URS Corporation Q3 2009 Earnings Call Transcript

| About: URS Corporation (URS)

URS Corporation (NYSE:URS)

Q3 2009 Earnings Call

November 13, 2009 11:00 am ET


Thomas Hicks – Chief Financial Officer

Martin Koffell – Chairman, Chief Executive Officer

Martin Tanzer – Executive Vice President Business Development

Randall Wotring – President EG&G Division

Thomas Zarges – President Washington Division

Gary Jandegian – President URS Division


Richard Paget – Morgan Joseph

Will Gabrielski – Broadpoint AmTech

Vance Edelson – Morgan Stanley

Andrew Kaplowitz – Barclays Capital

Jamie Cook – Credit Suisse

Andrea Wirth – Robert W. Baird

Scott Levine – J. P. Morgan

John Rogers – D. A. Davidson

Steven Fisher – UBS

Richard Rossi – Wunderlich Securities

Avram Fisher – BMO Capital Markets


Welcome to the URS Corporation earnings conference call for the third quarter of fiscal 2009. (Operator Instructions) To begin, I’ll turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS.

Thomas Hicks

Good morning everyone. Thanks for joining us. Before we get started let me remind you today’s call will contain forward-looking statements including statements about our revenues, backlog, business projects and 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 October 2, 2009 as well as in other SEC filings, and we assume no obligation to revise or update any forward-looking statements.

The webcast of this call is available on the investor relations portion of our website and will 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 Koffell

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 U.S. Division, Randy Wotring, President of the EG&G Division, Tom Zarges, President of our 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.

As usual, Tom and I will make prepared remarks and then we’ll open the call up to your questions, and in a moment I’m going to begin by briefly reviewing our results for the quarter. I must say that we’re really encouraged by the resilience and strength of our business and the portfolio itself through this recession which is still continuing.

The underlying business and the diversification we have has worked really well. As a consequence the team with me here today really does have a sunny view of the year ahead, and I’ll expand on that as we go forward.

Our consolidated revenues for the quarter were $2.3 billion and net income was $64.8 million, and earnings per share was $0.79. Based on our third quarter results and our expectations for the fourth quarter, we’re raising our earnings per share guidance for the full 2009 fiscal year to between $2.95 and $3.05.

This excludes the $0.37 gain we received from the sale of our ownership position in MIBRAG, that’s the German mining and power business which we completed in the second quarter.

A reconciliation of earnings per share guidance, with and without the net gain from the MIBRAG sale is provided in our reconciliation schedule available on our website at URScorp.com, and in our third quarter earnings press release.

As we have noted on prior calls, our revenues and profits increasingly are based on project milestones and incentives and as a consequence, our results have become more variable from quarter to quarter. So the best way to evaluate the company is on an annual performance rather than on results in any single quarter.

We’re on track to deliver another year of double digit earnings growth in 2009. Our ability to generate consistent growth in this really challenging economic period does reflect the benefits of our diversified business and we express call after call how we’ve deliberately diversified this company as a fundamental strategy which includes four separate market sectors.

At this particular time in the cycle, the strength of our Federal and infrastructure businesses is offsetting reduced capital spending by clients in the power and the industrial commercial sectors. Nevertheless, we remain positioned for growth in these sectors as market conditions improve.

We’ve also delivered again, consistently strong cash flow. Entering the quarter we generated $127 million in operating cash flow and this increased our operating cash flow for the first nine months of the year to $448 million, and that’s 58% higher than the same period last year.

We ended the quarter with net debt of $232 million, and that’s down from $1.07 billion in December 2007, and that was immediately following the acquisition of the Washington Group. We had $665 million in combined cash and short term investments on October 2, giving us ample resources to continue to invest in the business.

As we move into the final weeks of this year, we know that many of you are interested in how the company will perform next year, and accordingly, we’ll focus our comments on the outlook for each of our four market sectors. And in keeping with our usual practice, we’ll provide specific guidance for fiscal year 2010 in our fourth quarter call.

Based on the overall trends in our market sectors, our outlook for next year is positive. At the Federal sector, which will represent approximately 44% of our total revenue this year, has grown throughout the economic downturn and should continue to generate significant growth opportunities for us in 2010.

In the Infrastructure sector, we expect to benefit from increased opportunities in transit, in high speed rail, service transportation and the water and waste water and increased construction opportunities on a large scale in stimulus funded projects. You know we now have that construction capability.

In the Power sector, we’re seeing encouraging signs of improvement as utilities prepare for the next phase of mandated emissions control projects and begin work on new plants.

We remain cautious about conditions in our fourth market, the Industrial and Commercial sector and we expect that many of the businesses that comprise this sector which include major oil and gas, mining and manufacturing companies will limit capital spending until the economic recovery regains momentum.

But the long term prospects for this sector are favorable, and we anticipate that capital spending in certain industries will resume in the second half of 2010.

We’re currently engaged in planning for next year as you’d expect. However, based on preliminary trends, we expect that we’ll grow revenues in 2010. In addition, we expect that our earnings per share in 2010 will be higher than our earnings per share in 2009. That’s excluding the $0.37 gain from the sale of MIBRAG.

Underpinning our optimism is our $29.5 billion book of business which has increased by $400 million since the beginning of 2009. I’m now going to discuss each sector in detail, starting with Federal.

Our Federal sector revenues were $1.1 billion in the third quarter. For the first nine months of the year, Federal sector revenues were $3.1 billion, a 20% increase over the first nine months of 2008. The Federal sector has performed well. In fact, our business is growing at a higher rate than the overall budgets of the Federal agencies that we serve and at a higher rate than the key line items that fund most of our work.

The outlook for our business with the DOD remains encouraging based on expected demand for our services from the customers and the competitive strength of our market positions.

Last month, the President signed the $680 billion Defense Authorization Bill for fiscal 2010 which contains the $550 billion base line budget and $130 billion to support military activity in the Middle East. The bill which funds the military through next fall contains approximately $175 billion for the line items that fund much of URS’s work. This includes operations and maintenance, research, development, test and evaluation and chemical demilitarization.

The Bill also includes more than $20 billion for the military transformation initiative and we’ve discussed that in previous calls. This will maintain opportunities for URS to provide engineering design and construction services for new military bases and other DOD facilities around the world.

I should also note that despite the draw down in troops in Iraq, the DOD is likely to continue to expand the number of forward operating bases in the Middle East which should result in a sustained demand for the services we provide in 2010 and beyond that.

I’ll now discuss the other major portion of our Federal business, our nuclear processing and remediation work for the U.S. Department of Energy and the United Kingdom’s Nuclear Decommissioning Authority, or NDA as it’s called.

Our outlook for this business similarly is robust. Last month the House of Representative approved the DOE’s $7 billion budget for next year. The Bill includes approximately $17 billion for the programs that we support, including environmental management and our work at national laboratories.

This provides a secure base of work for 2010 and we’ve got several opportunities to expand on this space next year. At first we’ll continue to benefit from additional funding for DOE programs through the stimulus package. The DOE received $6 billion in stimulus funding to accelerate the clean up of former nuclear weapons and testing facilities, and this includes $1.5 billion for the five sites that we manage for the DOE.

Secondly, we continue to expand our relationship with the national laboratories. Last month, our URS team won a $322 million research and engineering services contract with the National Energy Technology Laboratory.

We also see growth opportunities in the United Kingdom based on our work at the Sellafield Nuclear Complex. We’re pursuing new opportunities with the U.K. Decommissioning Authority, the NDA and at other sites for other agencies in Continental Europe.

So in summary, we expect that our Federal sector business will remain strong and that our 2009 Federal sector revenues will be approximately $4.2 billion, and we anticipate continued growth in 2010 based on these favorable long term trends and the strength of URS’s market position.

Our next key market is Infrastructure. For the third quarter, Infrastructure sector revenues were $408 million. For the first nine months, Infrastructure revenues were $1.3 billion which is down just 3% compared with the first nine months of 2008, and we generated stable revenues despite the recession, despite the well publicized budget problems facing states and municipalities in large cities across the country and despite the fact that to date, little stimulus funding is being spent on the types of major infrastructure projects that URS performs.

Today our infrastructure work is highly diversified as to funding. It’s funded through a range of sources including bonds and dedicated tax measures, and it’s not solely dependant on state general funds budgets, which is where the budget gap exists.

We’re also benefiting from the competitive strength of our business including a significant backlog of assignments, close client relationships that go back for decades and our ability to provide a full range of services.

Next year we anticipate an increase in the size and scale of stimulus funded projects coming to the market, and already we’re seeing an increase of bidding activity on mass transit programs. Last month, 24 states submitted applications for the stimulus grants earmarked for high speed rail projects.

URS already is supporting California on its high speed rail projects and we’re currently hiring additional engineers to meet increased demand in this area.

We also expect to benefit from increased activity on water projects. Our URS led joint venture recently was awarded a contract with a potential value of $280 million to provide pre-construction services for the Saint Bernard Levy Project in New Orleans, potentially including subsequent construction of the new flood protection wall.

And just this week, California’s governor signed legislation to modernize the State’s water delivery system which includes an $11.1 billion bond measure to fund new water storage facilities, levy repair work and other infrastructure and environmental projects. The bond proposal will appear on the November 2010 California ballot.

Next year, bond funding should support other areas of our business. During the first nine months of 2009, new bond sales not including refinancings were $180 billion. That’s a 6% increase over the same period in 2008. This increase partially reflects the success of the Build America Bonds which were established as part of the Federal stimulus package.

In fact, California and New York recently sold more than $4 billion in Build America Bonds and we believe that our long standing relationships with the state agencies that will be managing these infrastructure projects will create additional opportunities for URS to win new work.

And of course we’re closely monitoring the Congressional debate around the Federal Highway Funding Bill. The previous funding measure, Safety Lou expired at the end of September and is being extended through a series of continuing resolutions.

Congress had not been expected to consider successor legislation to Safety Lou until after next year’s mid term election. However, at this point the political landscape may well be changing.

As you know, the administration and Congressional leaders are concerned about rising unemployment rates which you know from the last report were 10.3% and given the potential for infrastructure investment to create jobs, we’re hopeful that Congress will take up a new Federal Highway Funding Bill sooner than we expected initially.

In summary, our competitive strength in the Infrastructure market and the diversity of funding sources for projects has enabled us to deliver solid performance in spite of the serious challenges facings the states. We expect that our Infrastructure sector revenues will be approximately $1.7 million for fiscal 2009 and our 2010 outlook for this sector is increasingly optimistic.

Now to discuss the Power sector, third quarter revenues were $326 million. During the first nine months of the year, Power sector revenues were $1.1 billion, a decrease of 19% from the comparable period in 2008. This is in line with our expectations.

While our near term work load is affected by the completion of a number of large emissions control projects, and the delay in starting certain new assignments, the outlook for this market is improving, and the Power market is shaped by a myriad of regulations, economic trends and technical advances.

These forces interact and create market growth cycles driven by new generation technologies, major modifications to existing technologies and sophisticated operations and maintenance improvements.

At URS, we structured our Power resources specifically to respond to these multiple cycles. Currently the economic downturn and stringent emissions regulations is severely curtailing the building of new coal fired plants. This has produced a gap in nuclear capacity development which is being filled in part by a renewed interest in natural gas fired combustion turbine plants.

Over history, URS has engineered or constructed nearly 100 gas fired plants producing a total of 30,000 megawatts of electricity. We currently are working on projects of plants generating 1,700 new megawatts including a recent award for the Tennessee Valley Authority’s John Sevia facility which is valued at $400 million.

With the relatively low cost of natural gas and the abundance reserves and newly accessed domestic shale gas, we believe that this part of the market will remain strong for years to come.

In addition, increased demand for clean energy is supporting growth in our work on renewable energy projects, the development of carbon sea crustacean and storage systems for coal plants and improvements to the transmission and distribution grid.

Today we’re supporting ongoing programs throughout the spectrum of alternative energy programs. Amongst this work is a recent contract for program management services for a major solar program at PSE&G.

The most effective method though to generate large amounts of electricity without releasing greenhouse gases or air emissions of any kind, is through nuclear power, and although the new build has not developed as quickly as we and others would have liked, there is activity on several new generation projects. URS is focused on securing a share of this market as we’ve enjoyed in the past.

In the meantime, the industry is ensuring the viability of the existing fleet of nuclear power plants by increasing or upgrading the power supply and by replacing major components as part of the 20 year life extension programs. URS is undertaking three steam generator replacement projects including a current assignment at Exelon’s Three Mile Island station.

Amidst the national debate on green house gas emissions and global warming, there remains an active clean air market for the control of regulated pollutants. Over the past five years, this has been our strongest market and we anticipate new project awards in 2010 and 2011 for flue gas desulfurization and selective catalytic reduction systems to meet state and Federal mandates that will take effect in 2012 and in 2015.

A resolution from the Federal government regarding the control of carbon emissions does seem likely in the near term and whether the guidelines emerge from climate change legislation or directly through new EPA regulations, URS is positioned to benefit.

In summary, we expect that our Power sector revenues will be approximately $1.4 billion in 2009. In 2010 we expect to benefit from increased work on combustion turbines, alternative energy, transmission and distribution, clean air and of course, nuclear projects.

Turning to the fourth sector, Industrial and Commercial, revenues for the third quarter were $460 million. For the first nine months of 2009 revenues were $1.7 billion. That’s a 22% decrease from the first nine months of 2008. And again, this is consistent with our expectations.

This sector is the most exposed to the economy and our performance has been affected by the cyclical decline in capital spending by our multi-national clients in the oil and gas, manufacturing and mining industries. And while the number of current capital improvement projects has declined, our clients are using this lull to plan for the next phase of capital expenditures and of course they’re talking to us through that planning cycle.

We have however, benefited from increased activity under several of our master service agreements, or MSA’s with large multi-national oil and gas and mining companies. Furthermore, as commodity prices begin to recover, oil and gas companies are planning for new and previously suspended upstream projects.

For example, we’re negotiating several front end engineering and design or FEED assignments in the Canadian oil sands, the western slopes of Colorado and in Alaska.

URS is well positioned to capture new opportunities in the processing of shale gas in the New York and Pennsylvania regions as utilities look for a cleaner alternative to coal fired power plants. According to the U.S. Energy Information Administration, these fields will supply more than 80% of the increase in domestic gas production anticipated through the year 2030.

Additionally, we expect to benefit from long term positive trends in the mid stream market. A recent study by the INGA found that the industry will need to spend up to $210 billion in natural gas pipeline infrastructure over the next 20 years. This level of investment is necessary to support the growing demand for natural gas fired power plants and to connect the shale basins to the existing trunk pipeline network.

Last month we made our first acquisition to enhance our engineering capabilities for pipeline projects. The company, ForeRunner Corporation provides engineering and design and construction management services for the development of pipelines and the related infrastructure. We wish to make several more acquisitions of this type in the future.

In the Manufacturing market, we expect to see increased demand for our facilities management work in the second half of 2010 if the economy continues to improve. We anticipate growth in our business as clients restart dormant facilities and increase production at plants operating below capacity.

Finally, in the Mining market, recent increases in key commodity prices should result in new investments next year. In fact, we’re seeing increased bidding opportunities for the feed work we provide for phosphate and metal mines. We expect these contracts will be awarded early next year.

In summary, while we are optimistic about the long term prospects for the industrial and commercial sector, we do remain cautious about the immediate opportunities. We expect that our industrial and commercial revenue will be approximately $2.2 billion in 2009.

With that, I’ll turn the call over to Tom Hicks.

Thomas Hicks

To summarize our third quarter results, revenues were $2.3 billion, and this consisted of revenues of $1.1 billion in our Federal sector, $408 million in our Infrastructure sector, $326 million in Power and $460 million in Industrial and Commercial. The net income for the quarter was $64.8 million and earnings per share were $0.79.

Our financial performance is the quarter was affected by two significant issues. First, we recognized a charge of $20 million on the Cutter Gas Common Sulfur project. This charge related primarily to issues identified during commissioning and start up, as the project nears completion. And as an update, I’m pleased to report that in the last 48 hours, the plant became operational and is now in production.

Secondly during the quarter as part of our continuing integration and cost reduction efforts, we completed a reorganization of our foreign subsidiaries which lowered our expected full year tax rate from 41% to 37.9%. This one time adjustment was made to bring our year to date estimated effective tax rate in line with the expected full year rate and to recognize discrete items related to the third quarter. The tax rate for the third quarter was 25.4%.

As Martin mentioned, we generated $127 million in operating cash flow during the quarter reflecting our focus on cash management and cost control. We repaid $100 million of debt during the quarter, bringing our total year to date repayments to $215 million, and at the end of the third quarter our net debt was a total debt less cash and short term investments, dropped to $232 million.

Our DSO’s or days sales outstanding were 72 days for the quarter compared to 69 days at the end of the second quarter 2009. Interest expense for the quarter was $11 million, and diluted weighted average shares outstanding for the quarter were 81.8 million.

Our operating income margin was 4.5% of revenues in the third quarter and it is 5.5% year to date. CapEx excluding equipment purchased through capital leases was approximately $13.2 million for the third quarter.

Yesterday’s press release contained a detailed description of our book of business including backlog option years and indefinite delivery contracts for IBC’s. We ended the third quarter with a total book of business of $29.5 billion and that’s an increase of $400 million from the beginning of 2009.

Of the backlog, the largest component was $17.9 billion for the third quarter compared to $17.2 billion at the end of 2008. The value of option years was $4.9 billion compared to $4.3 billion at the end of 2008 and the value of IDC’s was $6.7 billion compared to $7.6 billion at the end of 2008.

With that, I’ll turn it back to Martin.

Martin Koffel

You will have read that we’ve updated our guidance for fiscal 2009, and as I noted earlier we expect that the Federal sector revenues will be approximately $4.2 billion. Infrastructure sector revenues will be approximately $1.7 billion. Power sector revenues will be approximately $1.4 billion and Industrial and Commercial sector revenues will be approximately $2.2 billion.

We now expect that consolidated revenues for 2009 will be between $9.4 billion and $9.6 billion. We expect that GAAP earnings per share including the $0.37 gain from the sale of MIBRAG will be between $3.32 and $3.42 per share on a diluted basis. This equates to earnings per share of between $2.95 and $3.05 excluding the gain from the MIBRAG sale.

We expect that the number of weighted average shares outstanding used to update our EPS for 2009 will be approximately 92 million shares.

In summary, we had a solid quarter and we expect to deliver substantial EPS growth this year. Our strategic mix of businesses is performing as we had anticipated and as we designed it. With the strength of our Federal business and the stability of our Infrastructure market, offsetting the near term softness in the Power and Industrial/Commercial sectors as I reported.

We’ve also generated substantial cash flow as a result of our consistent operating performance and really disciplined focus on cost management. As a result of the strong cash flow, we’ve reduced our net debt position by more than $800 million since the acquisition of the Washington Group at the end of 2007.

I should add that we’re obviously, I think it’s self evident, we’re very pleased with the acquisition and the way its integrated and the portfolio that its created for us and we’ve really seen it work for us through this recession.

We believe that we’re well positioned for another strong year in 2010. We see positive trends in our Federal and Infrastructure markets including robust demand in funding for the types of services and types of projects that we perform, and in the Power and Industrial and Commercial sectors, we’re encouraged by increased planning activity by our clients.

This activity is the natural precursor to greater capital spending which should benefit our business later next year.

And with that, we’ll open the call for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Richard Paget – Morgan Joseph.

Richard Paget – Morgan Joseph

I wondered if you could talk a little bit more about the Federal sector. I now it’s been a strong growth driver this year. You’re expecting further growth next year even on difficult comps, but how should we think about the longer term cycle? You mentioned a couple of longer term drivers, but are we kind of getting a peak Federal spending this year and next and might there be some kind of back last in mid term elections that might start curbing in some of the budgets?

Martin Koffel

It’s important to remind ourselves that the Federal business we have today is not the monolithic business that we had some years ago. We started out in the Federal business doing environmental work at the EPA and the DOD on military bases, and then we moved into DOD facilities. And then we acquired EG&G and integrated that along the way, and that took us into the provision of technical services and training and O&M.

We’ve done I think a really good job in the last couple of year diversifying beyond DOD even as DOD has grown. And then with the acquisition of Washington of course, we’ve got a very substantial franchise with the DOE which led to the work for the Nuclear Decommissioning Agency in the United Kingdom.

And then we’re diversified beyond that into Department of Homeland Security and substantially into NASA and the NSA and the General Services Administration, and the U.S. Postal Service. So when we think about the drivers behind Federal, it’s not simply one budget, one set of oversight committees.

You’ve got revenue sources ranging from in the case of the personal service, retail sales, to entirely different dynamics for DOE because the legacy from the Cold War has to be cleaned up and contained. You can’t make a political decision to postpone the half life of these projects.

And then we are expanding the military by man count and there’s a very dynamic change going on in the physical infrastructure. So we think with the diversity of those drivers, the fact that we’re at war, and we have to face that, we’ve got two campaigns going, and we’re configuring what we have, we think there’s growth next year and beyond.

Richard Paget – Morgan Joseph

Moving over to the Infrastructure side, new bookings in the quarter have started to grow and I know you mentioned the Saint Bernard Levy Project, any other big projects that were in there and maybe you could characterize the rest of the new awards if there are any particular areas they’re falling in or if it’s widespread.

Martin Tanzer

We’ve seen a lot of that procurement activity. It’s been very successful in this quarter, specifically on some of the stimulus projects. We booked about $75 million this quarter in stimulus related projects, the largest one being the project for Amtrak related to its high speed rail improvement program. It’s a $1.4 billion program in the northeast. We’re the construction managers for that.

We’ve been active in California, Ohio, Mississippi and Michigan on highway projects, large transit projects, high speed rail in California and Connecticut. So we’re quite bullish for the fourth quarter and certainly have the momentum for the first quarter of 2010.

Martin Koffel

Just to get back to your question about the DOD, we get questions about the draw down of troops in Iraq impacting our business. The logistics and dynamics of that draw down actually created a substantial market and the physical numbers are impressive and Randy Wotring who is President of the EG&G Division here, he’ll address that.

Randall Wotring

As Martin indicated, we do have a broad footprint and we have significantly enhanced capabilities with the acquisition of the Washington Group and we’re able to address program across the whole life cycle.

We are actually looking at up sides in the Middle East due to the transformation of the Army and the establishment of port operations bases on a go forward basis. We’ll likely be in that region for decades.

Further, as Martin indicated, with the draw down of the war, there’s a large activity associated with reset of the vehicles and then movement of all the equipment out of Iraq when it does happen and that’s called a retrograde program, and it should fuel our growth long into the future.

As an organization, we’ve been able to really leverage the resources, relationships and capabilities of all three Divisions, and as a result of that, you’ve seen all three Divisions grow nicely in 2009. We have a significant amount of proposals submitted awaiting award and a strong pipeline of opportunities that should fuel our growth in 2010 and beyond.

And again, by leveraging the resources of all three Divisions, we find that we have been able to address an expanded number of opportunities. So going forward, as Martin indicated, we’ll address and diversify into some other Federal agencies. We’ll build some new capabilities.

We need to really build our IT capabilities and we’ll continue to build presence in some of the new epicenters, the operating bases in the Mideast, some of the mega centers that the Army is moving to like Huntsville, Alabama and San Antonia for the Air force.

Richard Paget – Morgan Joseph

Will Sellafield, I think it was around $15 million in the quarter, is that a fair run rate going forward or is there still more ramp up or is this kind of what we should be expecting?

Thomas Hicks

Let me turn that over to Tom Zarges who runs our Washington Division and has responsibility for operations.

Thomas Zarges

It’s obviously hard to predict what the earnings will be in the future in Sellafield, but I can certainly tell you that the budget has been constant and remains constant. Looking out into next year and into the future beyond that, there is a bit of a transformation in the way that we earn fee in the future and the potential for fee.

At the moment we’re at kind of a base line program where we are evaluating the status of the site and creating performance based milestones and initiatives based on creating an adequate platform for future operations at that site.

And then in the future, the fee transforms into more of a share of savings or opportunity basis, so there is more potential but it is a little bit more difficult to get to. So I think we’re looking at a pretty good fee run rate now. The potential for it to improve exists in the future and the earnability of that fee is still something that we’re assessing.

Martini Koffel

Apart from the fact that the numbers are good, I think people should understand that it has been a great success for us. It is a clear success of taking a strategy and capabilities developed over decades with the DOE and as the NDA was developed, which in some ways mirrors certain functions of the DOE here in the U.S., we projected to the United Kingdom capabilities and competence and won that project competitively.

It got off to a very good start and we have a very good relationship and I think we’re going to be a permanent player in that market in the United Kingdom. So we’re very pleased with the strategy which was quite bold in its execution.


Your next question comes from Will Gabrielski – Broadpoint AmTech.

Will Gabrielski – Broadpoint AmTech

I was wondering if you could provide some color around your early look at 2010. Are you thinking double digit growth in 2010? And also, how much of that growth forecast is dependant on stimulus activity?

Thomas Hicks

It’s too early to tell exactly what our growth is going to be for next year but I can tell you this is the first time we’ve ever at the end of the third quarter projected forward to the next year. So we’re feeling good about what we said earlier in our comments that we’ll be able to grow our revenue line and grow our earnings line.

It’s too early to tell how much we can grow that, but given all the trends that you’ve heard about and what Martin commented on, we’ve got a good solid pipeline as Randy mentioned and if we execute, we’ll be fine for next year.

Martin Koffel

I’m going to introduce Martin Tanzer who’s Executive Vice President of Marketing, but let me say we did not see any material amounts of money from stimulus in 2009 because it went to the shovel ready projects not the large projects that we’re equipped to handle.

The exception of course is the DOE which I did mention in my prepared remarks where $6 billion of stimulus was given to that agency and quite a piece of that was applied to sites that we actually manage, I think about $2 billion.

Martin Tanzer will comment on how we see things for ’10.

Martin Tanzer

To give you our perspective on the stimulus, as you know there was approximately $27 billion of highway and transit work funded by the stimulus bill. 50% had to be obligated by June 30, and they obligated about $17 billion or $17 billion.

Of that total amount, only $2 billion was associated with major infrastructure programs. These are congestion relief projects. The remaining $14 million were paving type projects, re-decking of bridges, and painting and minor road projects.

What we foresee for 2010 is that $10 billion that has to be obligated by March of 2010 being specifically set aside for large infrastructure projects where URS has the expertise from both the design and construction perspective. So that’s about $10 billion.

In addition to that, we have the continuing resolution of Safety Lou which is funded about $40.1 billion, and that will also be a source of revenue in addition to the very strong backlog that we have going into 2010, and in many cases several states such as Washington, California, in addition to having the use of Federal funds also have propositions and tax referendums that are still actively providing funds for major infrastructure programs such as California and Proposition 1B, the State of Washington with a tax revenue bill.

So we see going forward in 2010, many opportunities for our infrastructure business to grow.

Will Gabrielski – Broadpoint AmTech

So the business can grow. If there was no stimulus package, the business can grow based on what you’re seeing elsewhere.

Martin Tanzer

Yes, and that doesn’t include high speed rail which is an $8 billion business which we anticipate seeing all the upfront work occurring in 2010.

Will Gabrielski – Broadpoint AmTech

So with the growth do you also, I think there was a comment in the 10-Q about this, but pricing, are you experiencing pricing increasing in certain markets right now or are you seeing more pressure?

Thomas Hicks

Maybe Gary Jandegian could comment on that. He runs our URS Division and faces that pricing pressure every day.

Gary Jandegian

We’re constantly being asked to take another look at our prices with our relationship based clients as well as in our RFP’s in the proposals we submit. We’re having to be as competitive as possible.

Our approach to pricing has been to resist mostly and we’ve done a good job at that. We feel that the relationship based businesses provide a value added to our clients that is more than just a few dollars in an hourly labor rate. It really derives from the cost benefit of costs we can avoid and costs we can save our clients.

So we constantly are talking to our clients about the millions of dollars we’re able to avoid through value engineering and continuing value engineering throughout the construction phase of projects.

So far, we’ve been able to resist. Our multipliers have stayed fairly close to what they were prior to the recession and our margins have been good on an annualized basis.

Will Gabrielski – Broadpoint AmTech

In terms of the DOE Federal funding you put into backlog, is that running through the business yet? If not, does that accelerate in 2010 and then the additional opportunities on the DOE side that you mentioned briefly in the prepared remarks, what’s the timing of some of those for 2010?

Thomas Zarges

The stimulus funding for the most part has been authorized, approved and obligated and it’s been negotiated with the DOE, scopes of work have been decided and in many cases the work is beginning now in 2009, and obviously it’s just beginning. The bulk of those monies will be spent through 2010, 2011, but it’s already beginning to roll.

Will Gabrielski – Broadpoint AmTech

The bond market, in terms of obviously Build America bonds, but it’s been strong and what type of lag is there right now between when that money is raised and when it’s being spent, and if you were to look at how much money is out there over the last three years, how far into the future do you feel comfortable that we now have funding support?

Martin Koffel

Let’s just play with some numbers. Obviously the bond issuance was dominated by the largest states and some of the states would be the oldest infrastructure, dominated by California, New York, Texas, Pennsylvania, Florida and Illinois.

Year to date the total bond issuance by state is about $288 billion. It’s lagging last year a little bit but it’s a very high number. We’re as interested in the bond issuance by purpose and it’s going to education, transportation, health care, a little bit into electrical infrastructure.

As far as the lag is concerned, I think it’s ’07 was probably 90 to 180 days, so I’d say that’s pretty tight coupling. We’re surprised at how quickly the voter approved bonds are actually fully funded and available to the states.


Your next question comes from Vance Edelson – Morgan Stanley.

Vance Edelson – Morgan Stanley

Just following up on the infrastructure side, you mentioned some pricing sensitivity on the part of customers. Could you comment on the overall outlook for the competitive landscape as this stimulus money starts to flow? Your high end expertise certainly helps, but do you see a lot of players even in your area of expertise chasing the money and how many bidders per project versus historical norms in 2010?

Gary Jandegian

We’re seeing a lot more competition. We’ll see 20, 30 bidders on a particular program, and as the infrastructure market moves toward design build and more public/private partnerships, we’re also seeing the U.K. firms that are starting to be introduced to the U.S. market, and Spanish firms and so forth that have been here.

But particularly some interest from the U.K. that have been doing public/private partnerships for more than 15 years and in some cases are more experienced at it. Obviously there’s a different dynamic in that market, but we are seeing a lot of competition and therefore we’re having to be real smart about how we price our bids.

Also what we’re seeing is that in some cases, clients that aren’t as sophisticated will qualify many firms technically and then go to a low price, and those are the types of procurements that we don’t necessarily have an advantage in. We try to avoid actually, but there’s more competition now than before, but we’re holding up quite well.

Martin Koffel

One of the things that shouldn’t be forgotten is that the structural advantage that we have because we’ve been in the infrastructure business for 70 years and we have a peerless network covering every state in the union. We have an office in every major city and every state capital and these are very long term relationships, and despite the price competition, people do want high quality work.

Gary alluded to one other thing, and if the pricing isn’t right, we’re big enough and diverse enough to simply leave it to someone else. We’re not going to chase the dollars down because holding our margins is important to us.

Vance Edelson – Morgan Stanley

On the nuclear generation side, you mentioned the overall disappointment in how slow things have proceeded. What is the current outlook in terms of when you might see a more meaningful pickup in that business and what are you watching most closely for signs that things can move along? Is it mainly on Capital Hill or more a matter of what your customers decide?

Thomas Zarges

I think it’s driven by the needs and desires of our customers and their ability to finance and develop these programs. The stimulus for doing so would be hydro electric demand or initiatives by the government to support and foster this, neither of which exist in abundance at the moment. But we still have a number of utilities that are driving forward with programs, nuclear programs that are important to them.

We’re still engaged in a number of very intense discussions. In fact, I guess I’d call them in some cases, evaluative negotiations that seem to be getting closer and closer every day. I know it sounds like a broken record because as we said, the pace hasn’t been what we would appreciate, but we are going quite quickly now toward the end of the year I think to some commitments by utilities.

Dominion is one that’s got a very public competition going on today, and I would say that we are actively engaged in that and there could very well be an announcement on their selection by the end of the year.

The other elements that are going forward though include upgrades of a number of existing nuclear plants and there are prospect there, many of them to raise both the availability, the reliability and the output of a number of plants, and these are very extensive programs, and we’re well engaged in that business as well.

So it still is a very active nuclear market, although as we said, the pace which would result in announcements of prospective plants is slower than I think we and the country would like as a matter of fact.


Your next question comes from Andrew Kaplowitz – Barclays Capital.

Andrew Kaplowitz – Barclays Capital

Could you go into a little bit more color on your Industrial and Commercial business in the sense that your guidance assume actually a pickup in revenue in 4Q and obviously revenue has been dropping for a couple of years now. Have you turned the corner in that business? Are your customers starting to talk about more spending in the near term or do we have a way to go?

Martin Koffel

It varies by industry. Remember what we call Industrial/Commercial embraces several different industries; manufacturing, process engineering, mining, and oil and gas. And they’re all on different cycles.

As I said in some of our process industry and manufacturing clients are talking to us about projects and we could foresee some resumption of capital expenditure in the second half of next year. Some of the mining clients, on the feed projects could be active even before the second half.

Now this is not across the board. It’s selective clients. And then with respect to the oil sands and the Pennsylvania and New York regions I discussed, we’re talking about fee projects and infrastructure projects at this stage.

So everyone is on a slightly different cycle. Everyone is talking, but I think we see some activity in the second half of next year but not before that.

Andrew Kaplowitz – Barclays Capital

Two questions about acquisitions, kind of related. One is, we’ve seen some evidence of M&A increasing across infrastructure market so I’m curious as to what you’re seeing. Your net debt has gone down significantly. What is the activity around are you looking for other things and where are you looking? And related to that, it’s been about two years since you closed on the Washington Group acquisition. Has anything surprised you about the combined business? Has anything disappointed you?

Thomas Hicks

Let me start with the first part of your question and I’ll turn it over to Martin about the surprise part. We have a very aggressive program underway with multiple initiatives, typically focused either geographically or customer or technology oriented or capability oriented to fill in gaps or to take advantage of where we see significant growth opportunities.

We’ve mentioned before, in fact I think we mentioned a year or so ago about Texas as a place we wanted to grow and we executed an acquisition there. We continue to think that’s a fertile growth area and we’re looking additionally there. As we’ve said earlier, we think Alaska is a place that makes a lot of sense.

Oil and gas pipeline business which we made a small acquisition this quarter, and that just for an example. We have other initiatives we’re pursuing as well. So our cash position and our strength, our balance sheet strength really I think gives us the posture to really truly look at doing two or three and maybe a little more smaller niche acquisitions each year.

Martin Koffel

To put it into perspective, in the early years of building the company, we focused on the substantial acquisitions and as you well know, we doubled ourselves five times in the course of building from a $100 million company to the size we are today.

Along the way in parallel, we did pursue smaller acquisition of the type Tom was referring to and we consummated quite a number of them. But the priority for our cash and our management time was the larger ones.

I think we’re in the position today where we can contemplate both tracks and we’ve got a professional M&A staff, and Tom of course personally has a strong M&A background which has been a great help since he’s come here, so we can follow on that track.

While we always look for what we refer to on many calls as the main chance, the opportunity not just randomly something large but to find a large company that would significantly advance our five year plan or our ten year plan, and Washington was just such an example. We wanted to get into a disciplined area of the construction market. We wanted to get into power. We wanted to get into oil and gas, and we wanted to get into DOE and bring in some of the disciplines they have.

They really did bring that to us. And you asked about the surprises, not to sound self serving on behalf of URS, but the surprise was just how smoothly it integrated. We had a lot of experience. We’ve done it five times in completely transforming the company, changing the name and everything else.

Washington, it should be remembered, had quite an acquisition history itself and was quite disciplined at it. I think that company was ready for it. It wasn’t quite large enough for its ambitions and there was no overlap or cannibalization. The view of risk was very compatible between us and each brought different disciplines and we immediately merged the leadership teams.

So the surprise is how well it worked. I often ask myself what is it that I wished hadn’t happened or don’t like about it, and I love this acquisition. I suppose I’d have to comment on every acquisition has brought a legacy. I’m not going to bore you with it by going back to the full prior initial acquisitions. There’s always something that carried over a legacy project.

There were a couple we knew of, of course because we studied and did due diligence with Washington and one turned out to be not quite so big as we thought and what we call corner gas, and was one of them. It turned out to be bigger in dollar terms.

But it doesn’t affect our view of Washington. It’s not a project that we would sign up for today and it’s not a project that the leadership of the Washington Division itself would sign up today. It comes from another time under different conditions.

So it’s really just a question of dealing with a sore limb and then moving on. So I’m very happy with it. I wish I had a list of things that I could tell you that surprised me, but there really wasn’t anything. It’s just a great acquisition.

Andrew Kaplowitz – Barclays Capital

A quick follow up on that project, I know you said the plant is running now. Is there anything that still needs to be done on the project or is it really close to done if not done?

Thomas Zarges

You’re right we do eventually wear these projects out even though it might be difficult, but now that the plant is operating and producing product, some of the main risks and vulnerabilities are now removed from the table. For example the delays, the changes, the equipment failures that one could anticipate in commissioning a complex job are now proven out and satisfied.

So the remaining work from this point forward to completion at about March is really punch list items, site clean up and the completion of some of the redundant systems that support the operation of the plant.

So when we take a look at what we’ve reserved to date, it covers our best estimate of cost to complete that job through March with what we think is an adequate contingency just in case something else happens. So the progress today is certainly in line with our estimates and we are getting very close to the end of the trail now. So we’re glad to report that.

Martin Koffel

Tom walked in yesterday with a photograph that thrilled us all. It was a large conveyor system with sulfur coming out of the machine and that’s what we wanted to see.


Your next question comes from Jamie Cook – Credit Suisse.

Jamie Cook – Credit Suisse

Back to 2010 again, can you walk me through, you’re probably not going to answer this but I’ll ask it anyway, how do we think about revenue growth relative to EPS growth in 2010 or Tom, can you walk me through tailwinds and headwinds that we should be thinking about? We know the tax rate is probably going to be lower in 2010 which helps you a little. On the other side you have MIBRAG which isn’t going to be in earnings. The half year earnings won’t be in there so that’s sort of a headwind for you. Can you walk me through how things like this that you consider that you probably know about that I don’t?

Thomas Hicks

You’re right. I’m not going to answer that, but I’ll give you some color that I think is appropriate. The first thing is, we worked hard to get this tax benefit that we recognized in the third quarter and it lowered our overall tax rate for the year quite significantly, down 300 basis points or so.

We will see a reduction in 2010 from the base rate we started in 2009, but we can’t get down to 37.5%. That’s just not going to happen. So we have to make up that difference. So that’s one big factor when you’re looking at 2010 versus 2009. That’s headwind for us.

The tailwind falls into Cutter Gas which is what you mentioned and knock on wood, we think we’ve got that one covered. It’s our best shot at it and we don’t see anything looming on the horizon that would replace that kind of issue.

On MIBRAG it’s the opposite. On MIBRAG we had some earnings this year in the first half before we sold it that we have to replace next year. So you’ve hit on three of the major things.

At the revenue line, we see opportunities and feel like given the pipeline we mentioned earlier we feel pretty comfortable we can grow our revenue. On the question about whether EPS grows in line with revenue, that’s a more difficult questions because of the issues with tax and also because a big chunk of our profitability comes through programs that don’t show up in revenue with our equity and joint venture, our agency accounting issues, and so it’s a little more difficult to give you a comment on that, although directionally obviously we think both are going to grow.

Our interest expense should come down next year unless we make a major acquisition which is not in the plan. We don’t have anything teed up at the moment, but we should pay less in interest next year. So this is a big think to think about as you think about how 2010 looks like.

Jamie Cook – Credit Suisse

But a large part of is you’ve done the Washington Group acquisition. It’s obviously gone better than you thought, but just comfort with the portfolio businesses now that we have some of the problem projects, not that there were a lot of them, but the few and far between sort of the out of the way so you feel comfortable with the margin profile and mix of business relative to where we were a year ago that gives you confidence to give such good guidance?

Thomas Hicks

I’ll make two comments on that. One, if you look at each Division’s margin on a full year basis for the last couple of years, we’ve been able to improve our margins. That’s been a lot of hard work by our operational people and our line management. We think we’re going to be able to sustain that improvement, so that’s a big issue.

Secondly, we’ve installed, and Martin’s talked about it before, a very rigorous risk management program here, a lot of which we got from the Washington people who came in and had that discipline in place. That’s helping I think prevent new problem projects entering our portfolio.

So to answer your question you never know, because we’re a project based business. There will always be some that we have issues with, but we don’t see the kind of material problems that we saw a couple of the major projects that we inherited. But I don’t see anything on the horizon like that. Of course it could always change, but right now I think you’re right.

The portfolio is performing well and the procedures we put in place to protect ourselves from a risk perspective I think are taking hold.

Jamie Cook – Credit Suisse

I’ve been covering this company for a long time and I remember when you were just, you brought this company from a small design engineer infrastructure firm. You’ve done EG&G, you’ve done Washington Group. How important is it for you to add the last leg of the portfolio and do something more meaningful in oil and gas? At that point you become more of the Jacobson Floor, you become one of the majors and that’s the one thing that’s sort of missing. How important is that for you?

Martin Koffel

It’s important but as you know our strategy has been meticulously never to become dependent on any single commodity, any single customer or any single industry group. When we set out to build URS 20 years, we said we want to be a superior engineering services provider but we want the earnings consistency of an S&P Industrial.

That’s probably a bad analogy today. But that’s what we set out to do. And having that consistency in the portfolio and not relying on any one particular commodity or industry flag is quite critical.

Having said that, the obvious opportunity for us is oil and gas capability and that is absolutely a strategic priority. I think, you commented yourself, as compared with other companies in the industry we have a smaller proportion of our business outside the United States and I always said while we had all that debt early on, we didn’t want to double the risk.

The other thing was we didn’t have the core size in North America and I still think we can grow substantially in North America, and I’m including Canada in that which is a priority for us and expand in oil and gas. That would be absolutely our ambition and our purpose and I intend to lead us in that direction.


Your next question comes from Andrea Wirth – Robert W. Baird.

Andrea Wirth – Robert W. Baird

Let me first address the power market. It sounds like your outlook is encouraging for 2010 but at this point can we think we can actually see revenue growth in the power market or is it still too early to tell?

Thomas Hicks

We’re right in the middle, as Martin said, right in the middle of finalizing our plans for 2010 and as I mentioned on the Cutter Gas program for example, things are happening in real time as we close out the year and get ready for next year.

It’s a little early to say one way or the other. We certainly long term, we think it’s a great market and we think when demand comes back for power, these are very long cycle projects typically, and you can’t just throw a switch and generate new power. You’ve got to build the plant.

So we’re hoping we’ll begin to see some signs of that as the economy recovers, but right now its too early to say what the revenue outlook is for next year.

Martin Koffel

We are wonderfully positioned when it comes back.

Andrea Wirth – Robert W. Baird

On the air emissions side, it looks like we should start seeing some coming through in 2010, but I’m curious what your potential is on the mercury side. I think the EPA has put out an information collection request to try to set the basis for an upcoming max there. I’m just curious what you think the outlook is for mercury and how you could benefit.

Gary Jandegian

We’re actually doing some flue gas de-sulfurization projects in combination with mercury control in what we call the process technology group in the URS Division. We’re also working with the Department of Energy on a number of grant programs that deal with mercury control.

So as far as our A2CS programs go, the mercury regulations can only help us because mercury has been at the forefront of our not so much R&D, but R&D for pay that we’ve been performing through our process technology group. And a number of our clients have come to us and asked us to also address their mercury issues at the same time we’re addressing socks and knocks.

So I think the market is going to be good any time there’s an air pollutant regulatory scheme driving the market, we benefit.

Andrea Wirth – Robert W. Baird

Switching over to the Safety Lou side, I’m curious with these short term continuing resolutions, have you seen any impact on state’s willingness to continue to push projects forward and do you think if we do continue to see these very short term extensions versus a longer term extension that this will have an impact on the spend and it’s just too great and the bonds will help push those projects forward?

Martin Tanzer

There’s no doubt the bond program is full push by the State DOT programs for larger infrastructure programs. The present Safety Lou which is the second continuing resolution expires December 18. There’s every indication that the next one will probably be six months which will provide the states with greater visibility to procure for those larger long term projects.

So we don’t see a major impact unless they were to turn around and again have only a 30 day continuing resolution. The Oberstar amendment calls for five years and $500 million, and the administration’s program is an 18 month Safety Lou program funding for 18 months.

So I think we’re going to see some compromise. It won’t be five years, but it should be somewhere between six months and 18 months which will provide sufficient opportunity for the states to procure.

Martin Koffel

At this point I will say there’s some disparity between what the House wants to do and what the Senate wants to do and that has to be resolved. The best possible outcome would be that the Oberstar bill or some version of it would be brought forward and under the political dimension of it being a ready made second stimulus activity, and it could well be that the present unemployment level creates the political momentum for something like that. We certainly hope so.


Your next question comes from Scott Levine – J. P. Morgan.

Scott Levine – J. P. Morgan

We saw news out of the U.K. or a couple of articles recently citing a more streamlined application process for new nuclear over there and some indications that coal carbon capture sea crustacean may take a back seat to nuclear. Do you have any thoughts on whether that market might proceed faster than you expect and whether you’re positioning on the clean up side might have any implications for your involvement on the new build side there over time?

Martin Koffel

I’ve been following the political dynamics of that quite closely and there is a definite political leadership to speed up the new nuclear and I think with the strong possibility of a change of government in the spring, it also appears that the Conservative government when it comes in would adopt the same program.

So I think you see continuity without too much of a break, and we’re obviously watching that tactically as well. We’ve got a lot to bring to new nuclear and carbon sea crustacean as well and I’m going to ask Tom Zarges to comment specifically on what we’re trying to do there.

Thomas Zarges

I think both observations are right. Your question is headed in the right direction and Martin’s comments are right on track. I think there is a lot of political will right now to stimulate the development of nuclear power in the U.K. perhaps at a pace that’s better and more supportive than here in this country.

I can tell you further that not only our work at Sellafield which provides us with a pretty good listening post and a lot of nuclear qualified people in country. We are also putting some of our early developers in place in the U.K. and they’re participating not only in formulating and helping the government with its policies and processes to fast track nuclear programs, but also well engaged with the customers and owners and developers of nuclear power over there to see what perhaps what we can do to help them and broker some early starts and some good work for ourselves.

We think the market and political climate and in fact the conditions for contract there could be quite good. So we’re advocates and we’re following that market very closely.

Martin Koffel

Tom and I have been physically there quite regularly and to stay in touch with the political direction but also the actual contractual opportunities.

Scott Levine – J. P. Morgan

On the ForeRunner acquisition, could you comment on whether this area of the pipeline side has become incrementally, an area of strategic focus and if so, how far back did you start focusing on this market more intensely and what are your expectations here both in terms of timing and magnitude impact?

Thomas Hicks

We’ve always been active in that market. We never had a big presence, and as we watched the industry, the demand for new pipeline which I think Martin commented on in his remarks, grow dramatically, and if you look at either sea crustacean or you look at the new gas formations or if you look at the fact that most of the gas is in places where not where people need it; you have to get it transported, and the age of our infrastructure, it’s pretty obvious there’s going to be a lot of work done in the pipeline area.

So it’s one that’s kind of jumped out at us and we as Martin said, we expect we need to fill out our capabilities even more than we have so far. So we think it’s a great market area for us. A lot of engineering needed, a lot of permitting and environmental work needed around it, and we’re looking forward to growing that area.


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

John Rogers – D. A. Davidson

In terms of the nuclear projects, I think you said you’ve got three steam generator replacement projects in 2010 scheduled?

Thomas Zarges

We have three in backlog. We have one underway.

John Rogers – D. A. Davidson

When will those three complete?

Thomas Zarges

The other two are scheduled for 2011 and 2012 so they’re longer lead items.

John Rogers – D. A. Davidson

But historically those have been pretty good projects for you.

Thomas Zarges

That’s correct. The one that’s underway now is at Three Mile Island for Exelon and it will probably complete certainly within the next we trust 45 to 50 days.

John Rogers – D. A. Davidson

In terms of the infrastructure market relative to your comments there, given that you now have the construction capabilities for some of this work, what’s your intent in terms of the balance of that work over the next couple of years; engineering and program management versus self performing?

Thomas Hicks

We’re trying to be very selective there. As you know from previous calls and spending time with us, we try to take advantage in places where we know the customer well, where we think we have great relations with the customer, and they tend to act professionally where we’ll step up to a broader range of risk and a broader scope of activities.

We have to be selective. In some cases, the market just doesn’t line up appropriately for our skill set. But you’re right. We can do a whole range of activities when we choose to and when it makes sense for us, and we’re just trying to pick and choose those as they come up and target the ones that make sense for us.

Martin Koffel

The issue is we’re not a general contractor and don’t want to be. That’s the thing to focus on. We’d only do it when it’s right.

John Rogers – D. A. Davidson

But you would take on full project responsibility?

Thomas Hicks

We have actually, and we’re comfortable doing that when the conditions are correct. We don’t do rip and read and we don’t want to be in that market. It doesn’t make any sense.

Martin Koffel

We’re distancing ourselves from rip and read or anything like that. We’re not going to build something that someone designed.

John Rogers – D. A. Davidson

But I’m saying more about some of the big transit projects, high speed rail projects that might be coming.

Thomas Hicks

Transit is one area where we feel very comfortable. We had great success there and Washington brings a legacy of doing some really interesting and terrific soup to nuts transit programs. So we’re aggressively pursuing that market. We think it’s a good market for us.

Thomas Zarges

I would say the more complex, the better. As long as we have reasonable contract terms and a client with a history of equitable administration, we’re right in there. But as Tom and Martin have said, we’re quite selective and we like the high end, the sophisticated projects where competitors are of the same class and caliber as we think we are.

Martin Koffel

There’s another important factor and that is the client must be experienced. What we wouldn’t do is do a design build job for an agency that hadn’t done one before. There has to be a long history of working with design build firms.

John Rogers – D. A. Davidson

Given what looks like should be another good cash generation year in 2010, how much are you feeling underleveraged at this point and where will you be at the end of 2010?

Thomas Hicks

At the end of 2010 with no significant acquisition, we’ll be not underleveraged, we’ll be negative leveraged. We’ll have a lot of cash and not much debt.

We talked before about this. We think from a financial perspective, probably the best return given the risk and given our size, the best return for our equity holders is to be 20% to 30% levered as far as our debt to cap ratios go.

Our industry has not traditionally been that levered and I think that’s a hold over from the fact that in many cases these were primarily construction companies in the old days. As you know we’re not a construction company. We don’t feel like the company requires a huge cash balance to operate safely.

My guess is that over time what we’ll do is redeploy that cash, and we’ll do it either by helping grow organically by doing these targeted acquisitions or doing something significant with a major acquisition.

So it’s a prospect that I don’t think you should count on us having a huge positive cash balance in the long term. We will probably be more aggressive than that.

Martin Koffel

I also should tell you that I have no career experience in managing an unleveraged company. We had a bank meeting two years ago just prior to financing the acquisition of the Washington Group at the W Hotel in New York City, and for about 10 days, we were technically out of debt.

I said to the group, “I feel like I’ve lost an old friend.”


Your next question comes from Steven Fisher – UBS.

Steven Fisher – UBS

If power revenues were to grow next year, when would you have to start seeing some gas fired environmental bookings? Do those orders have to start flowing in in the next couple of months or can revenues grow for the year if they start in March or April?

Thomas Zarges

It really depends on the project. I know that sounds vague, but in many cases some of these gas turbine combined cycle projects are ultimately replicates of plants that have been previously designed and in those cases, the design or the front end work goes very quickly and the real revenue experience occurs of course when you buy equipment, get into the field and start to leverage out the construction costs.

It is quite possible that the front end work which would include design and home office services could be as little as six months in some of those programs if they do involve replicates. In other cases, the other has done a significant amount of work and sometimes we even buy the major equipment themselves and have the program very well staged for a quick field start.

We’re seeing both of those cases as a matter of fact right now. The design emphasis on combustion combined cycle plants is pretty well done. We’ve engineered many different configurations and have been prepared for quick start. We’ve got a whole series right now of alliances in which the design and the design basis is pretty well established and all that needs to be done is to authorize the site and to tailor the plant.

On that basis, I think you can say six months or less is a reasonable gestation time before you can see pretty good field revenues beginning to flow from combustion turbine projects which would place the orders or awards either in the first or second quarter.

Steven Fisher – UBS

Can you give a little more detail on the expected high speed rail awards in terms of what services you might be providing in the contracts, what size and the timing?

Martin Tanzer

We’re presently under contract in California and Connecticut and pursuing up to 10 corridors. There’s probably six or seven that will under consideration in 2010. The work that we’ll be performing in 2010 is the preliminary engineering, the permitting and the corridor studies, so those particular programs that haven’t been fully sited.

There are some programs out there right now such as Florida where the sighting has been performed in prior years and we’ll be looking at those programs for preliminary engineering and detail engineering.

There’s the Chicago Regional Environmental Transportation efficiency program which is a large program in Illinois right now which also creates large opportunities for us. And these will all be 2010 activities.

You’ve got to remember that some of the high speed rail will be funded by state propositions as well as the $8 billion grants. As I mentioned before, on Amtrak, we won their first contract. That’s $1.4 billion of stimulus related funds, and that’s for improvements on the Northeast corridor.

So we see that as an active year. That market is an active market for us in 2011.

Steven Fisher – UBS

For these preliminary engineering contracts, are these in the tens of millions or hundreds of millions?

Martin Tanzer

They run in the $5 million to $20 million range. The construction you’ll probably start to see in 2011.

Steven Fisher – UBS

I’m wondering what you’re hearing about Guam? Do you expect any major contracts to be awarded under that program before the spring?

Martin Tanzer

We’re in pursuit of two very large Guam projects now. The timing is a question. We’re submitting proposals at the end of November. They could be awarded in January. If not in January, the early part of 2010.


Your next question comes from Richard Rossi – Wunderlich Securities.

Richard Rossi – Wunderlich Securities

Needless to say you’ve covered an awful lot already. One thing I just want to get a better understanding of your Mid East logistics work. I always thought that a fair amount of the work involved in Iraq, maybe not the majority but a fair amount, was related to equipment maintenance. Is that the case or do you lump that into logistics or is that a separate issue?

Randall Wotring

Historically it has been a lot of O&M activities but as the military transforms and establishes foreign operating bases, we’re seeing a lot of logistics related contracts on the horizon. In fact we have a number of bids in currently. I think you’re going to see a significant amount of O&M and logistics work for the next few years.

Richard Rossi – Wunderlich Securities

Once again looking at 2010 and your general trend guidance, would you be willing to say that operating earnings will be higher in 2010 or is that more questionable given you’re getting lower interest cost and you’re getting a lower tax rate than you’ve had in 2009?

Thomas Hicks

It’s early to say that. I think we can do that, but I think it’s too early to make any comment on that.

Richard Rossi – Wunderlich Securities

I’m presuming that to feel more comfortable with that, you’d have to see order flow by the first quarter of next year?

Thomas Hicks

As I said earlier, things are happening in real time and we bid some really large programs and winning two or three large programs in the next six to eight weeks can make a big difference as to what we think 2010 is going to look like.

We’ve got enough in the pipeline that I’m pretty comfortable as I said earlier, that we’re going to grow revenue and grow our bottom line. And helping at the bottom line, one thing that helps us on the operating earnings side is that we don’t anticipate anything like the Cutter Gas program impacting us next year.

That’s very helpful. And as I mentioned earlier, the margins of all three Divisions have shown some improvement which we expect to maintain. So let me just say I’m optimistic in that category, but it’s too early to give you any definitive answer.

Richard Rossi – Wunderlich Securities

Could you remind me, what were the charges on that project this year?

Thomas Hicks

The charge for third quarter was $20 million. Second quarter was $9.4 million and the first quarter was $2 million. So all in all it was a little over $30 million for the year, $31.4 million.


Your next question comes from Avram Fisher – BMO Capital Markets.

Avram Fisher – BMO Capital Markets

You had a huge booking it seems like in the EG&G segment. Can you talk about if that was one big thing or a lot of little things?

Thomas Hicks

We did book a program for the National Energy Technology activity out of I think its in the Pittsburg area. That was $300 million approximately. Tom Zarges’ organization was the lead on that.

Thomas Zarges

A little over $320 million and it’s a long term support contract for the operations of the National Energy Technology lab. That must be the one you’re referring to.

Avram Fisher – BMO Capital Markets

It sounds like one thing that would have moved the needle. Washington Group Federal, we saw a nice sequential uptick there and I’m assuming a lot of it comes from the stimulus or DOE. Is $300 million the new run rate? Does that accelerate to $500 million? Where does that go as the stimulus flows through that $1.5 billion?

Thomas Hicks

We’ve gotten notice that those dollars are being added to the sites that we’re at and added to the contracts that we operate. Some of those sites we record the activity there under an agency arrangement and does not flow into our revenue and therefore doesn’t show up directly in our backlog.

Part of what’s going on is that money is being obligated right now and put on contract and the timing of when we can spend it is being talked about right now with the client. So it’s a little early to say what the actual increase or run rate might be as far as operating earnings from that or revenue from that. But it’s been a very positive thing and all five of the site we operate have seen new money added to their program.

Avram Fisher – BMO Capital Markets

Should we think about $300 million as a new base line there for at least the foreseeable future?

Thomas Hicks

I wouldn’t hazard a guess right now. It’s moving around too much right now.

Avram Fisher – BMO Capital Markets

The [Ominal] Energy project, is that on your radar? Are you familiar with that? I think it was a 600 megawatt power plant just approved in California. I wondered if that was on your radar?

Thomas Hicks

We need you in our marketing department.

Avram Fisher – BMO Capital Markets

The tax, the reorganization of the foreign subsidiaries, what was the justification for that? Was that capturing an opportunity you saw this quarter? I’m just trying to figure out the justification for it now.

Thomas Hicks

We put together two very large complex organizations both of which had international operations and it took us, it’s almost taken us two years to get to the point where we could get that work done. There are probably hundreds of foreign subsidiaries involved over the years that have been created and our tax department had to scrub down all of those situations, come up with a strategy by country, come up with a total overall strategy and at the end of the day we were able to capture quite a large in effect a tax credit in the quarter and lower our tax rate.

So that was the driver. It was really we’ve just been working on it pretty continuously since the acquisition and we’re comfortable now that the regime we’ve put in place is going to serve us well going forward and help us keep moving our tax rate down over time.

But there was no change in legislation nor was there any kind of seminal event that caused us to do that other than the acquisition.

Avram Fisher – BMO Capital Markets

Andy asked the question about the sequential pickup in Commercial and Industrial. Is that likely to come from the URS side or the Washington Group side? Is this MSA type activity? Is it project type activity?

Thomas Hicks

It’s a relatively small pick up. If you look at our run rate versus what the full year is it’s $40 million or $50 million difference quarterly and I have to tell you, some of those projects, you can just have the order of one piece of equipment or two pieces of equipment and move the numbers $20 million the way that some of those large programs work.

I wouldn’t take any, we think the INC business has hit some kind of base line level and we’re hoping to grow it into next year, but I don’t think you should take any material significance out of that little blip in the fourth quarter.

Martin Koffel

To answer your other question, it does straddle both the Washington, it’s predominantly the Washington Division, but it also straddles the U.S. Division for the MSA’s and also some of the mining company work.

Avram Fisher – BMO Capital Markets

On Sellafield, as the work transitions from setting the benchmarks to achieving the hurdles, do the opportunities increase from this baseline or is this sort of, can you get more than the $5 million per quarter that you’ve been seeing so far if you achieve, jump over the hurdles you’re setting?

Thomas Hicks

I think Tom described it very well earlier. We’re taking on more risk as we go forward, but with that comes opportunity to grow our margin. So it might be more variability but there is a change to grow them.

Avram Fisher – BMO Capital Markets

I was hoping you could quantify it, how much higher it gets than what it is now.

Thomas Hicks

No, I don’t think it’s appropriate now. We can I think talk about it in future quarters as things start to get clearer. We’ve only been operating that for a little less than a year in real operation and it’s a very complex program with lots of moving parts. So I think it’s probably premature to give you any kind of specific guidance on that. But we do think there’s an opportunity to grow it if we perform.


We have reached the allotted time for questions. I would now like to turn the call back over to Martin Koffel.

Martin Koffel

Thank you very much for joining us. It’s been a long and from our point of view, an enthusiastic call. We enjoyed the questions and explaining the company.

You should know the lights at URS are on very early in the morning and they’re turned off very late at night, and unlike other parts of the economy, it’s not true anxiety. You see we’re doing well on the economy. It’s through enthusiasm.

One of my jobs is to make sure people go home at night and don’t get in too early. It’s just a great feeling of excitement about what lies ahead and we’re busily preparing for next year.

We’ll next talk to you in March when we report on the four quarter and full year, and thank you for joining us this morning.

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