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URS Corp. Q4 2008 Earnings Call Transcript 1 comment

March 04, 2009 | about: URS

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URS Corp. (URS)

Q4 2008 Earnings Call

March 04, 2009; 11:00 am ET

Executives

Martin Koffel - Chairman & Chief Executive Officer

Thomas Hicks - Chief Financial Officer

Gary Jandegian - President of URS Division

Randy Wotring - President of EG&G Division

Tom Zarges - President of Washington Division

Martin Tanzer - Executive Vice President of Marketing

Reed Brimhall - Corporate Controller & Chief Accounting Officer

Sam Ramraj - Vice President of Investor Relations

Analysts

Chase Becker - Credit Suisse

Alex Rygiel - FBR Capital Markets

Vance Edelson - Morgan Stanley

John Rogers - D. A. Davidson

Richard Paget - Morgan Joseph

Scott Levine - J.P. Morgan

Joseph Ritch - Goldman Sachs

Andy Kaplowitz - Barclays Capital

Andrea Wirth - Robert Baird

Greg Macosko - Lord Abbett

Steven Fisher - UBS

Avi Fisher - BMO Capital Markets

Presentation

Operator

Good morning and welcome to the URS Corp. earnings conference call, for the fourth quarter and full year of fiscal 2008. To begin, I’ll turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS.

Thomas Hicks

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

These statements represent our predictions and expectations as to future events, which we believe are reasonable and 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 and Form 10-K for the fiscal year ended January 2, 2009, as well as in other SEC filings and 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’ll turn the call over to Martin Koffel, our Chairman and CEO.

Martin Koffel

Good morning and thank you for joining us. In addition to Tom, the team with me here in San Francisco this morning includes Gary Jandegian, President of our URS Division; Randy Wotring, President of our 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, Vice President of Investor Relations.

You would have seen from the press release issued yesterday that we performed well in 2008. Thomas Hicks will discuss our results in more detail later in the call, but the highlights are consolidated revenue of $10.1 billion, net income of $219.8 million and EPS of $2.66 per share. That’s slightly above the midpoint of the guidance range that we provided in November and it’s 13% above the high end of the initial guidance that we provided a year ago.

We generated $344 million in operating cash flow in 2008, reflecting our ongoing attention to cash management. A focus on cash and tight cost controls have long been priorities for us at URS and you’ve heard about them in every quarter of the years, but today we’re as vigilant as ever in managing our cash and controlling expenses.

Our balance sheet remains strong. We ended the year with $224 million in cash and we repaid $200 million in bank debt in 2008, including all the scheduled principal payments through March of 2011. Under pinning our performance was the successful integration of the Washington Division.

We just couldn’t be more pleased with that acquisition and how it’s fitted into the company and what it’s turned URS into. Despite challenging marketing conditions, we’ve met or exceeded all of our objectives for acquisition, and today our three divisions, that‘s URS, EG&G and the Washington Division are pursuing and winning important work as a single unified company.

The results for 2008 reflect the underlying strength of the company and it’s a composite of what we’ve become with the integration of Washington. We’re a leader in the engineering, construction and maintenance and have critical public infrastructure in the systems engineering and the operations and maintenance services to the federal government; in the design, construction, and upgrade of power plants, including emission control work; in the management of nuclear cleanup sites for the U.S. Department of Energy and now the United Kingdom’s nuclear authority; and in environmental process engineering and facilities management services for multinational corporations.

We performed well in each of our key market sectors, federal, infrastructure, power and industrial and commercial, generating in the process record profits and we ended 2008 with a book of business of $30.7 billion, and that’s 6% higher than at the end of 2007. Now while we have to be realistic about the potential for clients to cancel or delay projects in this economy, this book of business provides us with a solid foundation of work for 2009 and the future.

Turning to 2009, I don’t have to tell you that we’re operating in the most difficult economic conditions in decades. Last week the US bureau of economic analysis announced a GDP decline by 6.2% in the fourth quarter of 2008; the steepest decline in over 25 years, and as we saw, worse than the earlier estimates for the quarter of a 3.8% decline, but not withstanding the economic conditions and the challenges facing many of our clients, we believe that URS is positioned to weather this downturn.

Firstly, our business is diversified. URS is not dependent on any single customer; it’s not dependent on any single funding source or a commodity price, such as the price of oil and each of our markets offers long term growth potential. We’re not in a market that we don’t see as being in the right place to be for the long term.

Secondly, we have a base of government funding that drives more than 50% of our revenue. This funding which comes from multiple federal and state agencies, state bond offerings, tax measures and other sources is likely to remain steady and in certain areas could actually grow. The third is the passage of the American Recovery and Reinvestment Act, the federal stimulus package.

The package provides nearly $130 billion in funding for the types of projects that is central to URS’s business, including money for the construction of public and military facilities which are served by our federal sector business; a significant funding for transportation and water projects that are serviced by our infrastructure business; and increased funding for the DOE’s environmental management and restoration programs, for which URS is already a major contractor; and additional funding for clean coal and carbon capture projects which are addressed by several of our businesses.

The pleasant surprise for us is, we’ve been focusing on seeing infrastructure money, seeing stimulus money come into the infrastructure area, but quite an amount is being allocated to federal markets where they are strong. We believe that our leadership position in stable long term markets, which is under pinned by the strong book of business as I mentioned, provides a measure of resilience to the current economic conditions and we should be in a positioned to deliver even stronger performance when the economy eventually recovers.

I’ll now discuss each of our key market sectors in more detail, starting with the federal sector. Our federal sector revenues were $3.6 billion in 2008. These results reflect the increased diversification across multiple federal agencies and services and we’ve been talking to you about that for the last year. We now support over 25 federal agencies, including the Department of Defense, the Department of Energy, NASA, the Departments of Homeland Security, Treasury, and Veterans Affairs and the General Services Administration.

Within the defense market we support a broad range of DOD initiatives, primary through large long term contracts that are competitively bid and won. This includes the elimination of weapons of mass destruction, maintenance and repair of military vehicles and equipment, support for the base realignment and closure or the BRAC program, the operation and maintenance of complex military facilities and program management, systems engineering and flight training.

U.S.’s federal revenues in 2009 will be affected by two consecutive fiscal years; the 2009 federal fiscal year and the 2010 federal fiscal year, which begins on October 1, 2009. The base line DOD and Veterans Affairs budget for the 2009 fiscal year, included $153 billion for O&M Programs, $1.5 billion for Chemical De-Militarization; $8.7 billion for the BRAC Program; and $5.5 billion for military construction and family housing for the military.

In addition, the administration recently submitted a $75.5 billion supplemental funding request to support military activities in Iraq and Afghanistan for the remainder of the federal fiscal 2009 year. This adds on top of the $66 billion in supplemental funding already approved, including $55 billion for O&M programs; programs that we address through our EG&G division.

Outside the regular budget, we expect to benefit from the recently passed federal stimulus package. Nearly $8 billion in funding for medical and housing facilities for the Department of Defense and Veterans Affairs; about $4.6 billion for the U.S. Army Core of Engineers for environmental restoration for levee repair and flood protection; and $4.5 billion for the General Services Administration to repair and modernize federal buildings; and more than $2 billion for the Department of Homeland Security, including security improvements of the nation’s airports and rail stations, port facilities and border crossings. URS has a long history of supporting these agencies on similar projects and similar scope of work.

Looking beyond the federal fiscal 2009 year, the administration recently submitted its federal budget for 2010 which begins in October of this year. The request contains two separate funding measures for the DOD. A $534 billion baseline budget for fiscal 2010, that’s a 4% increase over the 2009 budget.

The budget includes strong funding for the services that we provide the DOD, including importantly the O&M activities that will be necessary to support the deployment of the additional 17,000 troops to Afghanistan and the $130 billion request to support operations in Iraq and Afghanistan through fiscal 2010.

The second major component of our federal sector business is our work for the Department of Energy and that’s been greatly enhanced, in fact came in with the acquisition of Washington. URS has a preeminent position in providing environmental remediation and site management services to the DOE. The funding outlook remains stable for the three major programs that drive almost all of our DOE revenues, that’s Environmental Management, the National Nuclear Security Administration and The Office of Science.

In February, Congress proposed an ominous spending bill that would fund these programs at fiscal 2008 levels for the remainder of 2009. The stimulus package includes maybe $6 billion to accelerate and expand the DOE’s environmental management and restoration programs over the next two years. This substantially will increase the workload at six sites, where we have continuing operations and manage live projects, including the Hanford site and the Idaho Clean-up Project.

For fiscal 2010, the administration has proposed a $26 billion DOE budget, which provides sustained funding for the environmental and nuclear management programs that are important to URS. Now, as you know we’ve been very successful in extending our nuclear remediation and operations management business to new markets.

In late November, the URS led team, signed the final contract with the United Kingdom Nuclear Decommission Authority to manage and operate the Sellafield Nuclear Complex in West Cumbria, in the United Kingdom.

Our team will transition to full scale management of this site over the first half of 2009. It will then manage a scheduled work valued at GBP1.3 billion per year under contract, and lasting up to 17 years if all the extensions were exercised. We’re encouraged by the stable trends and durability of our federal business.

We ended 2008 with a federal sector backlog of $10.2 billion, which further supports our belief that we’ll continue to generate strong growth in our federal sector this year. Specifically, we expect that federal sector revenues will be between $3.9 million and $4 billion in 2009.

Our next key market is infrastructure. For 2008, infrastructure revenues were $1.8 million. We benefited from a continued high level of infrastructure investment and our enhanced ability to serve a larger portion of this market, following the Washington acquisition and there’s been intense discussion about public infrastructure in recent months.

There was a large article in the New York Times this morning. Much of it surrounds the stimulus package and the financial challenges facing many states. In fiscal 2009 which ends in June for most states, 46 states faced mid-year budget deficits and while many were forced to reduce spending, it’s important to note that our infrastructure business has continued to grow despite all this.

Today funding for URS’s infrastructure work is more diverse than ever, making our business less dependent on general fund spending at the state level, infrastructure projects increasingly are being supported through bonds, as sales tax referendums and users fees and of course federal funding.

In 2008, the state sold approximately $400 billion of bonds. In January of this year, the state sold another $15 billion in bonds; that’s a 5% increase over January of 2008. The majority of these bonds support infrastructure projects, including upgrading education and healthcare facilities and modernizing water systems and of course improving our highways, are all areas of traditional strength for URS.

In early February, the Los Angeles unified school district sold an additional $950 million in bonds to finance school building projects and URS provides construction management services for this district and the funding for our program is now secure through 2009; that’s just one recent example of our coverage across the country. Elsewhere, other municipalities approved a number of dedicated tax measures to support infrastructure programs, and these included sales tax increases in Los Angeles and Washington State to support transportation programs.

Of course, the states will be receiving significant support through the $787 billion stimulus package. The package contains nearly $65 billion for programs that are addressable by URSs infrastructure business. At $29 billion for highway and bridge construction; $18 billion for the expansion of mass transit, high speed rail and intercity passenger rail programs and $8 billion for clean water, flood control and other water projects.

The 13 states most important to URS will receive approximately 50% of the total funding for infrastructure improvements and this includes $4 billion to California, approximately $3 billion each to New York and Texas and nearly $2 billion in Florida. With our increased infrastructure capabilities and the unmatched network of offices that we have around the country, we’re well established in every state including Alaska, URS is well positioned to address many of these products.

Due to spending obligations in the legislation, there are deadlines by which this money must be obligated and spent and we expect to see opportunities for engineering design services later in 2009. Given the positive outlook in our backlog of $2.3 billion, we expect that revenues from our infrastructure business will be between $1.9 billion and $2 billion in 2009, and we’re increasingly optimistic about 2010 where a lot of the stimulus money will fall.

I’m now going to discuss our power sector which performed well through 2008. Our revenues were $1.9 billion due to a high level of emissions control work, increased work on new power plants and particularly gas and combined cycle plants and a significant increase in revenue from nuclear projects. For example, we completed the replacement of steam generators at two nuclear power plants in the U.S., but the new URS holds a preeminent position in the power industry.

We provide engineering, procurement, construction and decommissioning services for every type of power plant. These are typically major, long term projects, often well in excess of $200 million project value to us. Given the size, the start and the completion dates of these projects, it can have a measurable impact on reported revenues. Tom expects to say they’re lumpy and I think that’s a good way to describe it.

For example, we recently completed or are nearing completion on major full gas desulphurization GD scrubbers for the Tennessee valley authority, The Detroit Edison, Constellation Energy, Allegheny Power and Reliant Energy. URS has provided these utilities with design and construction services to retrofit coal-fired power plants, so they comply with environmental regulations such as the clean air industry rule.

We should note that in the present economic environment, we’ve not experienced the cancellation of any FGD projects that are in backlog. However, clients inevitably are stretching their capital expenditure programs and the start of several awarded projects has been delayed. While these delays will not affect our business in the long run, the delay will be reflected in our 2009 revenue forecast for this sector.

That being said, we’re confident that these projects will be built and the environmental regulations that drive them are in place and utility rates provide the majority of the funding. In fact, many utilities will have to further reduce emissions by 2015 in order to comply with the next deadline under the Clean Air Interstate Rule.

At the same time, we’re benefiting from several immediate positive trends in the power market and there is a growing demand for new gas fired power plants, but simple and combined cycle and these facilities are more capital efficient and produce fewer emissions than coal-fired plants.

For example, our work at TVA’s Lagoon Creek, Combustion Turbine facility is progressing rapidly. This $290 million EPC assignment is part of a long term alliance we have with the TVA, to support a series of combined cycle power plants. Additionally, we’re active on several programs in Canada, including the ENMAX Crossfield Turbine project in Alberta.

Our work on major component retrofit projects that extend the life of nuclear facilities remains robust. This work is executed under a joint venture with AREVA named SGT. The joint venture is currently completing a steam generator replacement at PG&E’s Diablo Canyon nuclear power plant in California, and we also won a contract to replace the steam generators at Exelon’s Three Mile Island and nuclear power plant in Pennsylvania, as well as a replacement program at NTG’s Water the Tree plant in Louisiana.

In addition we were just notified in recent days that we’ve been awarded a contract to provide project management, engineering and construction services for the replacement of four steam generators at TVA Sequoyah nuclear power plant in Tennessee. It’s a four year contract with an approximate value of $130 million to SGT.

Longer term, we see positive trends for our power business, including the anticipated growth in the nuclear market. The new administrations indicated that nuclear power will play an important role in the future, particularly as the administration focuses on developing emissions free power.

The nuclear regulatory commission, the NRC, continues to move forward with the licensing and regulatory process for nuclear facilities. The NRC has received 19 applications to support the construction of 21 new nuclear reactors and URS is the preferred contractor for approximately 25% of all the new nuclear units that have been submitted and given our unmatched experience in the industry, we believe we’re well positioned to capture additional assignments as more of these projects begin to move forward.

For example, we’re working with Mitsubishi Heavy Industries to develop the advanced pressurize water reactor know as the PWR and Mitsubishi is offering this technology in the U.S. market and URS is providing engineering and project management services for the nuclear island. At the same time, URS is actively engaged with several other partners in the application of the alternative boiling water reactor technologies to the U.S. market.

It’s even more encouraging that the stimulus package includes $30.6 billion for energy related programs and this funding covers a range of technologies and energy alternatives in which URS is playing an active role, including smart grade activities, energy conservation, renewable energy and carbon capture and sequestration.

In summary, we expect power sector revenues in 2009 to be between $1.4 billion and $1.6 billion, allowing for the effect of the timing issues on certain projects that I noted earlier. Our long term outlook for the power market remains positive and is supported by a backlog of $1.8 billion which is at the same level as a year ago.

Turning to our industrial and commercial sector, for 2008 our industrial and commercial sector revenues were $2.9 billion. On prior calls we’ve described this sector primarily in terms of the services we provide. Most of our revenue comes from front-end design, environmental, O&M and facilities management services. A significant portion of this work is delivered through our long term master service agreements or MSAs with large multinational corporations and involves environmental and engineering design services.

Because these projects support ongoing plant activities and help companies meet regulatory requirements, they tend to be less sensitive to the economic downturn. If fact our revenue for these programs is expected to remain stable in fiscal 2009. The remaining portion of our industrial and commercial revenue comes from engineering, construction and program management for large scale capital projects and this work is more susceptible to low commodity prices and tight credit markets.

The industrial and manufacturing market comprises about half our revenues in this sector and work includes facilities management and O&M services for multinational companies. These services tend to be countercyclical as clients look to outsource non-core activities to reduce overhead costs during the economic downturns. For example, Craft Foods recently expanded our facilities management contract to include several new production facilities.

The oil and gas market comprises about a third of our industrial and commercial revenues, and this business has been affected by a slowdown in several large scale capital projects as clients react to lower oil prices. We’ve been engaged by our clients since, to refine costs and schedules, so that these programs can restart quickly when market conditions improve.

Despite the slowdown in capital projects, we continue to see new opportunities, including potential assignments for the upgrade and expansion of gas related facilities in Alaska, which is an area of real strategic interest to URS. Our recent acquisition of the small engineering firm in Alaska to enhance the firm that we already have there, coupled with the Washington Division’s legacy work in the region, positions URS well in this market.

The mining market comprises of the remainder of our industrial and commercial revenues. We provide both mine development and operations services for our clients and this part of our business has been affected by the decline in commodity prices and the slowing demand for metals and industrial minerals such as copper, aluminum and bauxite. As a result a number of new and existing projects have been delayed or cancelled.

I should note that we recently announced the sale of the MIBRAG, the German mining and power operation that we own jointly with NRG Energy Inc. and this transaction is not yet closed and we expect to report on it at the end of our second quarter. Not withstanding the current economic environment, we believe the long term fundamentals of the industrial and commercial sector are positive.

The oil and gas, manufacturing and mining industries are cornerstones of our economy. When the economy recovers, capital spending should improve, sustaining demand for the URS engineering, construction and construction services. For the 2009 fiscal year, we expect that revenues from this sector will be between $2.3 billion and $2.4 billion. Our long term outlook is supported by a backlog of $2.9 billion in industrial and commercial projects.

With that, I’ll invite Tom Hicks, to discuss the financials in more detail.

Thomas Hicks

Thank you, Martin. I’ll focus on the full year 2008 results. Fourth quarter results are available on the press release that we issued yesterday. Our revenues for the year were $110.1 billion, a 19.5% increase from the pro forma combined revenues for URS and Washington group for 2007. Net income was $219.8 million and earnings per share were $2.66.

A controlling cost is particularly important in this environment and we maintained a disciplined focus on cost controls throughout the year. This is reflected in our improved margins in 2008 over 2007. We generated $344 million in operating cash flow during 2008, reflecting our focus on cash management and our strong cash flow allowed us to continue to pay down debt and strengthen our balance sheet.

During 2008, we repaid $200 million on the credit facility we used to finance the Washington Group acquisition. This repayment decreased the amount outstanding on the facility to $1.1 billion. DSOs or days sales outstanding were 67 days at the end of the year and interest expense for 2008 was $90.8 million and our tax rate was 41.9%. Fully diluted weighted average shares outstanding for 2008 were $82.5 million.

As you know, we report separate financial information for our three business segments; the URS Division, the EG&G Division and the Washington Division, and for fiscal year 2008, the URS Division reported revenues of approximately $3.4 billion and operating income of $243 million.

EG&G Division reported revenues of approximately $2.4 billion and operating income of $130 million and the Washington Division reported revenues of approximately $4.3 billion and operating income of $211 million. Finally our capital expenditures continue to be modest relative to our revenues. CapEx excluding equipment purchase through capital leases was approximately $92 million for 2008.

Yesterday’s press release contained a detailed description of our book-to-business including backlog, designations, option years and Indefinite Delivery Contracts or IDCs. We believe the best financial indicator of our future prospects is our book of business which continued to grow in 2008. We end of the year with a total book of business of $30.7 billion, an increase of $1.9 billion compared to the end of 2007.

Backlog, the largest component was $17.2 billion at the end of the year, compared to $17.6 billion at the end of last year. The value of option years was $4.3 billion compared to $2.4 billion at the end of 2007 and the values of IDCs was $7.6 billion, compared to $5.7 billion at the end of 2007.

I want to note the beginning in the first quarter of 2009; we will no longer report designations within our book of business. As the company as grown and our business mix has changed, designations have become a less useful tool for looking at our overall business prospects. Next quarter we’ll provide a comparable book of business for the first quarter of 2008, excluding designations.

With that I’ll turn the call back to Martin.

Martin Koffel

I’m now going to discuss guidance for fiscal 2009 and I shall first reiterate the outlook for our key market sectors. We expect that revenues from the federal government sector will be between $3.9 billion and $4 billion; revenues from the infrastructure sector will be between $1.9 billion and $2 billion; revenues from the power sector will be between $1.4 billion and $1.6 billion; and revenues from the industrial and commercial sector will be between $2.3 billion and $2.4 billion. Based on these assumptions we expect that consolidated revenues for 2009 will be between $9.5 billion and $10 billion dollars.

I would like to point out that a significant amount of our work is not fully reflected in revenues, because it’s performed through unconsolidated joint ventures or contracts that are subject to agency accounting requirements. For example, most of the work we’re doing for the DOE and all the work we perform for the U.K. nuclear decommissioning authority is not included in our revenue.

Agenda operating performance, we expect operating income margins to improve moderately in 2009 as we benefit from stable pricing and our focus on cost controls. We expect that EPS will be between $2.80 and $2.95 per share on a fully diluted basis. This range of EPS takes into consideration a number of variables including the impact of the sale of our interest in MIBRAG, which we expect to complete in the second quarter and finally we expect of the number of weighted average shares outstanding, used to calculate our EPS in 2009, will be approximately $81.8 million shares.

Before inviting your questions, I should like to point out that we’ve built URS to deliver stable earnings and cash flows through difficult economic periods. While these extraordinary times are testing everyone, we believe that our strategy has given us the balance and the diversification to achieve our goals and meet the needs of our clients and generate value for our stockholders.

We continue to benefit from a base of government funding that supports more than 50% of our revenue. As we’ve seen with the passage of a stimulus package, this funding tends to increase in recession. We also have a flexible cost structure with the ability to scale on resources based on demand and our business is not capital intensive.

Obviously, two of our sectors, power and industrial and commercial are likely to experience the effects of the economic slowdown. However the long term fundamentals and prospects for these businesses remain excellent. At the same time, our federal and infrastructure market sectors are growing at close to record levels.

The current infrastructure market is in fact among the most robust we have seen in years. Our balance and our diversification are clearly working for us. Of course in the current environment, it’s all the more important to be highly disciplined and preserving cash, lowering costs and prudently managing our risk profile is vital and these of course have long being priorities of URS.

As a result, we have the resources to pursue new opportunities that may be created by the economic downturn and we remain focused on delivering our services to clients with professional intensity and responsiveness and are considered that we’re all genuinely optimistic about our mid term and long term future.

With that, I’d like to open the call up to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first audio question is from the line of Jamie Cook with Credit Suisse.

Chase Becker - Credit Suisse

Hi, good morning. It’s actually Chase Becker in for Jamie. How are you?

Thomas Hicks

Hi Chase.

Martin Koffel

Good morning Chase.

Chase Becker - Credit Suisse

The question is pertaining to your expectation for MIBRAG in the guidance. Any color you can provide? I know you said its contingent upon when you’re selling it, but what is your current assumption?

Martin Koffel

Well we’re assuming that will close in the second quarter Chase and a couple of points to be made. There are a multiple number of variables related to what the impact will be on our performance in ‘09, including the actual interest rate that we avoid by paying down some of our debt, the final proceeds which will vary pretty significantly depending on issues like exchange rate and also some of the terms of the agreement.

The important thing to know is that, the guidance we’ve given you, the 280 to 295, encompasses the range of results there. So, what you’ve been guided to for next year, includes the impact of MIBRAG.

Chase Becker - Credit Suisse

Okay and then going to the Qatar gas project in the Washington Division, do we assume that carries into 2009 or are there any other projects that we should be aware of that are kind of dragging on into the beginning of the year?

Martin Koffel

Tom Zarges, the President of the Washington Division is very close to that project; if you can just speak to that.

Tom Zarges

Yes, with respect to Qatar of course, that’s a sulfur removal and handling program that we have in the Middle East. That program will substantially complete in mid-year and we in fact are in the final stages, the opening stages of commissioning of that program and so we believe that we are entirely and adequately reserved for that program going into 2009, and we obviously haven’t reflected our seen any other cause for reserves or issues on any other projects at the moment. So we are we believe adequately covered for that job for the balance of the year.

Martin Koffel

So as you know we have a huge portfolio of projects and at any given time we access what our potential profitability is so on all those projects and they’re all over the place and as a said they are hundreds of those, but your question was, is there any lingering large material issues and the Qatar gas is the one that we’ve disclosed and that’s the one that Tom just reported on. Beyond that, you can review what we’ve told you in the K, but there’s nothing new that’s emerged that we haven’t disclosed now.

Chase Becker - Credit Suisse

Okay. Great, thank you. One last questions, there’s just been some recent news about some of the utilities stepping away from the GE technology on the nuclear side. Wanted to get your thoughts going forward about your positioning in that market?

Tom Zarges

Well, I’ll respond to that question, if you don’t mind. We’re involved in a whole series of technologies; in fact alternative boiling water technologies in addition to GE and we’re still obviously engaged with them as well. I can tell you, although we are not in a position to disclose any details of those transactions, we are in substantial discussions and in fact in some very serious final negotiations with both utilities and technology vendors for the first round of EPC contracts and the first round of filings for government incentives for the first reactors built.

So, we are in a good position with multiple technologies and in some very substantial discussions and negotiations right now for those programs.

Chase Becker - Credit Suisse

Okay great. I appreciate the color.

Operator

Your next audio question is from the line of Alex Rygiel with FBR Capital Markets.

Alex Rygiel - FBR Capital Markets

Thank you. Good morning and congratulations.

Martin Koffel

Thanks Alex.

Alex Rygiel - FBR Capital Markets

Martin, could you comment on a couple of areas that I don’t think you mentioned. Number one, the upcoming highway transportation bill; number two, the potential for an upcoming energy bill; and number three, President Obama’s proposed budget and maybe kind of frame different opportunities that you see up in those three?

Martin Koffel

Well, let’s first of all talk about the highway bill, the success to the highway bill that actually expires in September. I’ve got Martin Tanzer here, he’s the Executive Vice President of Marketing and concentrates on the public sector and he’ll speak to that.

Martin Tanzer

Yes, thank you. The highway trust fund goal is the Safety Lou bill. The ’09 funding will be at $40.7 billion, which is about $500 million less than the original bill had called for. This will be in addition to the funds which are about $27 million to $29 million, which we’ll see in the stimulus package. That will support highway and bridge programs throughout the country.

I think you have to keep in mind that the Safety Lou money requires 20% matching funds from the states to receive those funds. The stimulus funds are free funds requiring no matching at all. So, we anticipate that the states will use the stimulus money first and follow that by the funds to the highway trust fund.

If you look at the economic stimulus bill of about the $28 million, $27 billion in funding, 13 of the states that were most active in and have large infrastructure programs represent about 50% of those total dollars to be expanded. Its highways and bridges about $26 million, transit about $7 billion, clean water and wastewater about $6 billion, and state energy programs about $3 billion, a total of $43 billion. So, as you can see we think we’re well positioned for helping the states and the federal government spend some of that stimulus dollar.

Martin Koffel

Your second question I think was about the new administrations energy policy and I think it’s being well publicized that there’s going to be an emphasis on low emissions and alternative energy and intrusively that embraces the nuclear market; we discussed that in some detail.

Our company, through our predecessor acquisitions, had accounted for or worked on 25% of the installed power capacity in the United States, including much of the nuclear capacity and so I said in my prepared remarks, we’re connected with 25% of the 19 applications pending before the NRC connected in some manner. So, I think we’ll emerge in a strong competitive position in the nuclear portion of the new policy as it emerges.

We’re also well positioned and doing work in what is now becoming known as the Smart Grid and the various forms of alternative energy and they’re going to depend on tax incentives and availability of capital and so forth, but as they go forward I think we’ll be a strong player there.

Now, the other part of energy is the DOE cleanup. We’re all surprised to see that there’s in the stimulus package this $6 billion of funding for DOE sites, two building for Hanford which is a site where we’re very active, $465 million I think for the Idaho cleanup project where we’re active, and $225 million at Los Alamos, $1.9 billion at Savannah River, $75 million at West Gallery and $170 million at Woodbridge which is one of our projects in New Mexico.

Then the other aspect of energy concerns the department of defense, because there’s $4.2 billion for DOD facilities, which include sustaining, restoration, repair and modernization of property and barracks for energy efficiency and that funding will supplement the own in accounts with the different surfaces. There’s $2.1 billion for MILCON, military construction for planning, designing and construction of military projects and DOD research and development and so on.

So a lot of this expenditure is under pinning the concept of energy efficiency. So, I think we touch it not only through our work directly with the power producers, but through the DOE and the DOD and the other agencies that have been given funding to promote more efficient energy use and I think we bracket it very well.

Alex Rygiel - FBR Capital Markets

One last question, could you comment on what the timing of the stimulus money could be? In other words, when do you anticipate you will see it or see opportunities; and secondly what is the timing of an announcement with regards to the nuclear generation contracts and/or relationships?

Martin Koffel

First of all, you should understand that our infrastructure business set to grow this year without the stimulus money. We’ve got robust plans and we’re optimistic about our infrastructure growth this year, without the stimulus money.

As to the stimulus money itself, it’s probably fourth quarter and then heavier to 2010. So we’re not dependent on it fully this year. Under pinning our infrastructure work we’ve got the revenue range that I gave, with $1.92 billion of our backlog of $2.3 billion. $400 billion in bonds issued or funded in 2008 and then all the ballot measures and so on. So, the back end of this year and much stronger in 2010 and I couldn’t at this point comment beyond the remarks that, Tom Zarges just made about the nuclear power projects. It just would be premature.

Just to go back to infrastructure for a moment, 50% of the stimulus money identified for our infrastructure projects was what they call obligated. We haven’t quite defined that expression, but it’s in the legislation, but it’s obligated to be spent or committed in the next 120 days. I think that means, in the next 120 days they can actually say, such and such amounts of money are committed for what they call shovel ready projects and then the remainder, which is another half of it, has to be obligated in the next 12 months. That nevertheless I think means, back end of this year and heavier in 2010.

Alex Rygiel - FBR Capital Markets

Thank you very much.

Martin Koffel

Thanks Alex.

Operator

Your next question is from the line of Vance Edelson with Morgan Stanley.

Vance Edelson - Morgan Stanley

Hi, thanks a lot. Just back on the impact of the joint venture sale in the second quarter, given that the revenue guidance calls for a slight decline, but the EPS guidance suggests maybe 8% growth at the midpoint. I’m just wondering if you can comment on how much of that is related to the sale at either the high or the low end of expectations, granted there’s a range there or asked another way, how much pertains to other factors, such as higher operating margins or lower taxes or the lower share account? How should we think about that? Thanks.

Martin Koffel

Okay, the first point is the MIBRAG activity. It enters our P&L as an interest in joint venture as opposed to in through revenue. So, the sale or not the sale of MIBRAG, has no impact on our revenue projection.

Secondly, I think if you look at the variables that every company faces going into the year, there is a whole range of things, tax rate, share count, what our margins might be, what our success is in winning new business and pursuing and expanding existing business and this is just one of the many factors, the MIBRAG sale.

I think probably what we’d like to leave it at this point and we’ll refresh that at the end of the second quarter is that the guidance range we’ve given you encompasses a whole range of variables, including MIBRAG and you were right about one issue you pointed out, which is that we do expect to see a slight operating margin expansion in ‘09 over ’08, as we saw in ‘08 over ‘07.

Thomas Hicks

Just to broaden that out, the thing to keep in mind always about us is, at any one time we have about 11,500 contracts. Now some are small and the very large ones are the minor part of that, but there’s a lot of variability and a lot of activity going on at any one time.

Vance Edelson - Morgan Stanley

Okay, thanks for that and on the nuclear side, it was in the news that Siemens signed a nuclear deal in Russia. Is that something you were interested in as well? Do you see opportunities in that region?

Martin Koffel

No, the issue there is one of indemnification, which is critical to our work and so we’re not interested in that.

Vance Edelson - Morgan Stanley

Lastly, you mentioned the vigilance in allocating cash, in terms of the use of free cash flow going forward, is debt reduction most likely?

Thomas Hicks

As we’ve said in the past Vance, our first requirement for cash is to support the business growth and working capital needs that we might have, including the modest CapEx that we have.

Secondly, we continue to look at small acquisitions. We executed two last year and we are very actively looking today; we think there are some great opportunities in the market and while those things make sense and really improve our strategy position, we will move ahead with those and then finally we’ll use any excess cash to pay down debt as we have in the past.

Vance Edelson - Morgan Stanley

Okay, that’s great, I appreciate it.

Thomas Hicks

You’re welcome.

Operator

Your next audio question comes from the line of John Rogers with D. A. Davidson

John Rogers - D. A. Davidson

Hi, good morning.

Thomas Hicks

Hi John.

John Rogers - D. A. Davidson

I guess first, Tom what are you expecting in terms of CapEx this year?

Thomas Hicks

I think it will be similar levels to what we’ve had in the past John. There’s nothing on the horizon of significance, especially with a year to understand the Washington Divisions business better. We feel pretty comfortable that the numbers that we’ve incurred in the past will be similar to going forward.

John Rogers - D. A. Davidson

Okay and then secondly, in the past you talked a little bit about margins by segment and I was curious, you talked about higher margins overall; are you looking at higher margins in URS, EG&G and Washington, some thoughts there?

Thomas Zarges

Yes, I think we’re seeing modest margin improvement in all three divisions and we’re really encouraged about that. We went hard at controlling costs and capturing some of the synergies and we also went hard at really making sure we examined every cost that we incurred during the year and we’re seeing some results of that and we’re seeing gradual margin improvements, not dramatic but its something that we’re happy about and we continue to push for it.

Martin Koffel

John the other aspect of margin improvement is good execution and if you get the work right and there’s no rework and no claims that obviously reflects in your margins and I thing we’re executing at the present time as well as I’ve ever seen us.

John Rogers - D. A. Davidson

Okay. Congratulations, thank you.

Thomas Zarges

Thanks John.

Operator

Your next question is from Richard Paget with Morgan Joseph

Richard Paget - Morgan Joseph

Good morning everyone. I wonder if you can get back to the infrastructure topic. Everyone’s talking about how a lot of this money is going to get spent on shovel ready projects and in some cases that might suggest that the up front in engineering and permitting has already been done, and maybe this projects were mothballed for a little bit and can go straight to the field.

So does that mean, maybe some of the initial projects that get put out there won’t really fit into your sweet spot and we might have to wait a little bit; like you said, maybe fourth quarter into next year before some of the projects could require your services.

Martin Koffel

Yes, that’s an accurate description of the market conditions. What we’re seeing now and we have several contracts now in supporting the states and allocating their funds to projects, some will be the shovel ready projects such as re-decking and asphalt and signage and barrier development and things of that nature.

Most projects don’t require design, but they required construction management and program management services where we actually are in the field overseeing the contractors work. So, we’ll see some up tick in those activities, but the design activities for the larger projects and the design built projects, will probably not be procured until the third or fourth quarter.

The secretary of transportation has promised that by March 6 we’ll have the final apportionment in place. At that time we’ll know exactly, the states will know exactly what funding they have available and we’ll start to submit to the federal government, the secretary of transportation, those projects available for funding. So I think by about the third or fourth quarter, we’ll start seeing the larger projects coming out, the major highways interchanges, where we have large design components.

Martin Koffel

I should reiterate the point I made early with respect to the ‘09 revenue outlook for infrastructure; the growth that we foresee is not dependent on the stimulus spending in our case. Now, it will help to the extent there’s any slippage or pockets of softness. I think it’s off set by the stimulus money, but we saw growth in our fundamentals before the stimulus bill was enacted.

Richard Paget - Morgan Joseph

Okay, but I mean it does seem given some of the volumes in projects coming through that project management or program management would definitely be in high demand.

Martin Koffel

Yes, we’ve got active discussions underway as we speak.

Richard Paget - Morgan Joseph

And then generally speaking, how are you seeing bidding these days in terms of pricing. I mean any pressure there, given the overall or is the top end of the market, there’s still not necessarily a big influx of bidders on any given project?

Martin Koffel

Well, there’s never been a shortage of capacity in any part of our business; it’s all competitively bid, but a lot of our work is value based selection. A lot of the federal contracts for example we’re selected on competency and then prices negotiated on a competitive basis after that. I think that’s still is the dominant theme here and we’re selective. I mean we’ve never chased jobs on a price basis, we’ve always wanted value and technical abilities to be the differentiator and I think we’re still able to hold that.

Richard Paget - Morgan Joseph

Okay and then just in terms of the tax rate for next year, what’s a good number to assume?

Thomas Hicks

I think you can look at our historical tax rate and that’s going to be in the general range.

Richard Paget - Morgan Joseph

Okay, thanks. I’ll get back in queue.

Thomas Hicks

Okay, thanks.

Operator

Question is from Scott Levine with J.P. Morgan.

Scott Levine - J.P. Morgan

Good morning, guys.

Martin Koffel

Hi Scott.

Scott Levine - J.P. Morgan

Can you hear me?

Martin Koffel

Yes, just barely, you’re not very clear. So you might want to speak up a bit.

Scott Levine - J.P. Morgan

Okay. Question regarding the stimulus bill. What areas maybe surprised you the most in the final stimulus package, either to the upside or the downside versus your expectations in environmental, infrastructure, defense, all your end markets that are impacted by the program?

Martin Koffel

Well, the only talk was about a larger amount for infrastructure, and it came out assuming a little smaller number than the media had in mind. I don’t think it was out of line with our expectations. I think people thought that the money might be spent sooner, but I think we always felt ourselves; I’m just commenting, from not second guessing anyone, but just from the point of view of our own planning, we always thought it will be the back end of ‘09 and then heavier into ‘10.

I think the positive surprises were the amount of money that went into MILCON, military construction and particularly the amount of money that went into DOE, and the extent to which the money is being allocated to projects where we’re actually active, the ones I mentioned. So I think, of the $130 million or so of infrastructure spending in the stimulus bill, only 46% of 43% goes to the states, and the greater portion goes to the federal government, so in a way as it is settled form of supplemental spending.

The other absolutely delightful outcome for us was the $8 billion that’s allocated for high speed rail. I think we mentioned in our last call that we’re active in the front end work on the high-speed railing between Los Angeles and San Francisco and now there’s a new one from Southern California to Las Vegas and one or two on the East Coasts.

So there’s a couple of billion dollars of the $8 billion for the West Coast and some money for Las Vegas and then money for the East Coast and we are very well positioned and that was a very pleasant surprise. So, it covered four or five markets, whereas the media focus had really been on one market.

Scott Levine - J.P. Morgan

Understood, one follow-up if I may as well, on pension expense, I think you have a program for the EG&G, maybe one for the Washington Division if not more. Could you comment on whether or not you’re embedding any increasing pension expense in your guidance and if so could you put out some detail, maybe.

Martin Koffel

Reed Brimhall who’s our Chief Accounting Officer is here and manages our pension programs for us, so I’m going to let him comment on that. If you hold on one second, he’s coming to the mic.

Reed Brimhall

We don’t actually expect to see pension expense in our income statement rise dramatically during 2009. The decline in values caused by the reduction in the stock market will actually affect somewhat to us in 2010, but that’s more of a funding question than an expense question at this point. The value of the liabilities didn’t rise dramatically, what happened was the value of the assets declined.

Martin Koffel

The other thing I think to note is that a significant portion of our pension exposures is covered under cost reimbursement contracts and therefore the impact to us is moderated by that.

Scott Levine - J.P. Morgan

Okay, thank you.

Operator

Your next audio question is from Joseph Ritch with Goldman Sachs.

Joseph Ritch - Goldman Sachs

Hi everyone; thanks for taking my question this morning. The first question I have and I’m going to push a little bit on the margin front. Got to imagine in this environment, across your business segments that you are starting to see some pricing pressure, so really I’m hoping that you can just provide a little bit more color on how you expect to see margin improvement in 2009?

I mean you guys mentioned cost reductions; are there any synergies left from the Washington Group acquisition? I’m just hoping that you can provide a little bit more color there.

Martin Koffel

Yes, I would say that on the pricing front we’ve been able to hold our prices, which in this market condition we think is admirable and looking forward we think we’ll be okay in that area and really the margin improvement is coming from cutting our costs and that’s a gradual process and we’re seeing the impacts of things we’ve done as part of the consolidation after the acquisition.

We’re seeing the impact of efforts that we’re undertaking across the Board to take advantage of a larger company and the buying power that we have to ask for lower prices; for the things like rental cars and hotel rooms and things like that. So, it’s a slow process, but the trend is good for us. This will be our second year in a row where we’ve seen some slight improvement in margins, but I would tell you it’s mainly focused on cost control at this point.

Thomas Hicks

In addition to that, I’d mention again the execution. We’ve got a major focus on improving our risk profile and on fewer lump sum fixed price projects and in executing the work efficiently and well and Collins can plaque this business as you’ve seen, across the spectrum of companies that participate in it and there’s been a huge focus on the disciplines of execution. I think that’s helping, as well as the cost controls.

Joseph Ritch - Goldman Sachs

Okay, great and that’s actually a good segue to my second question. I wanted to do a quick follow-up question on the sulfur project. You mentioned in our 10-K that there are liquidated damages on that contract of approximately $24 million. Wanted to know if you’ve reserved for any of the liquidated damages yet on that project and if not when do you expect to hit the milestones where you would have to at reserve and be assessed as liquidated damages?

Thomas Hicks

Yes, simply as a contingency we put some allocation into our reserve for liquidated damages, but as a practical matter we believe that the schedule, we will preclude those damages from actually being assessed and of course that will hold through.

Joseph Ritch - Goldman Sachs

Okay, great and can you give us an approximation of how much you’ve already reserve for?

Martin Koffel

Well, the 10-K identifies I think about a $50 million charge, project to-date, on that project and we think that’s an accurate description of where we are at this point in time, that’s the best we can tell.

Joseph Ritch - Goldman Sachs

Okay. Thanks for answering my questions today.

Martin Koffel

You are welcome.

Operator

The next question is from the line of from Andy Kaplowitz with Barclays Capital.

Andy Kaplowitz - Barclays Capital

Good morning guys.

Martin Koffel

Hey Andy, how are you?

Andy Kaplowitz - Barclays Capital

Good. If maybe just I could ask you a question about guidance in a different way. Basically, you’ve talked about or you’ve alluded to equity earnings, substantial contributions from equity earnings and so as you look into 2009 versus 2008, we have solar fields ramping up and so is part of the reason why your guidance is what it is, because you have a pretty significant contribution or up-tick in equity earnings in 2009?

Thomas Hicks

No, it’s not so much Andy as it is that, the point we’re trying to make earlier was that if some of these large programs that we’re winning had come through as at risk programs and showed up in the revenue line, that that would have had a material impact on our revenue projections for next year.

The ratio of equity in earnings of unconsolidated joint ventures to our total is about the same from year-to-year. It’s gone up dramatically from when we were a standalone company before we acquired the Washington Group, but I wouldn’t highlight that as the main reason for any revenue flatness if you will.

It’s primarily a timing issue as Martin said on some of the very large projects that come through in big lumps, and if some of the projects that we’re chasing had materialized on a timing basis, a little different time wise. We would have seen a different result or a different projection.

Andy Kaplowitz - Barclays Capital

Okay Tom and I know what you’re going to tell, that it’s just lumpy, but EG&G margins were pretty low in the quarter compared to last quarter and I know we had some awards in the last quarter, but is there anything going on there, anything unusual you want to point out, and what do we think about EG&G in 2009 in general?

Thomas Zarges

Yes, it’s Randy Wotring, the President of the Division, he has strong views on EG&G.

Martin Koffel

I’ll let Randy answer, but just to remind you, one thing we’ve always told you is you should look on an annual basis what our margins are, and I think that’s the lesson to take away and I’ll let Randy talk about the fourth quarter?

Randy Wotring

There’s not much to add. I think there is some lumpiness in our business as that’s been borne out over ’08, but we’re planning on seeing sustained margins or maybe a little growth in ‘09 to our existing margins. We’re pretty pleased with where we’re moving.

Andy Kaplowitz - Barclays Capital

Martin, if you look at the DOD business over the longer term, I mean Obama clearly wants to reposition our troops over the longer term and take us out of Iraq and I know it’s only a small portion of your DOD business, but has big ramifications for all the O&M budget if we’re lessening the supplemental overtime. So, how do you think about the growth rate in the DOD business over the longer term? How should we think about it?

Martin Koffel

The baseline DOD budget as I mentioned is growing at 4% and the supplemental is perhaps under another name for Afghanistan and Iraq are still there. To the extent that there’s a withdrawal from Iraq, that actually creates some opportunities for us. The operational tempo, which means the rate of utilization of equipment, remains high. If in fact there is a cutback in new procurements, that means higher operational tempo in the existing equipment and that plays to the kind of work we do and refurbishing and so on.

In the Middle East there’s a transformation to doing this work on forward operating basis, rather than bringing the equipment back to the U.S. I think we already have mentioned in an earlier call that we’ve built at least one large facility where we’re rebuilding and maintaining military equipment in the Middle East close to the theater.

As far as any withdrawal from Iraq is concerned, for the operations and maintenance work, there’s about a two year trail. The policy will be not to leave that equipment behind, it has to come back and be refurbished and as I said it’ll be refurbished either in theater or brought back to the United States. Again that plays to our field team type work, but as you said yourself at the start of the call, less than 5% of EG&G’s DOD business is convicted with the Middle East.

Andy Kaplowitz - Barclays Capital

Gotcha and one more, quick one if I could. In the INC segment you mentioned the craft example, but I guess have you seen examples of the opposite happening; like for instance you have contracts with caterpillar and some of these other industrial guys, where you would imagine that they would pull back on outsourcing a little bit, if the economy gets bad enough. So, I’m just wondering sort of what trend you’re seeing in that business?

Tom Zarges

Here is Tom Zarges. I think it’s a mix bag. Just as you’ve suggested it’s generally pretty stable, but it does includes some components of people who are going to outsourcing as a way to eliminate the permanent obligations of full time employees and it does include some situations where we’ve already been outsourced and have the contract, and where the total amount of the workload is declining. So, when put those two together, it’s a pretty fair balance I would think. So, it’s a fairly stable net market for us.

Andy Kaplowitz - Barclays Capital

I understand. Thanks.

Martin Koffel

Thanks, Andy.

Operator

Your next question is from the line of Andrea Wirth with Robert Baird.

Andrea Wirth - Robert Baird

Good morning.

Martin Koffel

Good morning.

Andrea Wirth - Robert Baird

I’m wondering if you could just first talk a little bit about your back log. I know you mentioned some scrubber work is getting stretched out, but did you actually see any meaningful cancellations during the quarter? You actually were taking meaningful amount of contracts out of your backlog and could you quantify that?

Martin Koffel

In general, across the board, we’ve seen very few cancellations. Mostly, it’s been stretch outs and specifically in the power business, it’s been exclusively stretch outs at this point. There were some talks about programs that we have never book into backlog that we’re put on the shelf and never really entered our book of business, but in general the tone that we see is people stretching out and delaying things as opposed to canceling them.

I think the thing to keep in mind Andrea is that, for the scrubber work I’d say that most, but not all, but most of the work is for utilities, where the funding is rate based. So, the availability of capital is not the constraint. It’s a question of I think caution and rethinking strategy. So as Tom said we haven’t really experienced significant cancellations.

Andrea Wirth - Robert Baird

Great and then could you give us what the pro forma revenue growth rate was in the fourth quarter?

Thomas Hicks

I don’t have it handy. We’ll give it to you before we hang up.

Andrea Wirth - Robert Baird

That will be great and then just wanted to see a little bit what your thoughts on how we should expect revenue growth to progress throughout the year. I had estimated that pro forma growth was probably about 15% this quarter. Obviously, now you’re expecting slightly negative for the year. Should we expect the negative comparisons to occur more in the second half of the year when comparisons get a little bit more difficult or could we actually start seeing some negative year-over-year comparisons already in the first half of the year?

Martin Koffel

We don’t give out quarterly guidance, but I would tell you if you look at the way our revenue has been distributed in past years, that will prior to be similar to this coming year.

Andrea Wirth - Robert Baird

Okay and just one last question. I wonder if you could just address Yucca Mountain and the Obama administration. I mean they’ve been fairly negative on that. It sounds like they’ve cut it from their budget pretty effectively. So I’m just wondering if you could comment on how much that actually would have an impact on the nuclear industry and the outlook therein.

Martin Koffel

Well you’re quite right there. They’ve attenuated that budget fairly dramatically, but I think the consensus remains that Yucca Mountain is a meaningful future alternative and so rather than shutting it down, it will be on a sustainment budget I believe for a number of years.

As you know there are a number of things looking for an answer here and Yucca is in that mix. One is what you do with spent nuclear fuel; there is no alternative right now to Yucca Mountain since we don’t reprocess, and at the moment the government has the obligation to take ownership of spent fuel and it’s stored at the moment at 121 sites in 39 states and many of those are getting pretty crammed full.

So there is a solution that we need really, to implement and Yucca I think being sustainable, being part of that mix, although it will not be obviously promoted very vigorously. In any event, the contract that we’ve taken over really starts in full implementation in April and that is still on schedule.

So however that budget resolves, and we are working to match the budgeted work load, we will be responsible for that site beginning in April as programmed. So, there’s a lot to be said yet and debated about Yucca Mountain and the country’s policy towards spent nuclear fuel and I doubt very seriously if they’ll take it off the table as a future option, although it will not be promoted in the near term.

Thomas Hicks

It’s a huge public policy issue. We’re the only developed country that doesn’t have a program for spent nuclear fuel and the security issues of having spent fuel located in over 100 sites around the country I think are pretty obvious.

Thomas Hicks

Andrea, the fourth quarter pro forma is about 17%, ‘08 over ‘07.

Andrea Wirth - Robert Baird

Great, thank you. That was very helpful.

Operator

Your next audio question is from the line of Tom Mayer with Lord Abbett.

Greg Macosko - Lord Abbett

This is Greg Macosko for Tom.

Thomas Hicks

Hey Greg, how are you?

Greg Macosko - Lord Abbett

Fine, thank you. Just could you give us a little color with regard to the state? I missed the first time part of the call, but with regard to the state budgets, did we see sort of any holdback in terms of the orders and things in the end of the fourth quarter; and are you expecting sort of color regarding the stimulus bill etc, in terms of the following quarters, in terms of hearing about things that may not come in right away?

Thomas Hicks

State budgets; there’s a cumulative deficit of around $50 billion across all states, a huge part of that coming from California at the mid-year point. I think while we’re not dependent directly on the stimulus bill for growth and our infrastructure business, I think it’s going to be a really big issue to some of the states.

On the other hand, a lot of the well diversified with the bond issues, we saw very heavy bond sales in ‘08 in New York, Texas, California. I mean some of the statistics are impressive. The bond issuance or sales in Texas was up 5% on the prior year, New York was up 26%, Arizona was up 7%, Massachusetts was up 18%. Massachusetts has been a sleeper on infrastructure, but it’s catching up on the funding, but the bonds are covering education, healthcare, utilities, housing and environmental improvements.

So, whereas say three or four years ago, the state deficits were a real indicator of what might happen, I think enormous diversification towards bond funding and then the initiatives to increase sales tax, 0.5% in Los Angeles, which I think starts as early as June and/or July, with a lot of projects ready to go on it through the MTA down there and then in Washington state.

I think we should no longer just look at the condition of the budgets as an indicator of what might get spent. I think the condition of the budget probably is more directly connected these days with the sort of entitlement programs like Medicaid and so forth. Do you want to add?

Thomas Hicks

Yes, I was going to say, we saw a slight slowdown in the fourth quarter of ‘08 in bookings and what occurred the state level was the states in anticipation of getting free money to the stimulus bill were not spending their own bonded money, and waiting to use that money for Safety Lou, where they have 20% matching funds requirements.

Greg Macosko - Lord Abbett

So should we expect a slowdown maybe here in the first and second quarter, because they’re still waiting for the money to come in?

Thomas Hicks

The money will be apportioned March 6. So, they’re already out procuring for those services in anticipation of the fund.

Greg Macosko - Lord Abbett

Okay and then finally, just with regard to the bond issues, is there a specific timeframe typically on those bonds whereby they have to be spent?

Thomas Hicks

On the economic stimulus bill, it’s 120 days, the money has to be obligated and by definition we’re not sure yet by what they mean by 120 days of obligation. It could be the contract has to be signed or they are in the process of negotiating with the contract.

Martin Koffel

I think Greg’s question was about the timing on the bonds and that’s typically one to two years.

Greg Macosko - Lord Abbett

Okay, and that’s not any different than it has been in the past?

Thomas Hicks

That’s correct.

Greg Macosko - Lord Abbett

Okay. Thank you very much.

Thomas Hicks

Thank you, Greg. Nice talking to you.

Operator

Your next question is from the line of Steven Fisher with UBS.

Steven Fisher - UBS

Great, thank you and my birthday is in January.

Martin Koffel

We’ll mark it down here Steve.

Steven Fisher - UBS

Great, thank you. Just want to confirm that you expect $50 million of interest expense in 2009. Did I see that right?

Thomas Hicks

No, we didn’t indicate what that is, but you can make some assumptions based on our past history of cash flow generation. We expect it to be similar to what it was in ‘08 plus we’ll have proceeds from the sale of MIBRAG, which will also impact that.

Steven Fisher – UBS

Okay, great and then you disclosed that California has delayed some payments due to some of the state budget issues. I mean how would you characterize the risk of receivable write-offs, and is that material?

Martin Koffel

With respect to California on generally?

Steven Fisher – UBS

Well California; that was the one I mentioned.

Thomas Hicks

Gary Jandegian’s here who runs our URS division, has a huge amount of California business, so I will let him comment.

Gary Jandegian

We do a lot of work for the state of California, of course Caltrans, Department of Water Resources, and they are backed up on payments. Typically, we run a small number of $5 million in arrears with the state and it’s grown to about $15 million right now. So it’s not a material number, but it’s something we’re definitely monitoring. We’re in meetings with the state to make sure that we get paid in a timely manner for the good work that we perform.

Martin Koffel

Since Californians were not unused to this, it has happened I think on two or three, maybe two occasions previously in our time with URS and of course, we always get paid.

Thomas Hicks

The other thing I would point out Steve is that our DSOs are healthy and we’re continuing to watch those and we are being more vigilant today than we’ve ever been as to checking the credit worthiness of any of our clients and as you know over 50% of our business is state, local and federal and now on then top of that, most of the rest of its would be the utilities or Fortune 500 companies. So, we have a high quality set of clients which helps a lot.

Steven Fisher – UBS

Okay, that’s comforting and then just lastly, last quarter you said that in terms of M&A interest, international and oil and gas, does that still hold?

Martin Koffel

It holds in a strategic sense, but doesn’t mean we’d necessarily do anything about it right now. If you think about our growth historically, it’s been organic growth and as Tom said, the money’s gone into working capital and we’ve had organic growth in the sort of 10% range and then we’ve had a number of add-ons in the small acquisitions we’ve added; the one in we did last year in Texas, which turned out very well, one in Alaska, which turned out very well.

Then over the years, we had a parallel track of looking for major opportunities as they come up and those major opportunities have led us to double the company five times. The last time we did it was the acquisition of Washington in November of ‘07 and strategy hasn’t changed. We’re going forward on the same three horizons and always looking to grow the business organically on the stream of our strong team that does that.

A bit more active on the add-ons, we’ve got a small M&A groups that we’ve added and we can review more of these opportunities as we become larger and more diverse. They find us with increasing frequency which is good and we always have our eye on the main chance and we think across all fronts, the present economy will create opportunities and we think the strength of our company and the cash flow and the balance sheet will serve us well.

Steven Fisher – UBS

Okay, great. Thank you.

Martin Koffel

Thank you, Steve.

Operator

The last question is from the line of Avi Fisher with BMO Capital Markets.