雅各布工程 (J) 2014 Q1 法說會逐字稿

Good morning and welcome to the Jacobs Engineering first-quarter of fiscal 2014 earnings conference call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Michelle Jones, Vice President of Corporate Communications.

Please go ahead.

Thanks, Laura.

Statements included in this webcast that are not based on historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Although such statements are based on management's current estimates and expectations and currently available competitive financial and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause the actual results of the Company to differ materially from what may be inferred from the forward-looking statements.

Words such as anticipate, estimate, expect, seek, intend, plan, believe, and similar words are intended in part to identify forward-looking statements.

Some of the factors that could cause or contribute to such differences are listed in the Company's most recent annual report Form 10-K for the period ended September 27, 2013, including discussions contained in Item 1, business; Item 1A, risk factors; 3, legal proceedings; and 7, management's discussion and analysis of financial condition and results of operations contained therein, and other documents the Company files from time to time with the United States Securities and Exchange Commission for a further description of the Company's risk factors.

That list is not all-inclusive, and the Company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements that are discussed on this webcast.

With that, I'd like to turn the call over to John Prosser, EVP, Finance and Administration.

Thanks, John.

Thank you, Michelle.

Good morning, everyone.

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

Turning to Slide 4 in the presentation, as reported last night in the earnings release, we did end the quarter with $0.71 on a diluted basis.

This is obviously down from last quarter.

As we had told you last quarter, typically in the first quarter of our year, it does come down anywhere from 5% to 10%, just because of the seasonality of the holidays and some other factors.

This quarter was obviously -- had a number of -- a couple of other significant items in it.

One was the closing of the SKM acquisition, which we talked about in the press release.

And between the operations that we had for two weeks -- which was probably the worst two weeks of the year from a holiday and vacation standpoint and operating standpoint for SKM -- and also the closing costs and such that had to be put through the financial statements, they contributed about $0.10 net loss on an after-tax.

Going the other way, we did have favorable tax settlements in one of our foreign operations.

This was a favorable court ruling, and so that had about a positive $0.05 between the reversing of some tax accruals and also the interest accruals.

So those do have opposite effects.

But even beyond that, the difficult calendar quarter ending in December -- with the holidays, vacations, some of the winter weather that impacts some of our field services activities, particularly around the Christmas holidays and such -- had a negative impact.

One other unusual item that we don't usually have in that quarter is we also had the government shutdown.

And while that was not as big an impact as it might have been, because we were able to mitigate much of that impact, it still did have a negative impact on the quarter.

So we talked about it having an impact of about $0.10 to $0.15 in this first quarter.

There were pluses and minuses in there.

The SKM closing costs were a little bit higher than what we originally anticipated in that range.

Some of the other things were the impacts of some of the vacations.

Having Christmas on Wednesday turned out to be an even higher-than-usual impact, because more and more people took the full week off because it was right in the middle of the week.

And that also had an impact on our billable hours, as we saw more of our billable people also taking vacation than maybe normal.

So while the results aren't something we would like to see, we don't think they are indicative of, certainly, the whole year; and I think they are pretty much in line with what we kind of anticipated going into the quarter.

Backlog at the end of the quarter was up to $18.1 billion, which is nice growth, both quarter over quarter and year over year.

Included in that is about $800 million of backlog that came in from the SKM acquisition.

So even without that contribution, that one-time uplift, we saw a modest increase in the backlog.

Our trailing 12 book-to-bill was 1.15.

Continue to have a strong balance sheet, even with the $1.2 billion that we spent.

In fact, our cash at the end of the quarter was just over $1 billion.

Our debt, obviously, grew from last quarter.

It was just over $1 billion, as well, so our net cash was slightly negative.

But actually, during the quarter we had pretty good cash flow, because we spent -- between debt and the cash, we spent over $1.2 billion to buy SKM.

And our cash position actually improved when you take that out of the equation.

We are maintaining our guidance at the range of $3.35 to $3.90.

That guidance includes SKM and all the activities that we had during the first quarter.

So we expect to be in that range, and that is the same guidance as we had going into the first quarter.

Moving on to Slide 5, just the earnings history.

And we have changed this graph a little bit from what we have shown in the past to show the impact of our guidance is and where that would fall, as we look at the whole year rather than just looking quarter over quarter.

And still, we feel comfortable that we are moving back toward that and maintaining that growth rate in the plus or minus 15% compounded growth on our earnings.

Moving on to Slide 6, backlog: as I said, nice growth year over year, partially due to the addition of SKM.

But overall, still trending up and heavily weighted toward professional services.

Virtually all of the backlog that came in from SKM would be in the professional services category, just because of the types of business they are in.

And while year over year our field services backlog was pretty flat, quarter over quarter it was down a little bit.

But that is probably more typical of the fourth quarter -- calendar quarter, because people are not making a whole lot of decisions around the holidays, and such like that.

So with that, I will turn it over to Craig to review the quarter.

Thank you, John.

Good morning, everyone.

We'll start on Slide 7. You have seen this slide over and over again.

Nothing about it has changed.

I will talk about the first four bullets in a little more detail.

On the cost side, we continue to do a good job of controlling our costs; and our cost position remains a nice advantage for us.

Moving on to Slide 8, this is our relationship-based business model.

We think this is an important aspect of the way we do business.

And it in fact represents a significant difference for us from most of our competitors.

We really do focus on long-term customer relationships and repeat business.

We think by doing that, we can get repurchase loyalty, and that will drive steady earnings growth -- good, solid growth for us as a Company.

It is a virtuous circle, when you think about it, in terms of how it works.

In the fourth quarter this year our repeat business was 96%.

So I think that's a good measure of what we're accomplishing in terms of making that relationship-based business model work.

Moving on to Slide 9 now, this is sort of how the markets -- or it is how the trailing 12 in the markets looks.

You can see that the process business share of our business grew just a little bit, by about 1%.

The public and institutional share declined by about that same percent.

Industrial was roughly flat as a share of the business, but mining and minerals grew about 1%.

And the all-other category, power, pulp, and paper, et cetera -- that dropped about 1% over the previous quarter's results.

Moving on now to Slide 10, we will take a look at each of the individual market areas one by one.

So starting with public and institutional, we are considerably more upbeat about this market as we look forward than we were year ago.

I think we're doing extremely well as a company across this market in terms of our ability to win work and grow our market share.

And we continue to believe that is going to be a positive for us.

There's some good news in the market, as well.

We're starting to see movements in investments.

Let me talk about each of those individually.

Starting with the national government's business, it is clearly improving.

Now that we have a budget that provides some funding, certainly that positions us very well.

And the good news is that the money is going where we provide a lot of services.

So we're very upbeat on our ability to continue to capture share there, grow our position in the markets.

And now we have some stability on which to leverage that.

So that is good news.

We're also seeing a lot of activity in the US military work, particularly around the Asia Pacific basin.

We think there could be as much as $43 billion of new investment there, and that is a positive for us as well.

Certainly, our SKM acquisition will be a contributor to that.

In fact, I will talk a little bit more about SKM in a minute.

We also see a lot of activity in the nuclear cleanup part of the world.

There is more than $1 billion worth of remedial projects here in North America.

And of course, the nuclear cleanup in the UK is very robust.

You might have noticed during the quarter we made a small acquisition in the UK, a company called Stobbarts.

That really helps us position for full EPC services to the nuclear industry in the UK.

So we think that's going to be a nice little addition -- one of those niche acquisitions that we talk about a lot.

Moving on to infrastructure: that is, in fact, becoming a strong market again.

We see lots of prospects in all the geographies we serve.

And on a real positive note for us from a legacy Jacobs perspective, both North America and the UK are strengthening.

A lot of water projects out there, a lot of activity in Asia-Pacific.

And we see something on the order of $70 billion worth of infrastructure-related projects in the Middle East.

So I think there's some real positives there.

We also see tremendous opportunity in telecommunications and gas distribution businesses, another area where we have made some niche acquisitions: FMHC in the telecom business and MARMAC in the gas distribution business.

Both of those are positives as we see it in terms of helping us leverage and grow that business.

And then in the buildings business, there's just a lot of good activity, particularly in the technically complex buildings that we favor.

So things like scientific facilities, laboratories, healthcare are all very strong.

And then, of course, the high-tech market -- data centers, control and operations centers, and the like remains very strong.

The outlook still is for about $80 billion in investment by the end of the decade.

SKM is going to be a significant factor here.

Obviously, they didn't contribute much in the two weeks around Christmas; but as we look forward, there is a very strong position there.

A lot of recent wins in SKM's background.

We expect a combination of Jacobs and SKM in this space will materially increase both our global leverage and our local market position across these industries.

So a big plus for us as we go forward.

You can see backlog is up a little bit quarter over quarter and up substantially year over year in this public and institutional space.

Moving on now to Slide 11.

This is our industrial sector.

Let me talk about these markets individually.

PharmaBio is getting better.

The product pipeline has some mixed results by company, but there is enough good new programs out there to drive investment, especially in the biotech world.

That is a strength for Jacobs.

We have both the know-how and the geographic reach to serve our customers wherever in the world they need to make those investments.

And increasingly, we are seeing those investments in places like India and Asia.

You can see from the note there an increase from something on the order of $16 billion to something on the order of $50 billion just in the next five years.

Mining and minerals is growing; it is growing for us.

And the good news is we think the industry is seeing the market come back a little bit.

Commodity prices are firming.

People's expectations about where commodities would go, particularly iron ore and gold, haven't come true.

The copper supply situation remains a concern.

And so we are starting to see people contemplating real projects again.

So the big projects business looks like it may be coming back.

Probably not a big factor in fiscal 2014, but certainly could be a significant factor as we move into 2015.

What will be a factor in 2014 for us -- and we're doing quite well -- is in this whole area of continuous presence.

I told you last quarter about the win at [Pelama] in Chile.

We are now leveraging that into a number of other relationships.

And we think this business of being able to do all this small-cap, sustaining-cap work is going to be a very significant lever for us as we go forward.

And then having the capability to provide all of the required infrastructure for a mining and minerals project -- both the buildings and infrastructure capability, the materials handling capability, and the minerals processing capability, is huge.

As a result of the SKM acquisition, Jacobs has become the dominant player in the mining and minerals industry in South America and in Australia.

And I think that it won't be long before we are the dominant player globally.

So a real positive aspect of the acquisition.

In the pulp and paper, power, high tech, food, and consumer markets, it is mixed.

Of course, it is a mixed set of markets.

There is a lot of alliance work for us, and that is going quite well.

There is a fair amount of upgrade and facility kinds of improvements.

We think the CapEx could be in the $5 billion range over the next 12 to 24 months.

And we are -- managed to grow a share of the power market.

Again, SKM is a real positive for us.

It brings some real strengths in geothermal and hydro.

So we think we're going to be able to see some leverage in our power business.

It still is an area where we would like to be able to find an acquisition for greater growth.

And I will talk about that in a minute.

Looking at the backlog numbers, up a bit quarter over quarter, mostly as a result of SKM.

Still down year over year.

Part of that is just what has happened in the industry in terms of where the projects are.

But part of it is, also, as we move to more services rather than project events, we're going to see less revenue per dollar of margin.

And so the impacts will tend to be lower revenues in backlog, even though we think margins will continue to grow.

So that will be a little bit deceptive until the big project part of the market comes back.

Moving on now to Slide 12, the process industries: these are really strong markets today.

The business grew, as I mentioned already, 1% share of our overall CapEx.

We saw lots of activity in refining, oil and gas, and chemicals.

Particularly strong this quarter in chemicals.

So the outlook is very positive.

Look at the individual markets in refining -- a lot of activity.

The US is likely to become an exporter of refined products.

A lot of activity in Europe as a result of upgrades and trying to make those refineries more efficient.

And then new CapEx, particularly Asia and South America, is going to be a big factor.

Brazil alone may have something on the order of $90 billion of refining investment.

We announced the Guimar acquisition during the quarter.

That is about 1,000 people in Brazil, and we think that gives us a very strong position to leverage our relationships with key customers in Brazil and grow that business.

We don't want to forget Tier 3 gasoline.

There is still something like 85 refineries that require upgrades for Tier 3 gasoline.

I think that is going to be a program that spreads out over the next two to three years.

Those projects are ideally suited for us.

They tend to be in the $200 million plus or minus size, so that is a plus.

Oil and gas, again, very strong market.

Global spending is up again.

North American CapEx looks like it is going to be $100 billion.

A lot of our key clients are the ones making the investment, so that is a plus.

A lot of activity in gas monetization -- and while that is not really our focus, it generates a lot of peripheral work.

And all of that fits us very well.

So we think that the oil and gas business is going to continue to be strong area for us and an opportunity for us to drive increased growth.

Brazil is also talking about becoming a major exporter, and that makes that Guimar acquisition fairly key there, as well.

And then the chemical business: I mentioned already we had several significant awards under the quarter.

None that we have been given permission to announce, but it was a good, strong quarter in the chemicals market.

There is ongoing expansion pretty much everywhere in the US regarding this.

We've heard a little bit about some project cancellations of some very big projects; but, frankly, there's more work out there than the industry can do.

And I anticipate -- and I think everybody does -- that this is going to be a continuing strong growth area.

And we continue to see lots of new FEED and pre-FEED work.

And we're also starting to see now a few projects going into execute phase.

So they are, in fact, getting released so that we can do the work.

The backlog story here obviously is quite good: 17% up year over year; 7% up quarter over quarter; 38% up over the past two years.

So clearly the strength in the process markets is one we have been able to take advantage of.

And that's a real positive for us as we go forward.

Moving on now to Slide 13, acquisitions: we have talked a lot about the SKM acquisition and its importance.

We talked about Guimar.

I mentioned briefly a couple of the niche acquisitions.

I think niche acquisitions are going to continue to be important to us.

There were several of them this quarter.

I think we will continue to see that.

A couple like MARMAC and FMC are in markets where we think there is going to be very significant growth.

So very small acquisitions, we hope, will give us very strong leverage.

In terms of looking forward, we're going to continue to look for opportunities to grow the business geographically.

Asia-Pacific still has lots of opportunity in it.

South America has lots of opportunity in it.

We also think we're going to work hard, and, again, as we have for some time now, in both oil and gas and power markets to try to find the right kinds of acquisitions.

If there are major acquisitions, that is where they are likely to come from.

Moving now to Slide 14: this is kind of that commercial that I give you at the end.

We think that we have a great track record as a company.

We've got a unique and powerful business model.

We are very diversified across geographies, markets, and services.

We've got a great balance sheet and a strong cash position.

Our cost position gives us a good competitive advantage.

And I think, importantly, the markets are going our way.

So for some time now, the process business has been strong.

It continues to be strong, and we are winning good projects in that market.

The public and institutional markets are rebounding nicely, and we see a lot of growth opportunity.

And the industrial markets, mostly focused on pharmaceuticals and mining and minerals, are showing some good, solid upward movement.

Particularly in mining and minerals, it looks like it's on its way back.

And I think that is a big positive for us in the industrial marketplace.

So overall, I think it's a good story.

We've got a great outlook and a great set of prospects going forward.

With that, Laura, I'll turn it over for questions.

(Operator Instructions) Jamie Cook, Credit Suisse.

A couple of questions.

John, on the guidance, I understand the puts and takes of your first quarter.

But to get to the midpoint of the range, it implies, I think, like 18% EPS growth in the remaining -- if we look at the remaining nine months of the year versus last year.

So can you just help me with your comfort level that you could get to the midpoint?

Is it more top line versus margin?

And any incremental details you can give us on just how accretive we should think of SKM -- in terms of the accretion related to SKM now that the deal has closed?

Thanks.

Looking forward to the next three quarters, certainly SKM is going to be part of that.

As we said in the press release, as we have been saying: it is going to be accretive.

This first quarter is not indicative at all of anything.

Both their operations part of that cost, which was based on a bunch of holidays and vacations and such; and the closing costs, which was a big part of it, are not indicative, as the closing costs won't be continuing and the operations we see as being nicely additive.

They are all incorporated in that.

I'm not going to give any specific cents per share and such, but I think that particularly as we look out to the third and fourth quarter, that will be where the biggest part of the strength comes -- and particularly that is more from our side, the legacy business, just because we are seeing ramp up, as Craig mentioned, in all the process industries.

We are having good sales in the government business with good prospects.

The new budget that was passed is net positive, I think, for even the shorter term as well as for the long term.

So I would say, as we always say, that the midpoint of our guidance is where we have the biggest comfort.

And from that it is a bell curve as we go through either side.

So I think we wouldn't have the midpoint where it was if we didn't think we were pretty confident that that was the highest probability.

Last quarter, when you first provided guidance, you said if there were two areas of upside -- I think you named government and SKM as one of them.

It's sounds like the government side you are incrementally a little more positive on, and SKM maybe more 2015 in terms of things turning.

So just -- I wanted to make sure I heard that right.

And then my second question is just -- the field services book-to-bill was pretty disappointing.

You've had first quarters before where the field services book-to-bill has been like this.

But is that something to be concerned about?

Do you think that turns positive next quarter?

And then I will get back in queue.

Let me take it.

Jamie, this is Craig.

With respect to the field services thing, we continue to have a business where we are very flexible with our clients about whether we do contracts, subcontracts, and procurement on their paper or our paper.

And that has a profound impact on backlog and an insignificant impact on gross margins.

Okay.

So, for example, a couple of the three big bookings -- big for us in terms of what we think their impact on gross margin will be -- to place last quarter, we did not put any significant to field services into backlog, because we don't yet know whose paper the contracts will be on.

Okay.

And so if the customer and we were to make the decision to put it on our paper, these are sizable jobs; you could see hundreds of millions of procurement and construction go into backlog.

If we decide to put it on their paper, you will see none.

And yet our margin flow for those projects will be virtually identical.

Okay.

So it is going to be a little less predictable and a little more lumpy, I think, in terms of field services content, except where we do direct hire, than it has been in the past.

Okay.

And then --.

Okay?

Yes.

To your other question, we think the contribution from SKM is going to be -- start now.

Yes, no.

But I think she was talking before the mining and minerals side.

Yes, but in terms of upside --.

I think the mining and minerals, just like ours, is a little bit longer term; but we are seeing positives there.

The government, which we had talked about possibly being a headway, I think certainly we've -- it looks like we have gotten over one of the cautions that we had, which was getting a budget and facing another shutdown right here in the first quarter.

So, yes, we got that hurdle out of the way; so that has got to be a positive.

Certainly it is not a negative, so I guess that makes it a positive.

Okay.

We still have a couple of other things, like debt ceilings and things like that, that could get into some impasses.

But I think at least one negative is behind us on the government side.

Okay.

All right, cool.

Jerry Revich, Goldman Sachs.

It is Matt Rybak on for Jerry.

My first question: just maybe walk us through how you were thinking about the current pace of bid activity on US infrastructure projects and possibly quantify for us the opportunities you may be pursuing over the next 6 to 12 months.

Probably can't quantify it in any meaningful way, but it is really clear that some of our traditional markets -- so things that are funded by user fees -- rail would be a good example of that; water and wastewater would be a good example of that.

Those markets have been on their way back for some time now.

I think we have told you over the last couple of quarters that those were already positives, and they continue to be.

What we're seeing now, though, is with some certainty in the budgets, with some -- what I will call tepid recovery in tax revenues at the state and local level, that road and bridge infrastructure is starting to move ahead.

And so there's a lot of both the small-project local activity -- and that is a big business for us -- as well as a fairly, pretty significant number of big project opportunities, both in North America and in the UK.

So those are, I think, very strong positives for the infrastructure business, transportation infrastructure in particular, as we look forward.

And that hasn't been the case up until recently.

And then you add to that what we have with SKM, who are a dominant player in the infrastructure business in Asia; particularly strong in Australia; very strong water infrastructure capability, which we think both represents leverage for us in North America and the UK, but also represents a significant growth opportunity in the UK as well.

One of the reasons we are as positive as we are about the acquisition of SKM in spite of the general attitude that Australia is on a downer is that SKM has done a terrific job of positioning for parts of the business in Australia that are going to continue to grow.

And so our outlook, as you go across now the whole infrastructure market globally, is really -- it is where that upbeat statement comes from, I guess, in that context.

But I couldn't give you a list of specific opportunities that we think drive that.

Again, we're not really driven by big events.

Sure.

And from a timing standpoint, the big project opportunities in the US that you just referenced -- are those middle of the year, end of 2014?

Or how do you think about those from a timing standpoint?

They are pretty well distributed quarter by quarter.

So we will see a few big events in this current quarter.

We will see a few more in the third quarter and fourth quarter -- our fiscal quarters, I'm talking about.

So there is a whole series of big jobs that just kind of are flowing into the industry, and into competition, and into selection.

And we expect to get more than our share.

Sure.

And then to switch gears really quickly, you mentioned $800 million in backlog contribution from SKM.

Can you maybe talk about how you are thinking about book-to-bill for that business over the next 6 to 12 months?

Yes.

I think you will see, because of the nature of the business having a high degree of consultancy, that book-to-bill will tend to be shorter in terms of the relative duration.

So book-to-bill will be in that 1.05 to 1.10 range.

Okay.

Great.

Andrew Kaplowitz, Barclays.

Craig, I just want to clarify something on field services.

Would you say that the field service business has been accelerating, and we just can't see it?

And maybe you could talk specifically about the oil sands business, because I worry about that business a little bit in terms of it still being kind of lethargic.

I don't know whether I would say accelerating, because that would, I guess, have to be relative to my expectations for it.

What we are seeing is projects get sanctioned both in the US and in Canada, and those projects being sanctioned to move into full scope of delivery.

So detail design, procurement, and construction.

And we are seeing that, I think, pretty much in line with what we have been saying about how good the markets are.

So while you might characterize the oil sands as tepid, that's certainly not the way we see it.

We wouldn't call it tepid at all.

Maybe it is because we're winning more than our share.

But overall the projects are getting sanctioned.

They are moving forward.

The business of being careful about authorizations in terms of releases that pushed some of this work out -- that is still out there.

So I think our customers in the oil sands in particular are going to tend to be cautious about how much they authorize and how fast they do it.

But I think that market is continuing to move along pretty positively.

George Kunberger, who is our head of sales, is here with me.

George, do you want to comment?

Yes, Craig.

I think relative to the oil sands, the amount of activity that we are seeing is not so much driven by big major capacity expansion at the processing level -- although there certainly is some of that -- but there is a tremendous amount of effort and money starting to be spent on reducing the cost of capital and improving the efficiency of the oil sand collection and distribution and taking to SAGD facilities.

A lot of it is going specifically in the form of well pads.

And how a lot of our customers are looking to lower their overall cost to begin with, their capital investment -- and, more importantly, their downstream efficiency of how they operate those facilities.

There is a lot of capital being put into that.

Those don't necessarily getting a lot of publicity as far as big-pool capacity expansion, but it's a lot of money being spent.

The next, saying -- well, that whole concept, that approach, will follow over into the design and construction of SAGD facilities as well, as far as standardization of design, getting standard specifications so we can go on a global procurement across various customers.

So that is where all the effort is being spent.

And it is a lot of money, and that is where we are playing a big part of in 2014 and probably into 2015, as well.

Okay.

That is helpful, guys.

Maybe if I could just shift gears and ask you about margin in a certain way.

Like, when we looked at the quarter, it is kind of noisy because of SKM.

So maybe, Craig or John, you can talk about the salary multiplier, and the overtime, and billings, and all these indicators that you usually look at.

Is pricing getting better, still?

Is it marginally getting better?

And do you see your margin snapping back to where it was before the quarter, in that high 5% range, given the noise in SKM should die down?

Let me start, and then I will ask John to comment.

If you look at the trend line for margins, it is clearly improving, slowly and steadily.

What obscures that a little bit in quarters like this one is, as I think John mentioned, a lot of field services activity -- maintenance activity, turnarounds -- disappears between about mid-November and mid-March.

And so last quarter and this coming quarter will tend to be -- will appear to be weaker because of that margin than the quarters where we have a lot of field activity.

But if you look at the overall trend in unit margins, the trend remains positive.

And we continue to see a good, steady improvement in the numbers.

John, do you want to comment further?

Yes.

I think we're going to see, just because of the [turn lower] that is going on in the transition into SKM, and in the impact of things like the amortization of intangibles and such that certainly have an impact on the net operating margin, or the operating margins, that the margins might trend a little bit lower than what we were having last year.

But they are going to be probably in that range.

A lot will depend on how contracts are taken in the field services.

If we get a lot of pass-through costs and such, that will have a little bit more of a dampening effect.

If we get a lot of these bigger projects, bigger activities that are going on, and are more on the client's paper, and so we're just managing them, and more professional services, the margins will still be the same amount of dollars.

So you will see it a little bit higher.

But somewhere in that mid-15%s is probably something where we will trail for the next -- you know, this year.

Thanks, guys.

Appreciate it.

Vishal Shah, Deutsche Bank.

You talked about an improving oil and gas segment, particularly gas monetization and some of the derivatives work.

Can you talk about timing of some of those projects, as you see them?

Also, can you talk about your utilization rates currently, as well as any comments on the level of competition in the current bidding environment?

Thank you.

Sure.

With respect to the gas monetization and all the derivatives work, we continue to get awards of pre-FEED and FEED work on an almost continuous basis.

And as I said, we have had several big programs, again, authorized to go into detail design and to execute, as we describe it in the industry.

There is a tremendous backlog of opportunity still out there.

We don't see any reduction in the planned spend of our customers.

It is all just driven by how much can they get out and get started at a time.

And to some extent, some of the pace here is governed by the customer's own availability of staff.

But it is still a very robust market, and I think you will see awards on a continuing basis -- at least the kinds of projects that we are following -- every quarter as we go through the next couple of years.

With respect to utilization, utilization is good.

We continue to run at historic utilization levels.

So that is a positive for us.

And I don't see any reason to think that there is any issue there.

I think we are going to continue to see slight improvement in margins as a result of that.

People are winning work and starting to load up.

But I don't think it is at that point where it's going to be any dramatic increase.

That's also very geographically dependent.

So some parts of the world, margins are -- it is still a price fight.

Other parts of the world, not so much.

So it is a mixed bag on a global basis.

Does that answer your question?

It does.

Thank you.

I need to go back and clarify something that I said.

When I said the mid-15%s, I was talking about gross margins.

And I was talking about operating margins.

The operating margins will be in the mid-5% range.

Who says?

(laughter) I'd love operating margins to be in the mid-teens.

So would I. But just want to make sure, since I kind of switched the nomenclature in midstream without clarifying it, I figured I better clarify it.

Brian Konigsberg, Vertical Research.

Maybe just a follow-up on that comment, John.

I know there have been a couple of these questions already, but when you talk about the mid-5%s, are you saying the rest of the year should be in the mid-5%s, or is it full year should be in the mid-5%s, suggesting you are exiting even closer to 6%, and then you have a nice tail into 2015?

I just want to make sure we fully understand that.

This first quarter had a lot of negative impacts from the closing costs and such like that.

So I think the rest of the year will be in that range, and the total year will be close to it, as well.

Obviously, the rest of the year will be a little bit higher than the total, simply because it will be dragged down a little bit.

But mid-5%s, it could be 5.6% versus 5.4%, something like that.

Okay.

That's fair enough.

And just on SKM, if you can, can you just provide a little granularity?

So the $800 million that was contributed in the quarter: can you tell us how that trended specific to SKM quarter over quarter and year over year?

And was that all in industrial?

No.

It was spread across all three of the market sectors, predominantly in the industrial and public and institutional sectors.

A tiny bit went into the process side.

The backlog is consistent with its historic levels -- shows steady but not great growth.

Remember, Australia on the mining and minerals side has really struggled over the last year.

But we see the backlog for SKM as a positive for our outlook as we go forward.

There's nothing about that that suggests we need to revise our thinking about its contribution in the next couple of years.

Got it.

And just one more on depreciation: so that expense actually has come up meaningfully over the last four or five quarters or so.

Maybe you can just explain why that is?

And should you expect that trend to continue?

I understand why amortization should be ticking up, but why is depreciation coming up?

Well, if you look at our capital spending over the last couple of years, it has been a little bit higher than trend.

We have had a number of facilities that we have moved into larger facilities as we have grown and consolidated to get more inefficiencies out of the existing facilities.

So that is been a higher-than-normal trend.

If you look at this going forward, obviously there will be some consolidations over the next couple of years, as we look with the SKM offices where we are in similar places.

But we don't have a great number of leases that are coming up, particularly this year, and even into 2015.

So you won't see that kind of activity.

The other thing is we have had a little bit higher than trend line because we have invested -- you know, as we have done some acquisitions with Aker and such, there has been more investment in the IT services.

We typically have to upgrade the IT within the organizations we bring in, just so that they will operate in our systems and have the level of capacity and such to run our systems and such.

But we have also been investing in some project controls and such to get better products there and integrate that globally.

And over the next couple of years that kind of spending will probably continue at that little bit elevated pace, just because of the acquisition -- the integration of SKM, and the fact that we will be going through an upgrade on our ERP system.

And there is a new generation of our Oracle system that will need to be implemented that will be a little bit higher cost -- more capital cost of the next couple of years.

So I think you will see the total number coming down from our capital spend because of the leases and such like that, but some pieces, like some of the IT and technology spend will still be maybe a little bit above normal.

And of course, the amortization costs will be up when you see a full quarter of SKM with the amortization of intangibles and such like that.

But when we give guidance and are saying that SKM is going to be accretive over the balance of the year, that is net of all those kinds of costs, including the integration costs, and the amortization of intangibles, and the interest we're paying on the debt that we have used so far.

Do you have an estimate today you can provide of how much of additional amortization we expect in Q2 through the rest of the year?

Right now our preliminary -- and we're still -- obviously, there is a period you go through to look at this, but it is going to be somewhere a little bit around $5 million a quarter.

Got you.

Okay, great.

Michael Dudas, Sterne, Agee.

Craig, turning to your backlog chart, maybe a conceptual question.

As I look at the pie chart, what do you think over the next couple of years -- which one of those single-digit contributors to the backlog will become double digits over the next couple of years?

And is it fair to say that the US federal and infrastructure portion of the whole Company will decline as a percent because of these international infrastructure opportunities and other private sector opportunities, as well?

Ask the second part of your question again, Mike?

Yes.

Just in that pie chart, the US federal business and maybe the US-oriented infrastructure business -- would that shrink as a result of other areas growing, I guess?

Okay.

Let me start first with -- I will speculate with you on where we might see pies go to double-digit share.

The two I think have good chance of doing that are mining and minerals and oil and gas.

Both are sitting at around 7%, 8%.

I think mining and minerals, as we bring in revenues from SKM and as we continue to succeed in growing the business and getting this continuing presence kind of work, should move over the next 12 months well up into the 10%, 11%, 12% of revenue.

The same with the oil and gas business.

While it isn't showing up in terms of growth yet, we are doing a good job of taking position in the unconventional gas business.

And we have done well in the US.

We continue to leverage that globally.

So that is another business that is plus or minus 7% today that I think could be a much more significant part of our revenue in a year or two.

So I think that answers your first part of your question.

Does it?

Yes.

Okay.

Second part of the question: I think what you will see with respect to that whole part of the pie that is public and institutional -- that its relative share will stay about the same.

And my reason for that is that while the US part of it as a share will probably be a smaller percentage, we're picking up a fairly significant share of that market from SKM in all of Asia-Pacific.

We are seeing a rebound in the business in the US and the UK.

So overall, I don't think the whole public and institutional piece -- buildings, infrastructure, and national governments will shrink very much.

I don't think it will grow very much, either.

With respect to the national governments part, we're picking up a stronger position in Australia in the defense market.

And, of course, I'm very upbeat about the expansion of our position in the nuclear industry in the UK.

So again, I don't -- the US share of that national governments market probably won't grow a lot; maybe a little bit.

But the overall national governments market will be stable or slightly growing.

And is there a big difference or delta in operating income from those services, international versus US?

You know, probably not beyond -- we might see it as a big difference.

I doubt if when you see it at the bottom line it is a big difference.

Sure.

Understood.

If you know what I am saying.

I do.

Because cost to serve and those things make a big difference as you go around the world.

My second and follow-up, Craig, is -- I think you have mentioned this, either in the last call or in the meetings you had here in the East Coast late last year -- 2014 from an acquisition standpoint: probably more of a digestive year, even though you will be active in maybe some of these niche opportunities?

Is it likely that that is the case, or is there a chance we start to see more G&A, higher expenses, because we are getting the bankers ready to make another major acquisition later this year for 2015?

Just want to get a sense of how you are thinking about that.

As I sit here today, there are a couple of things out there that are interesting.

I don't know that they are bigger.

I don't know that any of those that are actually going to mature into an opportunity for us or anybody else.

So I would say that our expectation for the rest of this year is probably mostly niche acquisitions going forward.

And if we start to see things that have -- will have a bigger impact on the numbers or that would have a big impact on the business, we will signal that, I think, pretty clearly before we get too close.

Excellent, Craig.

John Rogers, D.A. Davidson.

First, in terms of the tax benefit that you saw in the quarter, was that all in the tax line?

Or, John, you mentioned some interest recovery.

I'm just -- and then, what does that imply for the tax rate the rest of the year?

Part of it was in the tax, but the bigger part of it was actually in the interest, because we have been accruing interest on the tax liabilities.

And this tax case that we got a favorable ruling on goes back to the mid-2000s.

So it was like 2006, 2007.

So the interest that was accrued on it was much higher than, actually, the tax liability, just because of the rate.

So in round numbers, I think it was about -- and this will all be in the 10-Q -- but I think it was about 2.7 that was in the --- hit the tax line and about 4.1 that hit the interest.

And it will look funny, because it is a reversal of interest expense.

So interest expense is actually a benefit for the quarter.

Okay, thanks.

I just wanted to clarify.

And then, Craig, back to your original comments on gas monetization.

In the past you have talked about small LNG.

Is that still a market opportunity for Jacobs?

And what are you seeing there?

We believe it is a market opportunity for Jacobs.

We are involved in some high-potential FEED work in that area.

Whether that will turn into real projects or not, I'm not that confident yet.

But I think, as I may have mentioned on the call before, because we are not seen as a LNG player, we are seen as somebody who could be innovative about small LNG.

And I think that gives us a really interesting position in that aspect of the market.

Okay, but it doesn't like anything material near term.

I just wanted to clarify that.

I don't think we have anything in the short term that would have a -- that would be a big event.

Okay, great.

Tahira Afzal, KeyBanc.

First of all, congratulations on completing the acquisition.

We're really excited about it.

Thank you.

First question is really on Jacobs pre-SKM in a sense.

If you look at the organic growth on the revenue side, even outside of SKM -- and I know the contribution was very little in the first quarter -- but you saw 10% roughly of revenue growth.

So I guess my question is: Mr. Prosser pointed to second half seeing, potentially, stronger growth as some of the field services projects are released.

Could we see revenue growth organically pushing that 10% to 15% range?

Would that be a possibility?

We don't actually forecast revenues, but typically our first-quarter revenues are down a little bit from the fourth quarter, just because of the holidays and the activity level is down.

If you look year over year, we're actually up about 8%, 9% in revenues on a quarterly basis.

I think we will be adding in three quarters of a year for SKM.

That will certainly add to the revenue.

But even on an organic basis, we would expect to see growth.

Whether it gets up into double-digit by itself, that is hard to predict.

A lot will depend, again, even on the field service activity -- whether we are putting it through on our paper or on somebody else's paper, in which case either way could have a material effect on the revenues, and growth, and such.

But either way it would have a positive impact on the margin dollars.

Thanks, Mr. Prosser.

Second question is on SKM.

I'm not sure if I missed this, but did you folks give an accretion amount on a GAAP basis now that you have all the amortization numbers that have been finalized?

That could be helpful.

We have not, and we aren't.

Okay.

That was a quick one for you guys.

(laughter)

Other than it is positive.

Mr. Prosser, I will get it out if you somehow.

Third question is -- just going back to the questions I think Mike Dudas and John Rogers have asked, kind of melding them, in a sense: if you look at power, I know there are some very nice technology companies there that are employee-owned.

And I assume the employee base is growing slightly older.

The market has done well.

Are those opportunities in terms of profile becoming more interesting for you from a, let's say, next two to three years perspective?

And on what John Rogers asked about, small LNG, there seemed to be some niche LNG technologies there that are being sold by small, private companies, even.

Could that be something you are looking to do -- really leverage yourself into that market?

Let me go to the power business first.

You are right.

There are a number of nice-sized, privately-held firms who have good positions in the power industry and whose positions are very consistent with our relationship-based business model.

And to your point, they are -- the ownership, the leadership is aging.

And that does usually create significant opportunities for us.

But remember that these acquisitions are always opportunistic.

We have to have a willing seller as well as a willing buyer.

So we continue to stop by and visit those folks, and make sure they know we are interested, and that we would love to have them be a part of the future.

And sooner or later, one of them will say yes.

But it's just impossible to predict when that might happen.

With respect to the LNG side, most of what we see right now is not really a technology play in the sense of technologies for gasification.

It is much more a play in terms of knowing how to modularize small facilities, small projects, and being able to deal with the aspects that go with that.

So I don't know that we would be out looking for any small LNG technology companies.

Again, we're really not trying to be in the technology supply business, but much more in the honest broker, engineering know-how side of the business.

Fair enough.

Andrew Wittmann, Robert W. Baird.

John, you alluded in some of your earlier comments about the back half being better, and I think you said at the time that there's probably some ramp, maybe, in the top line.

How much of that back-half ramp might also be caused by integration costs with SKM that are happening right now in your second quarter?

And is that going to keep the earnings growth muted here in this quarter?

No.

The integration costs will be something that will be with us, actually, probably over 12 to 18 months, particularly in some of the systems development side and things like that.

And so having a bunch of costs that would be in the second quarter falling off is not going to be what drives it.

I think it is our historic business moving up.

Now, there will be a little bit of that, but that is going to be ongoing.

And it's not all going to happen in the second quarter.

Some of that, as we get into consolidation of space and things like that, might be 6 to 12 months or even further away.

So I just have to -- because of the nature of our businesses, it's not like we are going to run out and fire a bunch of people, or anything like that.

Because what we bought were people.

And so the idea is that the integration costs are more just getting people onto our systems and getting them trained -- looking at all the SKM systems, and what are good lessons learned there that will be incorporated into our practices, and things like that.

So it is not going to be like it's a big bubble in the second quarter and drop off.

Got it.

That is helpful.

Thank you for that.

Yes, it will taper over time.

Sure.

I want to also dig in a little bit on EBITDA margins.

We have talked about EBIT margins.

We have a little bit more insight on amortization.

But SKM was clearly a much higher-margin business.

I think it has been reported as kind of a mid-teens EBITDA margin.

That just, from a mix effect, should have 10, 20, 30 maybe even 40 basis points of EBITDA margin improvement.

I guess the question here is, one, would you say that that is true?

Is that kind of math, way of thinking about the impact of SKM, true?

And maybe a more specific question: can you also give us the increase in depreciation so we have the full D&A contribution from the SKM deal?

There will be some of that disclosure in the Q and such.

I am not going to go through it line by line yet today.

In fact, I'm not sure the depreciation number will be in the Q, but the amortization number will.

I think those will just shake themselves out.

The numbers for depreciation are not material, so it's not going to be like it is out of line with what their revenue and operational contributions are.

As to their margins, how they reported their margins were a little different than how we report margins.

So when you look historically back at some of the information that was -- the public disclosures on them through the acquisition -- the booklet and things that have been on there, there were some things that we typically show as pass-through costs that they didn't include in revenue that would have had -- doesn't change the margin numbers at all; it just changes the percentages a little bit.

But when you throw in the amortization of intangibles and things like that, which they didn't have, and such, that brings them down.

So their margins were not significantly different when we actually worked through them than ours on kind of a same-structure basis.

So it is not like they are going to pull ours up, or --.

Or down.

Or down.

Okay.

That makes a lot of sense.

So the numbers that were kind of talked about were what we would call kind of a net revenue basis.

So when you do look at the gross margin, it's much more similar.

Yes.

It sounds like it makes sense.

And then, Craig, just one last question.

You talked in November about potentially tracking $20 billion-plus type projects.

Can you just talk about the evolution of that?

I know it hasn't been very long yet, but is that list growing, shrinking?

Do you feel better about those odds?

Can you just give us some commentary on the large projects that you are tracking today?

The list is growing.

There can be additions to the list.

And we have had some unannounceable success in winning some of those.

So the story is good; I just can't tell it to you.

Got it.

So the stuff that you are winning right now is still FEED on these larger projects?

And is that a fair assumption?

And do you think there is --?

Yes, but in some cases the FEEDs are gigantic, okay?

Okay.

Will Gabrielski, Stephens.

A couple of questions.

First, can you just talk about -- it sounds like you are booking less pass-through, which is why we are seeing field services' backlog grow a little bit more slowly.

But in terms of revenue contribution, pass-throughs have been higher over the last two quarters than we saw over the prior year.

So how do you see that trending in revenue over the next year or 18 months, based on the bookings composition today versus what you are burning off?

Is there a shift there, or does it say pretty static?

I think in the near term you will see less pass-through being burned off because of some of the issues I just described, and because an awful lot of the business that we were actually executing today is FEED and similar work.

So part of what you are seeing in terms of backlog -- we are booking less pass-through, and we're working off historically booked pass-through.

That is why backlog goes in the direction in field services that it goes.

And I think you will see that affect pass-through revenue as you look out over the next few quarters.

Okay.

Did I say that right, John?

Yes, and the other thing is that in this -- our first quarter, some of the things that get moved around for the holidays tend to be maintenance turnaround activities that get -- and those don't have as much pass-through in them, because it is more direct hire in our own costs as opposed to big field construction, where we might have some direct hire, but we also do a lot of it through subcontractors.

And there is material and equipment that flow through there.

And actually, some of the pass-throughs -- not all pass-throughs are field services.

Some of the pass-throughs actually are related to some of our government contracts and professional services subcontractors that we have, particularly in some of our teaming arrangements and such like that, with the government in the public sector.

Okay.

A few questions on North American refining, the first being: there has been a lot of talk about the delayed and deferred maintenance over the past few years.

And the refiners are still making a lot of money.

Are we close to seeing any type of big maintenance cycle that could benefit you?

And then the second question around the Tier 3 refinery standards: outside of yourself and the EPA last April, and I can't find a lot of industry conversation about when those are coming and how real they are.

Can you just give some color about the engagement you have today with the customers on those projects, and when we start to see that impact the business more materially?

Sure.

In fact, I am going to ask George Kunberger, our head of sales, to comment on that.

On the Tier 3, what has been happening in the last six months -- and this is way more technical than I can probably accurately explain -- but in general, our clients have been able to buy and trade credits that manifest themselves in the form of extending the deadline when they need to be compliant with the new law.

So from the end of 2017 out a little bit, maybe even in some cases -- and it's different with each customer -- as far as even 2019.

And so as a result, naturally, since to a large extent these are non-ROI projects, then the clients are delaying those.

But that is a case-by-case thing.

It is not a broad issue.

The second thing that you're seeing going on with the Tier 3 is naturally, if you're going to spend that kind of money to modify the refinery, they are going to see what they can do to also improve its efficiency and even its capacity.

So you've got some reconfiguration and relooking at these projects that will not only deal with the Tier 3 regulations, but also that they can get out of that money they're going to spend as far as improved profitability.

But it is really -- so they are definitely being stretched out.

That is for sure.

And that is why you haven't seen as much, probably, excitement about those particular projects in the last quarter as you did at midpoint of last year.

The other aspect is that most of the folks you hear from, at least in our industry, are focused on big events.

And these won't be big events.

These are $100 million to $400 million; probably average about $200 million in size.

And so I think even though it is very attractive work, most of our competitors aren't going to make a big noise about it, because it is big project stuff.

To us, of course, it is absolutely right at the center of our business.

Can I just push you on that point before you get to the second part of my question?

But just within that comment, I'm not necessarily referring to the competitors, because CB&I actually did mention it last quarter.

What I am referring to more is that the refiners themselves, who all hosted analyst days in December -- I would have thought -- I mean, $16 billion over a short number of years for the North American refining industry is still pretty decent spend for that industry.

So I am just wondering why they are not making a big deal out of it, or if they are just sort of -- because they have been able to find some wiggle room, maybe as you are saying, that they will just deferred disclosing that until the last possible moment?

Well, I think it is -- partly it is wiggle room.

I am speculating here.

I can't pretend to understand why oil companies say what they say.

But I think that might be part of it.

I think there is some belief that they are going to get some relaxation from the EPA on these standards.

And there is no money in it for them.

And I don't know that if I were in that business, I would spend a lot of time telling you how much money I was going to have to spend to get no return.

Well, if you do the math on what you just said, $15 billion divided by 85 refineries, you are still talking about a couple of hundred million dollars a pop.

Over two or three years.

Over two or three years.

So I think all of that plays in.

I would agree with Craig.

Okay.

And then just my second point on the maintenance season that is coming up -- visibility there?

Yes, we see a lot of activity in maintenance.

It has been improving steadily, frankly, since the big turndown in 2008, 2009.

And I have every reason to think it is going to continue to do so.

The spring and summer turnaround activity looks good to us as we sit here today.

But, of course, turnarounds can be deferred almost on a moment's notice, depending on what is happening in the industry in terms of capacity and production.

So I think the outlook is good and getting better.

But it is a day-by-day business.

Okay.

Robert Connors, Stifel Nicolaus.

Just real quick -- with a couple of the ethylene crackers already awarded in the backlogs, and we may get our fourth here by the time we exit the first half of 2014, just wondering what your customers are saying about the timing of field construction awards of where you guys are going to participate, some of the polyethylene and off-site and utility work?

A lot of the derivatives work is being completed as we speak.

So I think we will start to see pre-FEED/FEED kinds of activities around those ethylene units over the next three quarters.

The cycle for construction is in that three years, maybe a little more.

So you can expect big field services activity is probably another 12, 18 months out.

Okay.

And then, also, you may have just answered this in a previous question, but wondering where you are best positioned -- whether it be end market or geography -- to deliver your direct-hire capabilities.

Is that mostly on the maintenance side?

Well, certainly maintenance is a strong capability for us as a Company, so the answer to that would always partly be yes.

But I think the construction business in terms of direct hire on the Gulf Coast is going to be another source of pretty significant activity for us, as well as the unconventional gas business onshore from Texas to North Dakota.

Of course, Canada is also big field services, as one of my guys just pointed out.

Another big field services aspect for us -- we have just won some fairly significant work in that area.

Probably be a press release here in week or two.

And we continue to see that as an ongoing growth opportunity.

A lot of field services activity.

George's comments about all of these well pads is a pretty significant amount of business.

Does that answer your question, Robert?

Yes.

And then if I could squeeze in one more housekeeping -- over the summer, obviously, we saw the Indian currency really devalue, and you guys have one of the largest presence in engineering in India.

Just wondering if you're seeing a little bit better competitive positioning and pricing environment there because of that?

For the most part, Indian engineering for these sort of workshare projects globally are all priced in dollars.

So the benefit is actually more to the margins than it is to the competitiveness.

Okay.

That is helpful.

Thanks for taking my questions.

Stewart Scharf, S&P.

Could you talk a little about the consolidation in the industry?

Just more of your long-term thoughts on foreign investments, for instance, the Foster Wheeler deal?

[Shora] was acquired.

Just your thoughts on the competitive landscape, the increase in foreign acquisitions, and overall.

Well, I have believed for some time and I continue to believe that our industry needs to consolidate, and it will continue to do so.

And I think we will see both small consolidations, a lot of the things that Jacobs traditionally has done; mid-sized consolidations, like the SKM deal for us; and I think there is still a potential for some fairly significant -- not necessarily public companies, but public-company-scale businesses to be acquired as well.

Whether that money comes from combinations of US businesses or some businesses -- the European or Asian with US businesses, I don't know that I can predict that.

I don't think anybody found the Foster Wheeler thing particularly surprising, except at least maybe a little bit -- to me, at least -- the price.

But I think that we're going to see more of that, because I think there are more companies out there that don't have the market diversity or the geographic diversity they need to survive in the competitive marketplace of the future.

And then just on the SKM $0.10 charge in the quarter, how much of that is transaction costs?

Break that out?

Yes, we actually do break it out in the Q, which will be filed today or tomorrow.

But the biggest part of that is the transaction costs.

But when you get in the amortization and such like that, it is probably one-third, two-thirds.

Two-thirds transaction?

Two-thirds transaction, one-third just the results of operations and the interest in amortization.

Okay.

Steven Fisher, UBS.

I got on the call late, so apologies if you have covered this already.

But the 20 large projects that you have previously talked about, beyond the FEED aspects of them, do you think you could book some of the bigger EPC pieces of that this year?

Well, I don't know if you were on the call for the discussion about whose paper we're going to be doing some of these big projects on.

I think that we will see some of these big projects go into execute in the next year.

So in one sense, I would say yes.

In the other sense, though, in terms of whose paper the procurement or construction activities might be on, there's a lot of uncertainty about that.

We've got a couple of these big jobs that we have won already, and the size of the booking is a bit -- very dependent on what the customer decides to do about whether it is on our paper or their paper.

And, of course, there's also the direct hire aspect of that -- whether or not we do the construction.

So I see some of those projects definitely going into execute.

I just can't tell you what the dollar impact on our backlog or revenue might be until these other issues are sorted.

But even if it is less on the backlog and revenues, you probably have a better earnings mix because of higher margins.

It will appear to be higher margins.

In terms of absolute dollars, it will be about the same.

The exception to that is when we do direct-hire construction.

And that carries an additional margin flow of its own.

Okay.

And then on cash flow, I'm not sure if you talked about that.

But is there any reason to think that your free cash flow won't approximate net income this year or probably even be a little bit better than that, given additional amortization you might be incurring?

I think that will be true.

We have worked really hard on focusing on getting our receivable levels down as they have grown here, particularly as the markets got more compliant (inaudible) favored.

Some of those terms got stretched out and such.

So I think as the market starts turning a little bit more in our favor, particularly on some of these big jobs -- and as we move into the fields, into the procurement, we tend to get much better cash flow terms on those contracts than just on the pure professional services, as we will get advance notice at the best.

But often it's at least a zero-balance funding, so that you have much better receivable collections on that.

So I think we will -- we should be pretty close to what has always been kind of our target and our expectation that our bottom line will turn into cash.

And so that cash -- a lot of that will be used to continue to pay down debt or rather small acquisitions and such like that.

Okay, very good.

(Operator Instructions) Rob Norfleet, BB&T Capital Markets.

Most of my questions have been asked but just a couple.

In terms of the recent acquisition you all announced, the FMHC, obviously giving you exposure to the wireless telecommunications market.

Can you talk a little bit about the opportunities you see to take market share in that market?

And then over time, do you see yourself being a big player in this market, either through, obviously, additional acquisitions or just roll ups?

Yes, the market is a very interesting market.

There are a couple of decent-sized players -- and by that I mean multi-hundred-million kind of revenues; one public, one not public, when I think of the two biggest.

I think there's plenty of room for another major player at that multi-hundred-million, billion-dollar-plus kind of revenue club.

Because the vast majority of the work in that industry is still done by what I will characterize as mom-and-pop operations.

And there is a lot of inefficiency created by that.

There is a lot of desire on the customers' part to have a one-source go-to operation.

So our outlook for that business is very high.

We're going to assign a key executive exclusively to that business to see if we can't drive it faster rather than slower.

I am looking at him as I am saying this.

And we will do that through a combination of organic growth, some niche acquisitions.

And if we find the right one, some slightly larger acquisitions.

Most of the businesses that are out there to acquire are going to be small.

So they won't be a lot different than FMHC was to maybe twice that size.

So half that size to twice that size will be the typical acquisition.

But there's a lot of opportunities to do that.

So it's a combination of rollups -- maybe there is a big deal to do in organic growth, but I think this is one of those places where we get very rapid growth.

This is, what, the third or fourth one that we have done in that space over the last couple of years?

So it's not like -- this was something that we have been continuing to grow in, and we see the opportunities to grow more.

Okay, great.

And just secondly, John, just a quick question on working capital.

Obviously it tends to be lumpy throughout the year, but what should we expect with SKM for the trend for working capital to be in 2014?

I think that as we get better on collecting receivables, our total working capital should come down a little bit.

And we will generate cash, and we will use that cash, probably, to -- most likely to pay down debt or for other acquisitions.

So I don't see that working capital is an issue one way or the other.

I would say that SKM historically did a good job of billing and collecting.

And I don't think there's any reason to think that will be different going forward.

Okay, great.

Thanks for your time.

And this concludes our question-and-answer session.

I would like to turn the conference back over to Craig Martin for any closing remarks.

I want to thank you all for dialing in and listening to our story.

I hope we have answered your questions.

If we haven't, I know you have Mr. Prosser's phone number.

And he will be glad to spend the next couple of days talking to you.

Have a great week.

Thank you, operator.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.