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URS Corp. (NYSE:URS)

Q2 2009 Earnings Call

August 13, 2009; 11:00 am ET

Executives

Thomas Hicks - Chief Financial Officer

Martin Koffel - Chairman & Chief Executive 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

Will Gabrielski - Broadpoint AmTech

Alex Rygiel - FBR Capital Market

Andrew Kaplowitz - Barclays Capital

Andrea Wirth - Robert Baird

Richard Paget - Morgan Joseph

Chase Becker - Credit Suisse

John Rogers - D.A. Davidson

Scott Levine - JP Morgan

Richard Rossi - Wunderlich Securities

Avi Fisher - BMO Capital

Operator

Good morning and welcome to the URS Corporation earnings conference call, for the second quarter of fiscal 2009. To begin, I’ll turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS. Mr. Hicks, please go ahead sir.

Thomas Hicks

Thank you. Good morning everyone and thanks 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 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 and Form 10-Q for the quarterly period ended July 3, 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 Chief Executive Officer.

Martin Koffel

Good morning and thank you for joining us. In addition to Tom, 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, Vice President of Investor Relations.

I know you’re not a custom to hearing positive news across the whole range of industries in which you follow or analyze or in which you invest and so we’re pleased to have such a strong story about both current or immediate results, but also the future. In addition to the results that I’ll discuss, we’re pleased that we have such a healthy pipeline of opportunities, both jobs we’re going to bid on and jobs sitting in backlog, but that most importantly, we have the resources, the technical resources, the people and of course we have the balance sheet now to capitalize on that.

So, as we look into ‘10 we’re pretty good about things. So, there’s quite a lot of enthusiasm here there always is at URS but there’s quite a buzz in the room about what lies ahead for us and it’s a pleasure to be telling you our story. I’m going to start of course by briefly reviewing our results for the quarter but as always, if Tom and I emphasize, we have a great quarter, but we don’t run the business by the quarter.

We run the business strategically and you’ve seen us build this company from a small beginning over a number of years and build it to a large company with carefully positioned strategic positions in key markets and it’s always strategic, so we run it on an annual basis and we’d ask that you look at our results on that basis also.

So the quarter result was very strong and you will have seen from the press release yesterday that we performed well. Consolidated revenues were $2.3 billion and net income was $95.1 million and earnings per share were $1.16. Our reported net income includes a net after tax gain of $35.5 million from our previously announced sale of MIBRAG, we hits the German mining and power business that we jointly owned with NRG Energy.

This represents $0.43 for the quarter on a per share basis and Tom will give you more details of the transaction a bit later, but even without the net gain on that MIBRAG sale, our operating results were strong and net income would have been $59.6 million, which is even with the second quarter of 2008, and EPS would have been $0.73 and that’s a 4% increase in EPS over the same period last year. Now, our reconciliation of net income and EPS with and without the net gain from the MIBRAG sale is provided in our reconciliation schedule, which is on our website at www.urscorp.com and in our second quarter earnings press release.

As we noted in the past with the addition of our Washington Division, our revenues and profits increasingly are based on project milestones and incentives and our results have become more variable than they used to be before we bought the Washington Company from quarter-to-quarter. Our first half results include earnings from MIBRAG and other large projects that were completed in this period.

As I said a moment ago, we continue to remind you the focus on annual results is the best way to evaluate URS’ performance. Our ability to deliver consistent growth in this really challenging economic period demonstrates the benefits of our diversified business. We built a company that is not dependent on any one market.

It’s not dependent on any one funding source and it’s not dependent on any one commodity price. While we are obviously not immune to the economic downturn, our current results reflect the strength of that long term strategy on which I always like to focus when I talk to you.

We continue to focus on execution and on cost controls, both of which have enhanced our profitability and our cash flow. We’ve benefited from a flexible cost structure that can be adjusted quickly, based on market conditions. This enables us to generate profits and cash throughout the business cycle. In fact, we generated $321 million in operating cash flow for the first half of 2009, and that’s a record for any six month period at URS. Just as importantly, we have the ability to expand the business rapidly to take advantage of improving market conditions and it’s always more attractive than cost cutting, obviously.

I’ll discuss our market sectors in a moment, but I should note that we’re seeing new opportunities emerge in several markets and we’ll be making targeted investments in the second half of the year to pursue those opportunities. As a result of our strong cash flow and the proceeds from the sale of MIBRAG, we also have ample liquidity to invest in the business. We ended the second quarter with record liquidity of $614 million in cash and short term investments.

Finally, we ended the second quarter with a $30.8 billion book of business and this is a $1.7 billion increase from the end of 2008 and a $3.2 billion increase from the end of the second quarter of last year. I’m now going to review the results for each of our four markets in detail, starting with the Federal sector.

Our Federal sector revenues were $1 billion for the second quarter. For the first six months of the year, Federal sector revenues were $2 billion, that’s a 19% increase over the first six months of 2008. These results reflect strong demand for our technical services and our engineering facilities work and growing budgets for the federal agencies that we serve.

Our clients as you know comprise more than 25 federal agencies. They include the Departments of Defense, Energy and Homeland Security and that of course includes FEMA, NASA, the GSA, the U.S. Postal Service, and the various intelligence agencies. The largest source of our Federal sector revenue comes from the Department of Defense. There’s been a much discussion in recent months about how the new administration will adjust the DOD budgets to reflect the administration’s priorities.

To-date, the most significant change has been the reduction in the proposed acquisition of new weapons systems, such as Combat and transport aircraft, the Navy’s New Destroyer and major portions of the Army’s future Combat system. Funding remains robust for program that support troop deployment, logistics, and military infrastructure, all of which require the types of services provided by URS.

For example, Congress recently approved the administration’s request for nearly $80 billion in overseas contingency funding to support military activities in Iraq and Afghanistan through fiscal 2009, which ends on September 30. The funding bill includes more than $28 billion for operations and maintenance activities. In addition, Congress currently is reviewing the DOD’s fiscal 2010 budget request and that includes $534 billion baseline budget, that’s a 4% increase over 2009.

The budget contains funding to support the administration’s recently announced plan to increase the size of the Army by 65,000 troops and the size of the Marine Corps by 27,000 marines. The budget also includes $130 billion in contingency funding to support military operations in the Middle East. These funding levels would sustain continued high levels of support activity.

We also expect increased opportunities to provide engineering, design and construction services as the military shifts its strategic priorities to address the security concerns in the Middle East, Asia and certain other parts of the world. The fiscal 2010 budget includes $21 billion for the military transformation initiative. This will fund the facilities and the infrastructure necessary to support the redeployment of troops and the expansion of military bases.

Over the past several years, we’ve won a number of indefinite delivery contracts or IDCs with the various branches of the military. This contracting strategy has allowed us to respond quickly to meet the demands of long term DoD initiatives such as the military transformation regardless of whether a particular project is for the Army, the Air Force, the Navy, or the Marine Corps.

Turning now to the second major component of our federal sector, our nuclear processing and remediation work for the U.S. Department of Energy and also for the United Kingdom nuclear decommissioning authority, this business also remains strong. It’s supported by steady budgets, by funding provided by the American Recovery and Reinvestment Act, the stimulus bill, and new opportunities to expand the environmental and site management services that we provide.

The administration’s proposed DOE budget for fiscal 2010 includes $15 billion for the programs that fund nearly all of our DOE work. With funding for existing contracts secured through 2010, which means no re-competes on the horizon. Our focus is on continued performance on our growth. There are several opportunities to grow our core business the DOE.

First, we’ll benefit from increased spending under the stimulus package. To-date, the DOE has authorized approximately $600 million of stimulus money for the five major DOE sites, where URS manages operations. We expect that these sites ultimately will receive approximately $1.3 billion in stimulus funding, which will increase our workload in 2010 and 2011. In addition, we’re pursuing you new opportunities to expand our business at DOE sites and national laboratories.

At the Sellafield site in the U.K. we’re pursuing additional opportunities with the UK Nuclear Decommissioning Authority and related entities. So in summary, given the strong funding picture, our growing base of existing contracts and a significant number of new opportunities, the outlook for our federal sector remains strong.

We now expect that our 2009 federal sector revenues will be between $4 billion and $4.1 billion. Furthermore, the growth in our backlog and the number of projects we’re currently pursuing gives us confidence that we’ll enjoy federal sector growth next year 2010, including growth in both our DoD and our DOE business.

Our next key market is infrastructure. For the second quarter, infrastructure revenues were $418 million. For the first half of the year, infrastructure revenues were $866 million. Essentially flat compared to the same period in 2008. You’ll recall that 2008 was a record year for the infrastructure market and for our infrastructure business.

We’re pleased with this performance, given the budget challenges facing so many of the states across the country and the fact that our infrastructure business has yet to benefit from meaningful stimulus spending. As we’d expected, initial stimulus spending has focused on smaller shovel ready, paving, repair and maintenance projects.

The remaining stimulus funds are likely to be spent on larger design and construction projects, which should create increased opportunities for our business infrastructure in 2010 and beyond. Our ability to deliver stable results I think demonstrates the diversity of our infrastructure business and our strong competitive position.

Our revenues from engineering and design assignments including upfront planning work for large projects grew during the first half of the year and these projects will generate opportunities for construction work as they move to the next and later phases. We’re also benefiting from the increased funding sources for infrastructure.

Our projects increasingly are supported through federal matching grants, through bonds and other financial sources such as dedicated tax measures and public-private partnerships and today, only a small percentage of our projects are dependent on state general fund spending. The budget challenges facing states across the country are of course well documented.

For fiscal 2010, which began on July 1 for virtually all states, 46 states were forced to close budget deficits due primarily to declining tax revenues. Nevertheless, states and municipalities continue to be successful in financing critical infrastructure programs through bond measures.

New bond sales through July 2009 were $139 billion, essentially flat to be same period in 2008. This includes the issuance of build America bonds which were established as part of the stimulus package and these bonds allow state and local governments to issue taxable bonds for capital projects. Another increasingly important source of funding is voter-approved tax measures.

Several new measures have been in acted recently, which as resulted in a steady flow of new business opportunities for us both in California and in the State of Washington. As you may know Safety Lou the federal highway matching fund will expire on September 30 of this year and with Congress and the administration focused on healthcare reform and other priorities we believe that lawmakers are unlikely to discuss a success a bill this year.

Meanwhile, the administration has proposed an 18 month reauthorization of the current program which should ensure that Safety Lou will be funded at 2009 levels until a new federal transportation bill is passed. The new bill proposed by the house committee on transportation and infrastructure would give a significant boost to the nation’s infrastructure.

It proposes $500 billion for highway and transit programs over six years. That’s an extension of the life of the bill compared with the prior bills, a significant increase from the $286 billion provided by Safety Lou. After accounting for inflation, the new bill would represent a 50% increase in federal transportation funding. So we’re encouraged by the array of infrastructure projects that will be available later this year and next year, particularly in the transit and the water markets.

For example, states currently are competing for the $8 billion in stimulus funding to develop a series of high-speed and passenger rail networks. URS is currently working on a number of projects around the country including two segments of California’s high-speed rail system.

Given the delay in funding and startup of many infrastructure projects, we now expect that our infrastructure sector revenues will be between $1.8 billion and $1.9 billion for fiscal 2009. However, we expect stronger growth in 2010. This optimism is based on our visibility on projects in the pipeline, anticipated stimulus spending on capacity expansion and a congestion relief project which hasn’t happened so far with the stimulus money and our expectation that several currently delayed projects will be moving forward.

I should now discuss the power sector. Second quarter revenues were $352 million. During the first half of the year, our power sector revenues were $781 million, that’s a decrease of 14% from the comparable period in 2008 and this is inline with our expectations. As anticipated, our performance this quarter was affected by near term factors including the completion of several large mission control projects and the delay in starting certain new assignments.

Long term, however, the power sector remains a significant growth market for URS. We continue to see opportunities for the E&C services we provide for new gas fired power plants as you utilities reduce their dependency on coal fire generation. These plants produce fewer emissions than traditional coal fired facilities. In addition, we expect the demand for air quality control work will increase as utilities begin projects to meet the Clean Air Interstate Rules, 2015 deadline for further emissions reductions.

Finally, we continue to see strong demand for our services to extend the life of existing nuclear power plants through steam generator and reactor head replacements and we also see significant opportunities to help our nuclear power customers increase their generating capacity through the application of advanced engineering technology improvements and the use of higher efficiency equipment. These life extension and upgrade projects expand the number of megawatts that qualify under the low carbon classification.

In addition to generating revenue and profits, our active involvement in these nuclear facility projects allows us to develop and expand our technical and professional staff. Building our nuclear staff will allow us to benefit from new nuclear programs when they move forward. Although the commercial nuclear renaissance is moving ahead at a slower pace than some had predicted, we’re prepared to capture anticipated new assignments. We have relationship with several of the leading technology suppliers and we’re currently engaged in commercial competition for several new facilities.

The Congress meanwhile is moving forward with a new energy bill, which includes provisions to reduce carbon dioxide and other greenhouse gases. We believe this policy shift combined with the administration’s focus on developing emissions free power, will increase the role of nuclear power in meeting our future energy needs. For fiscal 2009, we expect that our power sector revenues will be between $1.4 billion and $1.5 billion. We believe that the outlook through 2011 will be stronger as our clients move forward with emissions control and new generation projects.

Turning now to the industrial and commercial sector, this sector includes our work for the oil and gas, mining, and the manufacturing industries. Revenue for the second quarter were $515 million. For the first half of 2009, revenues were $1.2 billion, an 11% decrease from the first half of 2008. The industrial and commercial sector is the most exposed of our businesses to the economy and we’re seeing the delay, deferral or cancellation of some large scale capital projects in both the oil and gas and the mining industries.

For example, during the first half of this fiscal year, URS had one mining project cancelled and another suspended. The mining industry is consolidating and causing marginal operations around the world and we believe our mining business will recover more slowly than other portions of this sector. Our revenues in the first half of the year included the completion of the largest cement manufacturing facility in North America. Industrial projects of this scale will be slow to reappear in this market for the time being.

The work we delivered to multinational companies through our master service agreements or MSAs has been less sensitive to economic downturns than the capital based assignment that’s I discussed, because the majority of the work we perform under MSAs is driven by compliance deadlines and regulatory requirements and isn’t subject to large capital investment decisions. The long term outlook for the industrial and commercial sector remains positive.

In the oil and gas market we’re providing front end engineering and design on a number of long term projects. This should position us to capture engineering and construction work as these facilities move forward, which they will do. For example, we’re providing preliminary engineering services for a natural gas treatment plant as part of TransCanada’s proposed Alaska Pipeline. We’re also performing regulatory and scoping work in the Canadian oil sands.

In summary, we’re optimistic about our long term prospects for the industrial and commercial sector, but I note that it’s been the most affected by the economic downturn. We now expect that our industrial and commercial revenue will be between $2.2 billion and $2.3 billion in 2009.

At this point I’ll invite Tom Hicks to speak.

Thomas Hick

Thanks, Martin. To summarize our second quarter results, revenues were $2.3 billion. This consisted of revenues of $1 billion in our federal sector, $418 million in our infrastructure sector, $352 million in power, and $515 million in industrial and commercial.

Net income for the quarter was $95.1 million, and earnings per share were $1.16. Net income and EPS included a net gain on the MIBRAG sale of $35.5 million or $0.43 a share on an after tax basis. As Martin noted, MIBRAG is the German mining and power business that we co-owned with NRG. We sold this asset because its operations were outside of our strategic focus on professional engineering, construction and technical services and we’re pleased with the outcome of the sale.

As we’ve noted on prior calls, the financial impact of the sale of MIBRAG was dependent on several variables including the performance from signed closing, the final working capital balance, exchange rate movements, and a review of goodwill attributed to our infrastructure and mining reporting unit.

The final impact of this sale was an increase in other income before tax of $55.5 million in our second quarter and $47.9 million year-to-date. The impact on net income and EPS in the second quarter was $35.5 million or $0.43 per share and the net income in the first half of the year was $30.6 million or $0.37 per share impact.

More importantly, the proceeds from the sale combined with $100 million of operating cash flow we generated during the quarter increased our total cash and short term investment position to $614 million. At the end of the second quarter, our net debt or total debt less cash and short term investments was $386 million, and this is down significantly from our net debt position of $1,065,000,000 in December of 2007 following the Washington Group acquisition.

As you know, URS has a proven track record of successfully reducing debt following strategic acquisitions and our liquidity provides ample opportunity to continue on that course. At the same time, we enjoyed favorable terms under our credit facility, which gives us the flexibility to use cash to invest in the business and take advantage of other opportunities to build long term value.

DSOs or days sales outstanding were 69 days for the quarter compared with 65 days at the end of the first quarter 2009. Interest expense for the quarter was $11.9 million and our tax rate was 41%. Diluted weighted-average shares outstanding for the quarter were 82 million. Our operating income margin percentage was 5.5% in the second quarter, reflecting our continued focus on controlling costs and successful execution of our projects.

As you know, we report separate financial information for our three business segment; The URS Division, the EG&G Division and the Washington Division. For the second quarter, our URS Division reported revenues of $812.1 million and operating income of $70.2 million. EG&G Division reported revenues of $652.7 million operating income of $38.1 million and the Washington Division reported revenues of $850.7 million and operating income of $38.3 million.

Operating margins for all three of our divisions have expanded since the beginning of the year. Reflecting the effectiveness of the cost control measures we put in place during the first quarter of 2008, and outstanding project execution. CapEx, excluding the equipment we purchased through capital leases, was approximately $12 million for the second quarter.

Yesterday’s press release contained a detailed description of our book of business including backlog, option years, and indefinite delivery contracts or IDCs. We ended the second quarter with a total book of business of $30.8 billion, an increase of $1.7 billion from the end of 2008. Backlog, that’s the largest component, it was $18.1 billion for the second quarter compared to $17.2 billion at the end of 2008 and the value of option years was $5 billion, compared to $4.3 billion at the end of ‘08 and the value of IDCs was $7.7 billion, compared to $7.6 billion at the end of 2008.

I think it’s important to point out that even with the $463 million of backlog we removed due to the sale of MIBRAG. Our backlog grew by $900 million from the end of fiscal 2008.

With that I’ll turn it back to Martin.

Martin Koffel

Turning now to guidance for fiscal 2009, we expect that the federal sector revenues will be between $4 billion and $4.1 billion. Infrastructure sector revenues will be between $1.8 billion and $1.9 billion. Power sector revenues will be between $1.4 billion and $1.5 billion and industrial and commercial sector revenues will be between $2.2 billion and $2.3 billion.

Consolidated revenues for 2009 are now expected to be between $9.4 billion and $9.8 billion. Based on our performance for the first half of the year, and the net gain on the MIBRAG sale, we’re raising our full year EPS guidance for fiscal 2009 and we now expect the GAAP earnings per share including the $0.37 per share impact of the MIBRAG sale, will be between $3.20 and $3.35 per share on a diluted basis.

We expect that the number weighted average shares outstanding used to calculate our earnings per share for 2009 will be approximately 82 million shares. I selected point out that although we’re raising our guidance, will not have the benefit of earnings from MIBRAG for the second half of the year. So in summary, we had an excellent quarter and we’re well positioned to meet our objectives for the year. While we’ve not been unaffected by the current economic challenges, we have built URS very deliberately to weather economic downturns.

Our strategic business mix is working well with the resiliency of federal and infrastructure markets more than offsetting near term softness in the power and industrial and commercial sectors and the long term outlook for each of our markets remains strong and we see opportunities for growth to further reinforce our optimism about the future. This optimism is underpin by the strength of our backlog as we pointed out has increased by $900 million since the end of the last year and our growing book of business. Accordingly, we anticipate continued growth through 2010.

With that, we’ll open the call up for your questions. Operator, could we take the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Will Gabrielski - Broadpoint AmTech.

Will Gabrielski - Broadpoint AmTech

First of all, relative to what you guys did in the first half of the year, but I know you guys like to be conservative, but I really do struggle to get to the midpoint of your new full year guidance based on the margins you guys have put up in the first half and where we are on backlog and bond issuance year-to-date. Can you walk through a little bit more about your comfort level or how conservative you feel like you might be being there?

Thomas Hick

Will, we’ve said it repeatedly and I’ll just repeat it one more time. I think one of the issues you’re dealing with is the first half versus the second half I would assume is that right? I want to point out and we described it fully in the first quarter Q as well as repeated it in this Q, we had a series of significant recoveries on programs that we had claims in on contract negotiations for extensions and recovery of costs that we had recorded in the past without associated profit.

That is an ongoing part of our business and that’s going to happen year-to-year. Just so happened this year it was concentrated in the first quarter. It could just as easily have been in the fourth quarter or spread evenly throughout the year. So, I think the thing that I would just reemphasize is for the full year, we’re saying that our EPS certainly at the top end will be up 12% or so and for the first half of the year; we’re already up a significant portion of that.

In fact, we’re up over 30%, first half versus first half of last year. So, I’ll feel very confident we never give you numbers we’re not confident of achieving and as Martin said, what’s really exciting is the amount of opportunities we see coming for 2010 and we’re poise to take advantage of those.

Will Gabrielski - Broadpoint AmTech

I’m just curious, this quarter I know the equity and unconsolidated affiliates line can move around a lot and MIBRAG was in there for Q1 and not in there for the entirety of Q2 but the number was actually a little bit lower than I was modeling and I’m sure you guys know that’s hard number to forecast, but can you provide some color about what’s in that number right now versus what was in there a year ago and provide some sort of color and where you think we’re trending there?

Thomas Hick

I think to get to the last part of your question first, the best thing to do for, I mean to point out to everyone on the line, about 20% or so of our earnings come from that area, from areas that aren’t dependent on directly on revenue generation and that’s the first point. Secondly, I think if you’re trying to model the second half of the year, the best bet is to look at what the first half was and take out MIBRAG, which is about $13 million and then kind of figure that that kind of level will continue in the second half.

Included in that, I think the other part of your question was what’s in that. There’s a whole range of projects in there, some of which are agency based accounting, some of which are joint ventures, etc. and it’s just a long list of contracts. We’re pursuing quite a few that would impact that line in the future.

Will Gabrielski - Broadpoint AmTech

So you’re basically implying maybe $46 million for the second half of the year based on that math, is that about fair?

Thomas Hick

I haven’t done the math, but that sounds a little high to me, but I really haven’t done the math.

Will Gabrielski - Broadpoint AmTech

I have a question. The bond issuance year-to-date and you guys promised on this you’re running flat from year ago levels, which were at the high end of any number we’ve ever seen historically. That’s a significant funding driver for you guys. Is that money slower to be released right now? Is there any issue there, but obviously that’s a pretty positive indicator, I would imagine of infrastructure demand to come?

Thomas Hick

Yes, it’s been one of the bright spots actually, as the state budgets have come under pressure, the bond issuance and the appetite for new bonds by the investing public has been there. So these build America bonds, which are supported by the stimulus activity, as well as just normal bond activity in the states has been good and healthy.

Martin Koffel

The normal bond, the normal tax deductible bond activity level in the first half was about $222 billion then on top of that, issuances through July 31 of the build America bonds were about $18.5 billion the significant bond activity as you would expect was in California, New York, Texas.

I mean many other states were involved but the states where we have the heaviest part of our infrastructure work had higher issuances. General purpose bonds, transportation, education, healthcare, utilities and the like. So that’s really a much smaller proportion of our infrastructure work is funded by the general fund, considerably less than 20% and the bonds are a very important part of it.

Will Gabrielski - Broadpoint AmTech

Is there any issue with that money being spent right now? Are states slower to spend that? I know it’s not directly from the state, but is the money slower to come out or infrastructure projects slower to startup, which is the amount of funding that’s there is quite significant?

Martin Koffel

Martin Tanzer, who is the head of our marketing is here, would like to say something.

Martin Tanzar

No, we don’t anticipate any slowdown in the distribution of those funds. In fact 2010, if you look at the funding source other than the bonds, Safety Lou will provide about $41 billion of funds for infrastructure work in 2010. In addition to that, there’s $11 billion of stimulus funds that will be available to the states. So we should have a very large base of funding for infrastructure projects in 2010. In addition to the bonds, there’s about $51 billion available or appropriated for infrastructure projects. So we’re quite optimistic about 2010.

Martin Koffel

The slowness at present is the money coming from the stimulus bill. There have been large amounts appropriated and obligated, but the portion disbursed has been slower. We’d like to see that money spent on congesting relief, projects that relieve congesting and projects that increase the capacity of the transportation systems and so far it’s gone on what they call these shovel ready projects, which really are just paving and widening and the like.

Will Gabrielski - Broadpoint AmTech

Just a general question and then I’ll hop back in the queue. The government year-to-date I think across my coverage has been a little slower in spending money, the stimulus package created a lot of inertia as has the new administration and you’ve different other companies as well. Have you seen a turn in July, Army Corps of Engineers type work that getting release so to more quickly now. Has the government reorganized and are they spending that money a little more quickly yet?

Martin Koffel

I think we’ve got some helpful comments here. I’ll now invite Gary Jandegian, who is President of our URS Division and we can discuss a core project that was just announced.

Gary Jandegian

We are seeing a churn in opportunities funded by Stimulus Monies. In fact, we’ve identified 65 specific projects that we’ve either won or are pursuing to receive stimulus funds of more than $6 billion, and this does not include the DOE moneys that we referenced in our prepared remarks.

26 of these are confirmed projects and the remainder are prospects. I’ll just give you some examples, in the mass transit area; we’ve been awarded the Ohio DOT’s Eastern Corridor Commuter Rail environmental and preliminary engineering work. That’s money that’s stimulus funded.

In the highway side, we’re supporting the Federal Highway Administration in running its program management for stimulus funded projects. On the water side, we won a project for a wastewater treatment plant upgrade in the City of Millbrae that’s stimulus funded. With the Navy, we’ve won a number of task orders that are funded through our global contingency contract using stimulus funded monies.

In air transportation, we’ve won four projects including the Billingham International Airport, Laredo Airport, Payne Field and Spokane International Airport that were all stimulus funded projects. So we see a lot of prospects and projects that we’d actually won.

Martin Koffel

I think the two points to make on infrastructure, firstly, we’ve held our own with our results through this period last year, which was a very, very strong period, the strongest that I ever recall. We are pleased with the status of that infrastructure business. As I said earlier, there’s essentially negligible stimulus money in our revenue year-to-date. The stimulus money lies ahead.

Thomas Hick

Just to follow up one final point, you asked about our optimism or conservatism in the second half. What’s happening is a lot of the stuff is starting to come out now, but the chances of it having significant impact in the second half are dim. That’s why we think 2010 is what to look forward to. We may see this happened faster than we expect and we’re starting to see programs released and dollars flowing, but it’s still a little early. We’re all disappointed it didn’t come sooner.

Operator

Your next question comes from Alex Rygiel - FBR Capital Market.

Alex Rygiel - FBR Capital Market

Tom, I appreciate all the guidance as it relates to revenues, but your comment as it related

to 20% of your profit comes from basically fee-based contracts that don’t pass through your backlog really. Could you directionally help us to think about that 20% of profit looking out into 2010? Understanding, that you had a big surge in some of those fee-based contracts over the last six to nine months? Therefore, in current 2009, you might not necessarily be recognizing the full portion of profit, but probably next year you will be.

Thomas Hicks

Yes, I think that’s a good observation. One of the major contributors to that is the Sellafield program, which is really just getting up and running and we’re in the early stages. That’s a program that we can affect the profitability by our performance and we’re graded on an annual basis and this is really going to be our first full year of performance that we’re entering into now. So if we do well there, that should certainly help and grow that.

We’re seeing more opportunities that are being pursued through joint ventures, which are unconsolidated in many cases, and which you’ll see especially in the infrastructure area and some of the large design builds and construction activities, they’ll show up through that line item as opposed through revenue.

So we would expect as we start getting more definitive about 2010, we would expect that to be a significant growth area for us going forward. I would point out, though, that one thing you have to adjust out of MIBRAG was a significant portion of that line item in our P&L. Obviously, that’s gone away.

Alex Rygiel - FBR Capital Market

Is there any negative impact from the termination of the Bolivia mining contract?

Thomas Hicks

That is actually has a relatively immaterial impact on our performance as far as financials go for the year. It will have on a cash flow basis the owner of that mine is going to repurchase under contract all the assets that we’re using down there and they should be repurchased at no gain or loss.

Another impact there is that’s a very, very long term project which had revenues over multiple years of $360 million or $370 million of backlog. That’s another thing that came out of backlog, that I think mass a bit how our real backlog performance was for the second quarter and the first half.

Alex Rygiel - FBR Capital Market

Lastly, on acquisitions, obviously with some of your end markets weakening, you’re probably reevaluating some of your strategic views, longer term. Can you comment on acquisition activity and where you want to take the company?

Martin Koffel

Let me comment on acquisitions as part of the strategic growth of the coming over a long period of time. I think you’ve heard us say before that we follow three growth channels in parallel. Organic growth, obviously there’s a lot of intense marketing and execution that goes into maximizing our organic growth of the time and normally we pursue smaller add on or technical acquisitions and we’ve done a number of those and have a number under consideration at any onetime.

Then in parallel, on a third channel, we’ve always been opportunistic and the fact is that over the years we’ve probably made, a couple of dozen of the smaller acquisitions which have been very helpful. They fold in quickly they expand geography or they add technical ability in a particular market and we’ve consummated five transformational acquisitions, the last one being the acquisition of Washington Group, each of which, each of the five essentially doubled us from the size we were at that point and we’re always working on those three channels.

Right now, we see some good opportunities to add in some smaller businesses in a couple of areas to help us in the DoD market, to help us in some states like Texas and Alaska, to help EG&G which as we’ve said publicly we’re looking at cyber securities space and intelligence, and of course behind that we have the balance sheet. Our total debt at this point is about $999 million that’s 21% of our capital structure.

The net debt is $386 million that’s about 8% of our capital. So, we have the desire to make some acquisitions, particularly the tactical kind, and we have the balance sheet, we’ve got the strongest balance sheet that we’ve had in our history at this point. So acquisitions certainly are in a measured way part of the short and long term future.

Operator

Your next question comes from Andrew Kaplowitz - Barclays Capital.

Andrew Kaplowitz - Barclays Capital

Tom Hicks, I just want to clarify something. If I Bolivia was taken out of 2Q, not 3Q; is that correct?

Thomas Hick

No, I miss spoke earlier, I apologize. The backlog for the Bolivia will come out in Q3, not in Q2.

Andrew Kaplowitz - Barclays Capital

Forgive me but I want to ask you about the Common Sulfur Project again. You took another charge in the quarter. It is complete as of what you say in the Q, but what’s the risk of the damages, you’ve taken liquidated damages or future charges on the project?

Thomas Hick

It’s probably better to have Tom Zarges, who runs our Washington Division as been visiting that project quite regularly comment.

Tom Zarges

Just to put a tail on it, the project itself has three milestones for completion. The first of two are critical to the operation of the overall facility. The second milestone, which is the last critical milestone, is a milestone called minimum granulation in which Molten Sulfur is granulated and stored and that’s an essential part of the program.

We are weeks away from achieving that milestone, not months away, weeks away, but as we are doing so we are making some revisions and changes to the design which at this point have been quite expensive to implement in the field. So, we are wearing that project out we are rapidly coming to the point where the second critical milestone will be achieved and once that milestone is achieved, on schedule, we trust, it will facilitate the scheduled operation of the plan. So we never say it’s over until it’s over, but we are approaching the point of rapidly diminishing workload and complete commissioning of the plant.

Andrew Kaplowitz - Barclays Capital

Tom Hicks, when you’re thinking about guidance, do you think about the common sulfur project as a potential hindrance in the second half of the year as well?

Thomas Hick

Well, we think at any given time, we always believe we’ve adequately prepared for the estimate to complete on these projects and we thought we had done that the last couple of quarters. So we’re nervous, but as Tom says, we’re very close to completing this and we can see the end. We think we’ve provided for it adequately and certainly as we look at guidance, we look at all kinds of ups and downs that could happen.

We have thousands of projects of which there are probably dozens could affect us in a material way. So we’re very careful about that as we go through. When we give you guidance, we always fully expect it to do that and therefore what goes into that thinking is a very careful consideration of all these projects. So I think that’s probably the best way to answer that.

Martin Koffel

We can’t tell you that it’s over yet. It’s a legacy project that came with an acquisition. Obviously, we’re aware of it from due diligence and so forth. I had a certain amount of equanimity about this kind of thing. Each of the five large acquisitions that we made to go with it, it something more or less equivalent to the common sulfur project in terms of scale and longevity and that it also in each case, this project and the equivalent of it in previous acquisitions brought with it be in house expertise to deal with it.

Tom Zarges and his team were all over this before we acquired the company and I’ve got complete confidence in their ability to work without really being able to predict it. We have between 10 and 11,000 live contracts at any onetime and it’s a big portfolio, and while I’m conscious of this and we talk about it, I don’t lose sleep over it.

Andrew Kaplowitz - Barclays Capital

One other point of clarification, the ARRA funds that are going to the DOE projects, I think you mentioned $600 million has been allocated so far. Are those to your particular projects and I know how you report these projects as through equity income. So I’m just trying to figure out what the bookings equivalent would be in the quarter or for the year on that type of work?

Martin Koffel

You’re asking about the stimulus money that went into them?

Andrew Kaplowitz - Barclays Capital

Yes.

Martin Koffel

There are five projects, where we actually manage the operation that will receive stimulus money and for those five projects there’s been in broad terms about $600 million authorized. The DOE ‘10 budget requests for those sites add up to more than the amount authorized. They add up to something like $1.4 billion and so all that will have to be worked out through the budget process.

Andrew Kaplowitz - Barclays Capital

When does that money, so it’s going to be a little while before that money finds its way into these projects or we don’t know or…?

Tom Zarges

Just to put a tail on it. The $600 million that’s being authorized, those are planned expenditures, which will begin this year. Doesn’t mean it will all be spent this year, but those monies are now in the Q, being planned and being contracted for and implementation.

Some balance of the money which totaled including that $600 million, about $1.3 billion, $1.4 billion, will flow and be spent in FY ‘10 and FY ‘11 and for the most part these are agency contracts. So what we’ll see in the bookings will be the earnings that stream off of those budget allocations.

Martin Koffel

This portion to the stimulus funding was a pleasant surprise. We’ll likely to announce, we’re highly focused on infrastructure and when the stimulus bill came out and we saw the $6 billion, it was obviously a favorable outcome.

Andrew Kaplowitz - Barclays Capital

Is one of your competitors booked actual booking on it as part of an EPC contract? I think the difference with you guys is that it’s just a different contract structure. Is that fair?

Thomas Hick

Yes, it can be. I mean the contracts are different at these facilities. So some of them are done through joint ventures, some are done through agency accounting and some are done as direct revenues. So it varies from project to project.

Tom Zarges

I would add that at other sites, beyond the five that we directly manage, we’re also competing for and working on many of those programs that will be funded through these stimulus bills. So the impact for us and the opportunity for us goes well beyond the $1.4 billion that’s allocated to the five projects that we directly manage.

Thomas Hicks

This is a terrific market for us. As you know, we’re the leader in this area and money that’s put in play in this area is something that’s fair game for us to go after. So we’re real excited about this.

Andrew Kaplowitz - Barclays Capital

It’s fair to say, that it’s not really reflected in your federal bookings. So you can’t see the underlying strength, it’s just going to come through in equity earnings?

Thomas Hicks

That’s not always equity, sometimes in other methodology, but you’re right. It doesn’t come dollar for dollar. The $600 million probably I’ll never show up, but the profits from it might.

Operator

Your next question comes from Andrea Wirth - Robert Baird.

Andrea Wirth - Robert Baird

One of you can give us a little bit of an update on what you’re seeing in the oil sands market. One of your competitors booked a decent size project there recently and oil prices being elevate just wondering if you’re seeing a little more activity in that region.

Martin Koffel

I spent a week out there, came back pretty excited. There’s a lot of front end planning going on and people have their staffs intact and looking for capacity from companies like ours so I see it as being deferred, not cancelled, and I think it’s a very promising area for URS. Tom Zarges has also been up there recently and he’s close to it.

Tom Zarges

Yes, there’s certainly signs of vitality in the oil sands. I think what we’ve seen after a round of suspensions and delays is that people are re-planning, refocusing, re-scoping many of those programs against what they think the new economics will look like. As the price of oil freshens up and becomes more of a trend than a spot market, I think it’s giving a lot of people some confidence, the plans are going forward and if you sort of aggregated the comments that you hear, it sounds like 2010, 2011 will be a resumption of many of these longer range programs up in the oil sands.

So it’s a fine market for us. We actually think that the short-highest here in some major projects allows the industry and our customers to get refocused, re-scoped and take a harder look at the economics and the consequences of performance up there. I think when it resumes it will be on a very sound basis and we’re well prepared now to proceed with them.

Martin Koffel

We have the customer relationships and the reputation and we are focusing on building our capacity so that we can deliver as soon as it expands.

Andrea Wirth - Robert Baird

Just switching on to the nuclear side a little bit, your comments sounded that things were fairly optimistic there, but we did have Exelon pull their application earlier this quarter. So just want to really get a gauge of your optimism as to when we could be seeing another agreement or contract. Is there potentially you can see something in the next 12 to 18 months? Or is this something maybe a little bit further out on the time horizon?

Martin Koffel

When we talk about nuclear we’re talking about something much broader than new nuclear plants. They’re attractive and they will happen, but 20% of our power business, this may not be clear to people, but 20% of our power business is actually related to provision of nuclear engineering and construction services to the nuclear power industry.

As I mentioned in my prepared remarks, we are involved in replacement of steam generators and nuclear reactor caps and so on and we’ve been very focused on building and holding a large staff of nuclear trained people so when the expansion comes we are well equipped.

We have good revenue from the nuclear industry now, it’s profitable and good cash flow and we also have in place some excellent technical alliances so that when things move forward, we are ready for it. There’s been a lot of focus, I think a little bit too narrow of focus perhaps by the investment community on the DOE loan guarantees, and the first round of them and then the second round.

I think the second round in many ways when it comes out will be more important than the first round. I think people mistakenly thought that the first round would define the way forward and define who would build those reactors and I think the first round is just the first round and that’s too narrow a focus. Tom and I would be like to imagine that.

Tom Zarges

No, I think that’s quite true, Martin. I think we’re quite satisfied with our technical relationships with GE and Mitsubishi and of course we developed our relationship with Hitachi which demonstrates another trend which is the client’s interaction with these venders and they expressing their preferences for engineer constructers.

I think that’s good train for us by the way, but I think what you’re seeing is the utility industry the substantial utility industry has been quite deliberate in the way they put these plants together. It’s a pretty difficult planning scenario for them when you consider these are $10 billion investment issues that their current short term demand and pricing structure is a little uncertain and in many cases weaker than they anticipated will be in the future.

So they’re taking their time, making sure that the technology selections and the commercial application of these plants are premature and well defined. So, right now we’re continuing just as we said last quarter to be involved in meaningful negotiations, in competitions for the selection of technologies and we would anticipate, again, that some of those announcements on those selections would be made prior to the end of the year.

At the same time, we’re very active in preliminary work and in doing the staging for many of these projects, both for vendors and for utilities. So, it continues to be a market that shows a great deal of promise, but I think the sense is that the utilities are being very deliberate about the way in which they evaluate and contract for these pretty substantial investments in their future.

Andrea Wirth - Robert Baird

I think earlier this week a long term schedule was agreed upon for the clean up at the Hanford Site. I just wondering if this has any impact on URS in terms of the need to maybe speed up work on hand or ultimate, did the schedule not change much there?

Martin Koffel

There is some stimulus funding that’s been applied to Hanford and we do have several contracts there including the River Corridor Cleanup and the operation of the tank farms and in partnership and the construction of WTP. So some of those programs will be impacted by this decision and the acceleration due to stimulus funding and we’re already seeing as we reported earlier some of those effects.

Operator

Your next question comes from Richard Paget - Morgan Joseph.

Richard Paget - Morgan Joseph

Now that it seems that we’re not going to have a longer term highway bill in the near term and it’s going to be an 18 month extension, do you think there is going to be any impact on the mindset of some of the DOTs given that they’re generally conservative and if they’re not sure what’s going to happen longer term, then might be a little bit more reluctant to commit to some of the larger longer term capital projects?

Thomas Hicks

I don’t believe that the situation with the highway bill is news to them. I think this is we’ve known of the expiration date. We’ve known of the uncertainty. We’ve known of the new liquidity of the highway trust fund sometime, Congress has had to put money in on several occasions.

So I don’t think that’s so much the factor. I mean, I think the real betting is on what happens here with the Safety Lou successor. There are three possible ways for that to unfold. We could have continuing resolutions as we had some years ago and that would probably be the least desirable approach.

We just a continuing resolutions and money was sort of drilled out. If that happened, that would probably be something less than sort of 100% of what the ‘09 funding rate has been some percentage of them, 90% or 80%. The seemingly most likely outcome is pending a new bill, that there would be an extension and the Obama Administration effect just wants about an 18 month extension. Whether 18 months is realistic, I heard that if it were 18 months it probably would be 24 months, but we shouldn’t underestimate the political dynamics of this.

The Congressman over staff that chairs the house subcommittee on this has proposed increasing the funding from the Safety Lou level, which was $286 billion to $500 billion. Now, would extend the time period, it would go out to six years, and after you take inflation into account, that would be a 50% increase in federal transportation funding over the safety two level, but then it all gets tied in with the elections.

I think perhaps the strategy for the 18 month extension that’s been floated in Washington is that would straddle the midterm elections in November of next year and might give Congress opportunities to think about tax increases and so forth without getting mixed up with the election cycle. There’s some of the things that we’re hearing, so really gets down to three things.

Will it be a continuing resolution? I personally think probably not, could there be an extension? Most likely outcome, but we shouldn’t underestimate the political energy and the drive of the Congressional Subcommittee to bring in a successor bill and bring it in this year.

Richard Paget - Morgan Joseph

So it just to be clear, then your take on DOTs spending on the so-called short term shovel ready projects has more to do with them ramping up their funding right now to get people working versus being reluctant with the uncertainty of what was going to happen with highway bill longer term?

Martin Koffel

The biggest problem for DOT is their state budgets and to the extent that some of the money comes from the general fund, and I think DOT people are more worried about keeping their own staffing levels in place, about the tax revenue base and so not intensive…

Martin Tanzer

One of the phenomenon that we experienced in 2009 regarding the funding stream was that the states who have had limited procurement capacity and then that I will focus on procurement focused on the stimulus funds, which were $3 versus the matching funds that the Safety Lou requires.

So to meet the obligations of the bill, which was to obligate 50% of the total $27 billion by June 30, they focused all their efforts on that at the expense of the normal work that usually goes on the state DOTs. So what’s really happening is that we’re seeing with that wave. If you look at the drawdown on the stimulus bill, you’ll see that in many of the states have not drawn down their portion of the Safety Lou money.

The way the regulations are written now, if they don’t use it by September 30, they lose it. There’s every indication that Congress will allow them to roll those funds forward, giving them a longer vision of their build out programs. So we anticipate seeing the states having much more confidence in the funding streams for 2010 and 2011, looking at more capacity and congestion relief projects, which are the larger highway bridge and interchange projects that are our suite spot in the marketplace.

Richard Paget - Morgan Joseph

So that’s where you get the confidence that those projects will start ramping up, then?

Martin Tanzer

Yes.

Richard Paget - Morgan Joseph

Then the GSA has a pretty big program, upgrading a lot of their buildings. I think it’s around the $5 billion program. Are you guys participating or bidding on any of those packages?

Martin Tanzer

Yes, we are. Those are predominantly upgrades, and energy upgrades, and some build outs of built GSA facilities and we are actively engaged in a large portion of those projects.

Operator

Your next question comes from Chase Becker - Credit Suisse.

Chase Becker - Credit Suisse

I just had a quick question, digging deeper into the acquisitions. Martin, I know you’ve been saying for a while that you’ve always been kind of interested in energy and specifically I was wondering if you could maybe provide a little bit more color in terms of where you’re looking, are you looking specifically more on the upstream side or downstream or are you looking more on the front end type work or full EPC capabilities?

Martin Koffel

We just a little hesitancy for competitive reasons as would you understand. We’ll go as far as we’re comfortable publicly.

Thomas Hicks

I would say we’re very active in that whole area. It’s not a real strength of the company and we hope to make it strength overtime and currently most of our work is based on what I would call certainly downstream, where we’re providing environmental services and a lot of health and safety and mandated activities, but we’re doing small capital projects and small process engineering.

So there’s a lot of room for us to grow there. Also, certainly in the midstream area, the pipeline area, we could do much better. We have worked there and we’re pursuing work there, but we could expand there and as of right now, probably the upstream would be the last on that list, but it’s certainly an area over a long term we’d want to look at as well. Generally speaking, it’s one along with the couple of others. It’s one of the areas we’re focusing our M&A activities in right now.

Chase Becker - Credit Suisse

Then I guess a follow up to that, just in terms of the categories that you kind of broke down earlier and the size of the deals. Would it be fair to say that there is potential deals that would fall within all of those buckets, within the energy spectrum that you’re looking at?

Thomas Hicks

Well, for the small targeted deals, either geographically or technically, certainly. A lot of these companies specialize in one part of the process, either up stream, downstream or midstream. On the larger strategic acquisitions, almost anything we look at of a transformational size is going to have significant exposure to this marketplace. So hopefully that answers your question.

Operator

Your next question comes from John Rogers - D.A. Davidson.

John Rogers - D.A. Davidson

A couple of things, first of all, just back to the margin issue for a second. Specifically in the URS Division, margins were quite a bit better than they’ve been historically and sequentially and I know in the Q, you mentioned reductions in overhead costs, but was there anything else in there, I mean in the reduced use of subcontractors that would make these margins sustainable?

Tom Zarges

Let me make the comment and then I’m going to let Gary Jandegian, who runs that division comment, John. We’ve always said over the long term, that business is a 6% to 8% operating margin business. We still feel that way, when it pushes up over 8% it’s very hard to sustain that. I’ll let Gary comment on that.

Gary Jandegian

John, I think you’ve got part of it right. We talked about this on the last call that, we’re trying during this economy to do more self-performance, the things that we’ve historically subcontracted out or had heavy pass through costs. As we mentioned the margins on pass throughs are very low for the URS Division. So when we self-perform, we can really improve our margins. Part of the margin improvement, I’d say roughly half of it is from the less use of subcontractors and more direct labor performing that work ourselves.

We’ve also been able to withstand pricing pressures by clients. While we’ve been asked to lower our prices, we talked to our clients, we got a large relationship base set of clients and we’ve been able to do pretty well and in not succumbing to pricing concessions this year. However, prices aren’t going up. So we’re not able to get our pricing leverage that we were around achieving the last couple years, anyway, but overall, I think we had a really great margin in the URS Division for the quarter.

I think Tom’s right. We’ve always said 6% to 8%. I’d like to be able to sustain towards the higher end of that, but cost controls had a big element of that. We really planned well in the fourth quarter of 2008 and it really helped us in the second quarter.

John Rogers - D.A. Davidson

Just one other follow up, in terms of your cash position at this point, in terms of just maintaining or requirements working capital requirements, giving the mix of business you’ve got now, which includes more self-performance and construction work. Tom, how much cash for the size of your business do you need?

Tom Zarges

$200 million to $300 million, so I think on a net basis, we have maybe 650 right now, so, do the math. Some of that is because of international operations some is captured in JVs and all kinds of other situations so when you add all that up you get $200 million to $300 million.

Operator

Your next question comes from Scott Levine - JP Morgan.

Scott Levine - JP Morgan

A question, you guys have given explicit guidance through each of the four end markets and we can map that back to what you expected at the beginning of the year and you’ve also provided anecdotal commentary on 2010, but if we think about what your current anecdotal commentary is or expectations are in 2010, and you think about maybe what they would have been six months ago? Have there been any notable changes, either positive or negative, in any of the four segments that really come to mind?

Thomas Hicks

Yes, remember when we put our guidance together, it was in the end of last year, which was probably one of the darkest moments in recent memory as far as the economy goes. If you had asked us about 2010, I think people did, we were very reluctant to make any predictions because who knew how the recession was going to roll out.

Right now, and this is not reading the headlines, this is actually from what we see in the marketplace, the activity and the demand for our services is building and some of our markets as we mentioned earlier, the federal market in particular, as well as infrastructure, we see a significant opportunity to grow in 2010. The I&C sector is one that’s going to probably be very, very sensitive to how quickly the economy turns in the retail area and housing and all those areas.

Finally, power’s a very long cycle business and we have a big section of our power generating capacity in the U.S. is reaching its age or is 2/30 to keep online so we think there’s great long term opportunities in power, but short answer is 2010, we’re very optimistic today where we couldn’t have said that three months to six months ago.

Martin Koffel

While we think we’ll have good growth in federal and without trying to bracket numbers at this early stage and we’re very optimistic about infrastructure, we think a lot of the stall jobs will move forward and we’ll see the infrastructure money and the states of course now have balanced budgets, they’ll soon be worrying about the ‘10 or ‘11 budget, but they have balance budgets. We feel good about infrastructure and our competitive position.

We are having discussions in oil and gas and so on about the front end of projects in the I&C sector. The real issue is while we expect to get engineering and design work next year. How many in the course of next year in those other sectors will turn into real construction projects, the kind of large projects that in many ways define our Washington Division and it’s too soon to tell. We’re encouraged by the fund end work we’re getting. So, it really is the timing of when they become construction projects. Is it ‘10 or is it ‘11 and we’ll learn more as the year progresses.

Scott Levine - J.P. Morgan

In your key you mentioned you’re still seeing decent activity and you’ve had some announcements on the new build side in gas and power business. Is your expectation that could continue, could see additional builds in advance of new energy build and whenever that gets passed?

Martin Koffel

Well, I think that’s the obvious area where the new build will occur. Gas is still relatively cheap fuel, compared to alternatives and the supply looks good. I think the only issue that utilities are struggling with you now is their short term demand predictions and price predictions, but natural gas is clearly the fuel of choice and because of the capital costs of building either combined cycle or simple cycle plants. So relatively low to other generation means that’s what we’re going to see.

We’ve got some alliances now. You know about the TVA alliance, which could include up to 10 plants. They so far are authorized two and they’ve working on several more and we’ve got several in the pipeline that are emerging and coming on very quickly. So I think we’re seeing the developing trend. It’s obviously away from coal, it’s into natural gas for all of those reasons and that will continue to be the stop gap until we’ve got a less carbon intensive method in fuel, which could be nuclear coming online in seven to eight years.

Scott Levine - J.P. Morgan

One last and very quickly, I think you mentioned transmission distribution is an area potentially of interest and then even earlier this year. Is that still on your radar screen? Could that be an area where we might see something on the acquisition side or where does that kind of rank in terms of strategic importance?

Martin Tanzer

It’s still an area we’re very interested in. We do work there already and it’s a very fragmented local market and there are opportunities for us, as you know we’re spread geographically around the country to make selected targeted acquisitions to support that activity and certainly that’s on our list and we’re looking at opportunities there.

Operator

Your next question comes from Richard Rossi - Wunderlich Securities.

Richard Rossi - Wunderlich Securities

You answered most of my questions. I did have one minor thing though yet, unless I missed it. I didn’t hear very much about the water side. Is that more because the other areas are larger and more interesting at this point or is the activity there just reduced considerably?

Martin Koffel

We’ve had a lot to say about water over the years and one reason or another, other moves have been more attractive and so there is stimulus money of the $65 billion going into infrastructure, there is $6 billion appropriated for water and flood control projects. There’s $4.5 billion obligated, but at this point over about $2.5 million disbursed. We’ve had quite a few water projects and Gary Jandegian might comment for a minute.

Gary Jandegian

I think we see the water market being strength of ours when it comes to levee protection, flood protection and also dam projects, as well as we do a number of designs on waste water treatment plants. We’re working on the department of water resources levee protection program in Northern California. That project was stalled a bit until the state budget crisis was resolved, even though that wasn’t really depended on general fund money in California.

We’ve been able to restart or re-add up on some of the new task orders for that assignment. We’re also doing very well in the New Orleans area, when it comes to flood protection and hurricane protection and we’re pursuing a number of opportunities there for pump station gates work for the Corps of engineers, as well as the local communities. So I think those would be the main areas where we may have a little bit of a competitive advantage, particularly in the areas of levees, dams, and flood protection.

Operator

You your final question comes from Avi Fisher - BMO Capital.

Avi Fisher - BMO Capital

The backlog and backlog that was cancelled, if I heard properly you said $463 million in taken out of backlog because of that?

Thomas Hicks

Yes, we had that associated with MIBRAG, which had very, very long term contracts. There’s a $463 million or $500 million worth of backlog.

Avi Fisher - BMO Capital

In that time frame?

Thomas Hicks

Yes, that came out of our backlog during the first half and then second quarter.

Avi Fisher - BMO Capital

Any other projects that came out of backlog, I mean, not because of completions, but cancellations?

Thomas Hick

Yes, we mentioned a mining project as well that and I think Martin mentioned it and we’ve also mentioned it in our filings, cancellation of a project. That was $176 million and it fell in Q1, which has already come out. So in the first half, $600 million or so, little over $600 million has come out and we’ve added new orders for the year-to-date is over $6 billion for us, so in spite of that, our backlog from the end of last year has grown.

Avi Fisher - BMO Capital

I just needed to get it, because it skews the way I calculate bookings so that actually helps and shows the growth. In terms if I just wanted to drill down. I know a lot of people asked about equity income. It looks like in the Q there was $3.9 million from the U.K. nuclear cleanup. Should that be considered a run rate? Is that still a ramp rate? Or is there too much volatility to have any rate?

Thomas Hicks

I mentioned briefly, the way that contract works is, we get a base level of fee there and then we get a significant portion of our profits come based on our annual performance and assessment of that. That happens to fall in the first quarter of our fiscal year. That’s why it shows up in the first half of this year. It will not be a run rate. What you’ll see, unfortunately, because of the way we have to account for that and the way the award fee works, just see a steady level of fee activity and then a bump up as we get our award fees in the first part of each year.

Avi Fisher - BMO Capital

So it’s front half loaded?

Thomas Hicks

That’s exactly right.

Avi Fisher - BMO Capital

Also on equity income, I’ve mentioned in the Q the $6 million on a California rail project. It was unclear to me, is that a project that’s ongoing, that profits are lower than expected?

Thomas Hicks

This was related to a project that we’ve been working on for many years that’s reaching its final stages. It’s been a profitable project. As we get near the end, as we narrow the estimate to complete down to as best we can the actual performance so that was a true-up of the profitability on that project at the very end.

Avi Fisher - BMO Capital

Just on the cash flow generation, it looks like just for the quarter, $60 million overall in cash. Looks like also you burned-off $60 million in NOLs. Just wondered, I mean, and DSOs went up a little bit. Are collections slipping a little bit or can you give us some color and guidance on that?

Thomas Hicks

We’re up a little bit on DSOs and it’s due to a whole myriad of factors. I couldn’t point to one thing in particular, but we don’t believe, we see any long term trend there. Most of these factors are related to administrative or technical issues that we’re dealing with on an ongoing basis. We did see some slowdown in California as they grappled with their budget problems, but that’s freeing up now. We’re starting to see that money flow.

Avi Fisher - BMO Capital

On the NOLs, I mean, if I did my math right, you used $60 million in the quarter.

Thomas Hicks

I don’t have that number in front of me, but that doesn’t sound crazy to me. It sounds right. As long as we continue to generate profits, we’ll continue to be able to take advantage of that going forward, as a significant amount of that left and that will extend through this year and into next year.

Avi Fisher - BMO Capital

Just as a final question, people have already asked about this, you have a lot of cash on hand, certainly enough to meet your debt requirements. Martin talked about the targeted investments. Could you give some color on what we should be thinking about or looking for or what areas that really interest you in size and scope? Thank you.

Martin Koffel

I think I did cover that.

Avi Fisher - BMO Capital

If you already covered it, I’ll find it in the transcript.

Martin Koffel

Yes, I did cover that in slightly more detail than I intended to.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Koffel for any closing remarks.

Martin Koffel

Thank you for joining us today. We always enjoy these calls, but one of the disadvantages is that you hear us talking about the company and I’m sure you sense our enthusiasm. You don’t see the body language and if you were in the room with the dozen people who are here, what you would see is great body language. People feel good about the quarter. I mean, we talk to our clients who universally are not doing as well as we are.

I’m going to a dinner tonight in San Francisco of 25 CEOs in a round-table and I know I’ll have the best news both in terms of the six months that are behind us, the six months that lie ahead and the year that lies ahead next year. So people are in fine settle here and we feel I mean to be honest, we feel quite proud of what URS is doing in the worst economy in our lifetime or our parents’ lifetime and feel good about the remainder of the year and as we start to see visibility for 2010, we look at the pipeline.

The total book of business up $900 million since the close of business last year, we see all the early talk starting with our customers, even in some of the soft sectors, and we don’t have full visibility into next year, but we know we’ll grow and I know equivalent of these calls next year, I think you’re going to be fairly positive. So thank you for joining us and look forward to reporting on the next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: URS Corp. Q2 2009 Earnings Call Transcript

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