The Daily Magic Formula Stock for 10/10/2008 is Jacobs Engineering Group Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 50-75 %.
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We are one of the largest professional services firms in the United States. Our business focuses exclusively on providing a broad range of technical, professional, and construction services to a large number of industrial, commercial, and governmental clients around the world. We provide four broad categories of services: Project Services (which include engineering, design, architectural, and similar services); Process, Scientific, and Systems Consulting services (which includes services performed in connection with a wide variety of scientific testing, analysis, and consulting activities); Construction services (which encompasses traditional field construction services as well as modular construction activities, and includes direct-hire construction and construction management services); and Operations and Maintenance services (which includes services performed in connection with operating large, complex facilities on behalf of clients as well as services involving process plant maintenance). We provide our services through offices and subsidiaries located principally in North America, Europe, Asia, and Australia.
We concentrate our services on selected industry groups and markets including oil and gas exploration, production, and refining; programs for various national governments; pharmaceuticals and biotechnology; chemicals and polymers; buildings (which includes projects in the fields of health care and education as well as civic, governmental, and other buildings); infrastructure; technology and manufacturing; consumer products; and pulp and paper, among others.
Jacobs Engineering Group Inc. was incorporated under the laws of the State of Delaware on January 8, 1987. On March 4, 1987, the corporation succeeded by merger to the business and assets of Jacobs Engineering Group Inc., a California corporation that, in 1974, had succeeded to a business organized originally by our founder, Dr. Joseph J. Jacobs, in 1947. Unless the context otherwise requires, all references herein to â€śJacobsâ€ť or the â€śRegistrantâ€ť are to Jacobs Engineering Group Inc. and its predecessors, and references to the â€śCompanyâ€ť, â€śweâ€ť, â€śusâ€ť or â€śourâ€ť are to both Jacobs Engineering Group Inc. and its consolidated subsidiaries. The common stock of Jacobs has been publicly held since 1970 and is currently listed on the New York Stock Exchange (NYSE).
There are four major components of our business strategy: safety; a relationship-based approach to client interactions; a strong focus on cost control; and an organizational structure that facilitates efficient project management and execution. Acquisitions play an important role in our business strategy as they allow us to expand on existing client relationships as well as develop new ones. Acquisitions also allow us the opportunity to leverage our cost structure across geographic areas.
Key to the success of our business strategy is our uncompromising focus on safety. Providing an injury and incident free work environment is an unequivocal condition of the relationship we have with our employees. It is also a paramount issue in our dealings with our clients, and our safety program is a fundamental element of our overall approach to risk management. A safe work environment is critical to our long-term success and growth. We maintain a centralized quality and safety group to help ensure that the services we provide are delivered safely and in accordance with standard work processes. Unsafe job sites and office environments increase employee turnover, increase the cost of a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable, and raise our operating costs as well. Safe job sites and office environments, on the other hand, benefit our clients, promote employee morale, and enhance the long-term relationships we have with our clients, employees, and business partners.
Relationship-Based Business Model
Our relationship-based business model is central to our sustained growth and profitability. We aggressively pursue the development of long-term affiliations and alliances with our clients. By working as a partner with our clients on their capital programs, we increase our understanding of their overall business needs as well as the unique technical requirements of their projects. This increased understanding gives us the opportunity to provide a greater range of services to our clients. We market all of our services to clients in connection with their projects where the scope of work required is within our expertise. By integrating and bundling our services (i.e., providing design, engineering, and construction services on the same project), we can price contracts more competitively and enhance overall profitability while delivering superior value to our clients. Our relationship-based business model also helps us more fully understand the risks inherent in the projects, which in turn allows us to better manage those risks. Our approach also provides us with opportunities to market those services our clients will need in the post start-up and commissioning phases of a plant, such as operations and maintenance services. This model, however, does not preclude us from undertaking discrete projects that do not conflict with our business strategy. We will accept and perform discrete projects for our clients if we can negotiate acceptable pricing and other contract terms and conditions.
Another important component of our business strategy is our continual emphasis on cost control. As the global economy expands and companies providing technical, professional, and construction services are required to compete against each other across geographic boundaries, the company that can provide its clients with cost efficient solutions to their project needs has the advantage. Our attention to cost control throughout every level of our organization allows us to deliver superior technical, professional, and construction services safely, efficiently, and within the cost and time parameters our clients require.
Our organizational structure and integrated system for delivering services is another key component of our business strategy. Our operating units generally use a matrix organizational structure whereby our project management functions are supported by the various technical engineering, design, and construction disciplines that are necessary to effectively execute long-term engineering and construction contracts. Crucial functions, such as project controls and procurement, are local to each of our major offices and serve operations by providing specialized services required by projects. In addition, we actively employ a boundaryless approach to the way we serve our clients. We do not maintain â€śprofit centersâ€ť within the Company, nor do our operating groups compete against each other for contracts. Instead, our organizational structure encourages our operating groups to work cohesively while simultaneously helping to reduce costs and promote an efficient delivery system for all of our services. Our multidomestic geographic strategy supports this approach by allowing each office to compete in the local market place while supporting the needs of global clients in conjunction with our global network of offices.
The Role of Acquisitions in Our Business Strategy
Our relationship-based business model is a significant driver of our acquisition strategy. When we review potential acquisition targets, we are conscious of the effect the acquisition may have on our client base. We favor acquisitions that allow us to expand or enhance the range of services we provide existing clients, and/or gain access to new geographic areas in which our clients either already operate or plan to expand. By expanding into new geographic areas and adding to our existing technical and project management capabilities, we strive to position ourselves as a preferred, single-source provider of technical, professional, and construction services to our major clients. The following is a brief description of two of our larger acquisitions over the past five years:
In April 2007, we acquired Edwards and Kelcey, Inc. (Edwards and Kelcey). Edwards and Kelcey is a nationally recognized engineering, design, planning, and construction management firm serving public and private clients in the fields of transportation; planning/environmental; communications technology; buildings/facilities; and land development. Headquartered in Morristown, New Jersey, Edwards and Kelcey employs approximately 1,000 people in offices located primarily in the Northeastern region of the United States (U.S.). The primary purpose for acquiring Edwards and Kelcey was to expand our infrastructure business in the U.S.
In August 2004, we acquired the Babtie Group Limited (Babtie Group). The Babtie Group is a leading provider of technical and professional services to clients in the infrastructure; facilities; environmental; defense; and governmental outsourcing markets, among others. Headquartered in Glasgow, Scotland, the Babtie Group employs approximately 3,500 people in offices located throughout the United Kingdom (U.K.) and Asia, with smaller operations in India and the Czech Republic. The primary purpose for acquiring the Babtie Group was to expand our infrastructure and facilities business in the U.K.
In any particular year, we will also make smaller acquisitions as opportunities arise.
Our business is to provide technical, professional, and construction services. The services we provide generally fall into four broad categories: Project Services (which include engineering, design, architectural, and similar services); Process, Scientific, and Systems Consulting services (which includes services performed in connection with a wide variety of scientific testing, analysis, and consulting activities); Construction services (which encompasses traditional field construction services as well as modular construction activities, and includes direct-hire construction and construction management services); and Operations and Maintenance services (which includes services performed in connection with operating large, complex facilities on behalf of clients as well as services involving process plant maintenance). The scope of services we can provide our clients, therefore, ranges from consulting and conceptual design services, which clients often require in the very early stages of a project, to complete, single-responsibility, design-build-operate contracts.
We employ all of the engineering, design, architectural, and related disciplines necessary to design and engineer modern process plants (including projects for clients in the chemicals and polymers; pharmaceuticals and biotechnology; oil & gas; refining; food and consumer products; and basic resources industries); buildings (including facilities for clients in the health care; education; and criminal justice markets, as well as other buildings for clients in the private sector); infrastructure projects (including highways, roads, bridges, and other transportation systems; water and wastewater treatment plants; water resources facilities; and other similar plants and facilities); technology and manufacturing facilities (for clients in the aerospace; automotive; defense; semiconductor; and electronics industries); consumer products manufacturing facilities; pulp and paper plants; and other facilities. We also employ many of the requisite scientific, technical, and program management capabilities necessary to provide program integration, testing, and evaluation services for clients in the defense and aerospace industries; for the U.S. Department of Defense (DoD) in support of information systems for weapons acquisition centers; for the National Aeronautics and Space Administration (NASA) for aerospace, testing, and propulsion systems and facilities; and for various agencies of the U.S. federal government in support of environmental programs.
We are capable of providing our clients with a variety of value engineering services including â€śsafety in designâ€ť. Through safety in design we integrate best practices, hazard analysis, and risk assessment methods early in the design phase of projects, taking those steps necessary to eliminate or mitigate injury and damage during the construction, start-up, testing and commissioning, and operations phases of a project.
In the area of construction management, we provide our clients with a wide range of services as an agent for our clients. We may act as the program director, whereby we oversee, on the ownerâ€™s behalf, the complete planning, design, and construction phases of the project. Alternatively, our services may be limited to providing construction consulting.
Also included in the category of Project Services are certain related services (such as planning, scheduling, procurement, estimating, cost engineering, project accounting, and quality and safety) necessary to support our engineering, design, construction, construction and program management, operations and maintenance, and consulting services.
Process, Scientific and Systems Consulting
We employ all of the professional and technical expertise necessary to provide a broad range of consulting services including: performing pricing studies, market analyses, and financial projections necessary in determining the feasibility of a project; performing gasoline reformulation modeling; analyzing and evaluating layout and mechanical designs for complex processing plants; analyzing automation and control systems; analyzing, designing, and executing biocontainment strategies; developing and performing process protocols with respect to the U.S. Food and Drug Administration-mandated qualification and validation requirements; providing consultation on proposed railway and airport expansion projects; and performing geological and metallurgical studies.
Also included in this service category are the revenues relating to professional and program management services required to assist clients (such as the U.S. federal government and its agencies) in a wide range of defense and aerospace related programs. Such services typically are more technical and scientific in nature than other project services we provide, and may involve such tasks as supporting the development and testing of conventional weapons systems; weapons modeling and simulations; computer systems development, maintenance, and support; evaluation and testing of mission-critical control systems; and other highly technical programs and tasks.
We provide traditional field construction services to private and public sector clients in virtually all of the industry groups and markets to which we provide project services. In the area of environmental remediation and restoration, we provide environmental remedial construction services for a variety of public and private sector clients. We also provide many of our clients with modular construction technology. Our modular construction technology is an advanced form of engineering and design, off-site fabrication and assembly, and field erection. It provides our clients with an alternative approach to traditional methods of engineering and construction, which can compress and shorten the construction schedule, reduce risk, and lower costs.
Historically, our field construction activities were focused primarily on those construction projects for which we perform much of the related engineering and design work. By focusing our construction efforts on such projects, we minimize the risks associated with constructing complex plants and facilities based on designs prepared by third parties. The financial risk to us of constructing complex plants and facilities based on designs prepared by third parties may be particularly significant on fixed-price contracts; therefore, we generally avoid this type of project. However, we continue to pursue construction-only projects where we can negotiate pricing and other acceptable contract terms.
Operations and Maintenance (O&M)
O&M generally refers to all of the tasks required to operate and maintain large, complex facilities on behalf of clients. We can provide key management and support services over all of the facilityâ€™s operations, including managing subcontractors and other on-site personnel. Within the environmental area, O&M often includes engineering and technical support services as well as program management services necessary to remediate contaminated sites. Within the aerospace and defense areas, O&M often requires us to provide the management and technical support services necessary to operate and maintain engine test facilities, weapons integration, and high-tech simulation and verification centers. Such O&M contracts also frequently require us to provide facilities management and maintenance services; utilities operations and maintenance services; property management and disposition services; and construction support services.
O&M also includes process plant maintenance services, which generally involves all of the tasks required to keep a process plant (typically a refinery or chemical plant) in day-to-day operation. Such tasks could include the repair and replacement of pumps, piping, heat exchangers, and other equipment as well as â€śturnaroundâ€ť work, which involves major refurbishment that can only be performed when the plant is shut down. Since shutdowns are expensive to the owners of the plant, turnaround work often requires maximizing the number of skilled craft personnel who can work efficiently on a project on a 24-hours-per-day, seven-days-per-week basis. We use sophisticated computer scheduling and programming to complete turnaround projects quickly, and we maintain contact with a large pool of skilled craft personnel we can hire as needed on maintenance and turnaround projects.
Although the gross profit margins that we realize from O&M services are generally lower than those associated with the other services we provide, the costs to support maintenance activities are also generally lower. Furthermore, we view O&M contracts as presenting a lower financial risk to the Company as compared to some of the other services we provides because O&M contracts are normally cost-reimbursable in nature. Additionally, although engineering and construction projects may be of a short-term nature, O&M services often result in long-term relationships with clients. For example, we have been providing maintenance services at several major process plants for several decades. This aspect of maintenance services greatly reduces the selling costs in respect of such services.
Financial Information About Segments
Although we describe our business in this annual report in terms of the services we provide, the markets in which our clients operate, and the geographic areas in which we operate, we have concluded that our operations may be aggregated into one reportable segment pursuant to Statement of Financial Accounting Standards No. 131â€” Disclosures about Segments of an Enterprise and Related Information . In making this determination, we considered various economic characteristics of our operations including: the nature of the services we provide, our internal processes for delivering those services, and the types of customers we have. In addition to the discussion that follows, please refer to Note 15â€” Segment Information of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
There is a high degree of similarity of the workforces among our service categories. For example, engineering and design services (i.e., services provided by persons who are degreed and in certain circumstances licensed, such as engineers, architects, scientists, and economists) exist in all four service categories. In addition, there is a high degree of similarity among a significant component of the workforces we employ to perform O&M and construction projects. In providing O&M and construction services, we employ a large number of skilled craft labor personnel. These may include welders, pipe fitters, electricians, crane operators, and other personnel who work on very large capital projects (in the case of projects classified within the construction services category) or on smaller capital projects (in the case of maintenance projects classified within the O&M services category).
Our operating units use a matrix organizational structure. Our results, therefore, are dependent on groups representing technical disciplines (e.g., electrical engineering, mechanical engineering, cost engineering, etc.) supporting project management personnel (who maintain the relationship between us and our clients, and who are ultimately responsible for delivering projects to our clients safely, on time, and on budget). Additionally, all of our operating regions and divisions use common tools, policies, and procedures to manage and run their respective units. These include project review meetings, project performance evaluations, and project execution plans.
The use of technology throughout our organization is highly uniform. Whether it is PC-based computer aided design and drafting (CADD) applications used by our engineering and design staff, or PC-based modeling programs used by the scientific and consulting staff, or PC-based scheduling, estimating, and cost control applications used by home-office personnel in support of our construction and maintenance activities, all of the service categories described above are equally affected by changes in technology as they occur in the economy at large.
Furthermore, the types of information and internal reports used by management to monitor performance, evaluate results of operations, allocate resources, and otherwise manage the business support a single reportable segment. Accordingly, based on these similarities, we have concluded that our operations may be aggregated into one reportable segment for purposes of this disclosure.
Industry Groups and Markets
We provide our services to clients that operate in the following industry groups and markets: energy and refiningâ€”downstream; long-term programs for various national governments, including the U.S.; chemicals and polymers; oil and gasâ€”upstream; pharmaceuticals and biotechnology; infrastructure; buildings; and other, general industrial and consumer businesses and markets (such as technology and manufacturing; pulp and paper; food and consumer products; and mining and minerals). We believe these industry groups and markets have sufficient common needs to permit cross-utilization of our resources and help to mitigate the negative effects of a downturn in a single industry.
Energy & Refiningâ€”Downstream
We provide full-service engineering, design, construction, and management services to our clients in the downstream sector of the energy & refining industries. Typical projects include new design and construction, revamps or expansions of existing plants, upgrades of individual process units within refineries, and maintenance services. We also provide a broad range of consulting services to our clients including process assessments, facility appraisals, feasibility studies, technology evaluations, project finance structuring and support, and multi-client subscription services.
Government regulations continue to influence the need for project services by our clients in the refining industry. We see ongoing project activity in refining due to formulation and sulfur directives. New and existing regulations in areas such as off-road Ultra Low Sulfur Diesel, ambient air quality standards, removal of benzene from gasoline and sulfur from bunker fuels will continue to drive new investment requirements in the industry over the next several years. We are actively involved in such regulatory-based projects. In addition to our extensive experience in these types of projects, we offer a recognized proprietary and patented sulfur removal technology (SuperClaus), which has a strong market share for installed capacity. Biofuels, and particularly biodiesel, is an area of increasing activity and opportunity. We are already working on a number of these projects in Europe.
Refineries are also responding to changes in feedstock price and availability as well as the product market. This is leading to investment to facilitate processing heavier crude with higher sulfur content and producing a different product slate, responding to increased demand for diesel. Our North American and European offices continue to be very involved in this market. In addition, investment in new refinery capacity in the Middle East and Asia is occurring due to the overall desire to add value at source and to respond to the regional consumption growth. We are supporting this investment through specialist consultancy and project services from our growing local offices. We are also involved with capacity expansion projects in the U.S.
We have also used our modular construction capabilities on a number of projects in the energy and refining industry. In the U.S. and European refining markets, many projects involve revamping existing processing units or adding new processes to an existing refinery. As a result of the close proximity of processing units in these refineries, we believe using modular construction can decrease congestion at the construction site. Modular construction can also provide cost and project execution benefits in remote locations.
We provide maintenance services to our clients in the refining industry and have also established a number of formal alliances with various clients. Some of these alliances are both domestic (U.S.) and international in scope.
In this industry group, we also include power generation and cogeneration projects. We provide technical assistance, project management, design, engineering, procurement, construction and construction management, and maintenance services to our clients in the power generation and supply industry and for power generating units within our customersâ€™ process facilities. Typical projects include simple and combined cycle power projects, cogeneration power plants, aeroderivative and industrial gas turbines, and emergency power generation stations. The industry is now focusing on gasification as high energy prices, an increasing need for hydrogen and power, availability of lower priced solid fuels, and the potential to sequester CO2 emissions make this technology a new area for project development.
Oil & Gasâ€”Upstream
Historically, revenues from our hydrocarbon business related primarily to projects associated with petroleum refining and the processes and technologies required to convert crude oil and gas into petroleum fuels, chemical feedstocks, and lubricants. However, beginning in fiscal 2001 with the acquisition of certain elements of the Stork Engineering & Construction businesses in the Netherlands, and continuing in fiscal 2002 with the acquisition of McDermott Engineers & Constructors in Canada, and in fiscal 2007 with the acquisition of W.H.Linder & Associates, Inc., we have expanded our services to include more projects for clients operating in the upstream sector of the oil and gas industries.
We provide full-service engineering, design, construction, and management services to our clients in the areas of exploration and production. Typical projects include new design and construction, revamps or expansions, and maintenance services. We also provide a broad range of consulting services to our clients including process assessments; facility appraisals; feasibility studies; technology evaluations; project finance structuring and support; and multi-client subscription services. Currently, we are expanding our business in the upstream market, working on projects that include heavy oil processing (e.g., oil sands extraction projects); oil recovery through steam injection; and gas treating, gas gathering, and gas storage projects including extraction of commercially valuable elements of the gas stream. A relatively new area of focus for us is offshore production, where we are actively pursuing project opportunities in engineering and design of topside facilities. Higher energy prices and reduced traditional reserves are driving the development of new reserves and the enhanced recovery from existing ones. We are actively supporting our clients in these initiatives in North America, Europe, the Middle East, and Asia.
National Government Programs
We categorize our National Government Programs as generally relating to environmental programs, aerospace and defense programs, or building programs.
We are one of the leading providers of environmental engineering and consulting services in the U.S. and abroad, including hazardous and nuclear waste management and site cleanup and closure. Many of our projects for the U.S. federal government span over ten years. Our projects within this market generally relate to all major federal and state environmental statutes, with particular emphasis on the Comprehensive Environmental Response Compensation and Liability Act and the Resource Conservation and Recovery Act. We currently provide environmental investigation, restoration, engineering, construction, and site operations and maintenance services to a number of U.S. federal government agencies, including the Department of Energy (DoE) and the DoD.
As part of our environmental restoration work, we provide support in such areas as underground storage tank removal, contaminated soil and water remediation, and long-term groundwater monitoring. We also design, build, install, operate, and maintain various types of soil and groundwater cleanup systems at multiple project locations across the U.S. and its territories for the U.S. Army Corps of Engineers and the U.S. Air Force Center for Environmental Excellence (AFCEE). Typical projects also include the preparation of feasibility studies and performance of remedial investigations, engineering, design, and remediation services on several national programs. As an extension of our environmental support to AFCEE, we also serve AFCEEâ€™s customers with execution of capital projects involving sustainment, repair, and modernization of military facilities and infrastructure.
We provide a full range of environmental consulting services including air quality planning and permitting, water quality compliance, environmental conservation studies, pollution prevention assessments, and compliance with the National Environmental Policy Act.
As part of our support to our clients, we provide asset management services in the form of infrastructure operations and maintenance. This is an integral part of our services for the DOE at the Oak Ridge Environmental Management sites and at the Argonne National Laboratory. Asset management also includes building closures, which may involve deactivation, decommissioning, and demolition of government facilities. We also are providing these services to support the government of the U.K. in its nuclear sites decommissioning program through the Nuclear Decommissioning Authority (NDA). We believe this will be a growing market in the years to come, and we are well-placed to capitalize on it, having won a number of major framework contracts this year at the two highest-hazard sites.
Aerospace and Defense Programs
We provide support to aerodynamic, propulsion, and space facilities and systems for government clients at more than a dozen test centers across the continental U.S. This includes military systems acquisition management and strategic planning; operations and maintenance of test facilities, ranges, space launch facilities, and space chambers; test and evaluation services in computer, laboratory, facility, and range environments; test facility computer systems instrumentation and diagnostics; and test facility design and build. We also provide systems engineering and integration of complex weapons and space systems as well as hardware and software design of complex flight and ground systems. We support and maintain enterprise information systems for government and commercial customers worldwide, ranging from the operation of complex computational networks to the development and validation of specific software applications.
We have provided advanced technology engineering services to the DoD for more than 50 years and currently support defense programs in dozens of locations, both within the United States and internationally. In addition to operating and maintaining several DoD test centers, our support includes services such as aerodynamic testing of next-generation fighter aircraft; propulsion testing for space programs; testing of the U.S. Armyâ€™s next generation ground mobile weapon systems; and acquisition support for weapons systems such as air-to-air missile systems and precision guided smart weapons for high-value targets. We also support the acquisition and development of systems and equipment for Special Operations Forces as well as the development of biological, chemical, and nuclear detection and protection systems. We also support the DoD in a number of information technology programs including network design, integration, and support; command and control technology; development and sustainment of databases and customized applications; and security solutions.
We provide a broad range of engineering, science, and technical support services to eight NASA sites, delivering support to virtually every major space program including the International Space Station; space shuttle recertification; space observatories; aerospace transportation systems; space propulsion systems; advanced materials research; and advanced research and development activities such as protein crystal growth experiments for the development of new drugs and vaccines. We also provide operations and maintenance services for NASAâ€™s aerospace and propulsion research test facilities. We play an integral role in ensuring that the launch vehicles and propulsion systems of the future support NASAâ€™s new exploration vision.
National Government Programs also include many types of buildings programs for a variety of agencies of the U.S. federal government. We provide a wide range of advance planning, architectural, engineering, construction management, program management, and design-build services to agencies such as the Federal Aviation Administration (FAA); the General Services Administration (GSA); the DoD, and the U.S. Departments of State, Treasury, and Agriculture; and the Army National Guard, among others. Typical projects include renovating and modernizing terminal radar control centers, air traffic control towers, and other facilities for the FAA; planning and design services for Internal Revenue Service offices and customer service centers nationwide; and planning, design, and program management services in connection with certain homeland security initiatives for the GSA and the Department of Homeland Security. We have also performed on projects involving highly technical buildings supporting complex applications of physics, such as the National Ignition Facility (NIF) at Lawrence Livermore National Laboratory, and the Spallation Neutron Source (â€śSNSâ€ť, an accelerator-based neutron source facility located in Oak Ridge, Tennessee). We are providing planning, design, design-build construction, and program management services to the DoD on a variety of project types, including military family housing; quality of life, training, maintenance, and readiness facilities; and command and control centers. Other projects include military facilities supporting the DoDâ€™s global re-basing program, the 2005 Base Realignment and Closure program, and the transformation initiatives of the various military services. Similar initiatives are underway in Europe, specifically in the U.K., where we are leading the Custodial Servicesâ€™ project management delivery program to upgrade the U.K. prison stock, and also certain security-lead programs such as upgrading works to the Palace of Westminster and various regional police authorities.
Chemicals and Polymers
The chemicals and polymers market, which, we believe, is growing after an extended flat period, continues to be an essential part of our diversified business. Expansions and revamps are attracting investments in North America and Europe. This is an area of our traditional skills and we are very active in working with our clients to deliver added value. A large volume of new investment is occurring in the Middle East and Asia due to both low feed stock cost and rapidly growing local markets.
The types of projects we execute for our clients in these industries include feedstock synthesis, chemical synthesis, and polymerization. This includes high-pressure processes to produce industrial chemicals and low-pressure multi-product processes to produce specialty and fine chemicals. We have extensive knowledge of, and experience with, advanced polymerization reactions and state-of-the-art, post-reactor processing techniques. An area of focus due to high feedstock costs is gasification to produce the feeds for chemicals and fertilizers. Our involvement in these early studies positions us to help owners capitalize on return on investment opportunities by streamlining work processes and optimizing existing plant layouts for future expansions.
Another important aspect of serving our clients in the chemicals and polymers business is in the area of field services. We have contracts with major chemical producers worldwide to provide construction, on-site maintenance, and turnaround activities. Many of these contracts are evergreen in nature, with relationships extending over many years due to our focus on safety, value, and client satisfaction. Like the refining industry, we provide maintenance services to our clients in the chemicals industry and have also established numerous formal alliances.
Our clients in this sector focus on safety, reliability, and maintainability to keep operating costs down. To support this initiative, we apply best practices on capital and maintenance work by leveraging synergy and resources within our alliances and partnerships, which in some cases involve more than 25 chemical facilities for a single owner.
As these multi-site relationships increase in magnitude, the range of services we provide often expands. Other services vary from providing ad-hoc, on-site engineering services to completing an entire capital improvement program. We provide technical consulting; project finance structuring; facility appraisal; market analysis; and business consulting services as well as fully-integrated engineering, procurement, construction, and construction management services. Our services can guide and assist our chemical clients from a good project idea to a constructed and operating chemical facility.
General John P. Jumper (USAF Retired) , Director. General Jumper, age 62, retired from the U.S. Air Force in 2005 after a distinguished 39-year military career. In his last position as Chief of Staff, he served as the senior military officer in the Air Force leading more than 700,000 military, civilian, Air National Guard, and Air Force Reserve men and women and administering annual budgets in excess of $100 billion. As a member of the Joint Chiefs of Staff, General Jumper provided military advice to the Secretary of Defense, the National Security Council, and the President. During his career, he served as Commander, Air Combat Command; commanded U.S. Air Forces in Europe; and served as Senior Military Assistant to the Secretary of Defense. General Jumper holds a Master of Business Administration degree from Golden Gate University in San Francisco and a Bachelor of Science degree from Virginia Military Institute. General Jumper currently serves on the Board of Directors of the following publicly traded companies: Goodrich Corporation; SAIC, Inc.; Somanetics Corporation; and TechTeam Global, Inc. He also serves on several non-profit and charitable boards.
Linda Fayne Levinson , Director. Ms. Fayne Levinson, age 65, is Chair of the Board of Connexus Corporation, a privately held online marketing platform that connects advertisers with their target customers. From 1997 until 2004, Ms. Fayne Levinson was a Partner of GRP Partners, a venture capital firm that invests in early stage technology companies. From 1982 until 1998, Ms. Fayne Levinson was President of Fayne Levinson Associates, an independent consulting firm advising major corporations. Prior to that, Ms. Fayne Levinson was an executive at Creative Artists Agency, Inc.; a Partner of Wings Partner, a Los Angeles-based merchant bank; a Senior Vice President of American Express Travel Related Services Co., Inc.; and a Partner of McKinsey & Company, where she became the first woman partner in 1979. Ms. Fayne Levinson also serves as a member of the Boards of DemandTec, Inc., Ingram Micro, Inc., NCR Corporation and The Western Union Company.
Craig L. Martin , President, Chief Executive Officer and Director. Mr. Martin, age 58, has served in various senior and executive positions with the Company since joining it in 1994. Mr. Martin was promoted to President of the Company in July 2002, and became Chief Executive Officer in April 2006 .
Joseph R. Bronson , Director. Mr. Bronson, age 59, is President, Chief Operating Officer and a Director of Sanmina-SCI Corporation, a leading electronics contract manufacturer. From 2004 to 2007 he was the President, a Member of the Office of the Chief Executive Officer and a Director of Form Factor Inc., a global leader in advanced semiconductor wafer probe card technology. Mr. Bronson was previously Executive Vice President and Chief Financial Officer of Applied Materials, Inc., a worldwide supplier of products and services to the global semiconductor industry and a leading information infrastructure provider. Mr. Bronson had been employed by Applied Materials from 1984 to 1989 and from 1990 to October 2004. Mr. Bronson held the position of Corporate Controller for Applied Materials from 1984 to 1989, the position of Chief Financial Officer from January 1998 to his departure and was Executive Vice President since December 2000. From 1989 to 1990, Mr. Bronson served as Vice President and Chief Financial Officer of Stardent Computer. From 1979 to 1984, Mr. Bronson was employed by Schlumberger Limited, where he was Group Controller from 1983 to 1984. He is a Certified Public Accountant and a member of the American Institute of CPAâ€™s and serves as Chairman of the Leavey School of Business Advisory Board, Santa Clara University, California. Mr. Bronson currently serves on the Board of Directors of Maxim Integrated Products, Inc.
Noel G. Watson , executive Chairman of the Board and Director. Mr. Watson, age 71, has been with the Company since 1965 and was Chief Executive Officer of the Company from November 1992 to April 2006. He was also the President of the Company from 1987 until July 2002.
The Hon. Thomas M. T. Niles , Director. Mr. Niles, age 68, is Vice Chairman of United States Council for International Business (USCIB), a company working with its international affiliates to promote open markets and freer trade around the world. He was President of USCIB from 1999 to 2005. Mr. Niles was formerly U.S. Ambassador to Canada (1985-1989), U.S. Ambassador to the European Union (1989-1991), Assistant Secretary of State for Europe and Canada (1991-1993) and Ambassador to Greece (1993-1997).
Robert C. Davidson, Jr. , Director. Mr. Davidson, age 62, is retired. Mr. Davidson served as the Chairman and Chief Executive Officer of Surface Protection Industries, Inc., a company that provided surface protection products and services worldwide from 1978 to October 2007. He serves as a member of the Boards of Morehouse College, Fulcrum Venture Capital Corporation, Cedars-Sinai Medical Center, Broadway Federal Bank, f.s.b., and the University of Chicago Graduate School of Business Advisory
Edward V. Fritzky , Director. Mr. Fritzky, age 57, is retired. Mr. Fritzky served on the Board of Amgen, Inc., a global biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology, from July 2002 to May 2005 and also served as a special advisor to Amgen until July 2004. From January 1994 to July 2002, Mr. Fritzky served as Chief Executive Officer, President and Chairman of the Board of Immunex Corporation, a biotechnology company. From March 1989 to January 1994, he was President and Vice President of Lederle Laboratories, a division of American Cyanamid Company, a pharmaceutical company. Mr. Fritzky serves as a member of the Boards of Geron Corporation and SonoSite, Inc.
Robert B. Gwyn , Director. Mr. Gwyn, age 68, is retired. Mr. Gwyn was a Managing Director of Amaryn Group, a private investment company, from 1994 until 1998. He was President, Chief Executive Officer and Chairman of the Board of Agricultural Minerals and Chemicals, Inc., a company engaged in the fertilizer and methanol businesses from 1990 until 1994.
Rear Admiral Benjamin F. Montoya, CEC, USN (Retired) , Director. Admiral Montoya, age 72, is retired. From 1987 to 1989, he served as the Commander, Naval Facilities Engineering Command and Chief of Civil Engineers. He was Senior Vice President and General Manager of the Gas Supply Business Unit of Pacific Gas and Electric Company from 1991 to 1993. He was President and Chief Executive Officer of Public Service Company of New Mexico from 1993 until 2000 and was elected Chairman of the Board in 1999 and served until he retired in October 2000. He was the Chief Executive Officer of SmartSystems Technologies, a company that designs, develops and manufactures automated security, energy and other control systems for homebuilders and installers, from 2000 to 2007. Admiral Montoya serves as a member of the Boards of TEC, Inc., Brown and Caldwell Engineers, and SmartSystems Technologies.
MANAGEMENT DISCUSSION FROM LATEST 10K
Net earnings in fiscal 2007 increased by $90.2 million, or 45.8%, as compared to last year, and EPS (diluted) grew by 43.3%. Contributing to the growth in net earnings was increased activity on contracts with clients in a number of industries and markets including: energy and refining-downstream; upstream oil and gas; national government programs; and chemicals and polymers. Project Services revenues increased by $933.9 million, or 32.3%, in fiscal 2007 as compared to last year. Project Services consist of engineering, design, architectural, and other â€śhome officeâ€ť services that typically bring higher gross margin rates as compared to our â€śfield servicesâ€ť.
Cash and cash equivalents totaled $613.4 million at September 30, 2007; an increase of $179.3 million, or 41.3%, as compared to September 30, 2006. Our â€śnet cashâ€ť position (defined as cash and cash equivalents less bank debt) was $572.4 million at September 30, 2007; an increase of $230.5 million, or 67.4%, as compared to September 30, 2006. Additions to property and equipment used $64.6 million of cash and cash equivalents during fiscal 2007 as compared to $54.0 million last year. Our cash balances, combined with a borrowing capacity of $290.0 million under our long-term, unsecured revolving credit facility, provide sufficient capital resources for us to fund our on-going operations.
Critical Accounting Policies
In order to understand better the changes that may occur to key elements of our financial condition and operating results, a reader of this MD&A should be aware of the critical accounting policies we apply in preparing our consolidated financial statements.
The consolidated financial statements contained in this report were prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements and the financial statements of any business performing long-term engineering and construction-type contracts requires management to make certain estimates and judgments that affect both the entityâ€™s results of operations and the carrying values of its assets and liabilities. Although our significant accounting polices are described in Note 2 of the Notes to Consolidated Financial Statements, the following discussion is intended to describe those accounting policies that are especially critical to the preparation of our consolidated financial statements.
Revenue Accounting for Contracts and Use of Joint Ventures â€”In accounting for long-term engineering and construction-type contracts, we follow the provisions of the AICPAâ€™s Statement of Position 81-1â€” Accounting for Performance of Construction-Type and Certain Production-Type Contracts . In general, we recognize revenues at the time we provide services. Depending on the commercial terms of the contract, we recognize revenues either when costs are incurred, or using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method of revenue recognition requires us to prepare estimates of costs to complete contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule, the cost of materials and labor, and productivity, and the impact of change orders, liability claims, contract disputes, and achievement of contractual performance standards. Many of our engineering and construction contracts provide for reimbursement of costs plus a fixed or percentage fee. In some of the markets we serve there is an increasing trend towards cost-reimbursable contracts with incentive-fee arrangements. In certain instances, we base our incentive fees on achievement of target completion dates, target costs, and/or other performance criteria. Failure to meet these targets or increases in contract costs can result in unrealized incentive fees or non-recoverable costs, which could exceed revenues recognized from the project. One such incentive-fee contract is with the U.S. Department of Energy for the Fernald Closure Project (the â€śFernald Projectâ€ť). This contract provides for incentive fees based on schedule and cost. In addition, the terms of the contract provide that the incentive fees may not be fully billed to the DOE until the completion of the project, which we estimate to occur in fiscal 2008. At September 30, 2007 and 2006 there was $5.4 million and $40.0 million, respectively, of fees relating to the Fernald Project recognized as receivables in our Consolidated Balance Sheets.
We provide for contract losses in their entirety in the period they become known, without regard to the percentage of completion.
The nature of our business sometimes results in clients, subcontractors or vendors presenting claims to us for recovery of costs they incurred in excess of what they expected to incur, or for which they believe they are not contractually responsible. In those situations where a claim against us may result in additional costs to the contract, we would include in the total estimated costs of the contract (and therefore, the estimated amount of margin to be earned under the contract) an estimate, based on all relevant facts and circumstances available, of the additional costs to be incurred. Similarly, and in the normal course of business, we may present claims to our clients for costs we have incurred for which we believe we are not contractually responsible. In those situations where we have presented such claims to our clients, we include in revenues the amount of costs incurred, without profit, to the extent it is probable that the claims will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. Costs associated with unapproved change orders are included in revenues using substantially the same criteria used for claims.
Certain cost-reimbursable contracts with government customers as well as certain commercial clients provide that contract costs are subject to audit and adjustment. In this situation, revenues are recorded at the time services are performed based upon the amounts we expect to realize upon completion of the contracts. In those situations where an audit indicates that we may have billed a client for costs not allowable under the terms of the contract, we estimate the amount of such nonbillable costs and adjust our revenues accordingly.
Results of Operations
Our business focuses exclusively on providing technical, professional, and construction services to a large number of industrial, commercial, and governmental clients around the world. The services we provide generally fall into four broad categories:
Project Services (which includes engineering, design, architectural, and similar services);
Process, Scientific, and Systems Consulting services (which includes services performed in connection with a wide variety of scientific testing, analysis, and consulting activities);
Construction services (which encompasses traditional field construction services as well as modular construction activities, and includes direct-hire construction and construction management services); and
Operations and Maintenance services (which includes services performed in connection with operating large, complex facilities on behalf of clients as well as services involving process plant maintenance).
The scope of services we can provide our clients, therefore, ranges from consulting and conceptual design services (which are often required by clients in the very early stages of a project) to complete, single-responsibility, design-build-operate contracts.
Fiscal 2007 Compared to Fiscal 2006
We recorded net earnings of $287.1 million, or $2.35 per diluted share, for fiscal year ended September 30, 2007, compared to net earnings of $196.9 million, or $1.64 per diluted share for fiscal 2006.
Total revenues for fiscal 2007 increased by $1.1 billion, or 14.2%, to $8.5 billion, compared to total revenues of $7.4 billion for fiscal 2006. Revenues increased among most of the industry groups and markets we serve, lead by a combined, $608.4 million increase, or 21.7%, in revenues from clients operating in the energy and refining, and the upstream oil and gas industries. Also contributing to the revenue growth in fiscal 2007 were a $240.6 million increase, or 19.1%, in revenues from projects for our national government programs clients; a $114.1 million increase, or 10.1%, in revenues from projects for our clients operating in the chemicals and polymers industries; and a $134.4 million increase, or 24.6%, in revenues from projects for our infrastructure clients.
With respect to projects for our clients operating in the oil & gas and refining industries, revenue from the downstream sector grew by $264.1 million, or 11.7%, from last year. Most of this increase continues to relate to higher capital spending on projects involving the reconfiguration and expansion of existing refineries, and addressing the effects of changing crude inputsâ€”from lighter crudes to heavier crudes that contain slightly higher levels of sulfur. More recently, we have seen increased capital spending by many of our refinery clients involving projects driven by government regulations. These include projects to comply with the nonroad diesel emission and other similar standards. Revenue from the upstream sector of the oil & gas and refining industries grew by $344.3 million, or 63.0%, from last year. We continued to see a high level of spending in fiscal 2007 by our clients on oil and gas extraction projects, particularly in the oil sands area of Canada.
Revenues from projects for our national government programs clients increased by $240.6 million, or 19.1%, from last year. Most of the increase was due to higher levels of revenue from the U.S. federal government relating to various aerospace and defense projects. Revenues from projects for our clients in the chemicals and polymers industries increased by $114.1 million, or 10.1%, due to continued demand to increase production capacity. Revenues from projects performed for our infrastructure clients increased by $134.4 million, or 24.6%, from last year. Part of the increase was due to the acquisition of Edwards and Kelcey, Inc. (Edwards and Kelcey) in April 2007. Edwards and Kelcey contributed $67.2 million in revenues during fiscal 2007. The balance of the increase in infrastructure revenues was due to higher spending by clients on projects for improved roads, highways, and bridges.
Included in the above increase in revenues was a $66.0 million increase in pass-through costs. Pass through costs totaled $2,746.7 million in fiscal 2007 compared to $2,680.7 million in fiscal 2006. When we are responsible for subcontract labor or third-party materials and equipment, we reflect the costs of such items in both revenues and costs. The level of pass-through costs included in revenues and costs will vary between reporting periods depending principally on the amount of procurement that clients choose to do themselves, as opposed to using our services, as well as on the normal ramping-up (and winding-down) of field services activities on construction and O&M projects. Pass through costs as a percentage of field services revenues in fiscal 2007 and 2006 were essentially unchanged.
As a percentage of revenues, direct costs of contracts were 85.7% for fiscal 2007, compared to 87.4% for fiscal 2006 (for the remainder of this MD&A, we refer to this percentage relationship as the â€śDC%â€ť). The relationship between direct costs of contracts and revenues will fluctuate between reporting periods depending on a variety of factors including the mix of business during the reporting periods being compared as well as the level of margins earned from the various types of services provided. Generally speaking, the more procurement we do on behalf of our clients (i.e., where we purchase equipment and materials for use on projects, and/or procure subcontracts in connection with projects) and the more field services revenues we have relative to technical, professional services revenues, the higher the DC% will be. Because pass-through costs typically generate lower margins, it is not unusual for us to experience an increase or decrease in revenues relating to pass-through costs without experiencing a corresponding increase or decrease in our gross margins and operating profit. The decrease in the DC% in fiscal 2007 as compared to last year was due primarily to the increase in technical professional services revenues relative to field services revenues. Also contributing to the decrease in the DC% was a slight increase in the margin rates earned on our technical professional services revenues.
SG&A expenses for fiscal 2007 increased by $136.7 million, or 21.6%, to $769.4 million, compared to $632.7 million for fiscal 2006. The increase in SG&A expenses was due almost entirely to the business growth we experienced in fiscal 2007, particularly in support of the technical professional services area of our business. Generally speaking, such services require higher labor and facilities costs in order to support those activities. Also contributing to the increase in SG&A expenses was the acquisition of Edwards and Kelcey, which contributed $22.8 million of SG&A expenses in fiscal 2007.
Operating profit for fiscal 2007 increased by $140.4 million, or 46.6%, to $442.0 million, compared to $301.6 million for fiscal 2006. As a percentage of revenues, operating profit was 5.2% for fiscal 2007 compared to 4.1% in fiscal 2006. The increase in operating profit during fiscal 2007 as compared to last year was due primarily to the increase in technical professional services revenues; the improvement in our level of SG&A expenses relative to technical professional services revenues; and a slight improvement in the margin rates earned on our technical professional services revenues.
Interest income for fiscal 2007 increased by $4.6 million, or 29.9%, to $19.8 million, compared to $15.2 million for fiscal 2006. The increase in interest income was due primarily to higher average cash balances on deposit during fiscal 2007 as compared to last year combined with a slight increase in the rate of interest earned on our deposits.
We recorded income tax expense of $161.5 million during fiscal 2007, compared to $108.4 million during fiscal 2006. Our overall effective tax rate was 36.0% for fiscal 2007 compared to 35.5% last year. The Companyâ€™s overall effective tax rate for fiscal 2006 was positively affected by the favorable settlement of a matter with the U.S. Internal Revenue Service (IRS), off-set in part by provisions recorded for certain other income tax exposures. The net effect of the IRS settlement and the other income tax exposures was a net reduction of $1.5 million to the fiscal 2006 total tax expense. In the normal course of our business, we may
engage in numerous transactions for which the ultimate tax outcome (including the period in which the transaction will ultimately be included in income or deducted as an expense) is uncertain. Additionally, we file income, franchise, gross receipts and similar tax returns in many jurisdictions. Our tax returns are subject to audit and investigation by the Internal Revenue Service, most states in the United States, and by various government agencies representing many jurisdictions outside the United States. We continually monitor the appropriateness of the rate, and we adjust our income tax expense in the period it is probable that actual results will change.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
On November 2, 2007, we completed the acquisition of Carter & Burgess, Inc. (â€śCarter & Burgessâ€ť). Since the date of acquisition, we have been integrating Carter & Burgessâ€™ business into our operations. Accordingly, it is not practicable to provide meaningful financial information for Carter & Burgess on a stand-alone basis.
Results of Operations
We recorded net earnings of $108.7 million, or $0.87 per diluted share, for the third quarter of fiscal 2008 compared to net earnings of $74.8 million, or $0.61 per diluted share, for the third quarter of fiscal 2007.
Net earnings for the third quarter were $33.9 million, or 45.4%, higher than the amount for the third quarter of fiscal 2007;
Diluted earnings per share for the third quarter of fiscal 2008 increased 42.6% over the prior year.
For the nine months ended June 30, 2008, we recorded net earnings of $306.4 million, or $2.46 per diluted share. Included in this amount is a one-time gain of $5.4 million, or $0.04 per diluted share, from the sale of our interest in a company that provides specialized operations and maintenance services. The gain was recognized in the first quarter of fiscal 2008.
Excluding the one-time gain:
Net earnings for the nine months ended June 30, 2008 totaled $301.0 million; this represents a $97.8 million, or 48.1%, increase over the prior year;
Diluted earnings per share for the nine months ended June 30, 2008 totaled $2.42, a 44.9% increase over the prior year.
Total revenues for the three months ended June 30, 2008 increased by $835.2 million, or 40.1%, to $2.9 billion compared to $2.1 billion for the third quarter of fiscal 2007. Total revenues for the nine months ended June 30, 2008 increased by $1.9 billion, or 30.1%, to $8.1 billion compared to $6.2 billion for the corresponding period last year.
Project services revenues for the three and nine months ended June 30, 2008 increased 34.8% and 36.7%, respectively, as compared to the corresponding periods last year. A significant portion of the increases in projects services revenues were attributable to the operations of Carter & Burgess. Project services revenues include revenues from design, preliminary and detailed engineering, and architectural services. These services are more prominent in the earlier phases of projects â€“ before the projects enter their construction phase. In general, we believe that the level of project services we provide clients is a precursor to opportunities to provide construction and, ultimately, maintenance services.
For the three and nine months ended June 30, 2008, construction services revenues increased by 53.1% and 22.9%, respectively, as compared to the corresponding periods last year. These increases occurred primarily on projects for clients operating in the energy & refining-downstream, oil & gas-upstream, and chemicals and polymers industries.
For the three and nine months ended June 30, 2008, O&M services revenues increased 25.3% and 27.6%, respectively, as compared to the corresponding periods last year. These increases relate primarily to higher O&M activities associated with projects for the United States federal government, particularly as it relates to government test facilities.
Contributing to the increase in revenues recognized from construction services and O&M services were higher levels of pass-through costs. As more fully explained in our 2007 Form 10-K, the level of pass-through costs included in revenues will vary between reporting periods depending principally on the amount of procurement that clients choose to do themselves as opposed to using our services, as well as on the normal, ramping-up and winding-down of field services activities. For the three and nine months ended June 30, 2008 pass though costs increased $216.6 million and $242.8 million, respectively, as compared to the corresponding periods last year.
Process, scientific and systems consulting services revenues for the three and nine months ended June 30, 2008 increased 35.0% and 29.5%, respectively, as compared to the corresponding periods last year. We continue to experience growth in the services performed under new and continuing programs for the United States federal government.
For the three and nine months ended June 30, 2008, we experienced an increase in revenues from clients operating in many of the industry groups and markets we serve, with the oil & gas-upstream, energy & refining-downstream, infrastructure, and buildings posting the highest percentage increases.
For the three and nine months ended June 30, 2008, revenues from clients operating in the energy & refining - downstream industries increased $255.9 million and $772.9 million, respectively, as compared to the corresponding periods last year. We continue to see higher capital spending for projects involving the reconfiguration and expansion of existing refineries, and addressing the effects of changing crude inputs. We expect investment in modernizing and expanding existing refineries and new refineries to continue to be strong throughout the remainder of fiscal year 2008 and beyond. We also expect to see increasing capital spending relating to clean fuel programs designed to meet stricter fuel specifications.
For the three and nine months ended June 30, 2008, revenues from clients operating in the oil & gas - upstream industries increased $68.3 million and $263.8 million, respectively, as compared to the corresponding periods last year. We continue to see strong revenue flows from oil & gas extraction projects, particularly in the oil sands area of Canada. Although such projects are sensitive to the overall price of oil, it would take a significant decrease in oil prices from current levels to have a material effect on such projects.
For the three and nine months ended June 30, 2008, revenues from infrastructure and buildings projects together increased $126.2 million and $369.1 million, respectively, as compared to the corresponding periods last year. Although the acquisition of Carter & Burgess accounted for a significant portion of the growth in revenues in these two markets, we also benefited from an increase in capital spending by various clients to improve and develop their transportation infrastructure, and for projects relating to hospitals, medical, and research facilities.
As a percentage of revenues, direct costs of contracts for the three and nine months ended June 30, 2008 was 84.5% and 84.2%, respectively. This compares to 84.8% and 85.8%, respectively, for the three and nine months ended June 30, 2007.
The percentage relationship between direct costs of contracts and revenues fluctuates between reporting periods depending on a variety of factors including the mix of business during the reporting periods being compared as well as the level of margins earned from the various types of services provided. The decreases in this percentage relationship for the three and nine months ended June 30, 2008 as compared to the corresponding periods last year were due primarily to a higher level of project services revenue, relative to construction and maintenance services, combined with higher margin rates realized on our project services activity.
Selling, general and administrative (â€śSG&Aâ€ť) expenses for the three months ended June 30, 2008 increased $81.9 million, or 40.7%, to $282.8 million compared to $200.9 million for the three months ended June 30, 2007. For the nine months ended June 30, 2008, SG&A expenses increased by $243.6 million, or 43.0%, to $809.9 million compared to $566.3 million for the nine months ended June 30, 2007. In general, the increases in SG&A expenses during the current fiscal periods as compared to the corresponding periods last year were due to the acquisition of Carter & Burgess combined with increased spending in support of the higher level of project services activities.
Miscellaneous income (expense), net for the nine months ended June 30, 2008 increased $9.4 million to $6.0 million as compared to the corresponding period last year. Included in this amount is a $10.6 million gain from the sale, in the first quarter of fiscal 2008, of the Companyâ€™s interest in a company that provides specialized operations and maintenance services.
We include in backlog the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts that have been awarded to us. Because of the nature, size, expected duration, funding commitments, and the scope of services required by our contracts, the timing of when backlog will be recognized as revenues can vary greatly between individual contracts. Our policy with respect to O&M contracts, however, is to include in backlog the amount of revenues we expect to receive for one succeeding year, regardless of the remaining life of the contract. For national government programs (other than national government O&M contracts), our policy is to include in backlog the full contract award, whether funded or unfunded, and exclude option periods.
In accordance with industry practice, substantially all of our contracts are subject to cancellation or termination at the option of the client. Historically, we have not experienced cancellations that have had a material effect on the reported backlog amounts. In a situation where a client terminates a contract, we would ordinarily be entitled to receive payment for work performed up to the date of termination and, in certain instances, we may be entitled to allowable termination and cancellation costs. While management uses all information available to it to determine backlog, our backlog at any given time is subject to changes in the scope of services to be provided as well as increases or decreases in costs relating to the contracts included therein.
Unidentified Company Representative
Thank you, Carrie. Good morning. The company requests that we point out that any statements that the company makes today 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 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 ending September 30, 2007, 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 ending March 31, 2008 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, I will pass it over to John Prosser, Jacob's CFO who will begin today's discussion.
John W. Prosser, Jr. - Executive Vice President, Finance and Administration
Thank you, Patty. I'll briefly go over the financial highlights of the quarter and then I'll turn it over to Craig Martin, our CEO for a more in-depth discussion of our... a business overview.
We'll go to slide four, the financial highlights. Clearly, this was a very strong quarter. The EPS reported, the diluted EPS at $0.87 and for the year-to-date, excluding the one-time gain, was $2.42 for the nine months. Backlog grew nicely and ended the quarter at $18.3 billion. We continue to have a very strong balance sheet and our 10-Q will be filed by the end of the week. You will be able to get the details there.
Our net cash balance as of June 30th was $496.8 million, up nicely from the last quarter. And as you've... sure you saw in the press release, we have increased our guidance for fiscal year '08 ended 9/30 to $3.15 to $3.40 per share. That includes the one-time gain that I mentioned above.
If you go to slide five, this is a tracking of our earnings growth. The top line this just shows how the trailing 12 months through June 30th compare to the fiscal year ends over the last ten years or so. The bars underneath the graph show the five year... compounded earnings growth rate. And while we historically have said that we expect to be able to grow consistently at 15% per year on a compounded rate, clearly, in the last few years, we've accelerated growth above that amount and that growth has continued through this quarter.
Looking at slide six, the backlog, very strong growth year-over-year. Also good growth quarter-over-quarter. Strong growth on the field services side, but also the technical professional services backlog continues to grow and I think speaks well of our prospects for the future.
And now with that brief summary, I will turn it over to Craig to talk about our strategies and a market overview.
Craig L. Martin - President and Chief Executive Officer
Thank you, John. Good morning. I'm now on slide seven. I want to just run through our strategies for maintaining that 15% growth in the long run sort of forever more.
And these haven't changed any. You've seen them all before. We remain committed to our business model, our relationship-based business model. We are going to continue to focus on selective market diversity, try to make sure our business is balanced across the markets. And I'll talk more about each of those in a minute.
We are going to continue to grow through a multi-domestic strategy. And our strategy has been and continues to be to follow our core clients into geographies where they need our services. That will continue to be our approach as we go forward and we will be able to do that both through bootstrap kind to investments and perhaps through some acquisitions.
A recent example of that would have been the deal we made with ZATE in Saudi Arabia to give ourselves a presence in the Middle East in Saudi Arabia to match our presence in Abu Dhabi.
So that's an area where we continue to see opportunities for growth and we are going to continue to focus on that client-driven geographic expansion.
Acquisitions are going to continue to be a part of our mix of business. Now there is lots of opportunities out there right now. It's an interesting time in the marketplace in that a number of mid-sized players have concluded that they can't compete with the global players.
We think there will be ongoing opportunities for additional growth from acquisitions. Pricing is moderating, which we also think is a good thing. And we are going to stick to our sort of standard approach in dealing with these acquisitions, buy good companies with... on basis of their earnings, pay a fair price, get a cultural match and move forward.
And then finally, we still believe that keeping your costs down is a critical aspect of being successful in our business. And we are hardly... we hardly have a day now we don't focus on making sure our costs are tightly under control. The boom we are facing today is a great thing to be in. We are doing really well. We can expect to continue to do well, but we want to be positioned for the future, whether it's as bright as it is today or not.
Moving on now to slide eight, I'll talk a little bit more about our relationship-based business model. And let me start by reminding you of the... what we think of as the industry model, that pie-chart on the right.
For the most part, our industry grew... focused on big events. And as companies in the industry got bigger, they focused on bigger events. And even today, most of our competitors are very much driven around big event projects and often big jobs in faraway places for clients that don't necessarily build every day.
A lot of this work can be lump sum turnkey. Surprisingly, in a market as robust as ours, we still see a lot of lump sum turnkey opportunities out there. Those obviously aren't opportunities for us, but they are driving some of our competitors.
Our competitors also have a mix of business just like we do. So they do some discrete project and they do have some preferred relationships. And the ratios of those numbers will vary by which competitor you pick.
But the critical point is that they are all driven by the big event. We take the opposite approach. We try to build long-term relationships with our companies... customers, sometimes 50, 60 year relationships and maintain and expand those relationships as we grow as a company.
Today, we get more than half our profitability from only 40 clients. And those are our core clients. We have preferred relationships with about 80% of our business, and that keeps our business growing steadily and keeps us in a great position with those customers regardless of where we are in the market cycle. A lot of the business we do with these customers goes on year in and year out and is really baseload business rather than big event business.
We also do discrete projects just like our compensation. This tends to be for customers we have worked for before, but with whom we have not yet developed that deep preferred relationship.
About 90 plus percent of our business today comes from customers we have worked for in the past, in the recent past in fact. And we believe that will continue.
And then we may have the occasional transactional project in backlog. It isn't a driver for our business. We couldn't care less one way or the other whether we do or not. But there are occasionally opportunities to make a little extra money or to take particular position that will result in a nice up to high [ph] for our shareholders.
So that's the business as we see it today. The relationship-based business model continues to be a strong model, and frankly, we continue to see very few competitors in our space on a global basis.
Switching now to slide 9. This is our market diversity slide, or our revenue by market. I'll take you through each of these markets to give you a sense of where we think the business is right now and where it might be going.
I'll start on the refining side; that's the downstream side of the oil and gas business, really robust business for us. As you can see right now, it's about 32% of revenue. There is lots of activity in that market. And it continues to be very robust business as we look forward. Just to kind of give you some high level statistics, there's a lot of activity in things like environmental projects. An example would be the MSAT II project. There is something like 80 of those projects out there. We estimate just that piece of business will be 6 plus billion. We have got the business... we have taken the diesel out of bunker fuel coming out... or the sulfur out of bunker fuel coming up under Marpole 4 [ph]. Our guys estimate that could be $80 billion worth of work.
There is a belief that we are going to see some changes related to alternative fuels that could drive a huge investment as well and in this case, an investment that will be made by our refining customers. We see that as another opportunity. And just to give you a sense of where the market is right now, we went through a review of prospects here in the U.S. and identified over $15 billion which were upcoming projects in the next 12 months.
So we are pretty optimistic about the refining business as we go forward. Globally, that business is very strong as well. Our guys estimate something like $195 billion worth of projects in the next few years.
Turn to the upstream oil and gas. As you know for us, that's mostly the oil sands business in Canada. It does include some work in the gas area around the world, onshore in the U.S., onshore in the Netherlands and in the UK, offshore in the North Sea.
Again, a very strong business even with the recent weakening... it's kind of embarrassing to call a move from 140 to 120 a weakening... of oil prices, we see a huge amount of investment. Again, our estimate on the oil stands alone is something like $115 billion. So we see that as a very robust market and we are continuing to see opportunities to continue to grow our business as well.
Turning to the chemicals market, another good market for us, about 13% of the business. The major CapEx in chemicals is for the most part going to the Middle East and Asia. You won't see a lot of that kind of investment in North America or Europe because of the feedstock issues. However, there is a fairly significant number of small projects and they are sort of maintenance capital... baseload capital that we talked about a lot.
One bright spot in the chemicals business is polysilicon. We have announced one major win in the polysilicon area. There are lots of opportunities out there. And we see that as fueling some of the chemicals business as we go forward in addition to what's happening in the Middle East and Asia.
Pulp and paper high tech, food and consumer projects sort of our catch all category. There is not much story here. Markets are not particularly strong. There is not a lot of activity, and we don't expect to see a lot growth out of that aspect of the business.
PharmaBio is softer than it has been. It's about like what we reported a quarter ago. There is some activity. We have a commanding market share, but we are not seeing a lot of growth in that market as we look forward right now. So we think PharmaBio will be a little slow until the pipeline picks up and we start seeing more project activity in PharmaBio.
National governments is another very robust market for us. Remember, it's driven by two parts: one is the environmental clean up market, the other is the research and development test engineering and scientific and technical consulting. Starting with the environmental business, it continues to be a good business. The U.S. business is steady. The business in the UK is continuing to grow and we expect to see additional opportunities there. There is still a number of the UK programs left to be competed or to be decided if they are not in competition. And we think we'll be able to benefit not only as a tier one contractor in that business, but at tier two and at tier three.
On the research and development test engineering business, right now, that business is very robust, particularly working for customers like NASA. We've seen a lot of activity. We've been very successful in winning re-competes. We are being very successful in winning additional business for our company. We think that will continue. There is some reason to think that in the out years, the shift of investment from Iraq to other issues may affect that business. On the other hand, the last two times we saw such a shift, we actually benefited from it. So there is not any reason, as I sit here today, to think another spending shift won't still be an advantage for Jacobs given our fairly unique position in that market.
Turning to the buildings business, about 6% of our business. Very active, some very significant wins in the last quarter. The business is growing nicely. You remember that this is technical buildings. It's buildings where the technical complexity of the program is a critical factor in whether not we are a player. We don't do office buildings or hotels or apartment complexes. So the kinds of projects we work on tend to be driven by the marketplace for those technically complex buildings, which is a little independent of the overall economy. So things there include big healthcare work and big scientific and technical facilities such as the Eicher facility in France. And those businesses look to us and remain pretty solid as we go forward.
The last aspect of our business is the infrastructure piece. Again, a good strong business for us, lots of activity there. We seem to be doing very well. There are two issues that seem to driving it. While we see some weakness in some of the states, Florida, Texas in the U.S., in terms of the money they have available to spend. A lot of that's being replaced by local bond issues, a lot of bond programs out there. The last bond cycle that we have data for, 88.9% of the bonds for infrastructure past.
There is also a lot of money coming into the system in the form of public-private partnerships and toll road programs. We just looked at a major toll road program in one of the Southern states this week that represents a huge opportunity for us as a company, all driven by tolling that freeway. I guess it won't be free any more after that.
So overall, when we look around the clock at the business, for the most part, our businesses are pretty robust. Our sales numbers are coming in good. You can see the results on the revenue line. We are exceeding our expectations for the year. We expect that that should result in some pretty good performance in the out years.
And with that, let me turn to our commercial at the very end. This is slide ten. All the good reasons why you all should... an idea of investing in Jacobs. We do have our customer diverse... customer-driven business model. It is important to us that we continue to do that. It's the core of what we are accomplishing, and it's building a terrific base business for us as we go forward. We are diversified in terms of markets, geographies and services. We are in what is a strong market still. We have got a good, solid balance sheet and we believe we will be able to maintain that 15% average growth for a long time to come.
And with that, I will turn it back for questions.