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URS Corporation (NYSE:URS)

Q4 2011 Earnings Call

February 27, 2012 5:00 p.m. ET

Executives

H. Thomas Hicks – Chief Financial Officer

Martin Koffell - Chairman and CEO

Gary V. Jandegian – President, Infrastructure & Environment

Randall A. Wotring – President, Federal Services Business

Robert W. Zaist – President, Energy & Construction

Martin Tanzer – Executive Vice President of Marketing

Reed N. Brimhall – Chief Accounting Officer & Corporate Controller

Sam Ramraj – Vice President, Investor Relations

Analysts

Will Gabrielski - Lazard Capital Markets

Jamie Cook - Credit Suisse

Andy Kaplowitz - Barclays Capital

John Rogers - D.A. Davidson

Andy Kaplowitz – Barclays Capital

Tahira Afzal – KeyBanc

Avram Fisher – BMO Capital Markets

Rodney Clayton – JP Morgan

Andrew Wittmann – Robert W. Baird & Company

Steven Fisher - UBS

Chase Jacobson - William Blair

Rob Norfleet - BB&T Capital Markets

Operator

Good afternoon and welcome to the URS Corporation earnings conference call for the fourth quarter fiscal of 2011. To begin, I’ll turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS. Mr. Hicks, please go ahead sir.

H. Thomas Hicks

Good afternoon everyone. Before we get started, let me remind you that today’s call contains forward-looking statements about our future revenues, earnings, business prospects, book of business, acquisitions, dividends, tax rates, outstanding shares, debt payments, economic and industry conditions, and other statements that are not historic facts.

These statements represent our predictions and expectations as to future events, which we believe are reasonable and based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from our forward-looking statements, including those found in our recently filed earnings release Form 10-K, as well as in other SEC filings, and we assume no obligation to revise or update any forward-looking statements.

A webcast of this call is available on the investor relations portion of our website and will be archived in audio form on the website for a limit period. And with that, I’ll turn the call over to Martin Koffel, our Chairman and Chief Executive Officer.

Martin M. Koffel

Good afternoon and thank you for joining us. In addition to Tom, I have with me here in San Francisco 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.

Just a week ago, we announced our proposed acquisition of Flint Energy Services, and this is a significant expansion of our business that should position us well in the attractive segments of the oil and gas industry, especially in North American oil, oil sands, and gas, and we expect the acquisition to be completed in the second quarter and to be accretive in 2012.

At the same time, we stated that we expect growth in both revenue and earnings per share in 2012 without the benefit of Flint, and at that time we provided you with revenue net income and EPS guidance. In our earnings release today, we announced 2011 results and we reaffirmed the 2012 guidance. We also announced that we have initiated a regular quarterly cash dividend program starting in April.

Accordingly, today’s call will focus on 2011 results and the outlook for the current year, and given that the Flint acquisition has not yet closed, our comments on the outlook will only relate to our current business.

Operationally, we performed well in North America in 2011. All of our businesses in the United States and Canada met or exceeded expectations, but were affected by challenging economic conditions in Europe and in the Middle East, and I’ll talk more about this. But first I’d like to summarize the results.

Total revenues for 2011 were $9.55 billion, a 4% increase over 2010, and this includes growth in three of our four market sectors. Revenues from our industrial and commercial sector businesses rebounded very strongly in 2011, growing 17% from 2010.

The recovery in the power sector intensified in 2011, enabling us to deliver annual revenue growth for the first time since 2008. And while past sector revenues grew by 2% for the year, fourth quarter power sector revenues grew by 11%. And as you’ll hear later in the call, we expect high levels of growth in the power sector this year.

We delivered another year of the record revenues in our federal sector business. Infrastructure sector revenues declined slightly compared with 2010, but the pace of new sales has accelerated and resulted in a substantial increase in our backlog of infrastructure work. The company had a solid year overall in 2011, but our results were affected by several special charges.

Firstly, as you know, in the third quarter we took an estimated noncash goodwill impairment charge. The estimated impairment was due to the volatile stock market conditions and declines in our stock price during the third quarter. And this resulted in a reduction in our market capitalization.

In the fourth quarter, as required, we finalized our goodwill impairment analysis and recorded an additional after tax goodwill impairment charge of $32.9 million, or $0.43 per share after tax. This charge has no effect on our cash position and no bearing on our operational performance or on our outlook.

Secondly, in October, we took advantage of favorable market conditions as well as our recent upgrade to investment grade status to enter into a new credit facility with improved terms and greater capacity. Accordingly, the prior credit facility was extinguished and we recorded a noncash after-tax charge of $1.7 million, or $0.02 per share, related to the debt extinguishment. You’ll recall us mentioning this to you during our earnings call last November.

Finally, our 2011 results include a $5.5 million, or $0.07 per share, after-tax charge related to a restructuring of our international operations. As I noted, the performance of our international operations has been affected by the economic turbulence in Europe and the impact of the Arab Spring in the Middle East.

In the fourth quarter, we took actions to address the slowdown, including reducing our work forces in these markets and consolidating systems and offices. Early results would indicate that these actions have been successful and we now have our international operations on a solid footing.

Including these charges, we reported a net loss of $465.8 million, or $6.03 per share. Excluding these charges, net income as adjusted for both years, was $274.2 million in 2011 compared with $267 million in 2010. EPS, as adjusted for both years, were $3.53 in 2011 compared to $3.28 per share in 2010.

Reconciliation of net income and earnings per share with and without those charges is provided in the reconciliation schedule available on our website at www.urs.com and in our earnings press release.

A strong cash flow remains a hallmark of our business. In 2011, we generated $505 million in cash from operations. Over the past three years, we’ve generated $1.7 billion in cash from operations.

Our consistent ability to generate cash provides us with the flexibility to take advantage of market opportunities, and during the year we made several strategic acquisitions including Apptis, which serves the fastest growing segments of the $30 billion federal IT market; CATI Training Systems, which provides us with a team of specialized engineers and software developers, and we now have leading expertise in the high-growth flight simulation and unmanned aerial vehicle markets; and BP Barber, which adds technical expertise in the southeastern US infrastructure market.

At the same time, we’ve continued to return substantial value to stockholders through the repurchase of stock. We’ve bought an additional 3 million shares in the fourth quarter, bringing our stock repurchase for the year to 6 million shares. Total expenditures for stock repurchases in 2011 were $243 million.

So after spending approximately $525 million in acquisitions and share repurchases, we ended 2011 with $436 million in cash and short term investments. And finally, as you will have seen in our earnings press release, our board of directors has initiated a regular quarterly cash dividend program. The decision reflects URS’s financial strength, our consistent ability to generate strong cash flow, and our confidence in the future of the business. The company is committed to returning value to stockholders and the dividend program is indicative of this commitment.

Tom will talk more about the program later in the call, but now I should like to discuss our outlook for 2012. As stated in our press release last week, we expect that both revenue and earnings per share will grow in 2012, and this guidance does not include any of the benefits from Flint, which we expect will be accretive to earnings this year, including acquisition-related expenses.

We’ll update our 2012 guidance following the close of the Flint acquisition. Our outlook reflects improving conditions in each of our four market sectors. In the federal sector, while we’re mindful of the budget challenges facing the Department of Defense and other agencies, our work on essential, long term programs gives us a sizable and stable base of work. In addition, we see growth opportunities in federal IT support, projects for the Department of State, and the continued expansion of our work for the United Kingdom’s Nuclear Decommissioning Authority.

In the industrial and commercial sector, many of our oil and gas, mining, industrial, and manufacturing clients are moving forward with new projects. This should lead to additional opportunities for URS, particularly through our global master service agreements with multinational corporations. Of course, our abilities in this sector stand to be significantly enhanced by the acquisition of Flint.

In the infrastructure sector, our backlog grew by 17% from the beginning of 2011, reflecting a strong level of new sales, and many of our new projects continue to be funded by federal and state budget sources. And we expect the recovery in the power sector to continue as utilities move forward with capital expenditure programs. This includes funding for missions control projects, new natural gas-fired power plants, and the retrofit and modification of nuclear facilities.

I should note that our 2012 guidance includes an incentive award that we expect to receive for the successful early completion of a key milestone on a large chemical weapons demilitarization contract. We expect that a significant portion of this award will be made during the first quarter. Incentive awards are an important component of many of our contracts, particularly in the federal sector, and they’re a fundamental part of the business

During the fourth quarter, we completed key milestones on two other federal contracts, again, ahead of schedule. Consequently, we removed $1.2 billion from our federal sector backlog. Although work continue on these projects, the overall period of performance has been shortened due to our operational success. This adjustment we ended 2011 with a total book of business of $27 billion, including backlog of $14.3 billion. This provides us with a strong base of work for 2012 and beyond.

I shall now address each sector in detail, starting with the federal business. And as a reminder, again, this discussion does not include the positive effects of our pending acquisition of Flint, which I shall discuss again at the end of this call.

Our federal sector revenues were $4.6 billion in 2011. That’s an increase of 3% over 2010. Many of you have asked questions about our outlook for the federal sector, given the impending budget reductions, and I want to take this opportunity to address the subject.

We remain optimistic about the federal sector for the following reasons. Firstly, we have a large number of long term contracts with the Department of Energy and the United Kingdom’s Nuclear Decommissioning Authority - that’s the NDA - that have secure funding sources. In addition, there are a number of active competitions that will provide us with new opportunities to expand our business with both of these clients this year.

Secondly, within the Department of Defense, we also have significant long term contracts that are expected to remain funded through completion. These include a sizable and growing inventory of indefinite delivery contracts that are becoming the preferred procurement method of the DOD. Furthermore, we have more than $6 million in proposals submitted and awaiting award, and a strong pipeline of new opportunities over the next 24 months.

Thirdly, our Apptis and CATI acquisitions have positioned the company to benefit from the significant investments that the DOD intends to make in cybersecurity, in cloud computing, in unmanned aerial vehicles, and in flight simulation programs.

And finally, since URS is not a military hardware manufacturer, we have minimal exposure to the proposed reductions in new weapons programs. Overall, we remain confident about the potential for the federal business, and specifically we expect that federal sector revenues will be about the same or slightly higher than the $4.6 billion we delivered in 2011. It’s important to note that despite the budget uncertainties, we’re maintaining our revenues in the federal sector while quite significantly increasing our profitability in the sector.

Our next key market is the industrial and commercial sector, and this business performed exceptionally well in 2011. Revenues were $1.92 billion. That’s a 17% increase from 2010. Activity remains robust across virtually all of our industrial and commercial markets, including oil and gas, manufacturing, and mining. Our results in this sector were driven by a 33% revenue growth in our infrastructure and environment division.

This was primarily due to a significant increase in the environment and engineering work we performed under our master service agreements. We’ve won a number of new assignments to support Fortune 500 clients in North America, Europe, China, and Australia.

In oil and gas, we’re encouraged by the steady demand for front-end engineering and design services to support increased activity in the Canadian oil sands, and for pipeline expansion projects. Our involvement in early-stage work positions us for engineering and construction assignments as programs move forward. Of course, following the acquisition of Flint, we’ll be able to provide additional services to oil and gas clients.

The outlook for our mining business is strong. There’s been a resurgence of mining activity in both Australia and in North America, and as a result, we’ve significantly expand our Australian mining capabilities. In 2012, we anticipate increased demand for facility modification programs and mining expansion projects in North America and Australia.

In the industrial manifesting market, the demand for our outsourced facilities management and O&M services remains robust. Multinational corporations in the automotive, food and beverage, and pharmaceutical industries have increased production. We expect that the market fundamentals that drove our strong performance last year will continue through 2012. In 2011, our revenues in the industrial and commercial sector grew 17% to approximately $1.9 billion, and we expect to hold or better that position in 2012.

Turning to the infrastructure sector, revenues were $1.86 billion, down 2% compared with last year. We’re pleased with the performance of the infrastructure business, notwithstanding the slight revenue decline last year, and we’re particularly pleased with the pace of new awards. Our backlog rose by $446 million, or 17%, from the beginning of last year.

Our engineering and design business was strong throughout the year, which is a good indication that the construction market will follow behind. And there’s a high level of activity in the mass transit market. We recently won several new awards, both domestically and internationally.

Opportunities in the surface transportation market also remain robust. States increasingly are using design-build contracts to complete critical infrastructure. In recent months we’ve won a number of new design assignments to support highway and bridge construction programs across the United States.

Another positive trend is the sustained level of funding for state infrastructure. Several states, including New York, Washington, Kentucky, and Massachusetts recently announced major infrastructure programs they will begin later this year. The funding for many of these projects is expected to come from alternative financing sources such as user fees and dedicated taxes.

As you know, the administration and Congress continue to discuss the Federal Transportation Funding Bill. We expect that the final compromise will provide states with more than $50 billion a year in matching funds, and that would be consistent with current funding levels.

So in summary, the sustained demand for infrastructure work, particularly in North America, and our $3 billion backlog should support growth this year. As a result, we expect that our 2012 infrastructure revenues will be approximately $2 billion, and that represents an increase of about 7% over 2011.

Our next market is the power sector. Our 2011 power sector revenues were $1.13 billion, up 2% over last year. Meanwhile, revenues for the fourth quarter were up 11% from the fourth quarter of 2010. We believe that the recovery in this market has now taken hold, and we’re optimistic that the underlying market fundamentals, combined with URS’s competitive strength, will enable us to significantly grow the power business in 2012. The outlook is supported by our $1.6 billion backlog, which has increased by $216 million, or 15% since the beginning of 2011.

Demand for air quality control services remains strong. Over the next three years, it’s estimated the utilities will spend about $42 billion to upgrade their existing facilities. Utility companies need to comply with federal and state emission control guidelines, including the EPA’s recently approved mercury and air toxics standards.

The power generation market is strengthening. As the long term price for natural gas is expected to remain at historical lows, we expect that some utilities may consider building new combined cycle facilities rather than modernizing existing plants. And given URS’s leading position in both emissions control and new generation programs, we’re well-positioned to support capital intensive projects as they move along.

In the nuclear market, there’s a continuing demand for the modification and retrofit work that we perform on existing facilities. Later this year, we’ll begin replacing steam generators for Intergy and the Tennessee Valley Authority. In addition, we expect to see an increase in safety assessments as utilities begin implementing the NRC’s post-Fukushima safety requirements.

Taking all this into account, we expect that our power sector revenues for 2012 will be approximately $1.6 billion. That’s a 42% increase over 2011.

And with that, Tom Hicks will now discuss our financial results in some more detail.

Tom Hicks

Thanks Martin. I’ll focus on the full year 2011 results. Our fourth quarter results are available in the press release we issued this afternoon.

Revenues for 2011 were $9.55 billion, and excluding the noncash charges related to the goodwill impairment, the retirement of our prior credit facility, the restructuring charge related to our international operations, and acquisition-related expenses, net income was $274.2 million, and earnings per share, excluding these charges, were $3.53.

A reconciliation of net income and earnings per share with and without the charges is provided in the reconciliation schedule available on our website at www.urs.com and in our earnings press release.

Our cash flow from operations was one of the highlights for the year. We generated $505 million in operating cash flow and ended the year with $436 million in cash and cash equivalents. And as Martin discussed earlier, the board has approved the initiation of a regular quarterly cash dividend program. The initial quarterly cash dividend of $0.20 per common share will be paid on April 6 to stockholders of record as of March 16. We believe our strong operational and financial performance will enable us to continue investing in our business, return value to stockholders, and repay our bank debt.

Interest expense for 2011 was $22 million, and the diluted weighted average shares outstanding were 77.3 million. The operating margin, excluding the noncash charges we’ve discussed, continued to be at historically high levels, and we expect to maintain our strong margin performance in 2012.

As you know, we report separate financial information for our three business segments: infrastructure and environment, federal services, and energy and construction. For fiscal 2011, infrastructure and environment reported revenues of $3.8 billion, and operating income of $222 million. Excluding the restructuring cost associated with our international operations and acquisition related expenses, infrastructure and environment’s operating income would have been $227.6 million.

Federal services reported revenues of $2.7 billion, and an operating loss of $152 million, including the acquisition related expenses and the goodwill impairment charge. Excluding these charges, federal services operating income would have been $198 million.

Energy and construction reported revenues of $3.3 billion, and an operating loss of $214 million, including the goodwill impairment charge. Excluding this charge, energy and construction’s operating income would have been $263 million. A reconciliation of operating income is provided in the reconciliation schedule available on our website at www.urs.com, and in our earnings press release.

And finally, capex, excluding the equipment purchase through capital leases, was $67.5 million. Our press release contains a detailed description of book of business, including backlog, option years, and indefinite delivery contracts, or IDCs. We ended 2011 with a book of business of $27 billion, compared to $29.1 billion at the end of 2010.

Backlog, the largest component, was $14.3 billion at the end of the year. That’s down from $16.6 billion at the end of last year. The decrease in our backlog and book of business was affected by the previously discussed reduction of $1.2 billion. The value of option years was $4.7 billion, compared with $4.8 at the end of 2010. And for 2011, IDCs were $8.1 billion. This was up from $7.7 billion at the end of 2010.

And as I have discussed on past calls, the new work that comes from IDCs continues to grow, and is changing the relationship between backlog and revenue. New work assignments under IDCs typically have shorter periods of performance and more frequent awards are necessarily to deliver the same level of effort over a multiyear period. Therefore, works executed through IDCs generate a lower backlog relative to current revenue. And as an example of our growth in IDC revenues, for 2008 our federal services division generated approximately 5% of its new work from IDCs. In 2011, approximately 36% of federal services new work came from IDCs, and we expect this trend to continue.

And with that, I’ll turn the call back to Martin to discuss our guidance for 2012.

Martin M. Koffel

To summarize the outlook for our four key market sectors, we expect that revenues from the federal sector will be approximately $4.6 billion. Revenues from the industrial and commercial sector will be approximately $1.9 billion. Revenues from the infrastructure sector will be approximately $2 billion, and revenues from the power sector will be approximately $1.6 billion.

Based on these assumptions, we expect that consolidated revenue for 2012 will be between $9.9 billion and $10.1 billion. We expect that net income will be between $292 million and $300 million, and that earnings per share will be between $3.95 and $4.05 per share on a fully diluted basis. We expect that our tax rate will be approximately 33%, but the rate may fluctuate depending on the amount of noncontrolling interests that will be included in the results.

We also expect that the number of weighted average shares outstanding used to calculate EPS for 2012 will be approximately 74 million shares. These figures do not include the impact of our pending acquisition of Flint. Assuming that we complete the acquisition in the second quarter, we expect that Flint will be between $0.20 to $0.30 per share accretive to URS’s EPS on a GAAP basis in 2012.

I shall end with some comments on Flint. We think Flint is a great acquisition that achieves a longstanding strategic priority for us at URS. We’ve been seeking the right opportunity to build a position in the North American oil and gas industry for several years, and we’ve mentioned that to you in calls and investor meetings.

Flint is an ideal fit and gives us leading positions in attractive segments. Flint has a first class management team led by Bill Lingard, its president and CEO, and we’re excited to have Bill and his team joining URS and we’re enthusiastic about the opportunities that lie ahead for all of us. Once the acquisition is completed, Flint will operate as a new division of URS managed by Bill as its president.

In the meantime, URS is strong and well-positioned in each of our four market sectors. We remain focused on execution, on our work for customers, and on building value for stockholders. With that, we’ll open the call up for questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] Your final question comes from Will Gabrielski of Lazard.

Will Gabrielski - Lazard Capital Markets

Given the increase in IDIQ, over the past few years as a percentage of the federal business and total revenue, I’m just wondering why the guidance range is so tight, and what gives you the ability you have to give such a tight range versus what maybe you’ve done in the past.

H. Thomas Hicks

Well, the prospects and the programs that we’re working on we expect to continue. But the government is procuring the services through task orders now instead of multiyear, single award contracts. So we still have visibility and relationships with the same set of clients, so we feel good about the revenue prospects even though it doesn’t come in big chunks like it used to come in the past.

Will Gabrielski - Lazard Capital Markets

Okay. So is there anything else contributing to visibility this year that makes the guidance range tighter than normal?

H. Thomas Hicks

I think we mentioned in our call about some of the completion awards that we benefited from last year and also our progress in achieving some of those awards, and we have some large programs that we can see into 2012 and we feel pretty comfortable about our ability to generate a substantial portion of our operating income. So I think this year probably a little better visibility going forward than perhaps we’ve had in the past, even with the change in IDCs taking up more of the order input.

Will Gabrielski - Lazard Capital Markets

And then in the power market, can you talk about URS’s exposure to each one of the two major rules: the mercury and toxic rule and then the cross-state air pollution role and how the stay in CSAPR could possibly impact you at all?

Martin Koffell

Yes, let me put Bob Zaist on the line here.

Bob Zaist

Overall, I’d say that we’re positive about the power market, as Martin says, particularly the AQCS business. And as you mentioned, there’s a couple dynamics that go along with that. The CSAPR program has had a stay, but we’ve got the mercury and air toxics rule has presented itself. We also have seen the board of directors of various utilities that have made the commitment to a clean air initiative within their particular companies. So when you roll all that together, we continue to see good opportunities for us. There’s approximately 15,000 megawatt, which relates to about 30 units that are looking to do retrofits, and so we’re comfortable with that part of the market. As you know, there is a good horizon as far as the visibility of gas prices, and that is leading some utility executives to make the decision toward new generation in deference to retrofitting of existing programs. But in either case, I think we’re well-positioned with our skillsets to address that market. If the decision is toward retrofit for AQCS work, we’re in good shape, and if the decision defers to capital investment and utilization of gas, we’re equally well-positioned.

Martin Koffell

I should have mentioned, for the benefit of those who’ve not met him, Bob is president of our energy and construction division.

Will Gabrielski - Lazard Capital Markets

Okay, thank you. Just one last question on Apptis. I’m just wondering what type of visibility you’re getting there, and obviously if you’ve seen any synergy across their federal divisions where you can possibly leverage their classification clearance levels.

Martin Koffell

Apptis has worked out very well for us, and Randy can’t get to the speaker fast enough to tell you, because he founded and championed this, and it has integrated very successfully.

Randall A. Wotring

Our integration activities continue to go really well. In fact, we’re bidding on many opportunities that heretofore we wouldn’t have been able to address. Our pipeline has increased by $10 billion in the near term of opportunities we’re chasing, and we’ve submitted about $1.3 billion in new opportunities since the acquisition. So things are going well there. We’ve been able to get some cost synergies as well, so we’re extremely happy. You know, they support cloud computing and the cyber-activities which are areas of investment Secretary Panetta announced as he sets the new direction for DOD.

Martin Koffell

Without abandoning our base federal business, where we have a good position and we enjoy the business very well, Randy has been leading additional positioning into the federal IT market, cybersecurity and that end. And that’s well-funded and fast growing. And I think the initial positioning that he’s led is working out very well.

Operator

Your next question comes from Jamie Cook with Credit Suisse.

Andrew [Riscalia] - Credit Suisse

Hey guys, this is Andrew [Riscalia] on behalf of Jamie Cook. I’ve just got a question regarding the Flint acquisition. Can you guys talk a little bit more about the competitive landscape there once Flint comes onboard and your strategy in terms of dealing with the competition that’s already entrenched in that market? Specifically, North America. And then sort of what your timeline is in terms of moving. You mentioned during the acquisition call Flint is primarily more focused in Canada, and you’re moving more toward a 50-50 split between Canada and the US. Sort of what your timeline is so many we can kind of keep an eye on this as that acquisition progresses.

H. Thomas Hicks

I think it’s probably better for us to get into those details when we complete the transaction. But I think in general your points are right on the money. I mean, one of the things that has us really excited is bringing their skill sets out to the US. They’re very well established, as you pointed out, in Canada, and have a terrific reputation there. But although they have some US business, there’s a great opportunity to bring their skills south and introduce them to clients that we have relationships with and long term projects with. But beyond that, I think it’s probably premature. We mentioned that we were trying to close this in the second quarter, and certainly right on closing we’ll get more definitive about its impact on business and our plans for integration.

Martin Koffell

We did say, a week ago, in our call from New York, that the general direction would be to help Flint build in the United States a business as large as the business they have in Canada.

Andrew [Riscalia] - Credit Suisse

And then just kind of an unrelated question, but can you just comment on your headcount this quarter, how much it was up sequentially or year over year?

H. Thomas Hicks

Yeah, I think one of the areas where we’ve had real growth is in the federal area, and Randy, you might want to give a comment on your headcount growth?

Randall A. Wotring

The headcount in the federal services business in 2011 grew by about a thousand, so the quality of our revenue is much improved, headcount replacing some of the pass through work that we’ve had historically. So we’re really pleased with the headcount growth.

H. Thomas Hicks

Apptis of course added about a thousand people, and very, very high level skill sets. So it let us really reposition ourselves. And we’re close to 47,000-48,000 people now.

Operator

Your next question comes from Andy Kaplowitz from Barclays Capital.

Andy Kaplowitz - Barclays Capital

I wanted to ask you about the power business, just following up on Will’s question. Backlog in power is up mid-teens, and you’re forecasting over 40% revenue growth. So maybe if you can help us reconcile that a little bit more. And then the other thing is you mentioned low gas prices as an opportunity. I think we all understand that, for gas-fired generation. Does it change the retrofit equation at all? Have you had conversations with utilities on that?

Robert W. Zaist

We have had conversations and as I mentioned in my earlier comments, with the horizon perspective on gas pricing, I think as generation picks up, we believe that the gas-fired generation will be the fuel of choice, if you will, and that’s particularly going to fill in behind some of the earlier planned nuclear renaissance that’s coming to market slower than what we thought a couple years ago before the Fukushima incident.

As to whether or not utilities decide to do the retrofit, or do new build, I think in general, if a generating facility is to be retrofitted to meet clean air standards, in most cases that decision is made based on the condition and the age of those facilities, and if it’s reasonable to make that investment we’re seeing those investments continue to be made. If it’s borderline, then I think utility executives are taking a hard look at should they replace that facility with a new gas-fired generation facility.

We’re happy with the mix of work that we booked last year. We were pleased with how the market presented that to us. I would tell you we continue to be pleased with the opportunities that are out in front of us. And I would say at this time those opportunities are predominantly retrofit of existing generating facilities.

Andy Kaplowitz - Barclays Capital

Okay, and then in order to the revenue guidance versus the backlog, it’s just more service and general health of the sector. Is that fair? In’12?

Robert W. Zaist

Well, I would say in 2012 we’ve still continued to see a mix of large projects, dominated, as I said, by AQCS backfit work. We are starting to see selected new generation facilities. That number is modest, and we see a good flow of professional service work. As Martin mentioned in his comments, we are seeing an increase in nuclear service opportunities. This year we’ve got a good flow of steam generator replacement projects. We have one for Intergy. We have one for TVA. And all of that adds to the revenue flow in 2012.

Martin Koffell

The question, if I understand it, is are we getting this strong flow of work more from service work? And is there any sign of the larger projects? Isn’t that what you’re getting at?

Andy Kaplowitz - Barclays Capital

Kind of. It’s just the larger projects tend to reflect themselves in backlogs, and the service stuff is more in revenue, and if it’s a big revenue jump versus backlog…

Robert W. Zaist

Last year’s bookings were driven by large projects, and I would tell you that this year we continued to see a predominance of opportunities with large projects, with a regular flow of services work to augment those projects.

H. Thomas Hicks

The backlog input and the revenue burn go at different rates for different businesses, and different projects, so you can’t match it one for one and say…

Andy Kaplowitz - Barclays Capital

Right, so maybe it’s just faster burn this year? Is that kind of what it is?

H. Thomas Hicks

Yeah. To the extent you have projects where it’s a lot of material being delivered, that burns very quickly. If you follow me. And the labor-based stuff goes at a different pace. So we’re not concerned. We think the power revenue projections for next year are easily obtainable. We think we’ve got great visibility and there’s a great upswing in that market right now. So we’re feeling very good about that. I wouldn’t worry about the relationship between backlog and revenue projection for that business.

Andy Kaplowitz - Barclays Capital

Tom or Martin, just on the I&E segment, what’s hard to figure out is the margins - we’ve had this conversation on previous calls - are lower than they were a couple years ago, for a variety of reasons. But what’s hard to figure out is how much of this is the problems that you’ve had in Europe and maybe to a lesser extent in the Middle East, and how much can we recover from this as we go into ’12 and ’13. I know you said you took restructuring, so that should help. But maybe you could address that. How do I sort of parse apart maybe a stronger core US business versus a Scott Wilson?

H. Thomas Hicks

First of all, it’s all of our European and Middle East business, which includes acquired as well as existing. You know, we had quite a big business there ourselves to begin with. But to answer your question more directly, I’ll turn the call over to Gary Jandegian, who runs that division and he’ll give you some quick comments on that.

Gary V. Jandegian

You may know, we have nearly 8,000 employees internationally, and approximately 3,500 of those are in Europe. And in Q4 we took some redundancy actions and we consolidated systems and offices, and we transferred some underutilized staff to projects where we had hiring needs. Given the employment practices in Europe, it took us a bit longer to lay off employees. But we believe we’ve right-sized the Europe and Middle East operations to today’s market situation. And the core business is elsewhere in North America, China, India, Australia. All are going well. And early indications in 2012 based on utilization rates rising to over 75% in Europe indicate, at that rate, we’ll be profitable. And so we expect IE margins will be closer to the historical range of 7-8% over the longer term.

Andy Kaplowitz - Barclays Capital

What was your utilization in ’11? Can you tell us that?

Gary V. Jandegian

In Europe it was in the low 60s. In the US it runs about 78-80% depending on geography.

H. Thomas Hicks

And we just had too many people for the amount of work we had, and the work was declining faster than we could cut people. That’s what happened. That’s why the margins in IE were down last year.

Martin Koffell

We started off about right, but the crisis in Europe obviously started with the euro zone, and spread to the UK with the banking crisis moving from here to there. And as we got into the year, it clearly needed reconfiguring

Andy Kaplowitz - Barclays Capital

And your utilization was generally stable in the US for the year, and for ’12?

H. Thomas Hicks

Yes.

Martin Koffell

To comment on the Middle East, the so-called Arab Spring affected all of our markets. We ended up closing one large office and scaling back considerably, because the political instability really led to a cutback in spending on infrastructure and related investments.

Andy Kaplowitz - Barclays Capital

That was in Bahrain, Martin?

Martin Koffell

Yeah.

Operator

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

Martin Koffell

Couple of things. First of all, just in terms of the power generation and growth that you were talking about with Andy. How much of the incremental growth is new plant construction? And is that fixed price construction work?

Robert W. Zaist

We have very little fixed-price work in our backlog for the power group, and a very modest amount in our prospects going forward.

Martin Koffell

We don’t like fixed-price work institutionally. We do some. And I should tell you that Flint Energy doesn’t like it either, which is one of the attractions for us.

Andy Kaplowitz - Barclays Capital

And then the second thing was in terms of the award fee that you mentioned, that you’d be booking in the first quarter, can you tell us the size of that?

H. Thomas Hicks

We don’t think it’s productive to get into individual contracts and profitability, but it’s a material amount, and it will cause our first quarter profitability to be higher than a typically 25%. It’s a very good contract for us.

Andy Kaplowitz - Barclays Capital

And Tom, have you hit that milestone, so you know you’re going to book it? Or are you just confident that you’ll get there?

H. Thomas Hicks

We’re not complete in the sense that we don’t have full contract modification and all the administrative things that have to be done, but the bulk of the work is complete. We’re pretty confident.

Martin Koffell

The operational event that triggers it has been achieved.

Andy Kaplowitz - Barclays Capital

Okay, good. And then lastly, if you could clarify for me the $1.2 billion reduction in backlog based on hitting a milestone. How does that work?

H. Thomas Hicks

Well, the projects that were mentioned had a period of performance that extended quite far out into the future. However, if we were able to complete those early, below cost, we would receive a bonus for that, in effect. So that’s what happened. We captured a lot of the profitability sooner rather than later, and therefore as we completed the work, the backlog wasn’t necessary to complete the work, obviously. So we had to adjust the future work down to the level that compensated for that change. Pretty straightforward.

Operator

Your next question comes from Tahira Afzal of KeyBanc.

Tahira Afzal – KeyBanc

First question, and I don’t know if you folks can answer this, but on the chemical demil side, obviously that’s been a great contract for you as John mentioned. You know, obviously you hit one milestone in the first quarter. Could you talk about the opportunity for milestones on good performance going forward? Obviously you can’t talk about the amount, but perhaps in terms of timing when we could see any potential other milestone.

And the second question is more in relation to the infrastructure side. [unintelligible] hearing of a couple of large projects going ahead, pretty exciting. We know you’re on one of the big teams for [unintelligible], so would love to get a sense of the larger opportunities there, although they might be slow to take off, in terms of your backlog growth opportunities in that sector. Just them being strong. And similar on the [power] side, with such a big amount of revenue coming in, do you still think you’ll have enough opportunity to really end the year on a high backlog note.

Martin Koffell

Let’s take it one at a time. You asked about infrastructure and also about power.

H. Thomas Hicks

And also about the chemical demil.

Martin Koffell

So we’ll start with chem demil.

H. Thomas Hicks

That program has a significant amount of activity in ’12, and we expect, as I said earlier, to see some nice awards in ’12. It also continues out for several more years beyond. Not at the same level as it will have in ’12, but still at a very high rate in ’13 and ’14, and even beyond. So it’s a long term program that still has a lot of work yet to be done. So I think Martin Tanzer’s going to comment on the infrastructure projects.

Martin Koffell

Martin, as many of you know, is executive vice president of marketing, based in New York City.

Martin Tanzer

Just to give you a quick overview, if you look at the market right now, there’s approximately $8 billion worth of design-build projects in the marketplace. We’re pursuing all those projects right now. As you know, on the Tappan Zee Bridge, we’re one of four teams that’s been shortlisted for that. There are four other projects, all with fees in excess of a billion dollars, that we are now in the proposal stage. And I anticipate of that total of about five projects, two to three projects will be awarded in 2012. And that’s on the design-build side of the table.

If you look at the PPP market, we forecast that market potentially could generate an incremental $3.2 billion of opportunities on an annual basis. The largest of those projects right now is the Knik Arm Bridge in Alaska. We’ve been shortlisted with two other teams for that particular project. The fee is $1.4 billion.

There’s the Ohio bridge programs. There’s two bridges. One is a design-build. The other is the PPP. We’re in the process now of writing a proposal for that project. I-35 in Texas, Ottawa Light Rail, which we are on a winning team for that project. Highway 407 in Texas, as well as 183 in Texas. And that’s about $2.5-3 billion worth of PPP programs. Of that amount, I would forecast that there’s probably about $1-2 billion of opportunities that will be awarded in 2012.

The design-build projects are moving very, very quickly. The PPPs, as you can imagine, are moving a lot slower due to the process issues. There are 23 states with PPP legislation. The legislation is different state to state. The processes are different, and the requirements are different.

I might also add to the infrastructure market that there are several states that have very large programs. As you know, New York State, the governor has indicated that he could generate about $15 billion of additional revenue for infrastructure. He talked about 100 bridges and 2,000 roads. Massachusetts Port Authority has a billion program, and that’s all for infrastructure. Washington State is getting ready to issue a bond issue for $1 billion, and California has just allocated $347 million for infrastructure improvements. So we see the market as being pretty robust during the first quarter of 2012.

Martin Koffell

It’s years since we’ve seen opportunities at this frequency, certainly at this scale. And I should emphasize that we’re enjoying domestically very strong margins in our infrastructure business.

Tahire Afzal – KeyBanc

Brilliant update. Thank you. If I could get something on the power side, that would be great.

H. Thomas Hicks

What specifically was your question on the power side?

Tahire Afzal – KeyBanc

You’re going to see fairly strong revenue in 2012 if it all plays out. I would love to get an idea that regardless of that, could you potentially end the year on an up year on year backlog for the segment?

H. Thomas Hicks

I’ll let Bob Zaist comment on that.

Robert W. Zaist

Just to reinforce my comments earlier, we see a very good pipeline of AQCS projects. We see a modest pipeline on new generation. The modification market in the nuclear business -and by that I mean upgrades as well as responses to post-Fukushima safety assessment and subsequent work - all lead to confidence that we’ll be continuing to rebuild the backlog as we start to burn revenue in the existing backlog.

Operator

Your next question comes from Avi Fisher of BMO Capital Markets.

Avram Fisher

Quick question. I got on late, so I apologize if this has already been asked, but it looks like the industrial commercial backlog came down rather significantly. I saw in the K that there was a $222 million mining cancellation, but it came down closer to $300 million. Can you just talk about that? Or if you already talked about that I apologize.

H. Thomas Hicks

No, we haven’t. The reduction that you specifically identified was related to a project that we’ve had that had been in suspension for quite some time, and the customer finally decided just to shut down operations. So we de-booked that. Otherwise, the I&C business for us is going along quite well, and I think it’s just cyclical that you see some dropping in the backlog. We’re optimistic for the coming year that we’ll maintain our position there. So I wouldn’t read anything into the backlog there at all.

Avram Fisher

It was down about $400 million sequentially over the quarter. And I had expected a lot more strength there because obviously we’re seeing a recovery in the US. I mean, you don’t seem concerned, and I understand the cancellation accounts for more than half of the drop, but are clients pushing back? Are they delaying projects? Are you bidding on fewer projects? Just want to drill down into that a little more.

H. Thomas Hicks

Yeah, we could give you some color on that. Gary Jandegian can talk to you a little bit about what’s happening in his part of that world. Because the way they’re contracting has changed a bit. I’ll let Gary talk about that.

Gary V. Jandegian

You might not have been on the line when Andy talked about the services business, but that’s really what’s going on. The MSA business in infrastructure and environment grew the fastest it’s ever grown, and it was up 33% in I&C, and it was up 28% in power.

And so much of our work that comes through I&C comes from MSAs, or master service agreement, with multinational clients. And because it’s services work, often the contract values don’t ever get counted in the IDC, the indefinite delivery contract amount, or even in backlog. It’s pretty much a book and burn situation.

Upon receipt of task orders from an MSA client, the funding turns to revenue without entering the backlog. And this is typical when the MSA has no face value on the contract. We just receive task orders for doing work on an indefinite situation.

Some of these clients, and I can name a few - Shell, BP, Chevron - particularly the oil and gas clients - generate about $50-100 million per year of services revenue for us. And that’s not counted in our book of business. But it is counted in the revenue. So when you look at the MSA portfolio we’re very confident in the guidance and the growth outlook for 2012.

Bob’s going to have some comments as well.

Robert W. Zaist

One of the things that gives us confidence in our look forward basis is the fact that Gary is seeing in his business the throughput of service opportunities, whether it be environmental studies or pre-feeds, or feasibility studies, and we can see in our pipeline of opportunities distinct construction and design-build opportunities that are the follow on to that precursor work.

We see a strong market in Australia, particularly in the mining related business. We see great opportunities in Canada with large EPC pursuits with companies like Suncor and Total and TransCanada, Alaska Gas project. So we see good opportunities in those businesses. Our facilities management opportunities continue to be strong as the industrial sector comes back, and the demand for outsourcing of that facilities management, the utilities that support the production facilities continues to grow from our prospect list.

H. Thomas Hicks

And Avi, I think it’s important to note that quarter to quarter sequentially I think you can see things can happen that would mislead you as to the prospects. And what we’re trying to tell you is we see significant strength in that business and we’re not concerned about our ability to meet the expectations we’ve given you for that business for the next year.

Avram Fisher

Gotcha. Just to clarify though, it sounds like there’s a shift toward more MSA work. You haven’t changed the way you record that, with this shift to this MSA work. It’s happening in the federal services side as they move that in IDIQs. It’s happening in industrial commercial, with this MSA. And Flint also primarily doesn’t report a lot of backlog. Most of that’s under MSA. Is that correct?

H. Thomas Hicks

Yes, I think you’re right. On the MSA side, it’s difficult for us - as Gary was explaining - it’s difficult because a lot of these programs don’t have a value. They just say here’s how we will order business from you and we’ll call you when we need you. And many times they call us on the first two weeks of a quarter, and the work’s done by the end of the quarter. So it just shows up in revenue and never goes through backlog.

So it’s a difficult story to explain by the numbers. But we’re going to try to keep you informed as we go through the year as to what’s happening there. But I mentioned in my comments that more and more of our revenue is coming through these kinds of vehicles. So the backlog to revenue, it’s still a good indicator, but it’s not as good as it used to be.

Martin Koffell

I don’t know whether you heard Tom’s comments about federal backlog, but Tom mentioned the shift.

H. Thomas Hicks

We have one data point in the federal services side, which has a lot of IDCs as well. The portion of their revenue input, or new order input, has grown to about 36% now from the low single digits just in 2008. So right there you can see we’ve gone from, instead of getting three- and five-year contracts in big lumps, and then burning it off, we’re getting increments that are shorter-term, higher velocity, ending up with the same revenue, but it doesn’t come in in big chunks to be burned off. I hope that makes sense.

Avram Fisher – BMO Capital Markets

Over time we’ll have to get comfortable with it. It’s just a different [unintelligible] visibility. And just one final - the cash flow statement, there was a gain on the sale of assets. It looks like about $0.11 pretax. Is that included on the P&L? You didn’t call that out as a one-time item. I just wanted to check where that is on the P&L.

H. Thomas Hicks

That was some capital equipment associated with a project, a mining project, where the owner of the mine was required to buy back from us the equipment we were using if we cease work there. So it was just a gain on the difference between what they owed us and what we had it carried on the books for.

Avram Fisher – BMO Capital Markets

And that’s about $0.08 after tax, to earnings?

H. Thomas Hicks

I don’t think it was that much. I’m looking at Reed Brimhall right now. We’ll mention it on the call before we hang up. We’ll look it up.

Operator

Your next question comes from Scott Levine with JP Morgan.

Rodney Clayton – JP Morgan

Hi gentlemen, it’s Rodney Clayton here for Scott. First of all, just a quick modeling question. Did you mention what your implied tax rate is on your 2012 guidance?

H. Thomas Hicks

Yeah, we think it’s going to be - it’s a little tricky because of the noncontrolling interest part. A lot of our work comes through arrangements where we’re a partner with other firms, and then we consolidate it and we take out the noncontrolling interest. So assuming that that level, NCI revenue remains about the same in 2012, we think it will be about 33% on the face of the P&L.

Rodney Clayton – JP Morgan

Okay, 33% book tax rate, and you’re saying that’s assuming the same - I think you did, what, $122 million in…

H. Thomas Hicks

Yeah, it’s roughly the same in 2012, same ballpark.

Rodney Clayton – JP Morgan

Okay, got it. Just to go back to the power segment here, trying to just understand your expected timing on some of these projects. Obviously two factors you mentioned are new combined cycle gas plants on the generation side, and then obviously emission controls work. Just given the core [unintelligible] that’s out on [cash burn] when do you expect those bookings to start materializing. And then I would imagine any type of new generation that would result from that would be at least a couple quarters later. Is that a good way to think about it?

Robert W. Zaist

On the air quality work, we have a regular pipeline of opportunities that come in and out of that pipeline year over year, so some of the projects that we hope to book this year we may have been following those for the last 12 or 15 months. So we expect to see awards probably more in the second half of this year, but we will see some in the first half, but I think we have an expectation that it will swing up a bit in the second half of the year on the air quality projects. And as I said, the number of generation projects we have in our expectations for this year is a modest number, and they’re sprinkled throughout the year, but more toward the back end.

Rodney Clayton – JP Morgan

On the federal business, you mentioned that you expect higher profitability and obviously the revenue guidance there was flattish. So I’m just making sure, what you’re telling us - or is that your margins in that segment are going to be above the 7.9% you reported this year?

H. Thomas Hicks

We think the margins will hold at where they are, or increase a little bit in that market. It’s due to several things. One is there’s high incentive awards, which we’ve talked about, and we’re having lower passthroughs in the business, and a lot of that work comes through from the Department of Energy, and that work is done through JVs or agency accounting. So you receive the profit, but you don’t really book a lot of revenue associated with that profit, if you follow me. So all of those factors are impacting our profitability. But you’re right, we do expect a higher margin on a relatively flat business there in 2012.

Rodney Clayton – JP Morgan

And just the last one, have you gotten any early indication from the regulators or antitrust bodies on your Flint acquisition?

Martin Koffell

It’s too soon.

Operator

Your next question comes from Andrew Wittmann of Robert W. Baird & Company.

Andrew Wittmann – Robert W. Baird & Company

Nobody’s really chimed in on the dividend yet. I guess it’s a little bit surprising to us at least, given six months ago where the balance sheet was well over-capitalized, it sort of made a lot of sense. It might still make a lot of sense today, but Martin, I was just hoping you could give us some perspective from the boardroom as to why today, heading into one of your leverage spikes, this might make more sense today than maybe a year from now.

H. Thomas Hicks

You know, I think we mentioned in the call that we’ve generated operating cash flow of about $1.7 billion in the last three years, and if you look at what we’ve built over the last few years as a company, and the consistency of the cash flow, and also the fact that we bought back 6 million shares last year and returned a lot of excess capital to our shareholders, we felt, and in talking to our investors and building the company as we have, that setting up a regular, consistent dividend program was appropriate at this time.

And I think the rating agencies who we talked to extensively before we did this agreed with us, and felt comfortable maintaining our investment grade as well as the stable outlook. So we think it’s a vote of confidence and shareholders and your community should understand that we feel very confident we can generate the cash to continue paying that dividend well into the future.

Martin Koffell

You know, we have 20 years’ experience with URS as a cash generator, and it’s been tremendous. And by the way, I like the way you referred to the present era as one of our leverage spikes. [laughter] This is actually our seventh, and that never bothers us. We the word we use internally is once we’re leveraged we become cash demons. And the short and long term goal becomes deleverage and deleverage ahead of the commitments we’ve made. So we’re completely comfortable that we can service the dividend at the level that we posted today.

Andrew Wittmann – Robert W. Baird & Company

I guess that was kind of one of the things that caught me a little bit off guard though, is given that you do assume the debt, do the deal, and then pay it down, it seems a little bit - not like the $60 million or so annually is a large amount of money, but it does prevent you from paying off the debt as quickly as you have in the past.

H. Thomas Hicks

Well, I mean, obviously it will mean that we have $60 million less to pay the debt off each year, but if you think of the combined size of these two entities, when we put Flint together with us and the amount of cash flow that’s going to come out, it’s not a scary number by any stretch. It’s a very comfortable number for us, and we just think it’s the right time. The company’s matured to a point where we’re stable. We have a portfolio now that’s spread to all the right markets. And as you know, we don’t do fixed price work. We don’t go to strange places around the world and bet the company. And we’re very careful. We think the cash flow consistency has proven that, and will continue to do so.

Andrew Wittmann – Robert W. Baird & Company

Some of your other public peers disclose how much of the revenue they expect to be burned out of the backlog for the coming year. Can you just give us a little bit of a sense about what your revenue guidance implies? Basically how much of that is already in hand? And maybe just for some context around that, how that compares to what you were looking at last year at this time?

H. Thomas Hicks

Well, I can tell you that each year when we do our plan, we look at what’s so-called book and burn, stuff that’s not in backlog, that we have to find and then create revenue from. And that ratio of book and burn to the total amount of revenue that we expect to accrue has stayed pretty consistent the last few years. The amount of revenue in backlog varies dramatically by each of our three operating divisions. But it’s been consistent year after year, and so we’re very comfortable with what we’ve projected for 2012.

Martin Koffell

And I’d be careful comparing us with another company that is perhaps more monolithic, say a company that’s focused on one or two end markets. We’re deliberately highly diversified, and the ratio of backlog to revenue in each part of the business has unique characteristics. In some parts of it, backlog is insignificant or decreasingly significant.

Just as a comment on the dividend, if you look our net free cash flow, the dividend’s going to take a very small portion of it, so I think we’re not pretty good shape on that. Obviously we gave it a lot of thought. We did a lot of projections.

H. Thomas Hicks

You know, we report in our filings that around 60% of our revenue for the next year is going to come out of backlog, and that number varies as low as 50-55% up to as high as 75%, depending on the business. But that’s not unusual for us. That’s kind of a typical level.

Operator

Your next question comes from Steven Fisher with UBS.

Steven Fisher - UBS

Just curious, has the federal government been successful yet in achieving what they’re trying to do by moving from these sole-source contracts to the multiple award task orders, which I’m assuming is generally more price competition in the market.

Martin Koffell

Let me put Randy Wotring on, who’s president of our federal services business.

Randall A. Wotring

You know, the budget uncertainty has driven a lot of change, and we’re seeing more use of indefinite delivery contracts, shorter duration contracts, and more awards that are based on low price technical acceptable criteria. So I think from that standpoint, there’s two issues. One, the budget uncertainty is just causing them to move in this manner because they don’t know how much money they’re going to have in the future.

But two, they are expecting to get more efficient. We’re certainly seeing margins erode on some contracts, but moving to a fixed-price vehicle in some cases has allowed us to increase our profitability. So I don’t know whether the government calls that success or not, but in every market situation there’s opportunities and threats, and we’ve been agile enough to take advantage of the opportunities and increase our profitability during this period.

Steven Fisher - UBS

Okay. And then on Flint, are there any other reviews to come from credit rating agencies regarding the acquisition and financing, or can you now pretty much definitively say that your investment grade rating is going to be intact?

H. Thomas Hicks

The answer is yes. There are no additional reviews, and yes, we can stay intact.

Operator

Your next question comes from Chase Jacobson with William Blair.

Chase Jacobson - William Blair

Just wanted to follow up on the revenue, I guess, one more time. If we look at 2012, at your guidance, it’s at about a 5% revenue growth. Can you just talk about the growth assumed in your MSA business relative to that? Is it double or is it triple that? Maybe how much of your revenue is expected to come from MSAs in 2012 compared to 2011?

H. Thomas Hicks

You know, I don’t have that number in aggregate for the whole business, but as I pointed out, the federal service business, for example, we would expect it to be similar or higher than it was this year, which was in the mid-30%. In the I&E business, in Gary Jandegian’s business, I don’t know the exact number, but it’s probably close to that same level. In the E&C business, I think it’s a much lower number, because they tend to do larger projects and longer-term projects. But I can’t give you an aggregate number for the whole company.

Martin Koffell

We don’t track MSA as a ratio of the whole.

Chase Jacobson - William Blair

Right. You know, you talked about how that’s going to become a larger mix, so I was just trying to get a little bit more complete there. And then just lastly, on the European restructuring, was that in the guidance when you gave it at the third quarter?

H. Thomas Hicks

No, I don’t believe so. That was really a reaction that started to develop late in the third quarter, and the market really started to go south in the fourth quarter. So it really wasn’t apparent that it was going to be that dramatic until we got into the fourth quarter and started to react to the market conditions.

Operator

Your final question comes from Rob Norfleet of BB&T Capital Markets.

Rob Norfleet - BB&T Capital Markets

Just quickly, if I go back and look at the guidance you all gave back in November, you implied obviously annual earnings for the year 2011 of a midpoint of $365 million. And so if I extrapolate that out you would be looking for fourth quarter EPS of around $1.00-$1.02. Excluding obviously charges, etc., we came in at around $0.88-$0.89. So I wanted just to try to understand - maybe for Tom - what happened relative to our guidance over the last couple of months of the year. Was there something in particular that was unexpected? I’m just trying to reconcile what happened relative to what you were seeing just a couple months ago.

H. Thomas Hicks

Well, on a previous question, I was trying to address that. The whole issue relates to the European and Middle Eastern issues that we talked about earlier. As we started the year, things were okay, not great. As the year went on we continued to expect that the market would firm up a bit and we’d be okay. Third quarter things started to go south. It wasn’t clear if that was going to be a permanent change or whether that was something that was momentary.

And then as we got into the fourth quarter, it was pretty clear that we had to react, and we started then to lay off people, consolidate offices, cut costs, as fast as we could. And frankly, given the employment laws in Europe and the cost to separate people, we just couldn’t separate people fast enough to size up our workforce with the backlog that we had. So we were unable to make those changes fast enough. And it all hit us in the fourth quarter.

And I think as you heard earlier, we’ve taken out quite a bit of cost there, and we are a profitable footing going forward, and we have contingency plans in place if something else were to happen. So we feel like we’re prepared for that eventuality in Europe for the rest of 2012. So I don’t know what more to say about that.

Rob Norfleet - BB&T Capital Markets

That’s helpful, thank you. Last question I had was just you were talking a little bit earlier about obviously with the federal government that the procurement cycle obviously is slower now with all the cutbacks. Within federal services are we seeing any impact on the DSOs? Are we seeing the government actually hold back in terms of payment terms?

H. Thomas Hicks

I’ll let Randy comment on that.

Randall A. Wotring

No, we really haven’t seen a change in DSOs, other than the administration has increased the number of auditors, as I think we’ve talked about in the past. And that caused us to lose a few days. But you know, it’s been stable for the last year, and we don’t expect anything but improvement in 2012.

H. Thomas Hicks

Operator, before we go back. I’d like to correct something I said earlier about our amount of revenue that’s in backlog. 50% is probably a better number to use, 40-50%. Our backlog extends for many years, so in many cases we’ll have projects that have some portion of our backlog extend for three to five years. Some as long as 15 years. So I want to clarify that. I think I said 60% earlier. It’s closer to 40-50%.

The other thing is someone asked about headcount, and I mentioned that we added 1,000 people from Apptis. We also added 1,000 from other programs in the federal services group as well. So unless there are other questions…

Martin Koffell

Operator, no other questions in the queue I believe. Is that correct?

Operator

You have no further questions at this time. I would now like to hand the call back to Mr. Koffell for any closing remarks.

Martin Koffell

Well, thank you for joining us. We look forward to discussing our first quarter’s results with you in May, and in the course of the second quarter, announcing the closing of the acquisition of Flint. Thank you and good day.

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Source: URS Corporation's CEO Discusses Q4 2011 Results - Earnings Call Transcript
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