.

But as you I think can see from the backlog numbers, the construction cycle is moving behind us and the technical professional services cycle is starting to pick up, and so we would expect that reduction in pass-throughs that goes with that.

So, I guess another way of getting the question would be in 2011, I know you don't give revenue guidance, but are you expecting revenue to actually grow, or is it more just what's going to drive the earnings growth is the mix shift to higher margin work, since you have that drain of less construction revenue?

Well, you're right, we don't give guidance on the absolute dollars of revenue.

But as I said, we do believe that we'll see a mix shift in the professional services will be growing faster than the construction.

As we see the trend, particularly in places up like Canada and such like that, depending on how quickly some of those projects move, you might be seeing a pick-up in the backlog as we get towards the end of the year, but as you probably won't see the impact in revenues until 2012.

So, I think the overall revenues will probably be flattish to maybe even down a bit, but it will be mainly a mix shift to the -- between the professional services and the field services.

Great.

Got it.

Alright, thank you very much.

Very helpful.

We'll take our next question from Barry Bannister from Stifel Nicolaus.

Hi.

Hello, Barry.

In the last couple years, your net working capital to sales has increased from 10% to 14%.

Your receivable days are up and your payable days are down.

It can't really be explained by your mix.

Are you booking more working capital intensive work because working capital is cheap right now?

No.

Actually, it can be explained somewhat by mix because we tend to get much better payment terms on field services and on the private sector than we do in the public sector.

So, as we've seen the mix shift a little bit within the professional services to the public sector, while the credit of the federal government and such is reasonably good, their payment terms tend to be slower than what we see in the private sector.

So, without doing an extensive evaluation, I think that's kind of the trend of the mix that has impacted some of the things on the receivables.

I was just thinking from two years ago, the field services is only up 1% as a percent of sales, so I couldn't really explain it that way, but we can follow up later.

I guess my other question is for the last eight quarters, your SG&A has been $233 million, with about a 3% standard deviation.

That's pretty low.

But your TPS revenues has been $1.33 billion, with about 8% standard deviation.

So, I'm trying to gauge what kind of operating leverage we have going forward.

Can you keep that SG&A roughly at the $233 million level, maybe growing it very, very low single digits like in line with the CPI core?

And give us a little operating leverage, or are you pursuing TPS type work that's going to be more SG&A intensive?

No, I would say that we're striving very hard to keep the G&As flat to even down a little bit as we grow the professional services.

There's certain parts of our G&As like facilities which is the largest -- second largest piece of our G&A that you only have certain flexibility on as the workload comes down.

And that's the leverage that we get going up, certainly is in that space in facilities, because we have the capacity from just a pure desktop workstation capacity to grow in most of our locations without adding new facilities.

And even though we've closed some offices and shrunk some offices and taken advantage of some subleasing and such as we worked our way down the curve, there's still capacity there.

So, we would expect to be able to see the growth in the professional services without significant and certainly, with a lower growth rate in the G&As related to that.

We noticed your SG&A improved as TPS ramped because you had hired a lot of foreign engineers in places like India and maybe eastern Europe, and then you had also lowered your floor space and had more virtual offices.

Do you think you can continue to add to those very low cost locales to supplement your work in TPS.

Yes.

Yes, absolutely.

Okay.

Thanks.

And next we'll hear from Tahira Afzal from KeyBanc.

Good morning, gentlemen.

Good morning, Tahira.

First question is in regards to your backlog.

Could you tell me a bit about how the profile of your backlog looked in terms of duration versus around this time last year?

And the key reason for this being that as you look into fiscal year 2011, trying to assess that apart from really incremental work that you get during the year, are we going to see a sort of faster churn in backlog, and is that sort of also factored into your guidance?

Well certainly, as we see the professional services side of the backlog and activity picking up, that tends to have a shorter turn the construction, just because of the relative duration.

The only place that that's maybe a little misleading is in some of the national government work where the professional services contracts tend to be longer term and such like that.

But I don't think there's, other than the shift to the professional services, that there's a significant shift in duration overall.

Got it.

Okay.

So, we're probably looking more at incremental work during the year, perhaps helping really offset the fact that your backlog is flattish?

We would expect to see backlog improving as we go through the year just like we expect to see operations improving as we go through the year.

Got it.

Okay.

Last question is in regards to competitive pressures within your federal services space.

Given all the shifts that are coming through, you've talked about some help in a sense as some of your primary contractors look -- prime contractors look to spin off some of their businesses.

Are you seeing them trying to offset that through any other means in terms of competitive pressures, so net-net, the spinoffs, are they being a positive for you so far?

Well, I'd say so far, Tahira, the spinoffs have been a positive.

Although it's awfully early days to really know what that will mean to the competitive situation.

The aerospace and defense segment is probably the one exception to the historic no price competition in the federal government sector in that most of those procurements have always been best value.

And as a competitor, we've always been highly effective at winning best value procurements.

I don't think anything about that's changed, and I frankly don't think that we'll see much difference in the pricing behavior of these spinoffs compared to what we saw when they were parts of bigger organizations.

So, we're not really expecting a lot of change the competitive position in that A&D segment for the federal government.

And in the rest of the public sector business, it's really not a price competition conversation.

Got it.

Okay.

Thank you very much.

Thank you.

And we'll take our next question from Will Gabrielski of Gleacher & Company .

Thank you, good morning.

Good morning, Will.

Couple of questions.

If you look into fiscal 2011 and you're formulating your guidance, would you say you have more or less of the backlog and operating income in backlog that you need to hit your numbers this year versus last year or the same amount?

I'd say maybe slightly stronger backlog going forward than last year.

Okay.

But I'd (inaudible) as slightly.

So, would you say that then your guidance -- so I would assume it's fair to say your guidance does not imply a meaningful uptake in book and burn type work that you don't have in backlog coming into the year?

And if that were to happen, you would find that to be incremental to your numbers.

Or what's the way to think about that?

Well the way to think about it is if we have a really good sales year, we're going to get closer to the top of the range and if we don't have a good sales year, we're going to be toward the bottom of the range and if we have an average sales year, we'll be somewhere in the middle.

That sounds like very appropriate target.

I don't mean to be facetious.

I know that sounds facetious, Will --

No, so if I look at the numbers in the backlog you had exiting fiscal '09 coming into 2010 where you started with your guidance and where you finished with your guidance and which part of the range you fell into, even in your revised guidance for the year versus your initial guidance and I think about 2011, I'm just trying to characterize your level of confidence because the top line backlog number certainly isn't suggestive of a big year of earnings growth which the high end of your guidance range would imply for 2011.

Yes.

I don't think our world view right now is wildly positive or even strongly positive.

I think our view right now is that we ought to be able to do okay next year, maybe a little better than okay.

But we're certainly not trying to signal the world that we think that the happy days are here again.

Okay.

Fair enough.

That's helpful.

I'm curious, could you characterize why or put some color around why fiscal 2010 wasn't a better year for you in terms of the quantity of M&A that you were able to get done?

And what about 2011 makes you feel you could get more done?

Because I would assume valuations in some of your end markets are likely stabilized or improving at this point, unless you have a different view on that.

No, I don't have a different view on that.

I do think the valuations are probably stabilized.

I don't know that they're going up yet, but they certainly are not going down anymore.

Remember, though, that acquisition deals take a long time to do and quite often,it might take us three years to get a deal done with a company.

Sometimes it takes us 10 years to get a deal done with a company.

And these deals are purely opportunistic in the sense that you have to have a willing buyer and a willing seller.

Hostile deals are not something our industry can support.

So, I actually think last year was a pretty good year for acquisitions.

I think we made some good deals that are going to be strongly positive for the shareholders, both in the medium term and in the long term.

I'm equally optimistic, maybe even a little more optimistic going forward.

There are lots of deals on the street.

I mean, lots of deals.

And some of those look pretty attractive to us in terms of where we think we want to take our business.

But you just -- you can't predict when those will close, if they'll close, it's just a -- that's not one of those things that I could put my arms around and say, we're going to get a deal done this quarter and then another one two quarters from now because you can't get there.

Okay.

So, that's really as much help as I can give you, I'm afraid.

I understand that.

I was just wondering I guess the dynamics of those deals and what you saw happening in 2011 relative to '10 that made you more confident.

Like you said, it may just be the gestation of deals you're already working on.

Is that correct?

That could be.

Alright, fair enough.

Thank you very much and nice job.

Thank you.

And our next question will come from Stewart Scharf from Standard and Poor's Equity Group.

Good morning.

Good morning.

I was wondering regarding the Potash deal and Canadian government intervening and blocking foreign investment, whether you see that possibly having a ripple effect in other areas like energy companies that could possibly impact their market share and spending levels going forward and possibly even deals that you're looking into?

And also, do you see any opportunities for expanding in other emerging markets such as South America?

To the first part of the question, with respect to what happened to Potash, we don't think that's going to have a meaningful impact on our business anywhere.

Now, that always remains to be seen.

With respect to things like South America as a market, I think there are a couple of different scenarios for South America.

We are hearing from a few of our customers about investments, particularly in Brazil.

And that's an area we'll continue to explore and look and see if it's the right time for us to be in Brazil.

There are some challenges of making money in Brazil, and there's also some challenges of getting the money you make out of Brazil, and we've got to work through those issues as we think about that.

But South America is certainly an area that will have some interest for us in the future.

Eventually, we'll be everywhere our customers are, and it will be driven almost exclusively by where they're putting their investments.

So, our relationship based model really drives where we go.

And if you think about South America from that standpoint, there's a big mining play on the Pacific side of South America, and that's not a business we're in today.

So, I wouldnt expect that to be a factor unless and until we find a way to get into the mining business.

Okay.

Thanks a lot.

It appears there are no further questions at this time.

I would like to turn the conference back over to Mr.

John Prosser for any additional or closing remarks.

Well, I'll turn it over to Mr.

Martin.

Let me just make a couple of quick comments.

First of all, appreciate all of you -- your attention, your support.

We think the business is going to be better next year.

We're, like I say, mildly optimistic.

I guess that's better than faintly optimistic two quarters ago, but not nearly as good as really optimistic.

So, if you think about all that in the context, I think it's going to be a better business, but we've got a ways to go before we see the great business we would like to have.

Thank you all.

That does conclude today's conference.

Thank you for your participation.