雅各布工程 (J) 2014 Q4 法說會逐字稿

Good day, and welcome to the Jacobs Engineering FY14 fourth-quarter conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded.

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

Ms. Jones, the floor is yours, ma'am.

Thank you, Mike.

Statements included in this webcast that are not based on historical facts 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 you should not place undue reliance on such statements, as actual results may differ materially.

There are a variety of risks, uncertainties and other factors that could cause actual results to differ materially from what is contained, projected or implied by our forward-looking statements.

For a description of some of the risks, uncertainties and other factors that may occur, that could cause actual results to differ from our forward-looking statements, see our annual report on Form 10-K for the period ended September 27, 2013.

And in particular, the discussion contained in item 1, business item 1-A, risk factors, item 3, legal proceedings, and item 7, Management's discussion and analysis of financial condition and results of operations, as well as the Company's other filings with the Security and Exchange Commission.

The Company undertakes no obligation to release publicly any revision or update any forward-looking statements that are discussed on this webcast.

With that, I would like to turn the call over to John Prosser, our EVP of Finance and Accounting.

Thank you, Michelle.

Welcome, everyone, to our fourth-quarter year-end conference call.

I will briefly go over the financial highlights for the quarter and year and then I'll turn it over to Craig Martin, our CEO, to give a business overview and outlook.

Moving to slide 4, just on the financial highlights.

As we reported, the diluted earnings per share for the quarter was $0.65 and for the year to date was $2.48.

Both these numbers include the effect of both the restructuring that we had in the second half of the year and also the items that we had called out earlier in the year in the first half.

Backlog ended up for the quarter at $18.4 billion, nice growth year-over-year, pretty much flat with the prior quarter.

Nice growth on the -- in professional services side, but we continue to see a slowdown in the field service and on the conversion to field services.

Book-to-bill still is a good 1.09 on the trailing 12.

Continue to have a strong balance sheet.

Our cash position at $732 million is basically flat with last quarter, but during the quarter we had about $150 million that we spent for the acquisition of FNS and then the stock buyback that we initiated.

In September, we acquired 1.5 million shares for a total cost of about $78 million.

If you add those back into the cash, we actually had a very good cash generating quarter.

We are initiating fiscal year guidance of the range of $3.35 to $3.85.

This is a nice growth, I believe, over this year.

While we expect the year to be a good year, in that line, the first quarter as is typical, historically, will be down from the September quarter.

We would anticipate that could be in the range of $0.08 to $0.12 impact because of holidays, vacations and other slowdowns that we typically see in our first quarter.

Moving to slide 5, this is just the historical trend on our history and weighing in the growth that we expect for this next year.

Looking at the historical growth rate, while we target the 15% long-term growth, this still is a little bit trailing below that, but we believe this will be a transition year and get us back toward that 15% long-term growth rate that we still believe is a good target for us.

Moving to slide 6, backlog, again, as I said, nice year-over-year growth, flat with last quarter, but still good growth on the professional services side, while field services was down slightly from the last quarter and even from the last year.

With that, I will turn it over to Craig Martin to review the business strategies.

Thank you, John.

Before I begin, I just want to take a moment for those of you who are on this call who might not be with us next week in New York or Boston, to remind you that John Prosser has elected to retire and will be leaving the Company's full-time engagement in January.

John's been our CFO for 30 years and an employee for 40.

I just wanted to take this opportunity to congratulate him and to compliment him on what a terrific job he's done as a part of our leadership team over a very long period of time.

Thank you.

With that in mind, I'll now talk about our growth strategy.

It doesn't change and it hasn't.

We continue to focus on differentiating our business by using our relationship-based business model.

We continue to work our market diversity to try to keep the business balanced across the various markets and keep the growth going.

We are expanding our geographic presence every day through our multi-domestic approach.

We're taking our cash and using it to promote growth, whether that's through acquisitions or as we have done recently, through a buyback.

We also continue to drive down costs.

This is the only point I'm not going to expand on a little bit later on.

We are doing that through both the restructuring you saw and our constant attention to keeping our costs down.

The market remains, frankly, very price sensitive.

What we've done in restructuring and what we're doing to control G&As continues to improve our competitive position in that challenging market.

Turning now to slide 8, I'll remind you all of our business model.

We're very much focused on client loyalty and long-term repeat business.

You can see how the model works here.

It's what we think of as a virtuous circle in that we get the loyalty, we use that to drive growth and improve our performance.

That creates more loyalty, and that's a virtuous upward curve.

Our repeat business for FY14 was the best it's ever been, at 97.2%.

We're very pleased with our ability to get that repurchase loyalty and continue to grow the business.

Turning now to slide 9, this is that market diversity we were talking about.

You can see that the balance between our markets remains pretty constant.

Public institutional is up a bit.

Process is flat.

Industrial is down a bit.

Overall, the business continues to have good balance across all of the markets that we serve.

Let me take now and move on to slide 10 and talk about some of those markets individually.

Here we're looking at the public and institutional markets.

Take a look, first I think, at the backlog growth curves over to the right.

You can see we've gotten compound growth of 16% in the public sector markets between Q4 of 2012 and Q4 of 2014.

I think that's a very good track record, in particular, when you consider the overall view of the North American public sector market and very specifically the US public sector market.

I think we're demonstrating our ability to continue to grow the business steadily and aggressively in the face of stiff competition and challenging markets.

Looking at the individual markets, let's start with the national governments business.

We continue to see lots of opportunity in the defense and security world.

Our recent acquisition of SKM -- although it doesn't feel so recent anymore -- certainly is a big plus.

It helped us grow in Australia and Asia-Pacific, and we see a lot of significant investment in this area there.

We're hopeful that the US midterm elections are going to provide better budget certainty, and that will continue to represent a stimulus for our US business.

We're really pleased with how strong the nuclear cleanup business continues to be, very strong in the UK, lots of opportunity in North America.

We recently announced our win at Sellafield.

That's somewhere between $300 million and $500 million worth of nuclear cleanup work.

A really nice win for us and one of the two or so we were talking about last quarter that we thought we were going to win.

One of those two is in the old and the other is yet to come.

Another area where we've had really good success on the back of our acquisition at FNS is in the intelligence community.

We've already had significant wins in that area that have been a nice adder to our backlog as well.

Moving on now to infrastructure, the transportation market is pretty buoyant worldwide.

We're doing particularly well in places like the US and Australia.

We see a large investment in the Middle East coming and because of our position with ZATE and our history in the Middle East and our strength in terms of the diversity markets that we serve, I think we're in an excellent position to take advantage of that growth.

We're also seeing lots of utility demand and water projects.

It's a giant growth area across the world.

We see something north of $70 billion worth of project commitments potentially out there.

Then our framework agreements with our clients, whether it's in telecom, infrastructure, buildings, continue to be an important aspect of our business and we think we'll see continuing growth there as well.

Moving on now to buildings, our buildings business is growing globally.

We've seen significant awards.

Since the quarter closed, we've had some major awards in the Middle East in the buildings and infrastructure space.

Healthcare is another area where we see continuing growth and tremendous opportunity.

Let's face it, lots of places in the world, people are getting older and that's going to drive a continuing expansion of spend.

We had a really good year from bond issue passing in K-12 and things like that.

Most of those midterm bonds passed and that will drive additional business.

Then, we continue to be very, very excited about the high tech markets, particularly things like mission critical facilities, data centers, huge market, and we're very well positioned in that business.

Overall, these last two markets, infrastructure and buildings, have also been strongly benefited by our acquisition of SKM.

Tremendous leverage there, as we become a clearer global player in those businesses.

Moving on now to slide 11, let's start with pharma bio.

We told you last quarter that we saw a pretty good set of prospects out there.

Those things are starting to come home.

We've had some significant wins here since the beginning of the quarter, the quarter we're in, I mean.

We're seeing lots of activity in investments.

You know how well positioned we are in India.

You can see there's a very significant amount of investment planned for India.

We have that great footprint around the world for this business and we see really more than $2 billion worth of new work potential in a very short window as we look forward, so we're feeling better about the pharma market than we felt in sometime.

Moving on to mining and minerals, still a weak market globally, but we see some opportunities for growth.

The areas we consistently talk about, which are the sustaining capital, asset optimization, those kinds of things, that's where the big spend is relatively speaking today, and we continue to take share in that part.

I'm very happy with our ability to penetrate the small cap and sustaining cap work for our customers, both in the copper side of the business and in iron ore.

There are some things going on that are starting to show a few major prospects, particularly in copper.

We think we will see the opportunity to benefit from some of that.

We're also starting to see a little bit of spending from the majors in the iron ore space.

We think that's also a good news story for Jacobs.

We have a very strong position in iron ore.

Moving on now to pulp paper, the all other category, it continues to be a mixed bag.

We're seeing a little power work in the Middle East.

We continue to have good position in the UK and Europe in the power side.

So, that business will be okay.

It's not going to move the needle in the short term, but it is relatively interesting what we're able to accomplish.

If you think about the food and consumer products business, we're getting a number of alliances with major international players.

That continues to be an area of expansion for us.

Most of those are India-centric, so our very strong position in India gives us a very high leverage in that area.

In fact, one example, there is a consumer products company for whom we have worked for some time.

Our work for them now in India is at record levels.

So we are excited about what that means.

Then there's lots of industrial work out there, upgrades, improvements.

In particular, I wanted to point out the paper machine conversions that are going on.

We're one of the very few companies out there with the capability today to do paper machine work.

It's increasingly like the pharma business in that we're the last person standing.

We think that represents pretty good leverage for us as we go forward.

The industrial business, you can see the backlog overall is up year over year, but down a little quarter over quarter and down from two years ago.

I still think the year-over-year growth is significant, and I think the opportunity to see better growth going forward in 2015 is high.

This is one of those areas where we think there's good opportunity for Jacobs to see ongoing growth.

Moving now to slide 12, this is the heavy process side of our business.

Again, I'll start with the backlog situation over in the lower right.

We did have a weak sales quarter, last quarter, in the heavy process business.

But as I've pointed out repeatedly, that's always a lumpy business, comparatively speaking.

There's lots of EPC in that business, lots of construction dollars, so it tends to be more lumpy than some of our other businesses.

There also were one or two project cancellations, one of which I believe was significant.

We're seeing real weakness in the oil sands, just because of where oil prices are.

The oil sands market is a part of this, a very difficult market for us right now.

Looking at the individual areas within the process group, refining continues to be a good business as we see it.

There's a lot of investment in the Middle East.

There's a lot of investment in Asia.

There's still plenty of opportunity in the US driven by the Tier 3 and ISA 84 work.

Overall, I think we have a terrific position in those businesses, and the acquisitions that we've made have increased our potential across the globe.

If you look just at the compliance-related stuff, we still see greater than $20 billion worth of potential projects out there.

They have been a little slower to show up, but we think they are going to be significant for us.

We are, clearly, one of the better positioned companies to support that compliance and safety-driven work.

Moving on now to oil and gas, it's a very strong market globally.

We're beginning to get some pretty good traction in the pipeline services business.

We're also starting to see a fair amount of work in what would be characterized as midstream infrastructure.

Plenty of prospects out there, so the onshore gas business, in particular, is an area where there's real opportunity and continuing potential growth for Jacobs.

Right now, that's offsetting what remains, as I mentioned earlier, a pretty weak oil sands business.

Our strategy to deal with that is to come up with some new approaches to change the capital efficiency equation in the oil sands.

We think if we can do that, it will bode well for our business, in spite of the overall weak market.

Finally, moving on to the chemicals business, lots of feed and pre-feed activity out there.

It's all unconventional gas driven.

Cheap gas is the word of the day.

We've got a great chemicals resume and an ability to deliver globally.

I think that's a strength.

Everybody remains very measured in releasing these projects.

Frankly, I think that's going to continue for a while.

I don't believe the industry is as optimistic about the prospects for chemicals as perhaps the general market thinks it should be, so we're going to see very slow and steady releases of project.

I think the work's coming, but it's not coming fast.

Moving on now to slide 13, we've been very successful with acquisitions.

We continue to believe acquisitions are an important part of our growth strategy.

In the near term, we're going to be very focused.

We've pointed out the key markets, upstream and telecom, and largely a North America strategy for those.

That's going to continue to be our focus.

We may find the occasional small niche acquisition that's a tuck-in to support our business, but by and large, our main focus will be on upstream and telecom.

I think, for the most part, they'll tend to be smaller acquisitions rather than larger.

Moving on now to slide 14, our commercial.

It's a good company, and it's got a really good story.

I think the relationship-based business model speaks for itself.

97% repeat business is pretty special.

We continue to show that our diversification is a strength.

I think you can look to the backlog growth in the national governments and buildings and infrastructure business and see how that's working.

We've got a great balance sheet and a strong cash position that lets us grow.

We've got a cost position that keeps us in a strong, competitive position.

I think there are a number of arguments why we continue to be a good choice in this industry.

With that, I'll turn it back to Mike, and we'll listen to your questions, try to even answer them.

Thank you, sir.

(Operator Instructions)

First we have Tahira Afzal of KeyBanc.

Please, go ahead.

Thank you very much.

I would like to start by just thanking Mr. Prosser for all his help and guidance since I started in the sector in 2003.

I'm going to miss you very much, and I look forward to saying good-bye in person.

Thank you, Tahira.

First question is, just in regards to -- Craig, if I look at our comments around upstream and telecom, really more so the shale and telecom markets you've just gotten into.

Clearly, some macro skittishness around that recently, given where oil prices are going on the shale side.

On the telecom side, we saw AT&T really coming down and notching down some of its CapEx on the wireless side.

Seems you're still optimistic and upbeat about these markets, so would love to get your thoughts on why that's the case.

Sure.

Let me start with the unconventional gas side.

I think the unconventional gas is a two-story marketplace.

If you have dry gas, it's not a very attractive business right now.

Cost of production's probably higher than the value of the gas once it's produced.

I think if you have wet gas, so if you've got a lot of liquids in your gas, it's still extremely attractive.

What we're seeing is a concentration of investment in those areas that have the good combination of both gas and liquids.

The good news about all that is there's still lots of that.

It continues, even in these lower oil price markets, to be a very attractive investment for our customers, and we continue to see lots of activity there.

Moreover, it's still a business that's largely populated by small contractors and small engineering companies.

Our ability to displace those companies and bring a broader and more geographically distributed solution to our customers is driving opportunities for us to replace those small, as they are often called, mom-and-pop operations, with a greater and more efficient Jacobs operation.

So, I continue to be very optimistic.

I don't think a $75 plus or minus oil price has any impact when you have both the liquids and the gas.

Dry gas is just not a workable area right now.

That's where we're at on all of that.

With respect to telecom, again, it's a big business globally, and we continue to have a small share.

Part of my optimism about telecom is just taking share from other players in the industry who can't do the work quite as efficiently or quite as safely as we're able to do it.

I think there's plenty of opportunity for us for growth in that regard.

In spite of AT&T's pullback, I think you can see from our press releases we've been awarded a couple of nice chunks of work, including a chunk from AT&T.

For us, at least, that continues to be a growing business.

We continue to be very upbeat about the three-year, five-year, billion-dollar business prospects that the telecom business represents.

Did I answer your question, Tahira?

Yes, you did, Craig.

Thank you.

As a follow up on the positive side, you talked a bit about the Middle East opportunities going up.

Would love to get a sense how it seems the Qatar World Cup is back on, if that helps?

Number two, on the building side, you talked about some positive bookings for the quarter.

Would love some color on those, as well?

Let me start with Qatar, just because that's -- we have talked about the rail program that we're involved in.

We have two major sections of the Qatar metro rail.

We continue to get awards in Qatar to support the World Cup and all the things that Qatar's trying to do.

That's a very good business market for us, as is the most of the rest of the Middle East.

We have this strong base now of oil and gas capability and presence and relationship, and we're being able to leverage that into a broader infrastructure and buildings portfolio.

I can't give you any details on the awards that I was talking about earlier because we don't have permission from the clients to talk about them.

I think they are big programs, relatively big programs in which we're going to have a significant role.

As soon as we can press release those, I can give you more color.

I think there's much more of that kind of work to come.

The investment in the Middle East in buildings and infrastructure is significant.

It's one of those areas where there's been an under investment up to now.

I expect we're going to see, as various governments in the Middle East try to deal with the populous, the transportation issues, the lack of infrastructure in some cases, that's going to continue to be a big area of investment and I expect us to benefit differentially as a result of that.

Does that help?

Yes, it does.

Thank you very much.

Next, we have Jamie Cook with Credit Suisse.

Hello.

This is Andrew on behalf of Jamie.

Good quarter, and congratulations to Mr. Prosser.

Thank you.

I'm just looking at your model and your guidance so far.

You have got Q1 coming down a bit seasonally, it seems.

What gives you confidence in potentially achieving even the high end of that, your guidance range at $3.85?

It just seems that given more backlog is, specifically with field services being a little bit more lukewarm recently, is there anything that you think could drive upside, or that you have in mind that might push that earnings higher towards that $3.85?

Well, as you know, we don't give guidance within guidance.

Overall, when we look at the markets we serve, and in particular when we look at the balance of markets between the industrial, the process and the public and institutional market, there's enough activity in those markets that we see decent growth in all three.

This is one of those businesses, I think we've often talked over the years, it's like an eight-cylinder engine.

I think it's more like 9 or 10 now.

It's like an eight-cylinder engine.

If we can get five cylinders hitting well, we can grow really well.

I think that potential is out there.

When I look at micro trends, like what's happening to billable hours, those micro trends are also positive.

I think that the guidance range is realistic, but we'll have to see how it all goes as the quarters unfold.

Okay.

That's helpful.

Then just back on that field services, the revenues there were a little bit disappointing this quarter I think, and then the last couple quarters, they have been sort of the same.

What do you see in that specific segment as it pertains to potentially picking up any time soon?

Is there anything out there that you think you might see a turnaround in 2015 to drive those revenues a little bit higher?

Absolutely.

I think there's two key areas to think about.

Probably the most significant one is getting projects out of feed and getting them released to execute.

We've got probably as much feed business in the company right now in the process industries as we've ever had, but at this point, it continues to just be feed work.

The leverage, particularly the leverage for field services, is in the execute phase.

Probably the top of my list in terms of what will drive that expansion of field services is getting these projects released through the final investment decision into execute.

We've got customers, a number of customers, who are talking about those kinds of things happening in the next two or three months, but frankly, I've heard that story before.

That's clearly the number one question, is will we get releases on the projects that are already in-house, because that will have the biggest single impact on field services.

The other has to do with what the turnaround situation's going to be in the spring.

Right now, the turnaround situation's pretty unclear.

This is a particularly important issue up in Canada.

It's hard for us to see, just at this point in time, what's going to happen in turnarounds and what's going to drive our construction presence in Canada.

If the turnaround season is good, and it very well could be, that will also have a very strong impact on the last couple quarters of the year.

If it is a weak turnaround season, obviously that will be a bit of a drag on the number.

Does that answer your question, Andrew?

Yes, that's very helpful.

Thank you.

Next we have Sameer Rathod of Macquarie.

Hi.

Thanks for taking my questions.

Can you tell us what the final goodwill allocation for SKM was, since the K isn't out, and comment why goodwill continues to be written up every quarter since the transaction?

Well, the goodwill -- I mean, the numbers will be in the K and that should be released toward the end of the week.

As you go through the process of any acquisition, you evaluate goodwill for about a 12-month period after the acquisition and look at that quarter by quarter and re-estimate it.

We are approaching that 12-month period.

This last quarter we've taken, because it was the year end, we've taken another real strong look at it and such, so you get adjustments for things that have changed, both on project side and other expenses and such that come through.

It should be pretty well finished.

I don't think you'll see much change going forward, particularly related to SKM, but we do have other acquisitions we've made this year, while a lot smaller, that we'll still go through that process.

One thing that, to be clear about it, we do not write those projects up to market.

Okay.

I guess that was my question.

Okay.

I was curious.

We never have as we don't think it's a good practice, and so we haven't done it and that will continue to be our approach.

Okay.

My next question is in your last filing, which was Q3, you state that goodwill associated with SKM will be tax deductible, which if I'm correct, is new language compared to prior acquisitions Jacob has done.

Is that the thing you're expecting, a goodwill charge in the future or could you explain that language in the last filing?

It always depends on the circumstances and how we've written it up and such like that.

Because with SKM, we can do a 338 election and such, we get tax benefits against the dividend payments out.

We're getting into fairly complex tax.

In some cases we have that.

Some cases, we don't.

Depending on where the acquisitions are done and the forms of the acquisitions and such like that.

It doesn't have a future impact.

It just means that we can tax benefit it as we book the goodwill.

Okay.

Thank you.

Luke Folta, Jefferies.

Hi, good morning, Craig, John.

Good morning.

First question I had was just on the restructuring.

We've had pretty significant charges this year.

Is this the end of the charges, you think, going forward?

Can you talk about, when you look at your 2015 outlook, what the implied benefit of cost savings associated with the restructuring is?

Well, let me answer the first part of the question.

The restructuring that we did is done.

We have charges every quarter for closing offices and adjusting staff, depending on the work load.

We consider all those things to be a normal part of business.

We don't break them out.

We'll have those charges going forward, but they will just be in the noise.

The restructuring charges, as we have described them in the last few quarters, that's it.

Everything is done that we're going to do in that way.

The benefit of those charges is spread out over a number of years.

It's about half lease related, so that is a fairly long tail, about half staff related and even that has a long tail in some cases.

You're going to see the benefit of that over the next few years, as the business continues to grow.

You'll also see the benefit of it in the form of, while it's lower G&A, the competitive position of the Firm is such that we may see some of that go away in the form of lower selling prices in this very competitive market, and our ability to maintain that margin.

I think a restructuring was a smart thing for us to have done.

It does put us in a great position from a competitive point of view, and I think we're seeing some benefit of that.

I think you'll see in the G&A numbers as we go forward some benefit of that.

Again, not going to give guidance within guidance, so that's really as much as I can say on the subject.

John, do you have any comment?

No, that's what I was going to say.

Alright, I guess without giving specific guidance on next year, are you able to talk about what you think maybe the total magnitude of the long-term cost savings could have been?

We'll get more, significantly more than the value of the charges over the life of that restructuring.

I think, in general, leases are dollar per dollar, but labor savings have a multiplier effect.

We'll see more than the value of the charges come back to the shareholders over the next three or four years.

Okay.

On share buybacks, it's not something that's historically been a big part of your capital allocation.

Obviously, there is the authorization that was announced since last quarter.

Can you, John, maybe talk about what your thoughts are in terms of what the magnitude of what you could do on this front could be going forward?

In terms of how you think about it, is it more of an opportunistic thing, or is this something that you're going to include in the long-term allocation strategy?

As you are aware, the authorization is a $500 million buyback over three years.

We have said that we're going to be opportunistic.

As I said, we bought 1.5 million shares in the month of September.

While that didn't have a big impact on EPS and such like that in the quarter because of the way of how you figure the weighted average shares, it's a nice start going forward and certainly well above a pro rata buyback stream.

I think we'll continue to look and be active in looking for opportunities to buy that back.

My expectation would be, particularly right now with the period where we don't see a lot of larger acquisitions, then we may be a little more aggressive on the buyback than just we might on a steady-state basis.

So I think you'll see, probably, that won't last three years and if the opportunity is still there, it will get extended.

We'll just have to play that by ear.

But I think given where we are, our continued ability to generate good cash flow, the focus right now on probably relatively small to midsize acquisitions as opposed to any large acquisitions, that it's just another arrow in our quiver of use of capital.

It's one that we haven't used for a long time.

I think the last buyback was back in the late 1990s.

Because we have focused more on the acquisition side and have done a few larger acquisitions relative to what we normally would do.

But I think, given the strength of our balance sheet and what we believe to be a low stock price relative to our future outlook, that certainly now is an opportune time to be having the buyback ability and executing on it.

Great.

Thanks a lot.

See you next week.

Next we have Jerry Revich of Goldman Sachs.

Good morning.

Hi, Jerry.

Good morning.

Can you gentlemen talk about the M&A pipeline at this point?

John, if you could just orient us on how we should be thinking about the balance sheet from here?

Should we look for you to pay down some of the debt before you get aggressive on the M&A side?

Just curious what your assessment is on the bid ask on evaluations on potential acquisitions?

I think, as I just said, the pipeline is more focused on a couple of areas in the upstream and telecom business.

Those that we're really focusing on is consolidation and a roll-up -- I hate to use that word, but activity of a lot of smaller fragmented marketplaces there.

I think from a balance sheet standpoint, we're pretty close to a net zero on debt.

We've got $800 million of debt and $730 million of cash, so our balance sheet is in good position.

If we have excess cash, we pay down the debt because it's all revolving debt and that cash is still available to us.

We'll use some of it for buybacks as the opportunity is there.

We'll also, you'll probably see us doing a number of the small to midsize acquisitions.

None of those are mutually exclusive.

We don't have to pay down debt.

But I think certainly, the level of debt we're at right now is very sustainable.

If we have opportunities for the cash elsewhere, we'll use it for that.

If not, we'll pay down debt and have it available for when we need it.

Just to amplify on that a little bit, Jerry, when I look at the acquisitions that we have in discussion, there's nothing today that I see that's a significant, big number deal.

I would consider anything above maybe $500 million to be a big-number deal.

We're really not looking at anything like that at the moment.

Not to say something wouldn't come along, but that's not something we're seeing right now.

There are lots of Eagleton-sized deals that we're looking at, largely to support our upstream and telecom businesses.

I think we'll see -- like I say, there will be these niche acquisitions from time to time that will be very small numbers, in the noise, frankly, from a cash flow point of view.

I think, as we sit here today, we're going to continue to generate good cash flow and we'll have some acquisitions use for that, but we'll have other uses for it, as well.

Okay.

On the backlog, can you just talk about the drivers of the backlog decline in process?

What particular end markets drove that and maybe touch on were there any major projects within public and institutional where you saw really significant backlog growth, any really meaningful parts of that growth that we should outline?

Yes, let me touch on two different aspects.

In the process area, the big weaknesses were field services work up in Canada, where, as I had mentioned earlier, the outlook for turnaround work in the second half of the year is very uncertain.

That was a pretty significant factor in the numbers.

As I mentioned, we had one major project cancellation in the US Gulf Coast.

That was a pretty significant factor in the change in the process numbers.

Those are really probably the important drivers in the process numbers overall.

On the public and institutional side, the acquisition we talked about, FNS, we were able to book a couple of very large, new scope work for that business, and so that was a nice positive for that.

It doesn't account for the bulk of the number, but there were some substantial additions to backlog because the business of supporting the intelligence community, which we told you we were really positive about, is proving to be as every bit as positive as we hope.

Those are probably the highlights, without getting -- I can't really get more specific than that.

Thank you.

Next we have Andrew Kaplowitz of Barclays.

Hello.

Good morning.

It's Alan Fleming in for Andy.

John, congratulations on the retirement, and good luck.

Thank you.

We won't let him get far.

(laughter)

Craig, maybe taking a step back and asking you a little bit of a broader question, where do you think we are in the current E&C cycle?

How much has the recent volatility in oil prices impacted your views on maybe the sustainability of this cycle?

It seems like more investors we talk to either believe the cycle is ending or is significantly stalled here.

I would be very curious to how you respond to those types of comments?

Well, I think to the extent that oil prices are a key driver, we should expect oil prices to remain low throughout 2015.

I don't mean low, like $20.

I mean low like where they are right now.

I do think that will have some impact on investment decisions and where they are made.

Certainly, without pipeline capacity to Canada, that's going to impact the oil sands pretty significantly.

Fundamentally, new investment doesn't make any sense at these kinds of oil prices.

Particularly with the capacity constraints that they have in terms of getting the pitch into the market.

I think it's going to impact that business.

I think, though, more globally, I think the impacts are probably less significant.

For example, if you look at the Middle East, they have made the decision to continue to produce and let the price of oil come down.

There is a lot of interest, particularly in Saudi Arabia, in making sure that the social infrastructure and Saudiization takes place.

And I think, as a result, there's going to be continued investment in spite of the lower oil price in that part of the world.

I think you're going to see, for lack of a better word, geographically area limited impacts on investment.

So, Canada probably down a bit, Middle East, still very strong, Gulf Coast, frankly, I think will continue to be very strong.

Singapore, pretty strong, just because it's in a terrific logistic position.

I think Western Australia on the oil and gas side, probably we're going to see the investment taper off for a while.

Frankly, there has been what may be over investment in that part of the world, and I think it's going to be a challenging time until that sorts itself out.

I think what's happening, it's not going to have a uniform impact across the global business.

I think it will make customers even more cautious about the timing of their investments and when they make investment decisions.

Part of what we are reflecting in our outlook for 2015 is a slower environment in terms of releasing projects, but I don't think it's an end-of-cycle time per se.

I don't believe that we are at that stage where everybody says, okay, we're at the end of the cycle and now we're going to have a prolonged downturn.

Generally, when our businesses are booming, the cycle is already over.

We're not anywhere near the booming stage yet.

I think what we may have is more like a stag-flation kind of growth.

I don't mean that in the economic terms of that.

I mean in the sense that growth's going to be slower than a normal up cycle, but we are going to continue to see an up cycle.

That's where, as best I can see it right now, things are likely to go.

I'm going to play economist here a little bit, which is really, really dangerous.

Yes, that is scary.

The impact of lower oil and gas prices will have some positive impact on some of the economies, as people get more spendable cash because they aren't paying for gasoline and going into the winter for fuel oil and things like that.

So, you could see a little bit of stimulus on some of our other markets, particularly the public sector and things like that, that could be a balancing it.

Particularly in the refining area for us, what we generally find in these situations is that lower oil prices don't get reflected at the pump as fast as you might expect and therefore cash flow goes up for refiners.

Refiners like to spend cash flow on expanding plants and doing upgrades and retro fit.

So, I actually think the lower oil prices may well be a positive for our refining business, at least in the next year or two.

Did we answer your question, Alan?

I appreciate the robust response.

Maybe a related follow up to that, can you talk a little bit about the pricing environment, generally, in your end markets?

I think last quarter you had said that you weren't seeing any areas in the market where you could get significant improvement in price.

Is that still true?

I think you had mentioned previously on this call about some increase in billable hours, but can you talk about that?

And how concerned do we have to be that pricing could get materially worse for you guys in 2015, especially if we see some of this stagnation growth that you talked about?

I think pricing is -- all of our businesses, with one or two exceptions, continue to be very competitive.

As you look around the globe, the overall level of investment is not robust outside of maybe oil and gas.

As a result, competition is up and pricing is aggressive, to say the least.

As I think I mentioned at the end of last quarter, we had seen and do continue to see a very faint uptick in pricing, but I'm talking about 5 basis points a quarter uptick.

Not very much at all.

I think that's the best outlook as we go forward, is about that, not much.

I don't really see a collapse of pricing.

I don't see us going back to the 2010 pricing.

I think there is enough work and there is enough activity that things won't get quite that desperate, but I do think that looking for margin expansion in 2015 is probably not the right strategy.

We're certainly not basing our outlook on significant margin expansion.

Okay.

Thank you very much.

Next, we have Vishal Shah of Deutsche Bank.

Please go ahead.

Hi, this is Chad Dillard on the line for Vishal.

Thanks for taking my question.

Just given the backdrop of oil prices and where they are right now and what you're seeing in your project pipeline, do you think you can grow backlog in 2015?

To what extent do you think it will be driven by organic growth?

I think we can grow backlog well in 2015.

I would expect we would be able to grow it in the, I don't know, 8% to 12% range of backlog growth, which would be pretty consistent with what our expectations are for growth overall.

I think that it's, to a limited extent, dependent on the things I've already described on this call in terms of how and when that happens, but I fully expect to see our backlog grow in 2015.

I believe it will continue to grow out into 2016 and beyond.

I think the mix for us will be pretty much across the board.

I expect recovery in the process industries from the drop-off you saw in this quarter, and I expect our other businesses to continue to be good.

I think the recovery in the minerals market and the pharma bio business both bode well for growth in that backlog.

I think you can see we're doing very well in the national governments' buildings and infrastructure business growing backlog as well.

I don't know if I've answered your question, but we are I think pretty optimistic about our ability to grow backlog in 2015.

Yes, that was very helpful.

Then turning to the chemical side, now that some of the crackers have moved forward into construction, a greater focus is being placed on the derivatives market.

I would just be curious to get a sense of how do you see the cadence of EPC awards being doled out going forward?

I've got George Kunberger here, who is our head of sales, and I'm going to ask George to respond to that.

I think, as you well know, our derivative capabilities, both domestically and globally, is very strong from a capability perspective.

From an opportunity to turn these things and convert them into EPC deliveries, we are starting to see signs that those opportunities are starting to present themselves in a reasonably significant way.

Still, what Craig said earlier about the cautiousness with which people spend money and make decisions is there.

That's driven by a couple factors.

It's driven just by the overall market conditions, but it's also driven by the potential escalation of costs of capital in the project itself.

Those are really -- there's two factors that these clients look at when they try to make those decisions, so overall market forces for themselves and then what's happening to the cost of capital just as escalation happens with demand on construction, construction resources, et cetera.

Despite all of that -- I'm certainly starting to see and I can't obviously talk about it -- prospects on our list that will, I believe, pretty soon turn into EPC opportunities for Jacobs in the derivatives and related derivatives marketplace, in the US particularly.

Thanks, George.

That's very helpful color.

Thank you.

Next we have Robert Connors, location of Stifel.

Hello.

Can you hear me?

Yes.

Okay.

If I just look back at the past three years, I show that the published data, the chemicals spending component has been the fastest sector on the non-res construction side in the US.

Stepping back, is there something about this market where maybe the Jacobs relationship model versus more of a transactional model is keeping you from booking some of these larger awards?

Because I hear that from you contractors tend to be a little bit more mom and pop, and maybe the size of the projects are a little -- coming from a smaller balance sheet.

So, I'm just wondering if the model still applies in this sort of market?

It very much applies in this sort of market.

Our relationship-based model is, frankly, very effective in the chemicals business.

We continue to show growth in that business overall.

I think the challenges are that we're not really out there chasing the what I'll call marquee projects.

We're not in the ethylene side of the business at all, so growth in the ethylene side of the business isn't going to impact us very significantly until it starts to be the derivatives aspect that we were just talking about.

A lot of our chemicals work is at the small cap plant maintenance, operations level, so again, no big numbers there.

Just slow, steady growth as we expand our share of that marketplace.

I think the challenges that we're not focused on, to the same extent perhaps some of our other public sector competitors are, the giant events.

We've had a number of nice awards in the chemicals business.

We continue to have a nice chunk of our backlog in the chemicals business, but it's not the high visibility stuff that you think of when you see a Fluor or perhaps a CB&I.

Does that help?

Yes, that helps.

And then just--

And one other comment.

If you look at our growth in the chemicals industry over the last four or five years, it's been fairly significant as well.

It's been more on the side of the smaller existing plants as they have been upgraded and they have been brought back on to production as opposed to the big new builds.

As we roll through this, we'll start getting some of the derivatives on the new builds, and that just will even be more positive for us.

Okay.

Do you guys have a number as far as if you were able to transition a lot of that feed work into field services, what the potential pull-through could be?

We haven't sat down and tried to create a number like that, so I can't answer that question.

Okay.

I'm going to go look after this call, though.

Just one more quick one.

Do you guys expect the TPS to stay relatively flat here, 58% of the mix?

I think in the short term, yes.

In the longer term, I still expect that as these jobs go into execute, the field services proportion of the total will go up and the TPS will drop from its 58% range back down into the low 50%s, maybe even a little lower, depending on how much of that work actually goes out as EPC.

Okay, great.

Thank you.

The next question we have comes from the location of Andy Wittmann of Baird.

Hello.

Thanks for taking my questions.

I had a couple of just quick technical ones to start out with.

John, can you give us the amount of revenue that was from acquisitions that contributed to the quarter?

Actually, I don't have that right here in front of me.

FNS is relatively small.

They wouldn't have had a big impact for the quarter, I don't think.

Probably only SKM.

So, really it would only be SKM, which has been running about $250 million a quarter or so.

Thank you.

John, on the miscellaneous line on the income statement, there was a little bit of an elevation this quarter, about $6.8 million.

Could you give us some help with what that was?

We actually sold a piece of real estate in India.

Alright, so that's the gain?

That's been leased out, so actually we've been getting revenue off of it, income off of it in the form of lease payments and such and it was excess, so we sold it.

It's been on the market for actually a couple quarters and it just closed this quarter on it.

Got it, thanks.

That's helpful.

Then just on the restructuring charges, the $36 million, can you give us a sense so we have a better understanding of where maybe the underlying margins were?

Was that all in the SG&A line, or can you give us a split between gross margin and SG&A, where that was?

It would have all been in the SG&A line.

I take that back.

There is a little bit that was going into cost of sales in the form of unbilleds and such like that, but the vast majority of it was in G&A.

Okay.

Then just as you look at the guidance and knowing that you did some restructuring actions to adjust the cost structure, the way to ask this is how much of the EPS growth is due to just taking underutilization from last year and maybe having it better utilized, whether that's billable hours or real estate?

How much of that EPS growth is really just purely as a result of mechanics of taking cost out of the business?

Well, we're not going to give guidance within guidance, as we've said.

We're not breaking it down specifically, but that certainly is in there, just like the impact of continuous stock buybacks is considered in that range, and growth in the business, because as Craig said, we're also seeing a pickup in the hours, the billable hours being worked, and so that's in there as well.

We're not going to break them down as to how much of the guidance is related to each.

Okay.

In that you mentioned the buyback.

Did you say there could be -- is there incremental buyback associated that has not yet been completed that's contemplated in that guidance range, or would buyback from here be incremental to the guidance?

I think you touched on there in your answer, but I wanted to make sure we understood it correctly?

We're going to be doing the buyback opportunistically, so the idea of the buyback is included in the range.

It wouldn't be incremental at the top end of the range, I wouldn't--

Or decremental at the bottom.

Or decremental at the bottom.

There's just going to -- based on what we think what we're going to be able to do, based on the stock price, it's factored into the range of the guidance.

Got you.

Craig, it's maybe a little bit surprising to some investors to have a cancellation on a Gulf Coast energy-related project.

Can you talk about what some of the drivers may have been with that one, or if there's anything to read into it for the market as a whole, or if it's just a one-off?

I think some color would be helpful there?

I don't know that it's a one-off.

I certainly would not say that.

I can't tell you much about it because the customer wouldn't appreciate my sharing a lot of details, but fundamentally, the cost of the project was high enough that the economics didn't make sense.

So, the return on investment was inadequate to justify going forward with the project.

This is the issue that I've been raising for sometime now about why the customers are being so cautious and why there is this recycling of feeds to try to get the cost forecast down to the plus 0, minus 10 range, even though that really can't be done.

Is customers are very, very sensitive to whether the investment returns that they are committed to are actually going to be achieved.

They are all coming off experiences from the 2005 to 2008 timeframe where those things weren't achieved because costs overran significantly in lots and lots and lots of projects around the globe.

There's this very strong level of caution.

Occasionally, I think that's going to result in projects getting canceled, where the number just doesn't work for the customer and therefore the job doesn't go forward.

If you talk about the dark side of our outlook going forward, that's certainly it.

George, do you want to comment?

This is George, just to elaborate a little bit on the question and on Craig's answer.

A lot of times within these larger organizations, it's not so much that the project by itself does not pencil out.

It's that it doesn't pencil out relative to a lot of the other opportunities that the client's have to spend cash around the world.

I mean, that's not a universal statement, but that's often the case.

There's a lot of competing opportunities all around the world, as we all know, in the chemicals and hydrocarbon space.

It's well known.

If you're looking at some of these big companies and they are looking at where to put their cash, it's more competing returns on investment, not just that any particular return on investment is not attractive.

Okay.

Thank you.

That being said, that wasn't the case with the cancellation that I just mentioned.

(laughter) Okay.

Alright.

Thanks for all the color there.

Next we have a question from the location of Steven Fisher, UBS.

Great, thanks.

Good morning.

In terms of your cash flow expectations for 2015, is there any reason to assume that the free cash flow won't exceed net income next year?

I'm assuming that depreciation and amortization should be above CapEx.

Is that the right way to think about it?

I think that we've always said that we should be able to convert our bottom line into cash and that the depreciation offsets the CapEx and such like that.

I think, certainly, that would be our expectation.

If you look at -- when you'll see the numbers for this numbers for this year, I think we've had that this year, last couple of years we were a little bit below that.

I think going forward, that would certainly be my expectation, that we should be able to have good, strong cash flow.

Okay, great.

Craig, you gave us some color on the process industry, I think, around the world.

Maybe can you speak about the business in its entirety in terms of your growth expectations by region, either organically or in aggregate?

Sure.

Let me try to work my way around that.

North America, good growth in the US, probably one of our better growth markets, frankly.

Weak or no growth in Canada.

South America is still, for us, pretty much a mining- and minerals-dependent marketplace.

We're doing a good job of capturing share in the small cap end of the world, but to see real significant growth there, we've got to see some bigger projects get going.

I think that's probably a late 2015 sort of timeframe.

There might be a little activity between now and then, but not a bunch.

Europe, Europe's going to be very slow.

There will be some project-specific opportunities for growth, but overall, it's a wasteland from an economic growth point of view and a wasteland in terms of the return on investment of new projects and programs.

We see Europe as largely a maintenance capital.

There's a ton of investment there that's got to be maintained, but we don't expect to see a whole lot of new investment in Europe.

Middle East, it will continue to be very hot.

As we expand the services and the markets that we serve, I expect to see really good growth in the Middle East.

Africa will be pretty slow from a growth standpoint.

We have a huge position in north Africa, with Morocco and OCP.

I don't expect that to get much bigger in the near term, but it will continue to be a very strong business for us.

South Africa, probably not a lot of expansion there, and certainly not enough to move the needle in any way.

Africa will be flat to zero growth.

India will be a big growth opportunity for us next year, both in terms of foreign direct investment in India, investment by Indian customers in India and our high-value engineering center.

I expect our high-value engineering center, particularly, to show really dramatic growth in the next 12 months.

Moving on to Asia, China, Singapore, Malaysia, all three look like they are going to have good, but not great growth next year.

I think that will be a positive story.

Australia's going to be a tale of two different aspects.

I think our buildings and infrastructure, public and institutional businesses are going to show really good growth.

I think the mining and minerals, oil and gas, process industry, and process and industrial stuff, probably pretty slow.

Overall, though, I think we'll see some single-digit growth out of Australia.

I don't think I left anywhere out, did I?

No, I think you hit them all.

Thanks very much.

Okay.

The next question we have comes from the location of Justin Ward, Wells Fargo.

Hello.

Hi.

John, quick congratulations and wish you an excellent retirement.

Hi, thank you.

I'll sneak in a couple of quick ones just on the revenue growth in the quarter.

We saw continued year-over-year moderation there.

I think is was up 2% versus up 5% in Q3 and up 12% in Q2.

In Q3, a lot of the drag really came from the pharma and biotech and industrial other segments.

Those are pretty weak year over year.

Was there any concentrated weakness this quarter, revenue growth on a year-over-year basis, that you can call out?

If you look at the revenue from mining and minerals, it was down as a percentage of the total, even though revenue was up in the aggregate.

We continue to come off big project work in the mining and minerals segment and replace it with a good profitability line in terms of small project, capital, and maintenance engineering services.

They just don't carry the revenue.

It's a service-only aspect of business, where as big mining and minerals construction carries a ton of revenue with it.

That's probably the one place I can point to where there's a significant swing from quarter to quarter and that's really been happening to us all year.

Okay.

Then just one more on the growth.

You have done a lot of restructuring in the last couple quarters.

Is there any sense that you're trading maybe some revenue growth in the near term for margin there as you spend less on the SG&A line?

We have been very careful to focus our restructuring on eliminating excess office space that's unoccupied, on dealing with historic operations where we don't believe the growth potential's there, and refocusing our energy where we do believe there's growth.

I would say if anything, just the opposite.

I think the energy we put into restructuring makes us a stronger and more focused organization going forward and I would expect that to produce better result.

Okay.

I don't know if I can get you to comment on this, but it seems as if, if we back into the organic growth rate in the quarter, is maybe down mid single digits.

Is there any sense that this may be an inflection point in that organic growth rate and we may see that start to go back towards positive?

I certainly expect organic growth to be almost all of our growth in 2015 and a substantial part of our growth in 2016.

In the grand scheme of things, we're not expecting much growth from acquisitions, partly because we're not going to make much, we don't think, in the way of acquisitions in 2015 and probably into some part of 2016.

I think we're very focused, at this stage, on driving organic growth.

We've got some really good acquisitions in the Company and I think we have the opportunity to leverage those very aggressively for organic growth, as well.

Alright.

Thanks a lot.

(Operator Instructions)

Next we have John Rogers, location of D.A. Davidson.

Hi, good morning.

Hi, John.

And congratulations to you, John, although I didn't get any help with guidance.

(laughter) The question I have, Craig, as you look at your business now between TPS and field services, how much of the work that you end up or you take to field is flowing through TPS?

In other words, that you're doing the front end work on?

Oh, gosh.

It's the vast majority.

Exceptions to that are the maintenance business, which is probably about, I don't know, 20% of our total field services.

That's not an accurate number.

It's just a rough estimate.

The maintenance business doesn't have a big TPS component, but the rest of it is pretty TPS related and pretty much, again, in the private sector side of our business, so pharma, mining and minerals, heavy process.

That's really where TPS drives field services kinds of volume and the vast majority of our field services come as a consequence of that feed going into execute and it being a full-service execution.

If you look at the national government side, there's a chunk of field services there.

That tends to come with a chunk of TPS as it gets awarded, because with a lot of our programs and projects in that space have a combination when we win them or when we renew them.

On the buildings and infrastructure side, very little field services ever.

For the most part, what we see in the field services space there is very unattractive from a risk point of view, so that tends to be TPS only.

What I'm trying to think about a little bit is, if we're not seeing work go to field, and you've indicated that it just seems slower, and I've heard that from others as well, are we creating a backup in the TPS backlog that the bookings could materially slow as you stop studying these projects and just await a decision on whether to go or no go?

We don't generally find that the customers stop spending money while they are thinking about it.

In fact, what we generally find, John, is that they tend to recycle stuff.

What we're seeing is a situation where we go through the FEL 3 is the phase that we're generally talking about in feed.

We get to a number or with a schedule and a range of outcomes from plus or minus X%, and the customers go, no, that number doesn't work, let's look at this.

Then we go and study yet another aspect of the project or we redesign it to eliminate some aspect of the project, something that the customer believes they can do without.

That recycling tends to be what occurs between the onset of feed and the final investment decision.

What really happens is, we continue to work a long, steady base load feed work till the final investment decision is made.

Assuming it's made favorably, then we get a big tick-up in execute both in the TPS associated with doing the engineering and procurement work and in the field services associated with the construction.

Now, if the final investment decision is the job's not a go-forward job, then it pencils down and we got to find work for all of those folks that were involved in the feed on some other feed somewhere.

Usually, at least up to now, we've been able to do that.

As long as the market has growth, then the TPS backlog should be backlog that we can eat and it should be work that we can continue to expand on.

If the market goes south, like it did in 2009 and 2010, then obviously, there's a situation where we don't have enough work for the people we have and you're back in the mode of layoffs and dramatic price cuts and all those kinds of things.

You can't say that's not a possibility, but I don't put a lot of likelihood on it right now.

Okay.

On the other hand, then with the extensive TPS backlog that you have now, I presume you've got pretty good visibility, at least to that 8% to 12% growth range without significant field services growth to hold it up?

Yes, I think we have really good visibility in terms of where the business is now.

Remember, I think we've talked about this many times, about 65% of what we're going to do in FY15 was in backlog at the end of September, so there's still a lot of selling to do.

If we are unsuccessful selling or if the market's not there, then we're going to fall short of our expectation.

We don't see any reason to think that's true today.

That's really where the big risk to FY15 results is, is in what's going to be out there to win and how quickly can you win it and get it into backlog and execute it?

Okay.

Thank you.

That's helpful.

(Operator Instructions)

At this time, we're showing no further questions.

We will go ahead and conclude our question-and-answer session.

I would now like to turn the conference back over to Mr. Craig Martin, CEO and President.

Mr. Martin?

Before Craig wraps up, I would just like to thank all of you for the many years that we've worked together and all your support, and I've enjoyed working with all of you, and hopefully we'll see many of you next week in New York and Boston.

With that, I'm doing a thank you all for joining us.

I think we've got a great story for 2015.

I look forward, as like John, I look forward to seeing all of you next week.

Have a good week.

We thank you, sir, and to the rest of the Management team for your time today.

The conference call has now concluded.

At this time, you may disconnect your lines.

Thank you again, everyone, and have a great day.