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URS Corporation (NYSE:URS)

Q3 2011 Earnings Call

November 8, 2011 5:00 pm ET

Executives

H. Thomas Hicks – Chief Financial Officer & Vice President

Martin M. Koffel – Chairman of the Board, President and Chief Executive Officer

Gary V. Jandegian – Vice President Infrastructure & Environment Business

Randall A. Wotring – Vice President & President Federal Services Business

Robert W. Zaist – President Energy & Construction

Martin Tanzer – Executive Vice President of Marketing

Reed N. Brimhall – Vice President, Chief Accounting Officer & Corporate Controller

Sam Ramraj – Vice President Investor Relations

Analysts

Tahire Afzal – Keybank Capital Markets

Andy Kaplowitz – Barclays Capital

Scott Levine – JP Morgan

Avram Fisher – BMO Capital Markets

Richard Paget – WJB Capital Group, Inc.

Andrew Wittmann – Robert W. Baird & Co., Inc.

[Will Cabroleski – Unidentified]

Operator

Welcome to the URS Corporation earnings conference call for the third quarter fiscal of 2011. To begin I’ll turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS.

H. Thomas Hicks

Before we get started, let me remind you today’s call will contain forward-looking statements including statements about our revenues, business prospects, book of business, earnings and financial condition, economic and industry conditions, and other statements that are not historic facts. These statements represent our predictions and expectations as to future events which we believe are reasonable and based on reasonable assumptions. However, numerous risks and uncertainties could cause actual result 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 10Q for the quarterly period ended September 30, 2011 as well as in our 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 limit period. With that, I’ll turn the call over to Martin Koffel, our Chairman and Chief Executive Officer.

Martin M. Koffel

In addition to Tom Hicks, the team here with me in San Francisco includes: Gary Jandegian, President of Infrastructure and Environment; Randy Wotring, President of Federal Services; Bob Zaist, President of Energy and Construction; Martin Tanzer, Executive Vice President of Marketing; Reed Brimhall, Corporate Controller and Chief Accounting Officer; and Sam Ramraj, Vice President of Investor Relations.

As you will have seen in our earnings press release, while we continued to perform very well operationally, accounting rules required us to take a non-cash goodwill impairment charge during the third quarter. The impairment primarily is due to the volatile stock market conditions in recent months. And while significant in size, it has no effect on our cash position and no bearing on our operational performance or our outlook for the business itself.

In fact, our third quarter operating results were strong. Our revenues were $2.47 billion, an increase of 6% from the third quarter of last year. Including the goodwill impairment charge, we reported a net loss at $623.1 million or $8.05 per share but excluding this charge net income was $76.2 million, that’s up 8% from the third quarter 2010 and earnings per share excluding the charge were $0.98, up 13% from last year. A reconciliation of net income and earnings per share with and without the goodwill impairment charge is provided in the reconciliation schedule that is available on our website at www.URSCorp.com and in our earnings press release.

Our cash flow continues to be robust and we generated $100 million in cash from operations during the third quarter and $363 million during the first nine months of 2011. At the end of September our total book of business was $29 billion, an increase of $272 million from the end of the second quarter. Our operating results reflect the benefits of our mix of business across four market sectors. Third quarter revenues from the industrial and commercial sector increased 20% compared to last year. This is the third consecutive quarter that our industrial and commercial revenues have grown by at least 20% over the prior year period. Demand for work under our master service agreement with major multinationals remains particularly high.

The revenues from our federal business grew by 7%. As you know, we serve an increasingly diversified client base of federal agencies and provide a full lifecycle of services. This now includes sophisticated IT services such as cloud computing and cyber security which we added with our acquisition of Apptis in June. And while power sector revenues were flat compared with last year, the outlook for our power business continues to improve. Power sector backlog grew by almost $400 million in the quarter, an increase of 30% from the second quarter.

The increase primarily is due to new air quality control projects and assignments to modify nuclear facilities. Revenues from the infrastructure sector decreased by 7% and this reflects the completion of a large infrastructure project in our energy and construction division. The demand for infrastructure works remains strong as does our competitive position. At the end of the quarter, our infrastructure backlog was $3 billion. This is essentially flat with the second quarter but an increase of 17% since the beginning of the year.

With only a few weeks left in 2011, we know that many of you are beginning to turn your attention to next year. Accordingly, we shall focus our prepared remarks on the trends and market fundamentals that are shaping our outlook. Our preliminary plans indicate that both revenue and operating income will grow in 2012. Consistent with our usual practice, we will provide specific guidance for 2012 during our fourth quarter call.

Although the economic environment remains volatile, we continue to see favorable long term trends in our key markets. In the federal sector we have a sizeable and stable base of work on essential long term programs and these include the remediation of Cold War Era nuclear sites and the elimination of chemical weapons. In addition, we continue to win new work in high growth activities such as unmanned aerial systems, electronic warfare support, cyber security and cloud computing. The outlook for the industrial and commercial sector is robust.

In addition to 21% year-to-date increase in revenues, our industrial and commercial backlog has grown to $1.4 billion. Much of this backlog growth is in front end engineering and design work which should lead to larger engineering and construction opportunities in the future. In North America, the demand for infrastructure projects remain strong. While some states still face budget challenges, we expect that critical programs will move forward using federal grant programs, dedicated tax revenue streams, bond sales, and public/private financing.

In the power sector, the growth in our backlog provides additional evidence that the next growth cycle has begun. Power backlog now stands at its highest level since the first quarter of 2009. Obviously, we’re mindful that the global economy remains fragile but we’re optimistic about our outlook and this is supported by our $29 billion book of business as solid foundation for 2012. Our balance sheet is strong and gives us ample resources to invest in the business. You will have seen that recently we were upgraded to investment grade status by both Moody’s and Standards & Poor’s.

I’ll now discuss each sector in detail starting with the federal business. Our federal sector revenues were $1.3 billion in the third quarter. As I noted, this is a 7% increase from last year. For the first nine months of 2011 federal sector revenues were $3.5 billion, a 4% increase over 2010. While there is still uncertainty about future budget cuts, our outlook at URS for the federal sector remains positive. We continue to see increased activity and revenue growth under our indefinite delivery contracts.

In the defense market, much of our work supports critical military initiatives, intelligence, surveillance, and recognizance programs, weapons demilitarization, flight training services, and support for unmanned aerial vehicle programs. Given the critical nature of these programs, they are less susceptible to budget reductions. At the same time, we’ve increased our capabilities in other grown areas and with the addition of Apptis we have significantly enhanced our capabilities in the $40 billion federal IT market.

During the quarter Apptis received certification from the US General Services Administration to provide cloud computing services to various federal agencies. Only four companies received this certification which gives us entry into a large high growth market. The fundamental that support our work for the US Department of Energy and the United Kingdom’s nuclear decommissioning priority are positive. The US Senate recently approved legislation that contained more than $3 billion for the budget line items that fund much of our environmental management work for the DOE. This is a slight increase over 2011. This year we have expanded our DOE franchise by winning major contracts in the East Tennessee Technology Park and the Advanced Mix Waste Treatment Program in Idaho. These new contracts underpin our growth expectations for this business.

In addition, we see further opportunities to extend our DOE relationship. Next year, the National Nuclear Security Administration will recompete several of its largest programs. We believe we are well positioned to win new work. Overseas the funding picture for the United Kingdom’s Nuclear Decommissioning Authority remains stable. The government’s spending review allocated approximately $19 million to the NDA over the next four years. This includes approximately $2.5 billion annually to support activities at the Sellafield nuclear project.

In summary, we continue to expect that our federal sector revenues will be approximately $4.8 billion in 2011, an increase of 7% over 2010. Our optimism here is reinforced by our federal sector backlog of $9.9 billion. The next key marker I should like to discuss is the industrial and commercial sector. As I noted, this business has performed very well this year. Revenues for the third quarter were $492 million, a 20% increase over 2010. During the first nine months, revenues were $1.4 billion, an increase of 21% from last year.

Additionally, our industrial and commercial backlog remains strong at $1.4 billion, up from $1.3 billion since the beginning of this year. Activity has increased across virtually all of our industrial and commercial markets including oil and gas, manufacturing, and mining. There’s growing demand for the environmental and engineering services that we deliver through our long term master services agreement. In particular, we’re seeing growth from a global MSA with Royal Dutch Shell.

During the quarter we renewed MSA contracts with several other multinational oil and gas companies including BP and ConocoPhillips. In the oil and gas market there’s steady demand for front end engineering and design work on new processing facilities in the Canadian oil sands. We expect that several projects will move into the construction phase in the next two years and this should create EPC opportunities for us.

In the manufacturing market, increased production by our Fortune 500 plans is reading to new opportunities, particularly for our facilities management and O&M services. Our Australian mining business continues to perform well. We’ve been selected to provide conceptual studies for mine facilities by several clients. Our work on the planning phases of these projects positions us to capture engineering and construction work as they move into full development.

Given our strong performance over the first nine months of the year, we now expect that our 2011 industrial and commercial revenues will be approximately $1.9 billion. This is an increase from our original estimate of $1.8 billion. Now, turning to the infrastructure sector, for the third quarter infrastructure revenues were $443 million a 7% decrease over the comparable period in 2010. During the first three quarters of 2011, infrastructure revenues were $1.4 billion which is essentially flat with last year.

This decrease is due to the recently completion of a major levy construction project in Louisiana and there’s a natural lag of revenues as we begin new assignments of that scale. We remain optimistic about the outlook. Revenues from engineering and design projects increased by almost 10% compared with the third quarter of 2010 and this work should lead to more construction opportunities as the projects move forward.

In addition, infrastructure backlog in 2011 remains at the highest level since the beginning of 2008. We ended the quarter with a backlog of $3 billion which is unchanged from last quarter but up $444 million or 17% since the beginning of the year. We’re tracking a significant number of opportunities in the North America surface transportation market. This includes engineering and construction work on roads and bridges as well as outsourced traffic management and O&M services. Many of these projects are being funded through tax measures, user fees, and bond initiatives.

Congress continues to provide federal matching funds for highway projects. Just last week the US Senate passed legislation to fund SAFETEA-LU at 2011 levels and tomorrow, a key US Senate committee will take up a bipartisan proposal to reauthorize the Federal Highway Funding Bill for a two year, $109 billion program.

In addition, states continue to secure federal support for mass transit projects. In September, the Federal Railroad Administration released nearly $750 million to finance track upgrades and new construction projects along the Northeast corridor. This of course, is the nation’s busiest transit network. The US Department of Transportation recently issued grants to several other rail systems around the country including the Pacific Northwest and southeast. Contracts for these projects should be awarded next year.

We now expect that our infrastructure sector revenues will be approximately $1.9 billion this year. Our long term outlook for infrastructure remains positive. It is supported by growth in our engineering and design and construction work and our $3 billion backlog. Our next market is the power sector. Third quarter revenues were $275 million, essentially unchanged from last year. During the first nine months of the year, power sectors were $832 million flat with 2010. We’re particularly pleased with the accelerated pace of new rewards and this is reflected in our power sector backlog which was $1.7 billion at the end of the third quarter.

Our backlog is almost $400 million or 30% from the end of the second quarter and this is the highest level since the first quarter of 2009. We continue to support utilities on major air quality control projects to comply with emission reduction deadlines and with consent decrees. Recently, we won several major flue gas desulfurization and selective catalytic reduction projects. They include contracts with the Tennessee Valley Authority and other major utilities in the southeast and in the Midwest. We expect to begin work early next year.

Activity in the new generation market has resumed. Utility companies are building combustion turbine natural gas plants to replace older, less efficient facilities and to meet anticipated capacity increases. Utilities also continue to invest in transmission, distribution, and network systems to improve reliability. We recently expanded our relationship with [Ameron] to support the design and construction of upgrades to their communications network.

In the nuclear market, we’re seeing increased retrofit and modification work. These projects extend the life and increase capacity at existing nuclear power plants. We’re actively involved in the pre-construction and procurement planning work for Areva’s proposed Eagle Rock uranium enrichment facility in Idaho. Last month, the plant received its NRC operating license. It will supply uranium fuel for US commercial nuclear power plants. URS will provide construction services for the next phase of the project.

In summary, we’re encouraged by the outlook for our power sector. For fiscal 2011 we now expect that our power sector revenues will be approximately $1.1 billion which is a slight decrease of our prior expectation of $1.2 billion. But based on the growth of our backlog in recent quarters and planned capital investments by our clients, we expect that 2012 will be a solid year. With that, I’ll turn the call over to Tom Hicks.

H. Thomas Hicks

To summarize our third quarter results, revenues were $2.47 billion, an increase of 6% from the third quarter of last year. Excluding the non-cash goodwill impairment charge, net income was $76.2 million and that’s up 8% from the third quarter of 2010. Earnings per share excluding the charge were $0.98, up 13% from last year.

Cash flow from operations continued to be exceptionally strong at $100 million for the quarter and since the beginning of the year we’ve generated $363 million in operating cash flow and that’s up $10 million from the same period last year. We ended the quarter with $427 million in cash and cash equivalents. Interest expense for the quarter was $5.1 million and our diluted weight average shares outstanding for the quarter were $77.4 million. The operating margin for the quarter excluding the goodwill impairment continued to be at historically high levels.

As you know, we report separate financial information for our three business segments: infrastructure and environment; federal services; and energy and construction. For the third quarter infrastructure and environment reported revenues of $951 million and operating income of $60.7 million. Federal services reported revenues of $719 million and an operating loss of $307 million including the goodwill impairment charge. Excluding this charge, federal services operating income would have been $60.3 million.

Energy and construction reported revenues of $845 million and an operating loss of $355 million including the goodwill impairment charge. But excluding this charge, energy and construction’s operating income would have been $75.4 million. Finally, cap ex, excluding the equipment purchased through capital leases was $30.4 million for the quarter.

As you will see in our press release and in the Form10Q for the quarter, we’ve revised our income tax calculation for 2010 and 2011 year-to-date. This change has no effect on our pre-tax income, URS’ net income or EPS. It also has no impact on our condensed consolidated balance sheet or our cash flow from operating, investing, or financing opportunities. While have no effect on our pre-tax income, URS net income, or EPS, our reported income tax rate was reduced by about five percentage points in the record quarters. All of this is described in detail in Form 10Q.

Our press release contained a detailed description of our book of business including backlog option years and indefinite delivery contracts or IDCs. We ended the third quarter with a total book of business of $29 billion, that’s up from $28.7 at the end of the second quarter but down slightly from $29.1 at the end of 2010. Backlog, the largest component with $16 billion at the end of third quarter, compared with $16.1 billion at the end of the second quarter and $16.6 billion at the end of last year.

I should note that our third quarter ending backlog and book of business included a reduction of $312 million due to the successful accelerated completion of a phase of a weapons decommission contract with the Department of Defense, and we earned a significant incentive award from our client as a result of that efficient and safe performance on this contract. The value of our option years was $5.2 billion compared to $5.1 billion at the end of second quarter and $4.8 billion at the end of 2010.

IDCs were $7.8 billion at the end of the third quarter compared to $7.5 billion at the end of the second quarter and up slightly from the $7.7 billion at the end of 2010. Now, last month we announced a new five year $1.7 billion senior credit facility which includes the $700 million term loan facility and a $1 billion revolving credit facility. The facility has a number of attractive features. It allows us to borrow up to $400 million in various foreign currencies which is important given our plans to continue to expand our business in key global markets.

It also includes an option permitting us to increase the size of the revolving credit facility or pay and attention term loan of up to $1 billion by receiving commitments from new or existing lenders. We expect to record a non-cash charge in the fourth quarter for unamortized costs associated with the prior facility.

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

Martin M. Koffel

We’re pleased with our third quarter operating results. We also remain confident about our performance for the full year including our ability to generate revenue and EPS growth this year. We now expect our consolidated revenues for 2011 will be between $9.6 and $9.8 billion. This compares with revenues of $9.2 billion in 2010.

We continue to expect that earnings per share, excluding the goodwill impairment charge that we discussed will be between $3.60 and $3.70 on a fully diluted basis. As you’ll recall, our EPS in 2010 was $3.54. A reconciliation of the fiscal 2011 guidance for diluted EPS with and without the goodwill impairment charge, is provided in the reconciliation schedule available on our website at www.URS.com and in our earnings press release.

Although economic conditions remain challenging, we see positive trends in each of our markets. Our competitive positions are strong and we continue to win new work. And as I said, at the start of the call, our preliminary plans for 2012 indicate that both revenue and operating income will grow. As a result, we’re confident in our ability to continue to deliver consistent growth, profitability and strong cash flow. Thank you. With that, we’ll open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tahire Afzal – Keybank Capital Markets.

Tahire Afzal – Keybank Capital Markets

I guess my first question is if I look back to the third quarter 2010 you had year-on-year backlog down and yet as I look into the fourth quarter of 2011 and really your implied midpoint of guidance, that would imply EPS up around 15% plus. I know it’s too early to comment on 2012 but given your backlog at the end of the third quarter year-on-year it’s kind of down around the same territory as it was last year. Do you still think revenue EPS growth along the same trends as you’ve see this year is possible given the outlook you’ve provided on your end markets?

H. Thomas Hicks

We talked about the last couple of calls, maybe the last three about the change in velocity in our backlog, especially since a big portion of our backlog is in the federal sector. We’ve seen a shortening of period of performance and extensions of existing jobs rather than award of multiyear jobs like we’ve seen traditionally. We think a lot of that is the uncertainty in the federal budget and also just the government just a little bit behind the curve getting new procurements out the door.

I think from our perspective we’re very confident, as Martin said, that next year we’re going to grow earnings and we’re going to grow revenue. What percent we might grow those, it’s a little early, because we’re just finalizing our plans for 2012. Our backlog, a lot of which was mentioned in the earlier comments is front end work, is a good precursor to longer term growth opportunities.

Martin M. Koffel

The other thing I’d keep in mind with respect to the private sector, particularly industrial and commercial, not so much power, other than assignments where we have large construction projects where a finite amount of backlog does come in, a great deal of the I&C work, industrial and commercial comes off master service agreements and standing agreements with customer who just continue to give us the work project-by-project. The ratio of backlog to revenue in that part of our business is not as high as the ratio as backlog to revenue say in the infrastructure market or in the federal market.

H. Thomas Hicks

One other comment, you know that we do quite a bit of our work through arrangements where we just recognize the profit on the contract, or we just recognize our management fee. And that’s a significant part of our forward-looking thoughts about our confidence in next year. So two things going on, backlog velocity has changed and a percentage of our work coming from projects where the revenue doesn’t show up in backlog it just shows up as profit on our P&L. That’s part of the background into why we’re comfortable with next year.

Tahire Afzal – Keybank Capital Markets

A quick follow up and I’ll hop back in the queue, I know you’ve got a lot of people on the call probably today. If I look at the infrastructure side, obviously that’s where the incremental change has come in your outlook to the negative. But, as you said, your backlog in that sector is at record level. So should I be looking at in the next two quarters or the second half essentially reflective of some lumpiness as you said, because large projects are sort of finishing up and hopefully will be starting up on new projects? And, can you comment on any market share changes, if you’ve seen any in that segment.

Gary V. Jandegian

Yes, you did remark about our statement that infrastructure backlog is up $444 million since the beginning of the year and that’s at the highest level since 2008. In fact, infrastructure engineering revenues are up 10% in the third quarter and 13% for the nine months. Even excluding some infrastructure revenues that came in through acquisition, the engineering revenue are up in the third quarter. We had backlog growth and strong growth in our roads and bridges business, in transit, in ports, and in water, and we’re also seeing a lot of opportunities. So we feel pretty good about the front end engineering business and I’ll invite Bob Zaist to comment on the construction element.

Robert W. Zaist

I think we’re encouraged by the good mix of opportunities that we see out in front of us for the larger programs. For example, several opportunities that we’re engaged with on light rail work in Southern California, highway and bridge work in the northwest part of the United States, trolley and light rail work in the southeast quadrant of the US, highway and toll management services which is a back office support work that we do as part of our infrastructure business, are all encouraging signs for growth.

Martin M. Koffel

The other thing I would mention is there are two important elements to the funding of public infrastructure. In the first place, there’s the funding put in by states, cities, counties, and municipalities. Then on the other hand there’s the federal matching money and in my prepared remarks I referred to the federal matching money. There seems to be some [inaudible] of political will in Washington that the SAFETEA-LU has to continue. Now, will it be a two year stub, or a long term stub, we don’t really know. It’s a political ramification rather than an economic ramification.

It’s clear there’s some willpower to make that happen. The leading edge of it though is the states. You’re probably aware, despite everything that’s going on with the states and the economy, state tax revenues are up. The top states, the top 12 to 15 states, year-on-year through the second quarter of 2011 tax revenues are up 9.4%. For all 50 states, tax revenues year-on-year for the second quarter are up 10.7%. That’s very encouraging to us and that’s a factor enabling the states to commission all this funding, and engineering, and design work. And that’s why Gary is reporting that he’s so busy on that front and why the backlog is building.

H. Thomas Hicks

As you heard from Gary, our engineering work is growing very nicely and the other part of the work, the construction work that Bob mentioned, comes in very lumpy pieces. So you could easily, depending on the timing of a larger award, see a very large backlog jump one quarter over another, or a falling off. The adjustment we’ve made in the infrastructure revenue estimation for the year, really represents timing on some major projects more than it does a weakness in the market.

Operator

Your next question comes from Andy Kaplowitz – Barclays Capital.

Andy Kaplowitz – Barclays Capital

I want to follow up on what Tahira was saying, because to me the worry that I have here is that there’s a disconnect happening in infrastructure between the backlog going one way and the revenue going the other and the worry I know investors will ask us is, “Are the public customers having a hard time funding the projects even though they book URS to do the work?” So I was wondering if you could address that? Then more specifically what Scott Wilson looks like now and how are the trends at Scott Wilson overall?

Martin M. Koffel

We’re going to have Martin Tanzer address the US domestic aspect of that.

Martin Tanzer

The comment I was going to make is we haven’t really seen a major impact on the states, on their ability to certainly procure work. We’ve seen a slight slowing in the execution but procurement on target opportunities are way up. Just to give you an example, as of today we’re in the process of teaming and proposing on over $14 billion of major bridge programs. The Knik Arm Bridge in Alaska, the Detroit River International Crossing, the Louisville Bridges, the Tappan Zee Bridge, and the Bayonne Bridge. These bridges are about $14 billion and these are public/private partnerships. We anticipate the awards to be in the fourth quarter of 2012, maybe the first quarter of 2013. We haven’t seen much delay in the actual procurement process and we see the market as improving.

Gary V. Jandegian

We closed the Scott Wilson acquisition about a year ago and the integration structurally is advancing. We all know that the United Kingdom and the EU are experiencing challenging external market conditions and we responded to that by consolidated Scott Wilson operations and right sizing the combined cost structure of the legacy Scott Wilson and the legacy URS business there.

Then on the other hand, our China, India, Australia, and Canada businesses, and the markets we serve there are very strong. We do have a soft market condition in the EU and the UK but elsewhere, our international business is very strong.

Andy Kaplowitz – Barclays Capital

But you guys would expect revenue to grow from here in infrastructure? You’re pretty confident of that given the backlog, fair?

Martin M. Koffel

I think you could say overall we expect infrastructure revenue to grow year-over-year without question.

Andy Kaplowitz – Barclays Capital

Maybe Tom you could help us with some mechanics of the accounting change in the minority interest expense. If I look at 3Q I see $37 million of minority interest expense and the tax [inaudible] ex the impairment charges of around 34%. Would you be able to give us the numbers before the accounting change so we could see what it would have looked like and better accessed the quarter if possible?

H. Thomas Hicks

Let me try to give you a simpler way to maybe do this. Since as I explained, the net income, URS net income and all the other key elements that we would report do not change. You could start with the net income number after you adjust for the impairment and go back up the P&L. What happens is the tax amount goes down the exact same amount that the NCI number goes up. So you’re subtracting more for non-controlling interest and subtracting less for tax. You end up with the same exact net income.

The simplest thing to do rather than try to go through every quarter with you, would be to take the net income, apply the tax rate that you’ve talked about and go back up. NCI has to go up enough to offset that drop in tax rate. On page 10 of the 10Q there’s a detailed explanation. I didn’t want to take time on the call on it. But if you want to, you can follow up with Sam later and he can walk you through the details.

Operator

Your next question comes from Scott Levine – JP Morgan.

Scott Levine – JP Morgan

I’m looking at your guidance for ’11 revenue growth and it seems to imply at the midpoint at least consistent growth in the fourth quarter with the first three quarters, but your anniversarying Scott Wilson I think in September. So I’m wondering if you have certain projects kicking in, whether there’s timing of startup on certain things that give you the confidence you’ll see revenue growth accelerate or remain consistent despite the lapping of Scott Wilson there.

H. Thomas Hicks

As was mentioned, we had a big surge in power backlog in new orders in the third quarter. We’ll see start up on that, that will start to hit. We’re seeing real backlog growth in infrastructure as we heard talked about earlier, and infrastructure revenue we expect to accelerate. Generally speaking, despite the backlog diminution in federal, the velocity there continues to be pretty high and the Apptis acquisition is helping quite a bit. You’re right we believe that the midpoint of the guidance we’ve given you now is as close as we can get right now for the full year. So if you just extrapolate into what the fourth quarter would be, that’s the number we think we’re going to achieve.

Scott Levine – JP Morgan

Then maybe a follow up on nuclear. You mentioned that you’re seeing good activity in upgrades and component change outs. Just wondering for a sec, could you give your updated thoughts on the new build outlook? As well as we’ve heard some folks getting a little more interested in small modular, what are your current thoughts there?

Martin M. Koffel

Here’s Bob Zaist.

Robert W. Zaist

We are enthusiastic about particularly the aftermarket if you will for the nuclear business as service to the existing fleet. We continued to see our business grow as we get requests to address the engineering evaluations coming out of the Fukushima Assessment and particularly with opportunities on the nuclear up rates. Relative to the new build, we continue to remain active on that, particularly in our relationship with the Mitsubishi technology. But I would tell you that generally that the new build process seems to have slowed a bit as the market steps back to access what the implications would be coming out of Fukushima on the long term horizon.

Operator

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

John Rogers – D. A. Davidson & Co.

I wanted to follow up a little bit, and I know you’re not giving ’12 guidance but you indicated that we were going to see revenue growth next year in much of your markets and operating profit growth. Can you give us a sense – are margins going to improve given what you’ve got? I mean, you’ve got your backlog now, you know what pricing looks like there.

H. Thomas Hicks

As we’ve said in prior quarters, we’re really happy with our progress and margin growth over time. You’ve followed the company a long time and you know we’re at historic highs for our operating margins. I think we’re doing a very good job of on the front end selecting projects appropriately and maintaining our margins. We’re really, really happy with that. There is, as you know, a mix issue that will hit us as the big construction jobs start to flow through the P&L. They come through at a much lower margin, as you know, since you do a lot of pass throughs for subs and materials. That’s the one thing on the horizon that might make a difference but that’s a very high class problem. If we’re seeing really high revenue growth on the construction side given our selectivity there, then I think we’ll be in very good shape even if margins drop a little bit, our absolute numbers will grow a bit dramatically.

John Rogers – D. A. Davidson & Co.

That primarily Tom on the private sector work I assume, the power and the industrial?

H. Thomas Hicks

It’s in power and industrial but also infrastructure as Martin Tanzer said, we’re looking at some major bridge work. Now, that’s in the out years but there’s quite a bit of work there. I think we talked about some light rail projects and work in the northwest. Both places are potentially significant sized projects that could make a difference in our construction revenue.

Operator

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

Avram Fisher – BMO Capital Markets

Just to clarify when you talk about the growth exterior, you’re talking about that on an organic basis?

H. Thomas Hicks

Yes, I’m not anticipating any acquisition in the comment.

Avram Fisher – BMO Capital Markets

Have you had any change in your views on acquisitions? I noticed you didn’t do any share repurchases in the quarter. Are you holding clean powder for more acquisitions?

Martin M. Koffel

I’ll ask Tom to comment on your comment about share repurchases and then I’m going to comment about acquisitions.

H. Thomas Hicks

I think you know our position on share repurchases and we try to maintain or slightly retract our share count over time to offset any issuance we make for employee benefits. Our open market purchases would really be driven by our anticipated needs for cash for other things like working capital or acquisitions. During the third quarter, I think it’s safe to say we were interested enough about our prospects on the acquisition front that we wanted to hold on to some of our cash.

Martin M. Koffel

On the acquisition front, as we’ve said before we’re not necessarily seeking a transformational acquisition. We did a series of transformational acquisitions to build the necessary scale in the earlier years. At this point we’re looking to acquisitions to provide some directional changes, to move into markets we’re interested in, to move into geographies we’re interested in. There are certain markets we are not in [inaudible] oil and gas. We’d like to build our presence in Canada, a market we’re very attracted to, we have a business there. We’re doing very well in Australia, we’d like to build that. We have, through Scott Wilson, we have a good base in China and India, we’d like to build that. Then the extractive industries, the builders in oil, and gas, and mining.

And then in certain other places, in different parts of the world, including the US, we’ve got pockets where we’re geographically weak, or we’re technically less competitive than we’d like to be. We’re keenly interested in acquisitions and I’m pleased that we now have the balance sheet, the cash flow, and the low debt ratio to address it.

Avram Fisher – BMO Capital Markets

Martin, you called out and I think Tom also called out on the call, some non-US projects and yet your US geographic revenue mix is increasing more towards the US. Is this a surprise that you’ve been acquiring – I know Apptis is in there and Scott Wilson is out there and yet the US revenue mix is still up sequentially?

H. Thomas Hicks

It might be sequentially but year-over-year I think you’ll find that our international as a percentage of our total has gone from under 10% to around 13%. On a quarter-to-quarter basis it could be driven by onetime events of some sort or another. But in the longer term, we think we’re in the low to mid-teens right now and we probably would, over time, like to see that number get up. We don’t have anything in mind, but we would expect if we fill out the acquisition opportunities that we talked about, that number could be 20% or 25% ultimately which would be a nice balance.

Martin M. Koffel

Structurally the international ratio is materially large than it was. As Tom said, quarter-on-quarter there may be some aberration in the numbers, but we’ve definitely shifted it from 8% or 9% to 14%. The other thing is Sellafield which is this large project we run for the Nuclear Decommissioning Authority in the United Kingdom, a very large project. We had a consortium which we manage that manages 10,000 people for the NDA. It’s done on an agency accounting basis so you don’t see the revenue. It’s complicated accounting.

I’m not able to do it for you, but if you created a sort of revenue equivalent for the profit that comes out of it, the proportion of our revenue that came from outside North America would be somewhat higher than 14%.

Avram Fisher – BMO Capital Markets

Tom, one other quick question, I think you mentioned a performance based incentive fee?

H. Thomas Hicks

Yes.

Avram Fisher – BMO Capital Markets

What was the value of that?

H. Thomas Hicks

I wouldn’t want to point it out specifically but it is a project that we’ve talked about before actually, where we were given under a treaty there were certain expected dates that activity had to be completed by certain dates, and we were able to exceed that and do it a lot quicker. That fact really generated a lot of extra fee for us. It diminished our backlog as I mentioned, because the future work didn’t have to be done because we finished early. And the government is very happy, our employees are very happy that participated in that, and we’re happy to have achieved it as well.

Now, there are other phases to that. That project goes on for another two or three years and there are multiple sites and that just represented one site. We have several other sites to complete over 2012, 2013, and I think out into 2014, or something like that.

Martin M. Koffel

They’re all performance based. We actually have to achieve actual physical milestones to win those awards.

H. Thomas Hicks

It’s great business for us.

Avram Fisher – BMO Capital Markets

I know you don’t like to call out one time awards but would the margins have been closer to the normal run rate for the federal services business without it?

H. Thomas Hicks

They would have been lower than they were. I don’t know what normal run rate is, but it was a very positive effect.

Martin M. Koffel

The amount involved, I think it’s fair to say, it’s competitively sensitive and I’d rather not expand on it.

Operator

Your next question comes from Richard Paget – WJB Capital Group, Inc.

Richard Paget – WJB Capital Group, Inc.

Equity and income of affiliates sequentially was down a little bit. Any specific projects that ended? I mean I know there’s somewhat of an inherent lumpiness but I just wanted to get a further explanation of what the difference was.

H. Thomas Hicks

There’s nothing going on there it’s just probably a seasonal or timing issue. I think the run rate is probably for the year, a better indication where we’ll be for the full year. There’s nothing going on there Richard at all, nothing unusual.

Richard Paget – WJB Capital Group, Inc.

With the strong bookings in power and a pretty favorable outlook, how should we think about the levels of bookings going forward? With usual lumpiness disclaimer aside, I mean with the work you see out in front of you, should we expect higher levels over the next two years?

H. Thomas Hicks

Higher levels of revenue?

Richard Paget – WJB Capital Group, Inc.

Well, bookings.2

Well, I think you’ve heard from several of our speakers today that the amount we have in process that we’re pursuing is quite sizeable. Everything being equal we would expect to have out in front of us opportunities, at least equal to or greater than what we’ve seen in the past. We feel pretty good about it. Obviously, the economy could collapse, anything could happen, but based on what we see looking forward there are great opportunities to keep growing the business and our backlog.

Operator

Your next question comes from Andrew Wittmann – Robert W. Baird & Co., Inc.

Andrew Wittmann – Robert W. Baird & Co., Inc.

I wanted to dig in a little bit more on the questions on the buyback. Just with the stock price where it is today and has [inaudible] your capital allocation plan? Is this a tough hurdle to [inaudible] for acquisitions than maybe it was six or nine months ago as you look at your priorities in allocating capital here?

H. Thomas Hicks

I think depending on opportunities in the marketplace, the actual price of our stock, what we see coming as far as working capital needs, all play into our decisions on that. Obviously, if we believe that the conditions are right we would step back into the market. We have authorization to purchase up to 5 million more shares from our board and that’s available to us as soon as the window opens after we release earnings today. So that’s always available to us. But it’s not as simple black and white calculation as you might expect.

As far as pricing in the marketplace goes, prices have moderated to some degree, and as you know public values have come down a bit in our industry so that’s good. But private valuations, although they track public valuations, they tend to be more individualistic in their determinations so you have to take each deal one at a time and see what works. As I said on the last call we always have several companies that we’re pursuing and you have to shoot it a lot before you hit one. That’s kind of how we’re playing it.

Andrew Wittmann – Robert W. Baird & Co., Inc.

As it relates to the evaluations that are out there and the charge you had to take in this quarter, was that based solely on your stock price that required you to take the impairment charge or is that based on overall market pricing? I guess just a little clarity as to how – it seems like you felt the accounting rule made you do this. Is this something different than maybe kind of your normal valuation of the values of those businesses that you took the charge on this quarter? I guess, how does the stock price versus overall evaluation in E&Cs broadly affect that charge?

H. Thomas Hicks

Just one comment on that, if our prospects, our cash flow, our earnings, our revenue had seen serious diminution and driven a reduction in our stock price, that would have been one thing. But, as you know, for this year we continued to perform and grow over the last year. Our cash flow has been extraordinary for the fourth year in a row. All of our prospects, as you’ve heard on the call, tend to be positive so there was a disconnect between the stock price and what our prospects were. There was nothing driving the action that we had to take from inside the company, it was all being driven by external stock price.

If the stock price had been a few dollars higher, it’s highly possible that no impairment would have been necessary. We would argue that a sharp dip in the stock price in a short period of time triggered this event and once you trigger it then you get into some math that’s pretty well laid out and there’s not a lot of flexibility. You do the math and you come out with that answer, and that’s where we are.

Operator

Your next question comes from [Will Cabroleski – Unidentified].

[Will Cabroleski – Unidentified]

On the goodwill charge right off, I’m curious how this period compares to the second half of ’08 when the stock price got hit, and what was different, and how you do the accounting for that?

H. Thomas Hicks

There were a couple of things that were different. We asked ourselves the same question, “Why didn’t it get triggered in the past?” And there were a couple of things going on. We had more shares outstanding number one. Number two, the stock price dip in that time period straddled several periods, or straddled a couple of periods. Our convention is to look back 30 days from the point in time we do the evaluation and when you pick those dates to do the evaluation at the end of an accounting period, if you go back in that time period, you ended up with stock prices relatively robust for 15 of the 30 days and low for the other 15. Then the other 15 low days fell in the next accounting period so that was going on.

We had more debt outstanding which has an impact on the overall enterprise value at the time. And all those things combined caused a triggering event to happen. Once that happens you get into, as I said, a mechanical calculation where you have to estimate what you could sell the businesses at and make an adjustment based on that which starts to be a little mechanical and less realistic, let me just say that.

Martin M. Koffel

I asked the same question just from an intuitive point of view because I recall that in that actual period you mentioned, the end of ’08 and ’09, the total goodwill impairment charges by the Fortune 500 was about $230 billion. Now, it didn’t touch us and so a little bit of those dynamics is happening now and there we are.

[Will Cabroleski – Unidentified]

Common sulfur, it doesn’t look like there was a charge this quarter for the first time in a long time. Is that a risk that is removed? From here on out, how can we think about that project?

Martin M. Koffel

I’m inclined to say that your observation is precisely correct, there was not a charge this quarter. I want to be more responsive than that and I didn’t mean to sound facetious but, when you said that there were some smiles here. It’s a legacy, as you know, that came with an acquisition. Bob Zaist knows quite a bit about it and here he is.

Robert W. Zaist

In the prior calls we projected that we would be essentially complete with the punch list in the third quarter. In fact, that is where we’re at. We’re essentially complete with that. I told you that the long lead items that we had to receive at the site to close out a couple of items was expected in the last quarter. In fact, we received those items, they are under contract and are being installed at this point and we expect to be demobilized as we approach the end of the year and into the first few weeks of 2012.

Martin M. Koffel

That’s the best information we have as of today. We’re reasonably comfortable with that, but we’d like to take another hard look next quarter.

Robert W. Zaist

It’s up and running. The plant has been up and running for some time so this is not a question of turning the switch on.

[Will Cabroleski – Unidentified]

Your commentary around M&A and still having an interest in oil and gas, I was just wondering if you could drill down a little bit more and talk about your risk tolerance, what type of work you’d be ideally looking to execute and any color you could add would be greatly appreciated.

H. Thomas Hicks

Well, as you know we’re not big fans of hard dollar fixed price work and we’ve always tried to be very selective when we do that. We do some of it when appropriate and a lot of the oil and gas vary large projects tend to be that type so that would push us more towards service providers in the construction management, engineering services, maintenance, turnaround, those kinds of opportunities. We think there’s plenty of opportunities out there to do that kind of work so that’s where we’re focused.

Martin M. Koffel

We don’t like fixed price, we don’t like low margins, and we don’t like putting too much cash into these projects. I think you could expect that we’ll stay with our disciplines of now 20 years standing.

[Will Cabroleski – Unidentified]

Does approaching it from a technology standpoint interest you in any way?

Martin M. Koffel

It’s a bad use of the word but we like to be agnostic. While there’s some margin attractiveness in earning some technology, you can end up losing that sort of open-minded agnostic approach and you end up being a solution looking for a problem and that’s not a strategy that would suit us or suit our oil and gas clients.

Operator

I would now like to turn the call over to Martin Koffel.

Martin M. Koffel

Thank you for your continuing support and interest in the company. We appreciate it. Many of you have been associated and following us for quite a number of years. We look forward to discussing our full year 2011 results in February of 2012. Thank you.

Operator

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

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