URS Corp. Q3 2008 Earnings Call Transcript

Executives

Tom Hicks - Chief Financial Officer

Martin Koffel - Chairman of the Board, President, Chief Executive Officer

Analysts

Jamie Cook - Credit Suisse

John Rogers - D.A. Davidson & Co.

Richard Paget - Morgan Joseph

Scott Levine – JP Morgan

Vance Edelson - Morgan Stanley

Steven Fisher - UBS Corporation

Avi Fisher - BMO Capital Market

URS Corp. (URS) Q3 2008 Earnings Call November 6, 2008 11:00 AM ET

Operator

Good morning and welcome to the URS Corporation Earnings Call for the third quarter of fiscal 2008. To begin, I will turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS. Mr. Hicks?

Tom Hicks

Good morning everyone and thank you for joining us. Before we get started let me remind you today's call will contain forward-looking statements, including statements about our future revenues, backlog, business prospects, earnings and financial condition, tax rates, debt payments, outstanding shares, economic and industry conditions, and other statements that are not historic facts.

Now these statements represent our predictions and expectations as to future events, which we believe are reasonable and are based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

Information about some of these risks and uncertainties can be found in our earnings release in Form 10-Q for the quarterly period ended September 26, 2008, as well as in other SEC filings. We assume no obligation to revise or update any forward-looking statements.

A webcast of this call, is available on the Investor Relations portion of our website and will be archived in audio form on the website for a limited period. With that I will turn the call over to Martin Koffel, our Chairman and Chief Executive Officer.

Martin Koffel

Good morning and thank you for joining us. In addition to Tom Hicks, the management team with me here in San Francisco this morning includes Gary Jandegian, President of the URS Division, Randy Wotring, President of the EG&G Division, Tom Zarges, President of the Washington Division, Martin Tanzer, Executive Vice President of Marketing, Reed Brimhall, Corporate Controller and Chief Accounting Officer and Sam Ramraj, our Vice President of Investor Relations.

Clearly, we have some good news this morning and we are pleased to share with you. We continue to perform very well in the third quarter. Revenues were $2.5 billion. That is an 18% increase from the combined revenues for URS and Washington Group for the same period last year. Net income was $65.8 million and earnings per share was $0.79. Our backlog in our book of business are at record levels.

We ended the quarter with a backlog of $18 billion and a total book of business of over $33 billion. Tom will talk more about our financial results later in the call including several operational items that contributed to our earnings in the third quarter and honestly much has transpired since our last call, I do not need to tell you that, including the election, the unprecedented turmoil in the financial markets, the failure of the several major banking institutions, government intervention worldwide and the loss of trillions of dollars of shareholder wealth. Given these events in the pessimistic predictions for the economy next year, it is reasonable to ask how this will affect URS going forward.

This morning we will attempt to address the topics that we know are important to you such as the change in presidential administrations and the potential impact on our federal business including our work with Department of Defense and the Department of Energy, whether we have seen or likely to see delays in major projects that we have been awarded. The outlook for state budgets, there has been so much press and media coverage of that and how they affect the infrastructure market.

The status of the planned new built of nuclear power plants, the effect of declining oil and commodity prices on our industrial and commercial business and our clients, continuing tight credit markets and their effect on URS and our customers. URS has a strong position in markets that are resuming into economic downturns, so it is been strength of our strategy. While it is too early to provide specific guidance for fiscal 2009 and we currently believe that URS will deliver revenue and profit growth next year and we are looking forward to that.

Our outlook is based on number of factors including the strength of our position as a premier E&C Company. We have leading positions in large long-term growth markets. The base of government funding that enjoy that drives more than 50% of our revenue and we feel this funding is likely to remain steady and could actually grow in certain areas. Then the fairly dramatic approval of bonding issues has been tax measures on Tuesday and the likelihood of the federal stimulus plant focused on infrastructure and I will say more about that in a few minutes.

Another factor underlying our optimism is our record backlog, in the current economic environment, we have to be realistic about the potential for our clients to cancel or delay project. As a practical matter delay is more likely than cancellations. At this point, I have said that we have not experienced any significant cancellations and we continue as we speak doing substantially new contracts of a very large size.

What I will do now is discuss each of our key markets in bit more detail, starting with federal sector, which comprises approximately 35% of our overall business.

Historically, almost all of our federal business was with the Department of Defense and that was emphasized after we bought in EG&G some years ago. While our DOD business is still growing very helpfully, it now represent less than 65% of our total federal revenues with the remaining portion coming from other large federal agencies including the Department of Energy, Department of Homeland Security, the Treasury, NASA an important new client for us and the General Services and Administration for whom we worked for decades.

The broad range of work, we performed for the US Government tends to be stable and less susceptible to political changes. The work includes support services for the elimination of weapons of mass destruction and they are growing threat reduction market, which is a global market. Maintenance and repair of military vehicles and other equipment, increased support for large long-term program such as the Base Realignment and Closure (BRAC) program and the Global War on Terror and the operations and maintenance of complex military installations and test ranges and base operations in technical support services, for federal civilian agencies.

We are seeing continued strong demand in all of these areas. Our DOD business continues to benefit from stable funding and the federal government is continuing focus on outsourcing. Our defense spending comes from both the baseline budget and supplemental appropriations to fund the military operations in the Middle East.

In September, President Bush signed a $488 billion baseline defense budget for fiscal 2009, which began last month and ends on September 30th, 2009. This budget includes funding for the programs most important to URS including $153.5 billion for O&M programs, and that is a 8.7% increase of the fiscal 2008.

$1.5 billion for chemical demilitarization funded at the same levels as fiscal 2008, $13.5 billion for military construction, that is a 5.9% increase from fiscal ’08 and $8.75 billion for BRAC, which is an 8.8% increase from fiscal ’08. In addition, Congress has approved to so far $65.9 billion in supplemental appropriations for Iraq and Afghanistan in the current fiscal year ’09.

That includes almost $55 billion for O&M programs, the work we do. We expect additional O&M funding early next year when the new administration submits its final supplemental defense appropriation bills for 2009. It requires the supplements to round that up.

Now that the 2009 defense budget has been enacted, we think it is unlikely that the new administration will reopen the budget debate or may cut to existing programs. More likely the new administration will focus on the fiscal 2010 budget and in fact there are earlier indications which I am sure you have seen that the baseline budget will be increased and combined with the supplemental appropriations to form a single integrated budget. The Congress will pass, a single number obviously substantially larger than last year.

Although President-elect Obama has stated that he would withdraw combat troops from Iraq within sixteen months. He has also stated that he commit approximately 7,000 additional troops to Afghanistan, essentially expanding US forces there by a third. Furthermore, Senator Obama appears to be supporting the current goal to increase the size of the army in the Marine Corps. More, we believe the new administration may re-prioritize some DOD expenditures particularly large platform procurements.

We do not expect O&M programs to be significantly affected. We also anticipate that the new administration will increase spending for other federal civilian agencies providing opportunities for URS to further diversify our federal government business. The other major portion of our federal sector business is with the Department of Energy and our work there includes operations, construction, technology support and environmental remediation at 13 major sites associated with complex nuclear programs including of course the National Laboratories.

Our contracts are funded long term work commitments are focused on the remediation and disposal of radioactive waste and providing support for the operation of DOE facilities. The continuing resolution approved by Congress in September, provides $10 billion for DOE through early March. Almost all our DOE revenues come from three federal programs, environmental management, The National Nuclear Security Administration and the office of science.

These are funded at fiscal 2008 levels under the continuing resolution. We believe that the new administration will continue to support these programs at the same level for the remainder of 2009. As you know, we have also been very successful in extending our nuclear remediation and operation management business to other countries, whether to increase focus and funding for this effort.

We discuss in August that a URS led team was selected by the United Kingdom’s Nuclear Decommissioning Authority, the NDA as it is called for a long-term contract to manage and operate the Sellafield nuclear complex in the North of England. This is one of the largest contracts ever awarded by the UK government. The transaction will be completed later this month and we will transition to full management of these sites as early in 2009.

We have also continue to win significant nuclear management assignments here in the United States with the Department of Energy. The last week, the URS led team was selected to manage the Yucca Mountain high-level waste repository project in Nevada. Under this new contract URS will managed a scope of work valued at approximately $2.5 billion over 10 years, if all the options are exercised, and the transition for that will commence in January and we will be fully operational by the end of March.

I should also note that, on October the 1^st URS began providing a range of technical services at the Kennedy Space Center. I am very pleased about this. New client and new contract and under this arrangement URS is providing critical support services for shuttle launchers as well as and transition activities for the new constellation space program. The contract has a potential value of $1.5 billion over ten years and you will be interested to know that it will utilize the resources of the EG&G in the URS and the Washington Division.

It is a typical contract where we are operating as a single company, tapping the resources of all three divisions. At the end of the third quarter, our total federal sector backlog was $10.3 billion. Now in the commercial power sector, which comprises approximately 18% of our total business and URS provides the full range of engineering procurement and construction services for power plant.

Currently about 85% of our power sector business is from emissions control and retrofit project for power plants. Most of these projects are driven by regulatory requirements essential to keeping the plants operational. As a result, they are least likely to suffer from cut backs or delayed in capital budgets by our customers. Our backlog in power was $1.9 billion at the end of the third quarter. We won several new contracts, including a second strategic alliance with the Tennessee Valley Authority, the TVA, to provide emissions control services for coal-fired power plants. The new contract has a funding limit of some $3.7 billion, and that includes engineering, procurement, construction, and commissioning.

Now while we can not place a firm timetable on the development of new nuclear facilities, the licensing and regulatory process continues to progress. The Nuclear Regulatory Commission, the NRC, has received thus far 18 applications to construct 27 new reactor units, and by the end of 2010, the NRC expects to receive 23 applications for a total of 34 units.

Now through the partnerships with General Electric, Hitachi, and with Mitsubishi Heavy Industries, the URS is aligned with six of the utilities that submitted applications, and we believe we are well prepared and well positioned to capture the EPC work for several nuclear plants as these projects move forward.

Turning now to the industrial and commercial sector, which represents approximately 29% of our business, and includes our work for the oil and gas, industrial, and manufacturing, and the mining industries. Approximately two-thirds of our revenue in this sector comes from environmental, O&M, and facilities management services that we provide to our customers. A significant portion of this work is delivered through our long-term Master Service Agreements, or MSAs, with large multinational corporations.

Because these projects support ongoing plant activities and help companies meet regulatory requirements, we did not expect them to be sensitive to downturns in the economy. The remaining one-third of our industrial and commercial revenue comes from new capital projects in oil and gas and manufacturing as well as in contract mining. As you would realize, oil and gas is not a big part of our business accounting for only about 8% of total revenue. This was more susceptible to lower commodity prices and to some extent tightened credit market and that said we are in constant communication with our clients and to date we have not seeing any significant change in capital programs that would affect URS’s business. At the end of the third quarter, our backlog in the industrial and commercial sector was $3.3 billion.

Turning to the infrastructure sector, which comprises approximately 18% of our business. At the end of the third quarter, our infrastructure backlog was $2.5 billion. We of course are closely watching individual state and municipal budgets and based on the latest analysis, 27 states are projecting budget deficits and includes all the large states totaling more than $15 billion in fiscal 2009. However, as we mentioned on prior calls funding for infrastructure work is much more diverse than ever before and this has made our business less dependent on general fund spending.

Infrastructure projects increasingly being supported through bonds and other alternative financing sources. Based on current projections the 2008 will be the second largest bond issuance year on record despite the weakness in financial markets. During the first ten months of this year states and municipalities sold approximately $340 billion of bonds. The majority of these were to support infrastructure including upgrading education and healthcare facilities and improving our highways. All strength for URS and all markets to which we have good access.

Now our preliminary analysis from the voting on Tuesday is very encouraging. In the 13 states that are most important to us, voters approved nearly a 170 infrastructure measures, totaling more than $43 billion. The final results are likely too high and that does not include all of the bonds approved by cities, counties and municipality, a large number on top of the results.

In California, voters approved more than $34 billion in bond proposals including approximately $20 billion for education facilities, and $10 billion for the states high-speed rail project. Last year, two URS joint venture were selected to provide $170 million of engineering and planning services for California's proposed High-Speed Rail Link that is the link from Northern California to Southern California.

The passage of the bond measure will fund these assignments and beyond that move the project forward. In Texas, more than $2.5 billion in infrastructure bonds were approved to fund transportation, education and healthcare facilities. It is a constant theme through all the states, transportation, education, healthcare. All markets to which, we have good access. In Pennsylvania and Ohio that is combined to pass over $3 billion in bonds to fund water, waste water and transportation projects.

In addition to the bonds measures, municipalities around the country approved dedicated tax measures to support infrastructure programs. This included notably a $0.05 sales tax increase in Los Angeles for transportation programs and an $18 billion program to expand regional transit in the State of Washington.

As I comment on the Los Angeles sales tax increase, that required voter approval of 66 and two-thirds percent and it ensures you the real momentum that the public has the transportation improvements when in a city like Los Angeles on a edge of a recession, they will get a 66 and two-third majority vote for sales tax increase specifically the transportation projects. We think that theme is repeated across the country.

Our federal, the support for infrastructure also remains strong. The congressional leaders are considering a $250 to $300 billion economic stimulus package which could include up to $75 billion for infrastructure programs. As lawmakers draft a legislation, I will learn more about the details of the package which will dictate precisely when and how the funding will be made available.

I am assuming the package moves forward, will provide significant support for the infrastructure market. Important thing about that is not a federal matching program. Its direct funding by the US four projects that occur in the States. They have to be identified and commissioned within a 120 days and the money has to be spent within 12 months. We are well aligned with those projects.

It is based on specific identified projects and it is built in the bottom ups, so we are obviously very interested in that program. In addition to federal actions, several states are beginning to pursue their own stimulus measures. For example in Florida, the governor recently announced a stimulus package that would accelerate more than $1.4 billion of transportation projects and last week, the Texas Transportation Commission announced the $1.8 billion bond sale to fund highway projects across Texas.

Now looking at our business as a whole, we believe URS will continue to grow despite the challenging economic environment. We have utilized the combined resources of all three of that division to win a record amount of new work and in particular very large projects. In addition to the awards that I mentioned earlier, some of the large contracts we have won include $879 million contract with a Federal Intelligence Agency to replace and modernize power infrastructure, $600 million contract to upgrade the air quality control system at the We Energies and Currant Creek power plant, a $153 contract assignment to provide operation supported NASAs Martial Space Flight Center and $125 million contract to provide construction services at Williams Willow Creek Gas Processing Plant and $120 joint venture assignment to replace two steam generator and reactor vessel head at Waterford 3 Steam Electric Station.

Before I turn the call over to Tom, I should say a few words on the company’s continued financial strength during the current credit crisis. Our business continues to generate more than sufficient cash and negating the need to access the credit markets. Our bank credit remains intact and is fully prepared to provide us access to our existing credit lines, which remains undrawn. We have intensified our traditional focus on receivables management. It is part of our culture, as you know. In addition, we have more than 50% of our revenue coming from government sources and most of the remainder from Fortune 500 Companies or regulated utilities, our cash flow remains stable and very strong. With that I will invite Tom Hicks to speak.

Tom Hicks

Thanks Martin. Let me begin with our third quarter results, our revenues for the quarter were $2.59 billion and that is 18% increase from the combined revenues of URS and Washington Group in the year ago period. This consisted of revenues of $912 million in our federal sector, $776 million in our industrial and commercial sector, $456 million in our power sector and $444 million in our infrastructure sector.

Net income for the quarter was $65.8 million and earnings per share were $0.79. As we have discussed on prior calls, the results of the new URS will be less evenly distributed over the course of the year. Previously most of our revenue and earnings were derived from labor base contracts and our quarterly financial results tended to be relatively stable.

On today, because we have a larger number of contracts based on project delivery and more pronounced seasonality. We will have much more variability from quarter-to-quarter and as a result, we believe it is more appropriate to look at the expected annual performance of the business, rather than extrapolate from a single-quarters' results.

This variability was apparent in our third quarter results, which were positively impacted by several items including higher performance based fees and incentives on various projects performed by the Washington Division and including a $17.7 million of pretax earnings of a DOE nuclear waste processing facility contract.

Performance-based, awarded and incentive fee recognition on several EG&G projects. We continue to generate steady, positive cash flow and for the quarter operating cash flow was $64 million because of our continued strong cash flow, we were able to make two small acquisitions. We purchased 1 million shares of URS stock and paid down approximately $70 million of bank debt during the third quarter.

The total amount of debt we have repaid since the Washington Group acquisition, is now approximately $295 million. DSO or day sales outstanding were 66 days at the end of the quarter, and that is down from 88 days at the end of 2007 fiscal year. Interest expense for the third quarter was $21.4 million, our tax rate for the quarter was 41.9%, and fully diluted weighted average shares outstanding for the quarter were 82.8 million.

Now as you know, we report separate financial information on our three business segments, the URS Division, EG&G Division, and the Washington Division. For the third quarter, the URS division reported revenues of approximately $840 million, and operating income of $60 million. The EG&G division reported revenues of $607 million, and operating income of $42 million. Washington division reported revenues of $1.2 billion and operating income of $62 million.

Finally, our capital expenditures continued to be very modest relative to our revenues. Our CapEx, excluding equipment purchase through capital leases was approximately $17 million for the quarter and now totals 62 million year-to-date.

As part of our expanded financial reporting, yesterday’s press release contained a detailed description of our book of business, including backlog, designations, option years, and Indefinite Delivery Contracts or IDCs. As Martin noted earlier, we ended the third quarter with a record total book of business of $33.1 billion, and that is up from $28.8 billion at the end of last year, an increase of 15%.

Backlog, which is the largest component, was $18 billion at the end of the quarter, and that is up from $17.7 billion at the end of last year. The best financial indication of our future prospects is our book of business. The overall growth in the book of business, our continued success in winning new contracts, and our government and Fortune 500 client base, all combined to provide us with confidence as we begin 2009 and beyond.

With that I will turn the call back to Martin.

Martin Koffel

I should conclude the prepared portion of the call with guidance for fiscal 2008. We continue to expect that federal sector revenues will be between $3.3 and $3.5 billion and the infrastructure revenues will be between $1.7 and $1.9 billion. We now expect that industrial and commercial sector revenues will be between $2.6 and $2.8 billion, and the power sector revenues will be between $1.8 and $2 billion. Our revenue expectations for the industrial and commercial and power sectors have changed since our last call. The decrease in power sector is due primarily to change in the way we account for joint ventures which we described on several previous calls.

Based on these assumptions, we continue to expect that consolidated revenues for 2008 will be approximately $9.8 billion. Based on our performance through the first three quarters of the year, we are raising our full year guidance as you saw in our announcement. We would now expect that net income for 2008 will be between $215 million and $223 million and that earnings per share will be between $2.60 and $2.70 on a fully diluted basis. We also expect that net interest expense will approximately $90 million. That our effective income tax rate will be approximately 42% and that the number of weighted average share outstanding used to calculate our EPS will be approximately $83 million shares.

In summary, we are obviously pleased with our performance over the first nine months of the year and we are confident in the outlook for the remainder of this year. We have created over the past several years and I think commenting the last 12 months we have created E&C Company with exceptional expertise and it is strategically positioned to capture opportunities across all our markets. While the current economic environment may have some impact on our clients, we believe the long-term fundamentals in each of our markets remain strong. As an ongoing commitment to defense and to environmental spending, a growing needs to meet energy demands and strong support, as we have seen and certainly reinforce on Tuesday for infrastructure programs.

We believe the fundamentals underpinning our business including the strong backlog that Tom has taken time to explain, will allow us to continue delivering solid results and with that, that concludes the prepared remarks and we will open the call up for your questions. Tania?

Question-And-Answer Session

Operator

(Operator Instructions) Your first question is from Jamie Cook from Credit Suisse.

Jamie Cook - Credit Suisse

Hi, Good morning and congratulations.

Martin Koffel

Good morning, Jamie

Tom Hicks

Hi, Jamie.

Jamie Cook - Credit Suisse

I guess my first question, Tom. If I look at how the years has progressed or Martin, as the years progressed with your execution on the profit front. I mean, your margins year-to-date are trending much better than I had anticipated in the 5% range or so, where I thought, would be slightly lower than that. I understand throughout the quarters, puts and takes as a favorable close out or that will impact the business but that should happen every year.

I guess, as I look at over the next twelve to eighteen months, is there any reason why to think I shouldn’t take, is there any reason why to think I shouldn’t assume these profitability levels can continue going forward and as you hit a recession or there are any areas of the business that will come under more significant margin pressure that I should think about.

Tom Hicks

Well, there is a bunch of moving parts in the answer, Jamie. You're right to point that we did have and we've pointed out and you highlighted that our margins are going to move around quarter-to-quarter given that we have more project-based businesses and things get awarded recognizing performance over prior periods, then they come all at once and we don't recognize those until they get decided.

I think we've told you prior calls that we're pushing hard to increase our margins in all the divisions, but I wouldn't take this quarter as an indicator that we're going to be able to sustain this level. I mean, I think we're pleasantly surprised, we've made some progress across the Board in margins. But we are entering a period of a little bit of uncertainty and we're seeing very intense competition across the Board, which we always do.

But I think the best thing to tell you on margins is to wait until we tell you about '09. As we roll-up our plans for next year, one of the big factors we have is, we have as you know, several of our contracts are accounted for is either on a JV basis or the agency basis, which means that we recognize the profit on the contract, but not the revenue.

Obviously that's going to have a significant impact on our profit as a percentage of revenue. So the bottomline is, I think, our margins are getting better. How much better and what you could model for going forward, I think you need to wait a little bit till we understand how '09 works.

Jamie Cook - Credit Suisse

Okay. Then I guess just a follow-up question to Martin, one of the big theme, I think that will occur in 2009 is the potential stimulus pill, I mean the impact that has on your infrastructure sector. As you look out, I mean how long before assuming the stimulus will get implemented some time early 2009, how long before you think that could impact your business? Do you feel comfortable with your current resources or do you feel like you would need to hire additionally to take advantage of the opportunity on the highway infrastructure side?

Martin Koffel

Let me just go through this structure. We have a strong infrastructure backlog at this time that would give us momentum without the stimulus packaging and without the bond offerings. The first layer of it where we're attracted to with bond offering because they are certain and there is no political variability in that.

On Tuesday night, Jamie, it's pretty astonishing. We track every bond offering in the country. We have team on this up all night literally tracking out something new the next morning. But we had our own predictions, but it exceeded it. The will of the voters on this is quite extraordinary, so that's going to be a big factor.

In addition to the 43.2 billion of state bond initiatives, the total of initiatives by cities, municipalities exceed that. There is another $70 billion. So we've got more than a $100 billion of bonds coming in. The economic stimulus package that was announced by speaker Lucy was $250 billion to $300 billion of which $75 billion for infrastructure.

Funding has to be obligated within 120 days of enactment, that's enactment of the bill and actually spent within the year. As I said in the call, no state matching, so the nones and nons of bureaucracy point be involved in that. I think that we should have information on the number of identified projects carried. There are 3000 projects on which the $75 billion stimulus infrastructure portion, the stimulus package is based. There are 3000 projects ready to go.

So I think, we file first on the strong backlog we already have, we file second on the funded bonds that $340 billion that occurred through October. We file a third on the new bonds and then if Congress does what we expect, we file a fourthly on the stimulus package. But only looks pretty good for us.

The other, Tom just reminded me the other issue of the sales tax initiatives. The events in Los Angeles were extraordinary. It took as I said 66 and two-thirds in the vote. A lot of the infrastructure projects linked West Los Angeles with the Ocean and the Valley was politically against it, but it carried. Those are host of programs down there. We are very strong in Los Angeles, but we are involved in a lot of the projects for the(inaudible).

So that looks good also. Your last question was about hiring and Gary Jandegian, who is President of URS Division is here and I will ask Gary to comment on that.

Gary Jandegian

Hi, Jamie.

Jamie Cook - Credit Suisse

Hi.

Gary Jandegian

Obviously, we're going to need more engineers in constructions services, employees. We've done a real good job of recruiting. We actually have increased a number of in-house recruiters over the past couple of years. There is going to be labor available out there and we've got signature project and with a stimulus package there is going to be more projects to attract good employees to URS. We've been hiring at a good clip throughout the last few months, and we see no reason why it shouldn't continue.

One of the other reasons we're very optimistic about a stimulus package and what's happened on Tuesday night is the fact that we're very close to our infrastructure clients. We have offices in every major metropolitan area. We have offices in virtually every state. So we're right in the backyards of the municipalities and the state agencies that are going to be the recipients of the funds, and spending the money. We have strong relationships with all of those clients, particularly in our 12 key states.

Jamie Cook - Credit Suisse

Thank you very much. I'll get back in queue.

Tom Hicks

Thanks, Jamie.

Operator

Your next question is from John Rogers with D.A. Davidson.

John Rogers - D.A. Davidson & Co.

Morning.

Martin Koffel

Morning, John.

Tom Hicks

Hey, John

John Rogers - D.A. Davidson & Co.

I was wondering, given the decline in the market for all of these stocks and yours as well, I guess, Martin, what do you think about it in terms of another big transaction?

Martin Koffel

Now, why would you ask that? The way forward for URS has always been strategically driven, focused on markets where we'd like to build our presence, and we've doubled ourselves five times in the last decade and a half, and used leverage and pay debt back. We've also grown organically, and we've grown with small tactical acquisitions that we announced, but we don't have a lot to say about.

I think there are some very good opportunities for us at the tactical level at this point. I think I am a bachelor degree and always have our eyes open for a significant opportunity. We've not been in that posture. Of course, the economic condition and the capital market I think are real factors at this point. I don't think anyone would want to see us churn that stock around as currency at this stage with levels so depressed. But I think they'll be more consolidation in the industry particularly globally. There are portion of our business that undeveloped relative to those that are fully developed. We are ambitious and opportunistic.

John Rogers - D.A. Davidson & Co.

In terms of just market areas, where you're not would be of interest, now who knows if the opportunities is there or not. What would those be at this point?

Martin Koffel

Well, we said consistently that oil and gas is the least developed significant domestic sector for us. Regardless of oil being $60, $70 a barrel and everything else going on, in the long run I think this company fully rounded out should have a much stronger presence in oil and gas.

The other thing which I think we've commented on and we've been questioned about a lot is that, we are largely a domestic company and 90% of our revenue and probably more of the profit is generated domestically. Some significant portion of the international piece is actually for the US Federal Government. So the international piece will lowered some almost $1 billion in revenue, is not large compared with our peers. I think in the very long run you don't want see us balance globally because you think our largest multinational client is not one of the oil companies or manufacturing companies, it's actually the US Federal Government. We are committed to following them around the world and we do that very effectively. There has been enormous consolidation in our industrial clients. So I think having more capabilities on the ground outside the US also lies in our future.

John Rogers - D.A. Davidson & Co.

All right. Thank you

Operator

Your next question is from Richard Paget with Morgan Joseph.

Richard Paget - Morgan Joseph

Good morning everyone.

Tom Hicks

Yes Richard, how are you?

Richard Paget - Morgan Joseph

I want to get back to the infrastructure, I mean you guys put out some pretty big figures out there. What is your confidence and the ability of the DOT's to actually process and get this work out there? I mean, in the past, sometimes we have seen some big number but then the kind of bottlenecks that occur with letting us work has happened. There are lot of peoples who have been getting very enthusiastic about some big numbers out there. What realistically is the pacing that this is actually going to get spend?

Martin Koffel

Yes, that’s a very fair question. In the past time, the federal money has come through these highway matching funds through Safety Lou, Ice Tea and so forth. They involve matching funds for the states, so the states have to identify the programs and the state has to be liquid for its 20% or so and the federal money comes in and then sometimes the full amount doesn’t get spent and that can be a slow process.

Although I must say we have done, pretty well on the projects. The new stimulus package structure is something that we haven’t experienced before. Its direct expenditure by the Federal Government on infrastructure projects in the states. I mean, the Federal Government except for military infrastructure and a couple of agencies like the FAA is not a direct underwriter of infrastructure projects. It's always done through matching fund, so this is a whole new thing.

We mostly got a change of the administration, so the agencies that will be responsible for this have to re-staffed but there is a real political will to do this and Congress, I think for politic and economic reasons, is determined to have it. I think the provision that's being discussed, that the funding would have be obligated within 120 days of enactment and spent within 1 year with no matching money, makes us a bit more optimistic but I mean you’re actually right to raise that question. We haven’t seen anything like this done before.

Richard Paget - Morgan Joseph

And then –

Martin Koffel

There is no staff reduction at the state DOTs' at this point and they have robust procurement programs, so there is reason to be confident that this will work.

Richard Paget - Morgan Joseph

Then you can mention about 3,000 projects that they year marking. What, I mean, is there any general sense, these are larger ones, is it, are they a bigger pool of smaller ones or is there any way to generalize or it's just up and down the Board.

Martin Koffel

We give Gary back.

Gary Jandegian

Richard, I think they’re just across the Board but they cover everything from transportation, roads, bridges, transits, multimodal transit where you have bus, light rail and commuter rails, combinations, everything from small projects to large projects. This 3,000 came from Ashtos inventory of projects that were ready to go on the shelf. They could be started within 90 to 120 days and they are identified projects but they are across the Board, a lot of treatment systems et cetera.

Richard Paget - Morgan Joseph

Okay, and then in the queue, I think you guys mentioned something about the stock price. If it’s, sustained or lower levels, you guys might see a material amount of impairment on goodwill. What are kind of the triggers there and what, I guess, what's the magnitude of material here?

Tom Hicks

Well, as you know, in doing that assessment one of the elements of that assessment is your public valuation. Ourselves like almost every other company that's traded publicly has gone through a severe contraction evaluation, so we are as we do every quarter we’ll take a look at that and make that assessment using outside advisors to help us. But at this point, it’s something we are watching and cautious about it if we continued on downward trajectory it would be more a serious problem. At this point we don’t have an issue as we said in our filings, but we thought it was prudent to at least people that if stock prices remains extraordinarily low that could be an issue for us.

Richard Paget - Morgan Joseph

Okay, and then water on that topic, I mean does that change your philosophy of stock buybacks. I know the program has been in place to kind of offset any grants out there I mean would you step it up at these lower levels.

Tom Hicks

Well we continue to think that we have greatest investment opportunities in the market not just working capital needs to fund the growth that we see coming forward. But also some niche acquisitions and other activities like that and we think it’s appropriate at this time to stay with our million share kind of ceiling that we have and agreed to with our credit group. Of course if our stock plunged dramatically and stayed down for a long period of time and we have lot of excess cash. We might have to reconsider that but as of right now our policy is to stay with the million share limit.

Richard Paget - Morgan Joseph

Okay, thanks. I’ll get back in queue.

Tom Hicks

Thank you.

Operator

Your next question is from Scott Levine with JP Morgan.

Scott Levine – JP Morgan

Are you able to talk a little bit about pricing on the business and engineering, on the engineering side of the house. Whether you have seen any change in asphalt pricing levels and maybe talk a little bit about, what your expectations might be if we get the bearable case of the economy. Where your expectations might be on contract pricing for engineering services and in what parts of the business, you might expect the most and or a least sensitivity to slowing macro conditions.

Tom Hicks

It's Tom. Scott, I will let Gary Jandegian talk about that.

Gary Jandegian

Hi, Scott. I mean we've been really focused in all three divisions on pricing getting the best prices and that we can and in the markets and in given the scale of our company and our relationships with our clients. But, we actually have either held prices or improved prices slightly throughout this. We haven't seen any clients coming back to us, asking for significant price cuts and I think things are going well. We typically, our margins are holding pretty well. We're renewing contracts now and we're not seeing it. Now if you get into one off projects where there is 20 competitors. You're going to have to sharpen your pencil but those aren't the types of competitions that we're entering in, in the new URS so things are going real well.

Martin Koffel

I am going to ask need to ask Tom Zarges, President of the Washington division to make additional comments.

Tom Zarges

Well I'd simply add that most of our competitions are more value based competitions that is the efficiency of the work product and the value of total constructed cost in projects against budgets and so there hasn't been much specific pressure on engineering unit costs per say. It's more I think related to the value added in engineering and the ability to deliver results and of course we've been in a market that's been so much constrained by top engineering talent.

I don’t know that we’ve ameliorated that entirely yet, and still there is a lot of pressure in demand for engineers in the market. For example, there are a number of specific areas where the shortages will likely persist, whether they are in oil and gas, or whether they are in nuclear. Those two areas certainly are always high right now, so it’s a great time to be a young engineer graduating from college; looks like there’s a good long-term stretching out of this.

Martin Koffel

So all this is predicated on an assumption of that we’re now entering a recession; it may be a long recession, it maybe a deep recession. But yes, none of this takes into account that there is a very remote possibility that we could get into a period of deflation. This is a hypothetical discussion because that’s not what the economists are talking about. I think the situation in which you’d see real pricing pressure on us is if our customers lost price leadership themselves due to an actual price deflation across the economy. Then, like everyone else, we’d have to deal with that but we’d be looking at wage and salary deflation at the same time. I think that’s another whole scenario that I don’t think is prominent in public thinking at this point.

Scott Levine – JP Morgan

Okay, so it sounds like it's probably well too early to start thinking about things like that here, impacting the numbers in the near-term?.

Tom Hicks

That’s right.

Scott Levine – JP Morgan

Okay. Additional question on infrastructure; you guys have mentioned in the last couple 10-Qs that rising material costs have kind of sapped the project per dollar of available funding support. What are you seeing along those lines recently? You started to see some easing up there, or is it not really impactful at this stage?

Tom Hicks

Well we expect to see something like that obviously; we were affected by it on the upswing of commodity prices, but I don’t think we see any material impact yet of the reduction in commodity prices. It takes a while for that. It's little bit of one-way ratchet as you might expect. It's hard for it to go the other way.

Martin Koffel

To the extent the question was commodity prices causing more available dollars to be taken out, and therefore, less projects to be funded. I think the bond initiatives and the sales tax initiatives, I mean even if that were to continue and I actually think it's probably going to reverse. Even it were to continue, I think we've got an additional layer of funding here. Even in the year there was quite of concern I suspect that at this point it's abating.

Unidentified Analyst

Okay. One last one, if I may, on this fence, you mentioned potential longer term shift in priorities from this administration, but no impact anticipated in your defense related businesses. Is it too early to think about what type of priorities and maybe get a little bit more specific on what you might anticipate over, called it, a three to five-year time horizon there given what you know now?

Tom Hicks

I think we all are looking at each other around the table and I think it's way too early to make any kind of assumptions about that other than administration always have different priorities. Democrats have not traditionally been the group that comes in and cuts spending across the Board. They shift spending from different places to other places. So it's really early and you'll have to watch.

Martin Koffel

Some of the early comments, they have to very careful with transition team not even in place, but there have been comments that the baseline DOD budget without the supplements in '10 could increase $58 billion over the $488 billion baseline budget in '09. But at this point, I think you have say, who knows. I need the kind of projects that will come under fairly rigorous review. They are really high-tech global communication system, the satellite-based systems and so forth.

Perhaps some of the weapons platforms and I think there are opportunities for people to think about, how many of the Joint Strike Fighter are needed and so on. There has been a lot of talk about hardware programs being reviewed. But more importantly to us, we don't think that the line items would affect us, the O&M and technical services really will be affected.

Remember that we've got a great diversification. 60 something percent of our business is with DOD, but then, we're well-established with NASA, probably with Homeland Security, the IRS, Treasury, various intelligence agencies, the Department of Transportation and of course the BPA. Then, there is the threat reduction programs around the world, which is sponsored and funded by the US.

Expansion of technical services for various international agencies and then the other big thing which is driving and is the forward basing of equipment and personnel into the whole movement from the west to the east of US bases and the closing of bases. So that transformation of the military that is enacted by or not enacted but introduced by Secretary Rumsfeld is still well under way.

Unidentified Analyst

Great. Thank you.

Tom Hicks

Thank you.

Operator

Your next question is from Vance Edelson with Morgan Stanley.

Vance Edelson - Morgan Stanley

Thanks, good morning. In terms of upcoming nuclear wars, could you just remind us the dynamics of the likely split between you and your two principal competitors? Any reason that you think you have an edge or do you think that the business will be fairly evenly split given the capacity constraint of each contract? Thanks.

Tom Zarges

This is Tom Zarges. Yes, it's an excellent question. Obviously the market is not completely resolved yet. Applications are still being filed and still being filed at good pace. We are involved in alignments with some of those technology providers and our competitors are aligned with others. We are particularly aligned with the General Electric and Mitsubishi technologies and of the 18 power companies that have filed part 1 application. We are involved in six of them.

We're also involved in some of the front end work to support their application for (inaudible) and for COLA, but we're also involved in a design certification for those reactive technologies. So it's a fairly complete involvement right now. Some of the early movers, of course, are applying for the federal loan guarantees. Right now, there are about $18 billion in federal loan guarantees that are authorized.

So probably enough to care about the first three plans. So I'm clear whether more money will be authorized to do that program if possible, but we are involved in certainly one of the front runners for those applications. So I can't comment very well on what our competitors are doing except they have similar involvements to us but that's the extent of what we're doing and it continues to move at a pretty strong pace.

Vance Edelson - Morgan Stanley

Okay. Thanks for that and sticking with the nuclear it seem, Martin you mentioned the long-term desire to become more international. It would seem like putting your nuclear expertise to work abroad, continues to make sense. Could you just update us on your growth opportunities there in that respect? Thanks.

Tom Zarges

Well, the technology that we're using for nuclear cycle is pretty extensive. We're involved not only in some of the mining initiatives around the world, more particularly we're involved in Western Europe and in the UK as you know, where we've got two of the first and largest contracts led by the UK government through the NDA as they privatize.

Normally the operations of many of their nuclear complexes but also the remediation and the cleanup of those complexes. As Martin said, the two (inaudible) they are the low level waste repository in the Sellafield Complex, which encompasses both fuel operations as well as remediation from the legacy weapons program there.

There are other programs in the UK. There are about half let to date, which will include handling of their Magnox reactors in other sites in country. We'll obviously be involved in those competitions and there is a number of discussion going on with European countries about their own level of nuclear repositories. We're obviously one of the world leaders in that technology here in the States and now by virtue of our contract in the UK as well.

So we're involved in a whole host of opportunities that involve nuclear technologies advanced by us here in the States and now eminently exportable to other countries.

Vance Edelson - Morgan Stanley

Okay, thanks a lot.

Operator

(Operator Instructions) Your next question is from Steven Fisher with UBS Corporations.

Steven Fisher - UBS Corporation

Hi, Martin, you mentioned that 85% of your power business relates to retrofits and your backlog is up nicely. As you look over the next year, are there enough prospects that are your bidding like you could grow that backlog at healthy pace?

Martin Koffel

Well, I think we said 85% relates to environmentally mandated projects and retrofits. And as the backlog?

Tom Zarges

It is and there are many more programs to go. As you may know, we have a whole series of alliances with a number of utilities to take care of their fleet emissions controls programs. Really we're just at the beginning of the authorizations of many of those large scale alliances. We've mentioned, for example, [TVA], which is a substantial alliance for back and emissions control retrofits.

We've simply authorized the first of what will be several large scale programs for them. We also have our recently one program with Mid-Western Utility for a fleet order. So while we're talking about our backlog, our alliances include budgeted amounts that are much in excess of our backlog that would be authorized.

Steven Fisher - UBS Corporation

Great. Thank you.

Operator

Your next question comes from the line of Avi Fisher from BMO Capital Market.

Avi Fisher - BMO Capital Market

Hi. Good morning. Thanks for taking my questions. URS segment infrastructure $444 million in the color in the 10-Q, you cite strong demand for flood control. How much of that may have been through Iowa or Mid-Western flooding? Also how much of that, was associated with the border fence construction for the DHS?

Martin Koffel

We'll let Gary Jandegian respond to that, as a Head of the URS Division. Gary?

Gary Jandegian

Yes. Regarding the flooding in the Iowa area, we did some work for Wisconsin Energy and response to that. But it wasn't a big revenue producer for us and the border fence work, we're not involved in.

Avi Fisher - BMO Capital Market

So I guess that work was in New Orleans in California.

Gary Jandegian

Right. We're significant participants in the levy repair work that's going on in California throughout the Central Valley. We are the leading contractor to the California Department of Water Resources. The core of engineers as well as you know down in New Orleans, and more recently in the Gulf Coast in response to hurricanes Ike and Gustav, we’re involved in repairing flight control structures for both the core and local agencies.