Jacobs Solutions Inc. (J) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Jacobs Engineering Third Quarter Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Patty Bruner to read the forward statements. Please go ahead.

Thank you, Peter. The company requests that we point out that any statements that the company makes today that are not based on historical fact are forward-looking statements. Although such statements are based on management's current estimates and expectations and currently available competitive financial and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause actual results of the company to differ materially from what may be inferred from the forward-looking statements. For a description of some of the factors which may occur that could cause or contribute to such differences, the company requests that you read its most recent annual report on Form 10-K for the period ended October 2, 2009, including Item 1A - Risk Factors, Item 3 - Legal Proceedings and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations contained therein, and the most recent Form 10-Q for the period ended March 31, 2010, for a description of our business, legal proceedings and other information that describes the factors that could cause actual results to differ from such forward-looking statements. The company undertakes no obligation to release publicly, any revisions or updates to any forward-looking statements, whether as a result of new information, future events or otherwise. And now John Prosser, CFO, will begin the discussion.

Thank you, Patty, and good morning. First, I'll briefly go over the financial highlights, then I'll turn it over to Craig Martin, our CEO, to give an overview of the business conditions and what we're seeing today. As we reported, if you go to Slide 4, we reported the EPS was $0.15 for the quarter, $19 million year-to-date, $1.35 or $169 million for the nine months. So those numbers do reflect the impact, I should say, of the charge we took in the quarter for the adverse judgment that we received on the litigation in France. Also, includes the impact on the first quarter of the Houston sublease that we took a charge for. So if you take those out and look at just the operating results, if you go to Slide 5, the diluted EPS for the quarter was $0.63. That's earnings of $79.3 million. And for the year-to-date, it's $1.87 or $235.1 million. Our backlog, which I'll go into a little bit more in a minute was disappointing. It was down to $13.5 billion. However, we still have a very strong balance sheet. Our net cash did increase from last quarter, now sitting at $848 million. That's up over $100 million from the prior quarter. And we have revised our guidance to $2.30 to $2.65 from the old guidance range of $2.15 to $2.65. And that guidance does exclude the French litigation and the Houston sublease charges. If you go to Slide 6, just the history of our earnings. Well, the last couple of years have been disappointing. If you look at the blue bars under the curve, it still shows that on a 10-year trailing, we still are meeting that guideline that we talked about of 15% compounded earnings growth. Now that comes in at 17.2% through the year end or the period ended here in July 2. That also does exclude those special charges. Going to backlog, as I said, the numbers were disappointing and coming in at total backlog of $13.5 billion. The professional services backlog was at $7.8 billion. Those were down from a year ago. They're also down from last quarter. There was really nothing unusual in the quarter, either in any big wins or any significant cancellations. We have cautioned you folks in the past that backlog can be lumpy. And while it's been fairly consistent the last few quarters, we did have a slow booking period. We don't always have ability to control when things are actually put in to backlog. I'd also remind you that we do have the effect of Motiva working through the backlog, which continues and will continue for another at least 12 months. And also, we had some scope reductions, scope adjustments in some of our NASA work, although that was not a significant impact, but it does show in. Then most of the NASA backlog, we just booked one year at a time, so we don't see the full impact of the multi-year awards that we have with NASA. I would say though, that as we've gotten through the quarter, it does appear that our prospects are improving. And we would hope to be able to reverse this trend soon. With that, I will turn the call over to Craig to talk about the overview.

Good morning, everyone. I'm going to talk about five things in terms of how we're going to continue to grow the company. The first two, our business model and our market diversity, I'm going to talk about in some more detail on subsequent slides. I'm on Slide 8 right now. But I'm going to have to talk a little bit about the other three while we're here. We continue to believe that our multi-domestic strategy is the appropriate way to approach the market and we continue to expand it geographically. We think being local drives a significant base load of work, and then that base load gets you leverage for larger projects as they come along. Our focus right now in terms of that multi-domestic strategy is to expand our position in the Middle East, both to address the public sector projects, the infrastructure-related and buildings-related work, as well as the process work in the private sector. Those are both important because the spending there is very significant in both categories. Right now, Saudi Arabia has about a $200 billion, five-year CapEx program. Of that, about $130 billion is not process work. It's other work. So you can see that's a very significant opportunity for us, and we have not yet penetrated that business in any significant way in the Middle East, although we have a foothold in Abu Dhabi and opportunities to grow in Saudi Arabia. And then, of course, the private sector spend in the Middle East, Gulf-wide is going to be huge as well from an process-industry spend, and we're continuing to position for that. We also want to expand our geographic presence in China, get positioned on the ground with permanent operations. We're in the progress of doing that now. That will probably be driven in part by an acquisition. And we continue to expand our position in India, as we see India as both a great market locally and a tremendous leverage opportunity for our business across the globe. So our multi-domestic strategy is working. It's one that we think will continue to work into the future, and we're keeping the pressure on our growth in terms of being local to our clients. The next bullet: Drive down costs continuously. You've heard many times from us that we believe that driving your costs down helps you serve this industry effectively and increase its profitability in times when margins can be pretty tricky to obtain. I think we demonstrated, we had a very good quarter from a cost control point of view. Though benefits continue, they are offsetting the margin pressure to some degree, although the margin pressures in the industry are ongoing and some markets are still pretty week and affecting us from a margin point of view as well. And then acquisitions. We always talk about acquisitions. It continues to be a very important part of our growth strategy. This last quarter, we announced the acquisition of TTGSI. That's the government IT services arm of TechTeam. That's subject to shareholder approval. That process is in progress. We don't expect any problems with that, and expect to be able to close that deal here in the next couple of months. We think that leverages us further in the Government Services IT. It's a very large market. Just the services part of that market, domestically, we think north of $25 billion. And that means, it's a great opportunity for Jacobs to come in and take market share. It's a place where we think our strong cost posture will help us considerably in growing share against some of our less-disciplined competition. So we're pretty happy with that acquisition. We think there'll be opportunity to leverage that acquisition with additional acquisitions as we go forward. But there are a number of other areas where we see opportunity as well. We continue to see terrific opportunity in the Aerospace and Defense arena, both in the U.S., largely driven by the organizational conflict of issues, interest issues that the administration is pushing. But also, in places like the U.K., where we see opportunities to increase our position and expand our role with the Ministry of Defense. We also see geographic opportunities in the Middle East and China. I've talked about those. And we see service expansion opportunities in water and waste water, in infrastructure, generally, and in the Upstream business. So those are all remained areas of interest for us and there are a lot of good opportunities developing in those markets. And then there remains an interest in our part, although I can't point to any specific acquisitions, to expand into the Mining and Minerals business and into the Power business as new business lines for Jacobs. Those are the two businesses that when you look at our pie chart are the most obviously missing. With that in mind, let me turn to Slide 9 and talk just a little bit about our relationship-based business model. We talked about this every time because we think it's important to differentiate Jacobs from most of our competition. And let me go to the industry model on the right-hand side of this slide first. The industry is driven around transactional projects. These are big events in far away places. They are lump-sum turnkey, competitively bid work. It's how the industry has, for the most part, gotten business over the years. And it can be -- it can create a lot of opportunity to build the backlog. The challenges are, it is very competitive, pricing is extremely tight right now. The big events are fewer and far between, and so there's more risk being taken. And we think this is a very tough business going forward. And in fact, we think it's been a tough business for sometime as well. So it isn't a business that we're particularly excited about. The industry model also includes a fair amount of discrete project work. This is engineering and service-based work as well as some EPC and EPCM work. This is probably where we're seeing the heaviest pricing pressure right now. There are not as many of these projects out there. They are more attractive than the big lump-sum turnkey work, but there's lots of competition. And so the pricing pressure on discrete projects is probably as high as we've seen it sometime. That really brings us though to our model, which is focused almost entirely on Preferred Relationships. It continues to be a repeat business, business, and we're doing well. We're still getting about 90-plus percent of our business in any given quarter, for customers we've worked for in the last 12 months. And we're continuing to develop a broad slate and a deep relationship with our core and key clients. In some cases, those clients have reduced their CapEx overall and that's affecting us a little bit. And in all cases, it seems like our core and key clients are being more cautious about their spending. I think that's true, whether you're in a Preferred Relationship mode or Discrete Projects mode, but it's clearly something when we talk to our clients, we see more of than we have in the past. Our Preferred Relationship business still drives our base load. It's still greater than 40%. And that base load business continues to recover, although a little bit slowly. So the spending is coming back in that arena. That's a positive from our perspective, but it's not coming back rapidly. Overall, we remain committed to our business model. Our execution remains very strong. I'm very pleased with our project execution right now. We continue to expand our relationships. We're doing a great job of controlling costs. And we continue to avoid the high-risk events that we'll be apologizing for later if we were to take on today. Moving on now to Slide 10. Let me talk a little bit about our market diversity. And I'll just kind of give you an overall view and then go through these markets market-by-market and give you a sense of what we think is going on. Overall, the markets, the business is gradually better. And we're seeing a little more confidence, a little more spending, but it is very cautious kind of an approach for most of our customers. The good news about all that is, though, it seems very likely at this point that we have seen the bottom of the cycle, and that we're looking at the up slope going forward. Moving around the pie chart now in terms of markets. I'll start at the top of the chart again with pulp and paper, high tech, food and consumer products. That business is very good, frankly, and improving. Partly, I think that's because we have a unique position in the industry, both in food and beverage, consumer products and pulp and paper. And so those customers who are spending are coming largely to Jacobs. We are winning work consistently and seeing very nice growth. I mean, I wish it were 30% of that curve instead of 3%, we'd have a really interesting story to tell. Unfortunately, at 3%, it probably doesn't move the needle very far, but the story is quite good in that business. In the Chemicals business, the story is actually surprising and that it continues to show modest, steady growth. There's a lot of small project work out there. There's a lot of deferred CapEx that's finally being released. And then on top of that, you got some larger projects in the Middle East, in India, in Singapore that are driving the business as well. We're actually pretty upbeat about the Chemicals business, both short term and long term in terms of what it might offer for Jacobs. Moving on to Oil and Gas. That, for us, is the Oil Sands and the Gas business, both are strengthening nicely. Oil Sands, it continues to be a strong market. The 10-year CapEx is somewhere north of $150 billion. The numbers I'm seeing are in the $180 billion to $200 billion range. But our customers continue to be pretty cautious compared to the last up cycle in the industry. They're not moving as fast and they're releasing projects in increments. We have a very strong position in the Oil Sands. And frankly, I think we're winning a lot of work, but an awful lot of that is still in the early stages. The feed work and the conceptual design kinds of things that don't do a lot for backlog. On the Gas side, we continue to grow nicely. Our Gas business is dominated by two areas: production and treatment of Gas, and then the storage of gas. Both businesses are pretty robust, and we continue to have a pretty good share of those businesses. We're also beginning to penetrate the tight gas market. And we think that'll be another positive for Jacobs going forward. This is still an area where we would really like to make a clever acquisition or two, and drive our business growth up a bit. We'll see if we can find those acquisitions as we go forward. It's clearly been tough up to now. Moving on to Refining. Good news, I guess, is that relative to what we've seen in the past, crudes kind of stabilized a little bit. It's somewhere north of $70. I think it's running about $79 to $80 right now. That's a positive. On the not-quite-so-positive side, the WTI-Maya crude, so this is the spread between heavy and sweet crudes, has closed a little bit. It's still about $10, so that's not terrible. That spread is good for our customers who are prepared to spend the money to switch their refineries to treat heavier, sourer crudes. Also, the fact is, crack spreads are a little bit better, and that also is good for our Refining customers, but they're still pretty cautious. And so we're not seeing a lot of new cap investment. We think it's going to be very slow for a long time in the developed sort of refining centers around the world, mostly driven by environmental, maintenance capital and safety-related projects. There are a couple things on the screen that could start to drive some work here in the next 12 to 18 months. Phase II of the Ultra-Low Sulfur Diesel programs coming along, that's probably $2 billion to $3 billion. And in addition to that, there's the second phase of Ultra-Low Sulfur Gasoline, again another $2 billion or $3 billion with the work, all in the context of the near term, next two, three years. Disappointingly, the MARPOL VI work, which we think would drive a huge amount of CapEx to the industry, continues to not get legs. And there just doesn't seem to be enough drivers to get agreement on that. So that part is going to be slow. However, there's still a lot of activity in the Middle East, and we continue to expand our position in the middle east. So while Refining is not what we like it to be, I think we'll be able to continue to generate a decent book of business there. Moving around now to Infrastructure, and that really has two major parts for us. The first is sort of what I think of as planes, trains and automobiles. It's the transportation-related infrastructure market. The good news there is that we are winning share and it is a very large market. The bad news there is that government spending, and when I say government spending in this context, I mean both federal state and local government spending or counties and national government spending, when you get outside the U.S., still a little uncertain. And there's a lot of instability in that spending profile. Things appear to be approving at the state and local level in the U.S. Things appear to be getting a little weaker in the U.K. So overall, there's still a lot of uncertainty about just how much spending there'll be in the marketplace. And our growth will depend on our continuing to take market share from the competition. On the water and waste water side, we're just getting started there. We're a relatively small player in the market. We are starting to build some significant momentum, and we're starting to take some share away from our bigger competitors. I think we'll continue to see some nice growth in that business, but it's a very small sliver at the moment. It is another huge market like transportation, and it has a lot of pent-up CapEx that will need to be spent. So longer term, we think that's a very important market for us as a company. Moving now to Buildings. You'll see there's two parts to the Building graph. The dark red and the sort of polka dot red. What we're trying to do there is show the part of our Buildings business that's also in the National Government arena. We're going to classify those two together. So those will all be shown in Buildings as we're going forward. That makes Buildings about 8% of our business. It is a very robust market for us right now. Our focus, as I think you know, is in technical buildings, it's buildings where the complexities of the building outweigh other issues. So it's things like hospitals and healthcare-related facilities. It's data centers. It's mission-critical facilities, such as national security-related work. Labs, and particularly, the biosafety-related laboratory work, that kind of project. We're doing very well there. We're taking share. We see nice growth. We think that's going to be a positive for the next several quarters, at least. Moving on around now to National Governments. Remember, that's also two pieces of business, almost three now. The first part is our RDT&E, Research and Development Test Engineering, and SETS, Scientific Engineering and Technical Services. A very strong market surprisingly. Given the market, we had seven awards in the quarter. So that's a positive. We are taking share in that marketplace, and it is a really solid market for acquisitions right now. And I think I've mentioned the fact that the administration is taking a very strong position on conflict of interest. That's created a lot of acquisition opportunities as the big defense contractors divest themselves, their services businesses. And as we see smaller companies realized, they're going to have to be part of a bigger organization to be successful. We've made a couple of nice acquisitions there already. We think there'll be continuing opportunities to do that. NASA, as John mentioned, is a little bit of a conundrum. We did have to give up some backlog on the NASA contracts, and it was not as bad as it might have been. The first announcements were sort of like, "oh my goodness." And after we actually sorted through, they weren't quite that bad. But it continues to be a highly uncertain part of the business. The administration has one view. Congress, clearly, has a different one. And we'll have to sort of wait and see how that all sorts out. I think in the long run, NASA will continue to be a very important part of our business and it will continue to contribute in a very significant way. So we're looking really at the margins in terms of what NASA may or may not do. But it was a little bit of a painful quarter from that standpoint. We talked about the IT Services business. Told you I think how big the Government IT Services business can be, $25 billion in the U.S. alone, something like $70 billion including hardware in the Europe. We're just getting our toe into the water there. We've made this acquisition. Well, we haven't really completed it yet, but we're making this acquisition. We have some capability of our own that we could sort of bootstrap grew. I think the combination makes a credible competitor for government IT work in a variety of arenas. And I think that'll be an opportunity to leverage up some significant growth, partly because it's a nicely growing market, 4% or so a year, and partly because I think we'll be able to take significant market share, partly because of our cost posture, and partly because we really are engaged in some of the more interesting, more complex technical side of the IT services business. The other part there is the Environmental business, also a nice positive. A lot of activity, both in the U.K. and the U.S. We are starting to take back market share and we see that as a positive. We're having some success in the U.K. in those markets. They are finally starting to spend. We've talked about that more than once, and it really does look like there will be some decent-sized projects released in the near future. In the U.S, the administration continues to be a driver in environmental work, and we're excited about that business longer term. Finally, going to our PharmaBio business is the last part of the pie. We continue to have a very strong position. This is a little bit like our position in the food and beverage consumer products world, and we're sort of the last giant standing. Our prospects there are improving. We're seeing more activity. The consolidations of the acquisitions that took place here in the last 24 months seem to be behind us, and those customers are now moving to spend money. And we also seem to have gotten by healthcare reform. I think I've told you a number of cases that we were concern the healthcare reform could shut down the Pharma business. It has not done so and doesn't look like it's going to do so going forward. So that's another market, where we're optimistic about what we see better. So again kind of summing up, things all look better but not wildly better. This kind of goes to my comment about the recovery in general. It's going to be a slow recovery, not a V-shape recovery or a U-shape one, more like a bathtub shape frankly and we're just passed the drain at this point in time. That brings me to the commercial for Jacobs. We're going to continue to operate under our customer-driven business model. It remains relatively unique in the industry, and we are able to drive up our market share. As a result, we're happy about that. We're going to continue to be diversified. We think the combination of local capability and global scale is the winning position to be in. Obviously, we have a very strong balance sheet and we've got the advantage therefore, in doing acquisitions. And I think we're going to be able to continue to deliver on that long-term 15% compound growth as we look forward to the next decade. So with that, Peter, I'll turn it back and we'll take questions.

[Operator Instructions] And our first question will come from Michael Dudas. [Jefferies & Company] Michael Dudas - Jefferies & Company, Inc.: Craig, a couple thoughts. First, you talked about the Middle East opportunities, especially in the maybe public works or infrastructure sector. How competitive are you finding it getting into that arena looking at existing companies or building organically? How many other Western contractors are focused their sights in that marketplace? And is there enough room for Jacobs' business model to do it without increasing the risk profile of the company?

It is a market that is relatively competitive already. But frankly, I would tell you, most of the Western buildings and infrastructure competitors who are coming to the Middle East, who are coming with a relatively high-cost structure, and that a lot of the work is through service-based pricing. So they bring their sort of historic public-sector pricing to that market. We think that represents an opportunity for some leverage. An awful lot of them are also coming in the market, looking for export business, looking to do the work in their home country, home office. And it's pretty clear that customers are increasingly interested in having that work done domestically. So I think the opportunities are pretty significant there. Now I believe that acquisitions will be an important part of how we'll approach that and get our sort of in-country presence up. I don't think bootstrapping in and off itself will get us where we want to go as fast as we want to get there, although we are making some progress on the bootstrap side. But what we're looking at is largely free from the lump-sum turnkey risk. Like every piece of business that Jacobs addresses, there's always a chunk of that business is lump-sum turnkey, fairly high risk and we just make the choice not to do that part of the work. But in a $4 trillion market globally, we just don't really need to have to do all of everything. So that's kind of our approach in the Middle East. I think it will be successful. I don't see any major impediment to us, being able to drive some significant growth there. Michael Dudas - Jefferies & Company, Inc.: My second question is, relative to maybe -- and you did a good job explaining some of the customer hesitancies. But if you can break it down to maybe public and private sector funds that come through to Jacobs Engineering, is it just a more clarity from the public work side on regulation and government, and things going on in the Congress that will help break the logjam, or is there something else that's holding back? And on the private side, is there a pause in the cautiousness or was there a ramp-up and people just like stepping back, or is it just a gradual kind of turn to get people more comfortable that 2011 and '12 will be what they think it will?

Let me start on the public sector side. On the public sector, what we're seeing is a lot of uncertainty and delays in terms of expanding CapEx, mostly related to, "Where's the money?" So it's a combination of issues with getting bonds out there and funded, with tax revenues, both gas tax and sales tax at the local level, and gas tax at the federal level. It's a function of the Congress and their reluctance to commit. There's this idea that we did stimulus, so we don't need to do anything else. And frankly, if you do stimulus and you don't do anything else, you seem to just didn't fill up the hole that you left by not doing the things you would have done anyway. So there's a whole combination. Now that's true here in the States, it's also true in the U.K. I mean there's a very significant budget problem in the U.K. as well. There's a move out there that turned down budgets by 20%. That's bound to affect both the government spending and the national government basis and at the county level. And so it's a market where it's really a funding uncertainty. Where is the money going to come from? And to a lesser extent, a revenue uncertainty. How are we going to tax enough money to get what we need that's driving the numbers? On the private sector, I think it's a more just good business or maybe not-so-good business, so maybe I'll call it a crisis of caution or a crisis of pessimism. But most of the customers I talk to have significant number of projects that make financial sense at current oil prices or depends on what market they're in, obviously, but who are going to commit to those projects and very slowly, because they don't have confidence that the recovery is real, and I think we all suffer from that to some extent. We see what the Street and the press, more than media than anybody, is saying about the growth numbers, and you don't feel it in the economy. And so, I think, a lot of our customers are being pretty cautious. I think particularly when you get up in the Oil Sands, you're seeing the customers sit up there that sort of once burned, twice shy. And they are all collectively very reluctant to get all their projects up and going, and find out they're all doing things at the same time and have the market run away from them again. And so, I think, that's also driving a sort of a stepwise approach in a fairly cautious CapEx plan going forward.

And moving on, let's go to Tahira Afzal. [KeyBanc Capital Markets]

First question was in regards to your fourth quarter guidance that you sort of implied. It seems very wide for this point in the fiscal year. Would love to get a sense on the moving parts there or perhaps the uncertainty of visibility that's causing the wide range?

Well, I think as we talked about all year, and actually, the last couple of years, we are intentionally keeping the guidance fairly broad. And I think that reflects from the fact that there is a lot of uncertainty in the market place. And we would rather keep it broad and not be too specific, and we will continue to do that even as we go out into the probably over the next couple years because I think this uncertainty will continue for a while.

And just taking question and in regards to the bookings and awards, as you said, they were fairly light in the quarter. Versus your own internal expectations, could you talk a bit more about our side of NASA? Which areas might have come in a little weaker than [indiscernible]?

Well, I would tell you, Tahira, that the quarter didn't feel as weak as the numbers suggest. And I think we have said before, backlog is lumpy and there are lots of factors that affect the numbers. And so as John pointed out earlier in his prepared remarks, we were kind of disappointed that the backlog numbers came in where they did. In terms of the things that impact them, we've talked about the things that, we've said for some time, that Motiva has to be worked through and that we don't expect to replace that. So that's going to be a drag on backlog for several more quarters. The NASA thing, while it wasn't a huge impact, was certainly an impact in the quarter, and we had to adjust our numbers going forward to reflect what we now think we're going to do. Depending on what happens, we may have to adjust them again and could go back up or down further, because the NASA issue is still pretty fluid. So those are kind of the two things that I'd point to most of all. We'd expected more direct commitments in some of the bigger projects and programs that we're working on in terms of commitment of a bigger scope. And the customers, as I pointed out a couple times already in the call, that they're holding back on those commitments. So in terms of the big backlog additions, in particular, the ones that go with just detailed design and construction, those things are pushing out a little bit. So I think those are kind of a combination of factors that influence the backlog number. And like I say, the quarter didn't feel as weak as the backlog might suggest.

And our next caller is Steven Fisher. [UBS Investment Bank]

Craig, I think you mentioned in the prepared remarks, about seeing some improving spending at the state and local level. And, I guess, I'm just wondering what is driving that and if that's sustainable?

Well, it seems to be driving and it's a state-by-state sort of conversation. But what seems to be driving it is that some states are starting to see a little rebound in their tax revenue, both sales tax and property tax, the kinds of things that drive projects. And that little bit of rebound is increasing their confidence. So a couple of very big states have had very erratic CapEx programs for the last 18 months and those seem to have stabilized, and so that's what we see. And I think in those states, it's sustainable. Now whether it will spread to other states is not so clear. There's reasons to think it would, again, if you believe the media about the markets and about the recovery, then it will spread over time. If you're a little more pessimistic, then it may take a little longer for that to happen. So that seems to be what's driving things. Another thing that's helped is this Build America program on the bonds. So there is some money to be had that otherwise wasn't available if you look back, and so that's probably a little plus as well. But it's one of those gradual improvement kinds of conversations.

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

Well, currently, on NASA, doesn't have any impact.

No, separate. Currency and NASA.

Currency. Well, we're not going to quantify NASA any more than we've said. And the currency wasn't as big this quarter as it's been in the past because we've actually seen the euro come down and then come back up a little bit. So the currency impacts on backlog and such, were not all that material.

Still early, but I'm guessing at this point, you have some early view on whether earnings could grow in 2011. How high would you say the hurdles are at this point to be able to grow earnings next year?

Well, first of all, we're not giving any guidance or any projections into 2011 at this point. We'll save that for our year-end, which has kind of been our custom. But I think, as we've said in the comments, there's prospects out there seem to be getting a little bit better, but there's very lot of uncertainties and conflicting kinds of trends. And a lot will depend on just how the economy moves and how the confidence of our customers moves. These large projects that Craig referred that were in either early preliminary design, or feed, or things like that. As the customers get some confidence, those move more quickly, then things will be better. If they continue to be kind of at a very slow and steady pace, then the impacts will be a lot greater. But having said all that, we're not making any forecast for next year.

If you recall the notes in our press release, I said we were guardedly positive. That's about as much as you're going to get.

Our next caller is now Andrew Kaplowitz. [Barclays Capital]

Craig, just to follow up on sort of the backlog of the first and second. You've given or you talked about indicators in the past like billable hours and over time, and you mentioned that those indicators turned positive for you may be early this year. And were they still positive in the quarter? And that kind of give you more confidence that the backlog is lumpy, or can you talk about those other indicators?

I can. Let's talk about the billable hours one first. We told you a couple of quarters ago that billable hours, or I guess, last quarter, actually, that billable hours had flattened and it looked like we were in that period of sort of oscillating hours that indicated that change. That's still true. We still don't see a strong uptick in billable hours, but it's pretty clear that the steady downward pressure on billable hours is behind us. That sort of flat, wobbly billable hours is usually an indicator of a positive change upward. But we really don't see that yet in the hours. So there's no strong growth in billable hours yet. In terms of hires, we're starting to see that we're having net hiring as a company, so that also is a positive indicator for going forward. So we're adding net staff for the first time this last quarter or so, and for the first time in a while. So I think that's another thing that gives us -- part of why we're guardedly positive in spite of a weak backlog quarter.

If I could shift gears, just going into your relationship-based model again, I know it's worked very well for you in the past. The interesting thing though is over the last couple of years, maybe 18 months, as you know, your customers have been in significant cost-cutting mode, and even in sort of a baseload, I think you would agree. And so I guess the question is, do you need to sort of change your strategy a little bit as you go forward and maybe, are you doing that in more aggressively pursuing these new markets? How much of a subtle change will you have going forward? Or is it just we're just seeing sort of a slowdown level run its pace and things will get better?

Well, I think our view is that the business model is working, it continues to work. I think the critical comment I made in the prepared remarks is that it's fairly clear to us that we're gaining share. And while that doesn't necessarily manifest itself in big backlog increases or even right away in the P&L, I think that what it means to us in terms of long-term position in the marketplace is in a very, very strong positive. I wish I could point to how this quarter or next quarter is going to reflect that very strong positive, but we're in a longer game. So we don't think we need to do any significant tweaking to our strategy. We're always looking for a little nuance ways to be more effective, to win more work. But in terms of changing our risk posture or going out there and trying to be another one of the thousands of lump-sum turnkey contractors out there, whacking away for work, that's not on the screen. So we really do believe that maintaining our current risk posture, maintaining our current client-centric approach and just taking incremental share bit by bit will ultimately result in us in a very strong, if not dominant position in the industry.

Barry Bannister now has our next question. [Stifel, Nicolaus & Co.] Barry Bannister - Stifel, Nicolaus & Co., Inc.: Couple of quick, but detailed modeling questions. Of the $25.894 million of litigation effect on the revenues, how much effect at TPS? And how much effect at field services?

And it was actually oil field services. Barry Bannister - Stifel, Nicolaus & Co., Inc.: And of the $8.725 million effective litigation on the net interest income line and expense line, could you give us a breakout of what was interest and what was expense?

No. Barry Bannister - Stifel, Nicolaus & Co., Inc.: No, you don't have it or will it be in the Q?

I don't have it right here in front of me, and I'm not sure whether it will be in the Q or not. Barry Bannister - Stifel, Nicolaus & Co., Inc.: And what was the pass-through revenues in the quarter?

Again, I don't have those figures. Those will be in the Q. Barry Bannister - Stifel, Nicolaus & Co., Inc.: Q is tomorrow?

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

Alex Rygiel, please go ahead. [FBR Capital Markets & Co.] Alexander Rygiel - FBR Capital Markets & Co.: First, you did mentioned that you were taking market share, about the Infrastructure, Transportation segment and the Water/Wastewater segment. Could you comment again on who you're taking that market share from? Is it small mom-and-pops? Is it larger regionals? Is it larger public companies?

It varies a little bit by market and geography. On Water/Wastewater business at this stage, it's largely from competitors of our scale or slightly smaller. But remember, we're starting from such small base there in both in the U.K. and the U.S. that incremental market share at this stage doesn't have to be very much to be a lot as a percentage. So you wouldn't find one of our competitors whining just yet in Water/Wastewater, that we're killing them. On the transportations-related side, that's a little stronger story, where we really are aggressively taking share of percentages that are not any bigger, but more of bigger-base business. And there, I think, it's a combination of squeezing out some of the mom and pops and taking a little bit of work away from the majors. If you don't consider us a major, I don't yet consider us a major. So that's really where that share is coming from in those two businesses. Alexander Rygiel - FBR Capital Markets & Co.: And then I can appreciate your lack of wanting to quantify your reduction in the NASA backlog, but I was wondering if you could help us to maybe fully quantify the total cancellations in the quarter and/or reductions in the quarter associated with your backlog at the end of the prior quarter.

I don't have that number in front of me. I would guess if you took all of those things together, they were, I don't know, somewhere in the $100 million, $200 million range.

And Scott Levine has our next question. [JPMorgan Chase & Co.] Scott Levine - JP Morgan Chase & Co: Craig, at the risk of maybe microanalyzing, your guardedly optimistic comment and maybe comparing what your comments are and sentiment of the market relative to what they were last quarter, is it safe to say no change? And if you could maybe also make the same comment relative specifically to your outlook on the downstream market versus what you saw maybe three to six months ago, was there really no change in either or is there a move either way?

Let me answer the second part of that question first. With respect to the downstream market, I'm pretty much of the same view I was 90 days ago or 180 days ago. I still see our positioning to be good. I still see the opportunities. I still see small projects coming back first, and the rate of those things is probably slightly different than I expected, but it doesn't really change my opinion about where it's going or how soon it'll get there. In terms of my overall market view, I said on last quarter I thought we had a bathtub-style recovery here, very slow and gradual recovery. I don't see it any differently. I don't think it's shallow or flatter bathtub, if that makes any sense, nor do I think it's a steeper, more positive bathtub. So I don't think, for the most part, my view of the recovery has changed a lot. It is good to be slow. Our customers are going to be cautious. I think in a couple of markets, they've been more cautious than I expected. In a couple of markets, they've been less so. Overall, it's probably about what we should expect. Scott Levine - JP Morgan Chase & Co: And then if we were to roll together all the acquisitions you've done, call it, the last nine months year-to-date, fiscal, could you give us a sense of maybe what type of accretion you might be expecting from that bucket combined for 2011 or maybe give us a sense in terms of order of magnitude maybe?

Well, we don't break out the acquisition contributions. Historically, the first year to it, it's relatively small because of the amortization of intangibles. So they are positive, and they will continue to be positive. But the real benefits from the acquisition itself, now, we're getting some benefits from the combination like we talked about in the Water. The fact that we don't have better credentials here in the U.S. to sell, we're seeing opportunities in areas outside of where just JJG was to pursue those, so we'll see that kind of benefit, but that's kind of organic growth now because we've brought them in. But purely from the acquisitions, they will be positive, I think all of them, but they are individually and collectively relatively minor, and the real benefit from the historical business won't show up probably for two to three years as the amortization starts rolling off.

Yes, just to second John's comment. The real leverage on these acquisitions, certainly, when these really start contributing is in that 30 and 36 month kind of time frame. So those that we made in the last nine months are a ways away yet. Scott Levine - JP Morgan Chase & Co: So individually positive but not collectively enough to really move the needle financially strategic, more than financial in terms of impact?

Well, probably going to move the needle in their own right, but not for a while.

And our next question comes from John Rogers. [D.A. Davidson & Co.] John Rogers - D.A. Davidson & Co.: First of all John, do you have what total amortization was in the quarter? We got depreciation, but...

Sorry, I don't have that with me. That'll be in the Q. John Rogers - D.A. Davidson & Co.: And then in terms of acquisitions, Craig, you mentioned the Government Services business. Are there potentially some pretty large transactions coming?

Well, there are some potentially large... John Rogers - D.A. Davidson & Co.: To see whether you're involved or not, but yes...

Yes, there were some potentially large transactions out there. Sitting here, I'm not sure which ones are covered by confidentiality agreements and which ones aren't, so I'm not going to name any names, but I can think of six or seven significant-sized acquisitions that could get done. Now whether what happens with who does them and what they cost is something that is still an unknown or an uncertainty, but certainly, there are things that we're looking at. John Rogers - D.A. Davidson & Co.: And what about especially outside of the U.S. and the U.K., are there large acquisitions or multiple-acquisition opportunities for you there?

Well, if you're talking about the Government Services space? John Rogers - D.A. Davidson & Co.: And beyond that, I mean your other markets as well.

No, I think there are significant acquisitions out there in the Private Sector business, and in Infrastructure and buildings, but I don't think the Government Services business. Because so much of it involves national security, our ability to be in those businesses pretty well limited to the U.S., the U.K., Canada and Australia.

And now let's go to Will Gabrielski. [Gleacher & Company, Inc.] Will Gabrielski - Gleacher & Company, Inc.: I guess I wanted to push you guys in your conviction here. You had said it's very likely we've seen the bottom, and I'm wondering what's really driving that view because if you look at the tops-down macro numbers that we can all look at and then you listen to earnings season, you know that clearly, you're seeing international demand is there, not just on the big projects but just in general. But domestically, you've certainly heard a different story, and I'm wondering what internally is giving you that conviction, and then combined with that, what about that trend, have you hiring people here when your backlog is down 15% year-on-year?

Well, I guess starting with the second part of the question first, backlog has lots of revenue dollars in it that are pass-throughs and doesn't always come down when the work does. Remember, we're first and foremost technical professional services-oriented, and so those adjustments in staffing took place some time ago, and that's why we're in a position where we're rebounding ever so slightly in terms of hiring, and that's part of what gives us comfort. Part of what gives us comfort is the billable hours. Part of what gives us comfort is looking at our forecasts for out quarters in terms of what we think the business is going to be able to do, looking at prospect lists, looking at relative likelihood of our ability to win those prospects and what kind of prospects they are. And then all of that adds together that causes us to say we think it's likely we've seen the bottom. Nothing about the business out there today has certainty around it, however, so we could be wrong about that. We just don't think we are. Will Gabrielski - Gleacher & Company, Inc.: So if you were to assume just hypothetically the next quarter or two continued to run below trend as this quarter did versus your internal plans, would those hires then be underutilized or are you hiring and putting people to work and that's the only time you're making hires?

Yes, we only hire people when we have work for them. This is very much a just-in-time hiring environment. The exception to that, obviously, is people who can help us win work, but that's a relatively small number.

And our history has been when we hire those kind of people, they get to work really quick. Will Gabrielski - Gleacher & Company, Inc.: When you look at the employment trends in the U.S., and you guys are essentially a company that offers skilled labor at a multiple multiplier. What type of pricing are you seeing now versus what you may have expected?

Well, it depends a lot on the market. For the most part, what we're seeing in pricing is what we expected and, I think, what we've been telling the market for some time is going to happen. Private sector pressure on pricing remains high, particularly in Heavy Process business. In other businesses, it's much more genteel. So businesses like Infrastructure and Buildings, there's virtually no pricing pressure. In fact, there is none, I mean not virtually. No, there isn't any. So it varies very much by market. I think we're benefiting in this cycle pretty significantly from our diversity, and we haven't seen the effects on multipliers in the aggregate basis on unit margins that we saw, say, in the early 90s. Will Gabrielski - Gleacher & Company, Inc.: Just on the state and local, it sounds like you're feeling a little better as we've seen some of the revenue numbers increase. Have you guys given any thought to what impact the states and local governments are going to see if that entitlement, stimulus funding that was there rolls back? And I kind of cite New Jersey as an example of where they took a $2 billion hit or I think it was $1.7 billion hit in federal money that they're losing in next year's budget. And I know at least, I think, half of the states out there are still assuming that money in their budget, so I'm curious if you have any insight into that and whether or not you think that's a risk to maybe state and local spending even ignoring the top line revenue trends?

Look, it absolutely is a risk, a continued sort of lack of engagement at the federal level, a continued failure to recognize that stimulus wasn't stimulus and that it's over. I think it could have a negative on state and local spending, and that's one of those risks that is out there on the dark side.

And next, let's go to Chase Jacobson. [Sterne, Agee & Leach, Inc.] Chase Jacobson - Sterne Agee & Leach Inc.: Could you give us an approximation of the geographic mix of your backlog currently?

I'd say the geographic mix of our backlog's not much different than the geographic mix of our revenue, so you can kind of look at one and they'll both be very similar. Chase Jacobson - Sterne Agee & Leach Inc.: I was just trying to figure out if it's changed in your last three quarters.

I don't think it's changed significantly. Chase Jacobson - Sterne Agee & Leach Inc.: So if you look at that and you talk about expanding into the Middle East or more than Middle East, in China and India, what is your internal target for a percentage of exposure to those markets compared to where you are now?

Well, we really don't think of it that way, so I couldn't tell you that we have an internal target. We think there's a pretty significant growth opportunity in the Middle East. We think we can expand our, calling it, in-country presence by a factor of five over the next five years, and so that's going to drive a good business, but this isn't a business that wants a lot of strategy. It's a business that wants to be very client-focused and opportunistic in areas like acquisitions and in what geography you attack, and that's going to continue to be the way we run the business. So we're going to take market share where we can do so effectively and reap the best rewards from a P&L point of view, and that really drives us much more than we want 30% of our business in the Middle East or 20% of our business in Asia or any kind of conversation like that. Chase Jacobson - Sterne Agee & Leach Inc.: And then kind of a modeling question, when we think about the lag between backlog growth and sequential revenue growth, how should we be looking at that in terms of quarters or months or however you want to state it?

Well, that's a difficult modeling question because it depends on the kinds of revenues. Your technical professional services tends to book and burn fairly quickly. Construction, as we book that, as we get close to a construction phase, it gets a big lump that then takes 12, 18 months, 24 months to work off. The Government Services arena, particularly the O&M side of it and such, yes, we might get a five-year contract but we only recognize out one year at a time as we -- on a rolling 12. So even when you get a very large program, it doesn't have a big impact on the current backlog because it just has that one year, but it's kind of got assumed backlog or it'll go out for five years or even longer. But if you -- looking at it the other way, about 65% of our business at any given time tends to come out of backlog, so that's levels of backlog that we have. One or two quarters up or down doesn't really make it a really good story or really bad story. You really have to look at the longer trends, and that trend has been clouded over the last 12 months, 18 months because we've had cancellations, and we've got Motiva going through that we are replacing that are things that certainly are in the current business but are not things that we're banking on or that'll be there as we come out. What we're booking now and what we've booked over the last couple of quarters are the things that will start driving the business up, and as those early phases of the feeds and things like that get into the detail design and then into construction, you should start seeing the backlog moving up fairly dramatically as those move through the transaction. On the public sector side, particularly the Buildings and Infrastructure, that tends to be more of a book-and-burn business because it is mostly Professional Services, so it doesn't typically have as long a duration kinds of activities. So there's a lot of different moving parts, and I guess that goes back to both I think Craig's comment and my comment that there is a lot of uncertainty and a lot of moving parts into the outlook over the next six to 12 months.

And a question now from Avi Fisher. [BMO Capital Markets]

When I look at your revenue mix and you report it on a trailing 12-month basis, so if I back out the prior three quarters, it looks like Upstream has grown pretty significantly from last quarter. I guess I want to check if that's accurate and if so, sort of what's driving that?

Yes, that's accurate.

Yes, I think it's accurate.

Quarter-over-quarter's a nice growth.

Yes, and I think that's being driven by two things that Craig talked about. One is that Canada is starting to come back and with some sanity this time maybe as opposed to what we've seen in some of the past levels but also the Upstream Gas business that we've got going, particularly here in North America, Northern Europe in Gas Storage and such, those markets are improving.

And is that something that we should continue to see mixed shift in that area or more generally, you talked about where the markets are as you see them today. Where do you see any material changes in mix looking out going forward? What should do well? What...

Well, I think you'll see forced excess [ph] (1:08:50), and this isn't a quarter-over-quarter discussion but a longer-term discussion. I think you'll see significant growth in the share that is Upstream relative to the share that's downstream. I think you'll see kind of modest growth in Chemicals, and I think you'll see some significant growth in Infrastructure relative to maybe the other businesses. So those are a couple of years where we see probably above-trend growth.

So you'll look -- as opposed to the coming out of the last cycle where you were also gonna look kind of similar to that where you were heavy. I guess last cycle, you were heavy industrial. This cycle, you'll be heavier on the Infrastructure side?

Yes, I think that's probably -- heavier is right. I mean it's not going to swamp the Heavy Process business partly because of where all the Construction revenue comes from.

And then one thing I'm a little bit confused about, your CapEx was up in the quarter. I like to look at book-to-bill on a trailing 12-month basis because it cancels out some of the fluctuations and the lumpiness in bookings, but your CapEx has grown as a percentage of revenues back to levels where you normally see your trailing 12-month book-to-bill well above one. So book-to-bill's trending down. CapEx as a percent of revenues is back to "normal levels." Apparently, if the press reports are accurate, you've let go of some people in the NASA site, I'm trying to kind of flip what seems to be contradictory signals with the guarded rebound. I mean it looks like you're looking, but your CapEx would suggest you're adding people more robustly and looking for more than a guarded rebound.

There was a little bit of an anomaly in this quarter in that we were finishing up a major office move in the U.K. that, yes, we actually committed to well over two years ago, and as you get closer, expenditures tend to be kind of back-end loaded as you do the final furniture, and so all the stuff that goes into it that -- our nickel as opposed to the building's nickel. So I think that was probably part of it, and we continue to roll out things like our financial systems with the acquisitions. You have the cost of rolling out the financial systems and other support business systems to those new acquisitions and such, so I think there's a little bit of that in there.

Could you give any update, I'm not sure if this was asked before, on how the TYBRIN acquisition is going?

In a broader sense, it's going well. Integration is good. We've resolved most of the integration issues that we have to deal with. We had seen a modest reduction in their G&A expense that should benefit the P&L, and we think we'll continue seeing some additional reduction. On the prospects and winning work side, things are going well, just right in line with our expectations. So if we were sort of toting it up as okay, good or great, it'd be somewhere in the good-plus range.

And on margins, where do you expect for them to be in that business as well?

Yes, we're doing fine.

[Operator Instructions]

Sounds like we're done. Well, thank you all very much for your interest and attention. We're going to continue to try to build the business that we've committed to over the years, and we hope you'll all see that as a positive and stay with us. Thanks very much.

Ladies and gentlemen, that does conclude our conference call for today. Thank you again for your participation.