URS Corp. Q1 2008 Earnings Call Transcript

URS Corp. (URS)

Q1 FY08 Earnings Call

May 08, 2008, 11:00 AM ET

Executives

H. Thomas Hicks - CFO

Martin M. Koffel - Chairman of the Board, President, CEO

Robert W. Zaist - EVP, Washington Division

Reed N. Brimhall - VP, Chief Accounting Officer, Corporate Controller

Gary V. Jandegian - President, URS Division

Randall A. Wotring - President, EG&G Division

Analysts

Jamie Cook - Credit Suisse

John Rogers - D.A. Davidson

Rodney Clayton - JP Morgan

Chris Brennan - Morgan Joseph

Vance Edelson - Morgan Stanley

Avram Fisher - BMO Capital Markets

Steven Fisher - UBS

Presentation

Operator

Good morning and welcome to the URS Corporation Earnings Conference Call for the First Quarter of fiscal 2008. To begin, I will turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS. Mr. Hicks, you may begin your conference.

H. Thomas Hicks - Chief Financial Officer

Thank you operator. Good morning everyone and thank you for joining us. Before we get started, let me remind you that today's call will contain forward-looking statements, including statements about our future revenues and business prospects, our future earnings and financial results, our future tax rates, the benefits of our Washington Group International acquisition, our future interest payments, our future outstanding shares, future economic and industry conditions and all other statements that may be made on this call that are not historic facts. These statements represent our predictions and expectations as to future events, which we believe are reasonable and are based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information about some of these risks and uncertainties can be found in our earnings release issued yesterday, in our Form 10-Q for the quarterly period ended March 28, 2008, as well as in our other SEC filings, and we assume no obligation to revise or update any forward-looking statements. Today's call will also include a discussion of certain non-GAAP financial measures for revenues, net income, and earnings per share.

Reconciliations of the non-GAAP financial measures to GAAP numbers can be found on the company's website at www.urscorp.com under the Investor Relations tab. A webcast of this call is available on the Investor Relations portion of our website and will be archived in the audio form on the website for limited period.

And with that, I'll turn the call over to Martin Koffel, our Chairman and Chief Executive Officer.

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

Good morning and thank you for joining us. In addition to Tom, the team with me here in San Francisco this morning includes Gary Jandegian, President of the URS Division; Randy Wotring, President of the EG&G Division; Bob Zaist, Executive Vice President of the Washington Division; Martin Tanzer, Executive Vice President of Marketing; Reed Brimhall, Corporate Controller and our Chief Accounting Officer, and Sam Ramraj, Vice President of Investor Relations.

Now, we had the pleasure of seeing many of you at our Investor Day in New York, which was just two weeks ago. At that meeting, nine members of our management team including those who are with me here in San Francisco today have provided a detailed outlook of what we're calling the new URS. We discussed URS' enhanced capabilities and our increased exposure to high-growth markets such as power, nuclear energy, and oil and gas.

At that time, we also described the key trends in each market and our outlook for 2008. Now, for those of you who were not able to attend the meeting or to listen to the live webcast at the time, there is an audio replay of the event on our website at www.urscorp.com. So, because of the extensive overview provided at Investor Day, our prepared remarks this morning will be shorter than usual. And as always we will take your questions at the end of our prepared comments.

As you all have seen from the press release issued last night, we're off to a good start this year. And we think we are on track to meet our expectations for 2008. Revenues for the quarter were $2.26 billion and that's almost double our first quarter 2007 revenues and it is a 22% increase from pro forma revenues for URS and Washington Group International for the first quarter of last year. And net income for the first quarter of 2008 was $49.4 million and earnings per share was $0.60. As we discussed on our last earnings call in February, URS will be recording an annual non-cash expense related to the amortization of purchased intangible assets from the Washington Group.

For fiscal 2008, the non-cash expense will total approximately $54 million before taxes, and $31 million on an after-tax basis. The portion of this expense that we recorded in the first quarter was $13.3 million before tax or $0.09 per share after- tax. Excluding this non-cash expense, net income in the first quarter was $57.2 million or $0.69 per share on a fully diluted basis. And the reconciliation of pro forma revenues to GAAP results for the first quarter is available on the Investor Relations page of our website at www.urscorp.com. The reconciliations are provided for net income and EPS excluding the expense related to the amortization of purchased intangible assets from the Washington Group.

I should like to say how pleased we are with the progress we've made in integrating the Washington Division into the new URS. Our companies have come together extremely well and we are currently pursuing several billion dollars in new projects as an integrated company under the single URS brand. Last month, on a run rate basis, we achieved the $50 million to $55 million in annual cost savings that we had initially targeted and discussed with you. And we see opportunities for additional savings and in future calls we will update you on our progress.

The addition of the Washington Division was a key component in our strategy to shift our business mix in order to focus on high-growth markets including, as I said, power and oil and gas. And that strategy is predicated on several market fundamentals including the states, municipalities, and cities, and supported of course by the federal government have an obligation to build, update and maintain our civil infrastructure. And with the threats facing the US will require continued defense expenditures of approximately 4% of GDP. In addition that the militaries operational commitments will require continued growth in the O&M portion of the defense budget, and that our energy needs will require continued reliance on oil, natural gas, coal and nuclear plant.

As a result, these markets present exceptional growth opportunities for URS, on top of the strong foundation that we have in the infrastructure and the federal markets. Accordingly, as we described in February, where we defined our market sectors to reflect the new URS. Hence we told you earlier these sectors are the federal sector, the infrastructure sector, the industrial and commercial sector and the power sector. And I will now discuss our results for each of these sectors beginning with the Federal.

In the Federal sector, we are tier 1 provider of technical, engineering and operations and maintenance services to the Department of Defense. We're now also one of the largest contractors to the Department of Energy. And for the first quarter of 2008, our Federal revenues were $823 million. Our performance reflects the added scale and the added resources of the new URS. We can now provide more services under large bundle contracts to support major initiatives, like the global war on terror and the Base Realignment and Closure or the BRAC program. And previously, URS could respond to portions of these programs, but with our added capabilities particularly in construction, we can participate in much larger DoD contracts. For example, URS now provides the full range of E&C services required to implement BRAC projects at military bases around the world. Last month we won a $90 million task order under our heavy engineering repair and construction contract, that's the HERC program with the air force to design and build two medical instruction facilities. And this project is just one of many assignments that URS is performing in support of BRAC.

The new company is also a leader in the threat reduction market an area in which both URS and Washington Group had significant prior experience. Today, URS is providing services at all seven of the chemical weapon stockpile states in the United States. And importantly, the company's expansion has added a highly attractive new dimension to the Federal business and that's how it worked for the Department of Energy. As one of the DOE's top contractors, URS helps manage the largest nuclear clean-up program in the US, the handset site in Washington State. And we also help manage complex facilities at the Los Alamos and Lawrence Livermore National Laboratories, as well as the several of the DoE sites.

And the DoD and the DoE businesses have separate funding and a distinct markets within the Federal sector. And our Federal business, which previously was based almost entirely on the DoD is now significantly more diversified. In addition, we have an opportunity to leverage our DoE experience in capturing new work in the rapidly emerging nuclear remediation market in the United Kingdom.

In March, as you would have seen from the prior press release, we had an important win in this market. A URS led team was awarded a contract to operate the UK's national low-level nuclear waste repository. A contract, which is valued at $250 million over the first five years is the first award by the UK Nuclear Decommissioning Authority, which will be overseeing billions of dollars in nuclear remediation contracts in the years to come.

Looking ahead, we continue to see favorable trends in the Federal Government sector. There is strong funding for O&M programs, which is expected to reach $300 billion in fiscal 2009, a 7% increase over fiscal 2008 levels, increased opportunities to support long-term DoD initiatives and stable funding for the DoE's environmental and nuclear programs including the National Nuclear Security Administration. Due to our critical role in the federal market and the solid funding outlook, we continue to expect that revenues in our federal sector will be between $3.3 billion and $3.5 billion in 2008.

And turning now to the infrastructure sector. For the first quarter of 2008, infrastructure sector revenues were $422 million and as we discussed last quarter and at the Investor Day, this has been a consistently profitable business since the formation of the company. There is a critical need to repair, to modernize and to expand infrastructure and cities and states will never stop investing in this work. It's a truly evergreen market. And with our expanded capabilities, URS is better positioned to capture a larger share of this work. In 2008, URS's infrastructure spending is expected to exceed $300 billion. Previously URS was focused on professional services such as design and engineering and could address about 20% of this total market. And the new URS, which includes construction capabilities can address the entire market from engineering design through construction and operations and maintenance. And as our clients shift to design build and to design, build, operate, maintain contracts, the ability to provide a full range of E&C services becomes increasingly important.

As we noted in our call in February and again at Investor Day, our long-term outlook for this market is very positive. Our business has not been affected by the economic slowdown. However, we are continuing to monitor the state budgeting processes. The 2009 fiscal year begins on July 1 for those states, and at that time we will have a clearer picture of our business for the second half of the year and for 2009. In the meantime, state and local Governments continue to find resources to fund infrastructure programs. In the first four months of the year, states and municipalities sold nearly $129 billion of new bonds to fund infrastructure projects, including education and healthcare facilities and of course new roads and key projects continue to move forward. URS recently won a $60 million contract with California's Department of Water Resources to conduct a geotechnical evaluation on the states' urban levees. In Indiana, we won $45 million contract to provide engineering design for a major expansion of I-465 in Indianapolis. So, in summary, we are optimistic about the long-term opportunities in the infrastructure market and the ability of the new URS to capture this growth. In 2008, we continue to expect that revenues from this sector will be between $1.7 billion and $1.9 billion.

In the Industrial and Commercial sector, we have expanded our capabilities to serve multinationals, including oil and gas companies. For the first quarter of 2008, Industrial and Commercial revenues were $614 million. And this sector comprises all of the company's private sector work, other than our Power business, which is managed and reported separately. The principal markets include oil and gas, industrial and manufacturing, and the mining industries. The oil and gas business is the fastest-growing portion of this sector. URS is positioned in this $350 billion market was greatly enhanced by our acquisition of the Washington Group. Previously, URS provided environmental and front-end engineering services for downstream facilities in the oil and gas market. And today, URS provides the full range of engineering procurement, construction, and maintenance services for large-scale upstream and downstream facilities. These expanded capabilities have given us access to new markets and broadened the services we can deliver to multinational clients with whom we have long-term master service agreements or MSAs. For example, recently we won a contract with Exxon Mobil to provide engineering procurement and construction management for a new plant that will remove carbon dioxide emissions from natural gas.

And looking ahead, we believe the oil and gas industry will continue to grow in 2008 due to increased investments in capital projects. As companies explore and develop remote production areas such as the Artic and the Gulf of Mexico, URS can capitalize on our ability to deploy resources across a range of project sizes and of course in diverse geographic areas and this is the basis of our MSA relationship with the multinational clients. In addition, we're well positioned to help clients build, upgrade or modify refineries to handle new types of fuels such as oil from Canada's oil sands. Energy companies have invested over $100 billion in Alberta for example, with the goal of doubling oil sand production to 2 billion barrels a day by 2010. And Canada's oil sands represent the largest oil reserve after Saudi Arabia. And based on favorable market conditions and the opportunities to expand our MSA services to our oil and gas plants, we continue to expect that industrial and commercial sector revenues will be between $2.4 billion and $2.6 billion in 2008.

And now the Power sector where revenues were $400 million in the first quarter of 2008. The new URS is one of the leaders in the power industry including both fossil and nuclear fuel markets. In fact, recently we're ranked by engineering news record as the second-largest power sector design firm in the industry. Our ability to provide expanded services for all types of power plants has allowed us to benefit from several market trends and the development of new fossil fuel generation facilities particularly the increased demand for combined cycle power plants, and the requirement to upgrade and retrofit power plants to comply with stricter environmental regulations, and the need to extend the life of the existing nuclear facilities, and URS is one of the only two US based companies with the capabilities to replace critical components in nuclear plants for both life extension and increased efficiency.

And finally we are well positioned for the resurgence in nuclear power, and the development of new nuclear facilities. URS has engineered or constructed 49 units around the world and providing us with a competitive advantage in this rapidly emerging market. And just this week URS dedicated a new Nuclear Energy Center in Fort Mill, South Carolina, which eventually will be staffed with 400 professionals. This center will be the headquarters for our support to the reemerging nuclear business.

Our performance this quarter reflects the continued strong demand for modification services at nuclear facilities. For example, URS recently completed an upgrade project at a nuclear facility in the southeast, which included the replacement of two steam generators. During the quarter, we also won a new assignment to assist a nuclear power plant operator in the south to replace its existing steam generators. And looking ahead, we remain optimistic about the outlook for the Power sector. The Department of Energy estimates that electricity usage will increase by almost 40% by 2030 and that the US will need to add more than 1,50,000 megawatts of new generating capacity to meet this growth. Now URS is well positioned to capture the additional work needed to meet this demand. We expect that new combined cycle natural gas plants will fill much of the increasing demand, as these plants produce less greenhouse gases than coal-fired facilities and of course they can be built faster.

Longer term, the stage is set for a robust commercial nuclear power market. In 2008 alone, we expect nuclear power companies to submit applications to the Nuclear Regulatory Commission for 14 or 15 new plants and through partnerships with General Electric and with Mitsubishi Heavy Industries, we are supporting four power companies with a nuclear power plant proposals. In addition we continue to see strong demand for our air quality and emissions control services, as utilities upgrade their power plants to comply with most stringent environmental regulations. There are over a 1000 coal-fired power plants in the US, many of which is subject to these environmental regulations.

In summary, based on these positive trends in the market, we continue to expect that Power sector revenues will be between $2 billion and $2.2 billion in fiscal 2008.

And with that I will turn the call over to Tom Hicks.

H. Thomas Hicks - Chief Financial Officer

Thank you, Martin. To summarize our results for the first quarter, revenues were $2.26 billion, net income was $49.4 million and earnings per share were $0.60 per share. As Martin noted, during the quarter, we recorded a non-cash expense of $13.3 million or $0.09 per share for amortization of purchased intangibles from the Washington Group acquisition. Excluding this non-cash expense, first quarter net income was $57.2 million or $0.69 per share on a fully diluted basis. A reconciliation of our GAAP results, net income and EPS excluding the effect of the amortization expense is available on the Investor Relations page of our website at www.urscorp.com.

Interest expense for the first quarter was $25.6 million compared to $3.9 million for the first quarter of 2007. And our tax rate for the quarter was 41.5%. Fully diluted weighted average shares outstanding for the quarter were 82.5 million, an increase from 52.1 million in the first quarter of last year. The increased interest expense and the additional number of shares are primarily the result of the Washington Group acquisition. As you know, we report separate financial information for our three business segments, the URS Division, the EG&G Division and the Washington Division. As part of integration of the URS and the Washington Group, we have realigned portions of our operations and confirmed our accounting policies. Therefore for the divisions 2008 amounts are not directly comparable to 2007 results.

Now, for the first quarter URS Division reported revenues of $819 million and operating income of $57.3 million. EG&G Division reported revenues of $549 million and operating income of $26.5 million in the first quarter and the Washington Division reported revenues of $902 million and operating income of $48.2 million during the quarter. We used $23.9 million in operating cash flow during the first quarter, which was in line with our expectations. Our Day Sales Outstanding or DSOs were 70 days for the quarter, compared to 84 days for the first quarter of 2007. And a significant portion of this reduction resulted from the inclusion of Washington Division, which has a lower working capital requirement than the previous URS Corporation.

Finally, CapEx excluding equipment purchased through capital leases was $15.5 million for the quarter versus $4.8 million for the same period in 2007 and this increase reflects the capital requirements of the Washington Division. As part of our expanded financial reporting, we included in yesterday's press release a detailed description of our book of business, which includes backlog, designations, option years and indefinite delivery contracts or IDCs. We ended the first quarter with a total book of business of $29.3 billion compared to $28.8 billion at the end of last year, and all the elements of our book of business increased. Backlog, the largest component was $17.8 billion at the end of the quarter compared with $17.6 billion on December 28, 2007. And as we explained at Investor Day, we are working to provide you with backlog for each of our core four key market sectors and we expect to be able to provide that data to you later this year, and with that I will turn the call back to Martin.

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

Well thank you. As you saw in our press release our performance in the first quarter gives us increased confidence in our outlook for 2008. Specifically, we continue to expect that Federal sector revenues will be between $3.3 billion and $3.5 billion, infrastructure revenues will be between $1.7 billion and $1.9 billion, industrial and commercial sector revenues will be between $2.4 billion and $2.6 billion and power sector revenues will be between $2 billion and $2.2 billion. Consolidated revenues for 2008 are expected to be approximately $9.8 billion. We continue to expect that GAAP net income for 2008 will be between $187 million and $197 million or between $2.24 and $2.36 per share on a fully diluted basis and more likely to be closer to the upper end of that range. We also continue to expect that net interest expense will be approximately $88 million, but our effective income tax rate for 2008 will be approximately 41.5% and the number of weighted average shares outstanding used to calculate EPS for 2008 will be approximately 83.5 million shares.

So in summary, we are pleased with our results in the first quarter, and with our progress towards meeting our financial objectives for the full year. The new URS provides a greater range of services to larger and more diverse markets and we couldn't be more excited about the prospects. At the same time, it's worth commenting on the mix of businesses that we now have. And today approximately 60% of URS' revenues are derived from what we call our legacy businesses, which comprise several thousand projects at any one-time for federal and state and local government agencies and for our corporate clients. And these contracts typically generate stable, linear revenues over the duration of a project. And the remaining revenues, which is approximately 40% of the total have come from the Washington Division, and consist of a smaller number of much larger projects. And the quarter-to-quarter financial impact of this project- based business is less evenly distributed. Accordingly we believe that a focus on annual results is the appropriate way for you to evaluate our performance.

In closing, I should like to point out that one of the hallmarks of our company has been our ability to anticipate market changes and shape the company for the future. We have doubled ourselves five times in the last 15 years doing that. And we've now transformed the company to include the full range of E&C services, a long-term strategy that we have had in place increasing our exposure to two high-growth markets, power and oil and gas, and of course further diversifying our federal and infrastructure businesses. And we've positioned the company to benefit from the long-term market trends, including the commitment by state and local governments to civil infrastructure, continued strong defense expenditure and the need to expand our energy production to meet ever-increasing demand.

And with those comments, I'll turn the call back over to the operator and we will open the line for your questions. Kena?

Question and Answer

Operator

[Operator Instructions]. Your first question comes from Jamie Cook of Credit Suisse. Please go ahead.

Jamie Cook - Credit Suisse

Good morning and congratulations.

H. Thomas Hicks - Chief Financial Officer

Hi, Jamie.

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

Good morning, Jamie.

Jamie Cook - Credit Suisse

I guess my first question, I appreciate that you guys don't give quarterly guidance as like the rest of the industry. But, you know you beat the Street by $0.10. So, I'm just trying to get a feel and while we came up with this on our own and we had Washington Group to deal with. I am just trying to get a sense of how the quarter came in relative to your expectation, because that even though we were probably off a little, it sounds like you probably did a little better than you thought. And so then the next question on that is why aren’t we raising guidance besides the... what are the two or three big reasons why we are not raising guidance besides the fact that it’s the first quarter or that we're concerned about just stay in local budget side?

H. Thomas Hicks - Chief Financial Officer

Jamie, it's Tom. First part of your question is, did the first quarter exceed our internal expectations and the answer is yes, it did. We actually... as Martin commented, this new URS is not as linear as it used to be. You followed us for years and know that our core business in the past has been pretty easy, or not easy, but easier to predict than a project-based business that now comprised about 40% of the company's performance. So, some things happened in the first quarter that came in timing wise, different cycle than we expected. So, yes we're... of course we always like to beat expectations. But, the actual performance was actually exceeded our own internal projection. As far as the guidance issue, we strongly believe that the right thing to do is focus on the annual performance of the company. More so, now than ever because of the comments I just made about, the lack of the Washington Division's project base business being not as linear as our core business. We would expect that, as we said, as you'd pointed out, we're still just one quarter into the year. It's a little early to make any changes we feel like for the whole year. We're optimistic, as Martin said that, we feel better about the guidance and we feel like the upper end of the range is more achievable now than we felt just a few months ago when we put the plan together. But, we think it's too early to make any final predictions about the year. We will tell you as soon as we feel good about that and let you know as soon as we know something.

Jamie Cook - Credit Suisse

But the point is, you are not seeing, I mean if anything it sounds like, Washington Group is growing better and you are not seeing any deterioration in markets versus where we were last quarter.

H. Thomas Hicks - Chief Financial Officer

Yes. I think across the board, we're seeing the markets holding up. As we've said, we are watching infrastructure, but so far so good this year. It continues to perform and as everyone is at this time given this general state of the economy we're very cautious and we are watching everything closely. But as of right now, we don't see deterioration in any of our businesses. They are performing as expected and as I mentioned we did a little better in the first quarter than we expected.

Jamie Cook - Credit Suisse

Okay. And then just my follow-up question to Martin. Martin, as I look at your [inaudible] with Washington Group today, people were very excited about the acquisition because you have power now and it provides growth that the old URS never had. I guess I get concerned though is that with power being pushed out especially on the nuclear side which is Washington Group's expertise. With that getting pushed out and US infrastructure potentially declining, given the US market, I get concerned that when I look at the growth for 2009 and 2010 that you are still going to grow on a relative basis to your peers but it's still going to be sub par relative to the peers. So is there anything that you can help us in terms of your long-term EPS target? At your Analyst Day, you did say, top line I think should grow 10% to 12%, or 10% to 13% in terms of the markets that you are in. But I'm assuming with market share or with cost synergies is it fair to say you should be able to grow better than the market than your markets that you outlined at the analyst meeting?

H. Thomas Hicks - Chief Financial Officer

I'll take a quick shot at that and then let Martin comment. I mean, yes, you are right, remembering that 10% to 12% kind of growth rate that we expect in the markets we participate in. And we are confident that we can grow at that rate or better. We will have... we do think that there are niche acquisitions out there still that we could fill out our growth and augment that growth. And we beat this to death, but it's really a true statement. We have a broader range of capabilities now and it opens up a significant numbers of opportunities that we really couldn't pursue on our own in the past. We are pursuing several billion dollars now of projects that probably we couldn't have chased before this acquisition, Jamie. So we're very optimistic we can exceed that 10% to 12% rate, but it's too early to say for '09 or '10. And I will pass it to Martin for any other comments.

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

Yes, there is relentless pressure on the power sector to comply with these environmental regulations, which are getting tighter, not easier. And then it's a political dimension of... change of political leadership in January and what that may mean for the regulatory front. I think it's not unreasonable to think it may lead to more rather than less regulation. And then you have got this great shortfall in power capacity and plenty of capital in the power industry to do it. I mean very good access to capital. So, we think the growth drive is very good. The infrastructure sector is interesting and I might spend whole morning on it. We're very close to it, as you know it's one of the original businesses in URS and without being able to quantify that I am sensing that the diversification of funding sources at the state level to rely on some bonds for example, for greater reliance on bonds, and to the private public partnerships is getting a little more attraction than we may have anticipated. In the first four months notwithstanding the economy the State sold a $129 billion in bonds. I mean obviously led by California and Texas and in the bigger infrastructure States and all that's going directly and we are talking about having sold the bond, the cash is there in the trust funds and on escrow. And that's going into all kinds of infrastructure, transportation, schools and healthcare facilities and the public-private partnership is developing; up to 25 states already have statutes on the books to allow that. So, the first half held up pretty well and just to, I just like to comment on your comment on what we said in February. We never said that there’d be a downturn in the infrastructure market. We said that the rate of growth would slow to the more traditional levels, which was the high double-digit range. We don't want to get... thanks. Tom, correct me. We said it would... the growth rate that we experienced last year in infrastructure would reduce to the traditional long-term high single-digit range. And it's probably running a little higher than that in the first half and a great focus here is on what happens with these state budgets that I mentioned. So, I think we feel as confident as we did at Investor Day about '09 and the years beyond. We think we've really got the, a portfolio of finally lined up against the opportunities and just a question is of us putting the resources and the management time into building the growth vehicles and we're getting on with that.

Jamie Cook - Credit Suisse

Thanks. I will get back in queue.

H. Thomas Hicks - Chief Financial Officer

Thanks Jamie.

Operator

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

John Rogers - D.A. Davidson

Good morning.

H. Thomas Hicks - Chief Financial Officer

Hi John.

John Rogers - D.A. Davidson

Just a follow up a little bit. In terms of Washington Group's performance in the quarter, when they were a separate company you often would give us a sense of puts and takes in the quarter and I don't want to get in too much detail. But, were there any unusual projects or recoveries that helped the quarter?

H. Thomas Hicks - Chief Financial Officer

There weren't any recoveries per se. John, there's nothing abnormal in that respect. We did have good performance in the power sector, had some good turnaround on projects and good performance. But nothing that we would call unusual or something that would stick out as one-time event that thing, no

John Rogers - D.A. Davidson

Okay. But even in the course of... it's hard to call it unusual. I mean the construction or the project driven business went up and down every quarter. I was just trying to get a sense of the factors of the projects that were particularly high profit in the period.

H. Thomas Hicks - Chief Financial Officer

I wouldn't point to any one particular project. I think it's a range of things. As I mentioned, power was particularly good in the quarter. We had some good events projects completed and I just want to reemphasize not to beat this to death, but as a project-based business and you have heard this before following Washington Group, when it was an independent company, quarters will go up and down. And we have to deal with that going forward and we will try to give you anything that's... any leading indicators that would tell us that for the year, or something's amiss or something extraordinary happened in the quarter that really is not a repeatable event. But it’s more like business as usual for the Washington Division this quarter and we just had a good quarter and we're hoping we can repeat that going forward.

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

But your sense of the dynamics of the Washington business is correct, John. It's... as Tom said its project driven at very large projects. And this group, the Washington Division, very disciplined at execution. And we're very, very impressed with the way they lay out a job before they bid on it. The way they price it, the way they execute it, the quality control and the relationship with the customers. So they... the revenue by quarter doesn't reflect any lack of execution skills. It is just the size of the contracts and just when the revenue recognition falls because of the scale can cause it to vary from quarter-to-quarter. So you shouldn't look for the sort of highly predictable quarter-on-quarter linearity that we used to have.

John Rogers - D.A. Davidson

No, I mean I guess what I was trying to get to is that I don't expect it to be flat or straight up. And I am just trying to... is this quarter above or below... sort of that longer-term trend for Washington Group?

H. Thomas Hicks - Chief Financial Officer

I think they had a good quarter. I think that is the way to characterize it. And it is nothing off the chart is kind of good but very good solid quarter. They had good performance and it's... is it going to be exactly the same next quarter? Absolutely not, it could be higher, it could be lower. We don't know at this point because of the timing of completion and how contracts will roll out during the quarter. But I don't think, you should, I don't think you should put your thumb on the scale either negatively or positively very much for Washington Division for the quarter.

John Rogers - D.A. Davidson

Okay. Thank you.

H. Thomas Hicks - Chief Financial Officer

You're welcome.

Operator

Your question comes from Rodney Clayton of JP Morgan. Please go ahead.

H. Thomas Hicks - Chief Financial Officer

Good morning, Rodney.

Rodney Clayton - JP Morgan

First of all, on the infrastructure side, you talked about the bond sales and how that's going to supporting activity on that side right now. Incrementally, are you feeling more positive about the second half of the year than you were, when you initially gave your '08 outlook or is it just kind of the same based on the bond sales?

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

Based on a good quarter in infrastructure, one’s emotions leave anything [inaudible] things are okay, but we got be very cautious of this budget change. I mean, many of the states had very large deficits. The Californian Governor said that there is $20 billion deficit in California. Now that may not affect the way it works out, it may not affect infrastructure that much. But there is going to be some real political pushing and shoving across the 12 states that drive our business. And whenever I get a little optimistic here, and I look back all the previous years and I remember that those budgets are everything. And so, I wouldn’t like to get ahead of what we said in February and what we said at investor day other than to say that we did have a good quarter in infrastructure.

H. Thomas Hicks - Chief Financial Officer

Rodney, the only comment I'd add to that is that obviously as we get into the year and we put performance behind us. We can feel more confident about how the year is going to look and having one quarter in the books and turned out to be a good solid quarter for infrastructure, it makes us feel marginally better about the year and that with caution as Martin said.

Rodney Clayton - JP Morgan

Okay. Fair enough. And then on the nuclear side, how do you see that developing, I guess a couple of your competitors have announced either EPCs that they have begun negotiating EPCs for some new deal nukes. How is that kind of developing on your end and when do you think you might be able to announce something there?

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

Let me introduce Bob Zaist, who is Executive Vice President of Washington Division.

Robert W. Zaist - Executive Vice President, Washington Division

Yes. Thank you for the question Rodney. As Martin indicated in his introductory remarks, we are working with both General Electric and Mitsubishi Heavy supporting their technologies in the US market. We are supporting through that venture, four major utilities that have proposals to the NRC in process and we would anticipate starting to build up workforce against those opportunities, actually we have started this year and we would expect to see a further growth in 2009.

Rodney Clayton - JP Morgan

Okay. And just one last question, a bit of a modeling issue I guess, the equity income of unconsolidated affiliates that's kind of a new line and I think before you said that's kind of broken out from revenues based on how you used to report it. Can you just give us a little more detail and remind us what that's all about there?

H. Thomas Hicks - Chief Financial Officer

Yes I think... let me introduce Reed Brimhall who can give you the full background on that issue, Reed is our Controller and Chief Accounting Officer. Reed.

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

Good morning.

Rodney Clayton - JP Morgan

Good morning.

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

URS has historically accounted for unconsolidated joint ventures using what's called the equity method which basically means we carry the investment on our balance sheet in a single line and we carry... we record the earnings of our unconsolidated joint ventures in a single line. Washington group's practice was slightly different, they used what's called the proportionate method for construction joint ventures and that would mean that their proportion of the income statement of that joint venture would be spread to gross revenue, cost of revenue etcetera. With the acquisitions they have adopted our accounting policy, so the joint ventures that they used to record on a proportionate method are now being included under the equity method in that line item on the income statement to which you referred.

H. Thomas Hicks - Chief Financial Officer

And then Rodney you can expect to see that number be in that range as we go forward. It will vary from period to period depending on performance, but it's not a... it's not a one-time thing it will be there for modeling purposes. As you mentioned it's something that you have to include in your thinking as you look at us going forward?

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

But one other comment about that historically in URS the earnings on the equity method were small enough that would even break them out separately and now with the combination, they are material to us, so we had to break them apart.

Rodney Clayton - JP Morgan

Got you. That makes sense. So it looks like that was about $30 million this quarter, this was obviously the first four quarter with Washington included, so should we look at for something so much of that every quarter.

H. Thomas Hicks - Chief Financial Officer

It will vary, and once again it's going to be driven by how the projects perform in each quarter. But it will be a significant number, it won't go to zero next quarter or it won't go to a significantly different number. The thing to look at for the Washington Division if you are putting [inaudible] together for Washington Division operating income is look at the total operating income including that activity and that will give you a better picture of how Washington Division is performing because the mix between unconsolidated JVs and construction joint ventures and the typical project based accounting will change slightly over time and if you try to model it you are going to end up making some wrong assumptions. So I would... if you look at the total operating income for the Washington Division as reported and start to use that as your baseline, that would be more appropriate, I think.

Rodney Clayton - JP Morgan

Okay. That makes sense. All right. Thanks a lot gentleman. Nice quarter.

H. Thomas Hicks - Chief Financial Officer

You're welcome. Thank you.

Operator

Your next question comes from Chris Brennan of Morgan Joseph. Please go ahead.

H. Thomas Hicks - Chief Financial Officer

Good morning, Chris.

Chris Brennan - Morgan Joseph

Just a quick question with regard to backlog growth can you tell me what the organic growth was for the core URS businesses?

H. Thomas Hicks - Chief Financial Officer

It's all right now. I want to make sure our terms right here, since we finished the acquisition prior to the close of last year, all of our information related to backlog and book of business included Washington Division at that time or Washington Group. So when you look at from the end of '07 to now, those numbers are comparable. I don't know if that helps you answer the question or not.

Chris Brennan - Morgan Joseph

So basically you're saying, you've combined them together and you just include URS, but you don't really break out what it is for the core URS businesses?

H. Thomas Hicks - Chief Financial Officer

That's correct. And we also just... I think you're aware we reorganized the business and realigned the businesses so they would remove significant portions of the business between the divisions. So it's very difficult to compare old URS prior to the end of last year compare that to the new URS and I would focus you more on the forward-looking statements we have made about, how we expect the year to perform and what kind of growth we expect by business sector.

Chris Brennan - Morgan Joseph

Well, that's very helpful. Thank you very much.

H. Thomas Hicks - Chief Financial Officer

You're welcome.

Operator

Your next question comes from Vance Edelson of Morgan Stanley. Please go ahead.

Vance Edelson – Morgan Stanley

Hi, thanks a lot. I was on another call and missed most of your opening remarks but when you talked about the 12 states that really drive your business, it's something one of your competitors touched on. Was it the regional strength within the US the fact that some states are much stronger than others in terms of the infrastructure build right now? Could you elaborate on your ability to actually move resources accordingly to take advantage and smooth the variability if the current 12 states are not with the most action is? Thanks.

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

I am going to introduce Gary Jandegian, who's President of the URS Division which... where most of our infrastructure work is executed.

Gary V. Jandegian - President, URS Division

Well, thanks for the question. As you know, we have offices in all 50 states and we have 300 offices overall. So one of our great assets is the ability to move our people around to work on different projects. We often have our high way people from Tampa and other parts of Florida working out in California on projects and we have a number of projects right now in the state where we bring a board of 12 different offices to this... to the project. So, that's one of the strengths of our footprint in all 50 states. We have the assets to move them around.

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

We also, I should point out we also have structured our reporting systems and how we run the company to allow for a sharing of labor between offices. So, it's a very easy thing to do for within Gary’s division. Individuals in one city can work for another and another city and it's transparent to the customer. So, we've worked hard to make that happen, because as you point out regional changes in growth rates really mean that we have to move resources around to accommodate that.

Vance Edelson – Morgan Stanley

Okay. That's very helpful. Thanks guys.

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

Well, from our point of view and this is just some anecdotal comment, of the two big states probably Florida is the only one that is not showing growth in infrastructure expenditures at this point, it’s flat. It’s not down, it’s flat. The other key states as of the first quarter still have some growth, definitely has growth in them.

Vance Edelson – Morgan Stanley

Okay. Thanks a lot.

Operator

[Operator Instructions]. Your next question comes from AV Fisher of BMO Capital Markets. Please go ahead.

Avram Fisher - BMO Capital Markets

Hi good morning.

H. Thomas Hicks - Chief Financial Officer

Hi.

Avram Fisher - BMO Capital Markets

Thanks for taking my question. I was wondering if you could provide please a little more color on the joint ventures, because that number kind of exceeding what I was looking that. Does that include MIBRAG and as well as the nuclear retrofits?

H. Thomas Hicks - Chief Financial Officer

Yes, it does.

Avram Fisher - BMO Capital Markets

Okay. And was MIBRAG previously included in Washington Group’s, I don't know if you know in Washington Group's mining segment?

H. Thomas Hicks - Chief Financial Officer

Yes, it was.

Avram Fisher - BMO Capital Markets

So, now going forward we should kind of break that out and looking at it as just on the joint venture line?

H. Thomas Hicks - Chief Financial Officer

No, it's the part of the Washington Division today and we're reporting it, we're just reporting the Washington Division as a segment. Is that your question?

Avram Fisher - BMO Capital Markets

But, that just rolls into the JV line. Right?

H. Thomas Hicks - Chief Financial Officer

For MIBRAG and particular, yes it does. But, we have other mining activities that don't that aren’t in that.

Avram Fisher - BMO Capital Markets

Right. Okay. So, the MIBRAG I could… if I want to think about historically may be break it out historically if possible, I don't if I can do that?

H. Thomas Hicks - Chief Financial Officer

Well, Avi, if you go to page 44 of the queue, you can get a sense of healthy equity and the unconsolidated affiliates break out, and it doesn't give you the detail for MIBRAG in particular, but MIBRAG is one of the significant elements of the number for the Washington Division.

Avram Fisher - BMO Capital Markets

Right. Okay. Thank you.

H. Thomas Hicks - Chief Financial Officer

You're welcome.

Avram Fisher - BMO Capital Markets

Also one I noticed in the queue there was some reversal of accruals to I guess normalize the profit margin on some construction work, was that related to SR125 or can you provide some color on what that was related to and what can expect going forward?

H. Thomas Hicks - Chief Financial Officer

Yes Avi, as you know accounting rules make you recognize with so-called profit normalization if the profit in the backlog of the portfolio you acquire is significantly above or below what the expected profit rate is for that area, for that type of business you have to record either a liability either a credit or debit on the balance sheet and in this case there was about $5 million of profit normalization that came in that was resulted from that entry. It's not voluntarily it's something we have to do under the regulation. So I just point out there is a whole bunch of non-cash charges that comes through anybody's quarterly statements. In this case we had... that number was overwhelmed by the amortization of the intangibles, which goes the other direction significantly. So that's a good point, the total number I think is in the $30 million range and it will get spread over the next six or eight quarters and it is driven by a bottoms up calculation looking at every individual contracts and making those adjustments to the extent they are necessary under the accounting rules.

Avram Fisher - BMO Capital Markets

Is there any one or two construction contracts that stand out or they might want to or should keep an eye on or just sort of nature of the construction business?

H. Thomas Hicks - Chief Financial Officer

No, it's not; it is a whole group of contracts. It is not one or two it is dozens of contracts that make up that number. So there is no one dominant job that we could say, hey, you have to watch this that is the one that is driving this number. It's part of the very complex process of putting two large companies together and making that assessment.

Avram Fisher - BMO Capital Markets

All right. Thanks for that color. And just one final question I notice your US Army revenues were really strong this quarter, nearly doubled. Any particular contracts or cash quarters that was on and how longer those are suppose to last if there are any?

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

Let me introduce Randall Wotring, President of the EG&G Division.

Randall A. Wotring - President, EG&G Division

Good morning, the operational tempo remains high and the transformation activities are moving forward. We grew our labor nicely over the 2007-year and then we had some additional pass-through work so just a combination of those activities led to the growth.

Avram Fisher - BMO Capital Markets

Okay I mean is that $300 plus million kind of a run rate for next few quarters on past quarters?

Randall A. Wotring - President, EG&G Division

Well I think it is too early to say, but it can be no work and the threat reduction work and all that type of activity will lead to continued growth but at this point in time it's too early to determine whether it is going to be at the $300 million rate or not.

Avram Fisher - BMO Capital Markets

Okay. Thanks for the color and nice work on the quarter.

Randall A. Wotring - President, EG&G Division

Thanks Avi.

Operator

Your final question comes from Steven Fisher of UBS. Please go ahead.

Steven Fisher - UBS

Wondering on the $129 billion of bonds raised in the first four months, are you actually seeing that money being spent and is there anything that would hold up spending the funds that are actually available such as any kind of contingencies on tax revenues being needed to be generated for other parts of the project.

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

We are seeing the money flowing in and this money is not subject to Federal matching funds such as from the highway funds, so the State has...they have approved by voters in the States and the States have sole discretion of it. And usually there is tax hike involved in the State and that tax revenue is separate from the bond money. So we'd see the $129 billion being deployed without too much impediment, obviously California or Texas and New York led that and they are all those States are quite committed to getting on with their programs.

H. Thomas Hicks - Chief Financial Officer

And given the concern of generally speaking of people about the economy you would expect that the local spending for transportation would be something that, that they would not hold up and so we don't see it yet, and we don't expect it and certainly not in the near term.

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

One of the political aspects that is helping hold up infrastructure is, because of the downturn in the housing construction market we've got at least 20% of the people who were employed last year in housing construction essentially out of work and the States on local level are doing everything possible to mitigate that unemployment. And one of the several benefits of promoting infrastructure construction at state level is to redeploy those construction workers. That's a real factor in the mix.

Steven Fisher - UBS

And that's great. I guess what I just wanted to also clarify is, do these bond programs cover 100% of given project or is there some components to a project that needs to be required… that needs to be funded from tax revenues at the state or local level?

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

No, it's a mix. I mean it varies by state and project. But usually the bond funding might build the project but still got to be operated or they may be some local county or city funding involved, but in the main we expect that bond funding to flow through and particularly as Tom said, in the current economic environment at the state level.

Steven Fisher - UBS

Okay. Great. Thanks a lot.

Operator

At this time there appears to be no more questions. And I would like to turn the floor back to your host Mr. Martin Koffel for any closing comments.

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

Well thank you for joining us. We are obviously pleased with the progress made and comfortable with the outlook for the year. We look forward to updating you on our second quarter results, which should be at a date to be set in early in August. In the meantime the company has been invited to present it in several important Investor conferences and we will have a team there. As is our style for those conferences that that team will always include one of our more senior operating executives. So we want you to meet and see the people who are really running the company at the excecutional and operating level and give you a chance to ask a different range of questions. So thank you and we will see you then in August.

Operator

This concludes today's URS Corporation conference call. You may now disconnect.

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