URS's CEO Discusses Q2 2012 Results - Earnings Transcript

Executives

Martin Koffel, Chairman, Chief Executive Officer

Thomas Hicks – Chief Financial Officer

Analysts

Tahira Afzal – KeyBanc

Alex Rygiel – FBR

Andrew Biscotti – Credit Suisse

Michael Bivins – Sterne Agee

Richard Paget – Imperial Capital

Andy Kaplowitz – Barclays

John Rogers – DA Davidson

Steven Fisher – UBS

Andrew Wittmann – Robert W Baird

URS Corporation (URS) Q2 2012 Earnings Call August 7, 2012 5:00 PM ET

Operator

Good afternoon, and welcome to the URS Corporation Earnings Conference Call for the second quarter of fiscal 2012.To begin I’ll turn the call over to Mr. Thomas Hicks, Chief Financial Officer of URS. Mr. Hicks, sir you may begin.

Tom Hicks

Good afternoon, everyone. Before we get started let me remind you that today’s call will contain forward-looking statements, including statements about our revenues, business prospects, book of business, the Flynn acquisition, earnings and financial condition, foreign currency gains and losses, outstanding shares, tax rate, 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 or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

Information about some of these risks and uncertainties can be found in our earnings release and Form 10-Q for the quarterly period ending June 29, 2012, as well as in other SEC filings. And we assume no obligation to revise or update any forward-looking statements. A webcast of the call’s available on our Investor Relations portion of our website and will be archived in audio form on the website for a limited period.

With that, I’ll turn the call over to Martin Koffel our Chairman and Chief Executive Officer.

Martin Koffel

Good afternoon, and thank you for joining us. In addition to Tom Hicks the team with me here in San Francisco includes Gary Jandegian, President of Infrastructure and Environment; Randy Wortring, President of Federal Services; Bob Zaist, President of Energy and Construction; Martin Tanzer, Executive Vice President of Marketing; Reed Brimhall, Vice President and Chief Accounting Officer; and Sam Ramraj, Vice President of Investor Relations.

I should also like to welcome Bill Lingard, President of the Oil & Gas division, is joining our earnings call for the first time. Bill of course is the former President and Chief Executive Officer of Flint Energy Services. And we completed the acquisition of Flint in May. And we’re all delighted that Bill and his outstanding team are now a part of URS Corporation.

The response from customers to the acquisition overwhelmingly has been positive. Many of our multinational clients in the Oil & Gas sector already have inquired about utilizing our now expanded services. Our legacy URS clients want to learn about the new construction and maintenance capabilities that we gained through the acquisition of Flint. And clients of the former Flint Energy business are interested in URS’s engineering and our environmental services. Our expanded geographic reach is also very appealing to customers. With Flint we now offer full EPC capabilities in essentially all the major North American Oil & Gas regions. And already a joint team including our new Oil & Gas division is performing well-paid site assessment work in Pennsylvania for a major Oil & Gas customer.

Of course Flint has also added a substantial and growing book of business that provides for us an immediate basis of work. At Flint’s book of business, which was $1.8 billion when we closed the acquisition on May 14 already has grown to $1.9 billion at the end of our second quarter. This continued growth underscores the robust opportunity in the American Oil & Gas market, which is the reason we’re so excited to have an industry leading team in house at URS. And the integration of the new business is going very well indeed.

Those of you who have followed URS over the years know that integrating acquisitions is indeed one of our core strengths. And with regard to Flint, our assessment of the highly complementary nature of our operational capabilities, as well as the seamless cultural fit has only strengthened since we closed the acquisition.

Now before I discuss our results of the second quarter, I should like to point out that our reported results include only seven weeks of Flint’s operations. And the results also include acquisition related expenses. The results will be provided with and without these expenses so that you have a clear picture of our underlying operational performance, which continues to be strong.

Our revenues were solid at $2.7 billion. Now that’s a 14% increase from the second quarter of last year. These results include approximately $278 million in revenues from Flint for the seven-week period after the transaction was completed. Flint revenues contributed approximately 12% of the 14% revenue growth in the second quarter. On a GAAP basis net income for the quarter was $53.6 million and earnings per share was $0.72.

Now our GAAP net income includes $11.3 million in pre-tax expenses related to the acquisition of Flint. These expenses equate to $0.16 per share on an after tax basis. As a part of the financing of the Flint acquisition an intercompany loan between two euro subsidiaries, one was Canadian and one was U.S. based, was put in place to enhance the value of the transaction. In the future, we’ll be recording a noncash expense or income item each quarter to recognize U.S. Canadian currency exchange rate movements.

The second quarter income statement includes charges for foreign currency losses related to an intercompany loan and for foreign country contracts totaling $9.2 million or $0.12 per share. Excluding the transaction expenses and the charges for foreign currency losses relating to the intercompany loan and the foreign currency contracts, U.S.’s net income for the quarter would’ve been $74.7 million. That’s a 10% increase over the non-GAAP net income in the second quarter of 2011. And earnings per share, excluding these items would’ve been $1.00, which is a 15% gain over the same period last year on a non-GAAP basis. A reconciliation of net income and earnings per share with or without the acquisition related expenses and the foreign currency charges is provided in the reconciliation schedule on our website at www.urs.com, and in our earnings press release.

So in summary we’re pleased with our second quarter performance. Revenues continue to increase. Of course with the addition of Flint for the seven-week period we had even more substantial growth. We delivered net income and earnings per share growth, excluding the charges related to the acquisition and the foreign currency losses, and as I shall detail in a moment, we added to our book of business, further enhancing our prospects for growth in the quarters that lie ahead.

These results reflect the strong positions we’ve built across our markets, and the benefits of our diversified business strategy. The company has been further strengthened with the Flint acquisition. In fact, in the second half of the year we expect our Oil & Gas business to contribute approximately 25% of our total revenue. You’ll recall from previous discussions that expanding our Oil & Gas capabilities has been a longstanding strategic objective for URS and we’re pleased to have achieved this goal.

Conditions in our private sector markets that power Oil & Gas and industrial remain favorable. And while everyone is aware of the curtailment in public spending, our outlook for the federal and infrastructure sectors is based on our current strong backlog. And power sector revenues were outstanding in the second quarter. Power revenues were up 28%, reflecting increased work for utilities on emissions control projects and steady demand for our nuclear retrofit and modification services.

The revenues and backlog from our Oil & Gas sector increased significantly with the acquisition of Flint. We now have a full range of capabilities to capture increasing opportunities in the North American Oil & Gas market. This includes capital expenditure growth in the Canadian oil sands and the development of unconventional shale oil gas resources. In the Industrial sector, which includes the Industrial Manufacturing and Mining markets, we’re benefiting from the expansion of our facility management services for a multinational corporation. In addition, strong commodity prices for base metals and minerals are creating opportunity for our Mining business, both in the United States and internationally.

Our Federal sector continues to generate strong revenues and profits. The future outlook is stable because most of our programs support critical missions, strategic priorities for the United States and United Kingdom governments. We’re also capturing new opportunities in growing areas of the U.S. federal budget such as high end IT services.

In the Infrastructure sector procurement activity remains strong. As a result our backlog continues to exceed $3 billion. And after years of delaying, we were pleased with the passage in June of the new MAP-21, the federal highway bill. The bill provides approximately $105 billion in total direct funding through fiscal 2014. Importantly, it also includes a significant increase in funding for the Transmutation Infrastructure Finance and Innovation Act or TIFIA as it’s known.

And this federal credit program should generate an additional $17.5 billion for new projects. And the combined package will lead to the highest rate of federal spending in the history of the highway program. Overall we ended the quarter with a total book of business of $27.3 billion, which gives us a strong base at work through this year and beyond. Our book of business includes approximately $1.9 billion in Oil & Gas projects from Flint. And with that I’ll now discuss each sector in detail, starting with the power business.

I’m pleased to report that the resurgence in the power business we discussed in previous calls has continued. Our second quarter power sector revenues were $328 million. That’s a 28% increase from the second quarter of 2011. Our power sector revenues for the first half of 2012 were $620 million, an 11% increase compared with the same period last year. We won a number of new contracts in the quarter, and this is reflected in our increased backlog of $1.4 billion. Most of the procurement activity has been in the air quality control market.

Over the next five years utilities are expected to spend $37 billion to comply with expanding federal and state regulations. Demand for our nuclear retrofit and modification services also is growing. There are 15 modification proposals pending before the nuclear regulatory commission with another 15 expected by 2015. Furthermore, the NRC’s stricter post Fukushima guidelines are creating new opportunities for us to reinforce the existing fleet of nuclear power plants in the United States. And with natural gas prices remaining at historic lows we expect our customers to increase their emphasis on combined cycle gas facilities to meet future power generation needs. We believe this will lead to new EPC opportunities for our power business.

In the Oil & Gas sector revenues were $464 million, including $278 million from the former Flint business, including Flint, Oil & Gas revenues increased by 210% from the prior period. And as I mentioned earlier, our results include Flint for only seven weeks. \

During the first half of the year Oil & Gas sector revenues were $627 million. I mentioned earlier the positive response from our clients to the Flint acquisition. Several multinational clients with whom we have master service agreements have access to expand the services that we already provide for them have previously URS provided engineering and environmental services to these Oil & Gas clients, and now want to use our expanded Construction & Maintenance capabilities. And we recently won our first assignment operating with Flint under the URS brand on a combined basis. It was a contract to provide Environmental & Construction services for Royal Dutch Shell.

Flint operates in four areas, Oilfield Services, Production Services, Facility Construction and Maintenance Services. And since these areas are an expansion of URS’s Oil & Gas business, I’m going to take a few minutes discussing each one of them in a little detail.

In the Oilfield Services market we provide drilling related services, pressure and vacuum services and fluid hauling. We’re the largest rig moving company in North America, and activity in this market is buoyant. Currently we’re moving rigs in the U.S. to support new oil and liquid-based projects in the Bakken and the Eagle Ford regions. In Canada we’re seeing increased activity in Saskatchewan and in Alberta. URS is now the leading production services company in North America. We provide facilities construction and pipeline support services for the midstream production market. Our field infrastructure and facilities work continues to benefit from our clients’ increased drilling and midstream activities.

Our Facility Construction group performs large-scale construction projects for upgrading in refining facilities in the Canadian oil sands. Our Construction & Maintenance spending in this region is expected to reach $25 billion annually by 2013. And this is a significant growth market for URS. And finally, through a joint venture we provide pipeline and plant maintenance services for oil sands producers at large process and heavy oil facilities. Much of our work is delivered through long-term contracts. Investments in the Canadian oil sands also creating new opportunities to expand our maintenance work.

Now obviously we’re very enthusiastic about the potential of the Oil & Gas sector. Capital spending in the oil sands alone is expected to exceed $180 billion over the next 10 years, with several large-scale projects already under development. Our expanded technical capabilities and $1.6 billion in backlog positions us very well in this market for the future.

Turning now to the industrial sector, we serve the industrial, manufacturing and mining markets. The revenues for the second quarter were $297 million, down 6% from the second quarter of last year. For the first six months of the year our industrial sector revenues were $592 million, a slight decrease compared to the same period last year. We ended the second quarter with a backlog of $876 million. That’s up 25% from the beginning of the year.

Since the beginning of the third quarter we’ve seen an increase in the pace of new project awards from large corporations across a whole spectrum of industries. The outlook for the mining market remains strong. In Australia we’ve begun feed work at a number of new iron ore precious metals and coal mining sites. And as these projects move forward, they should lead to expanded EPC opportunities for us. Activity for facilities management and O&M work also remains robust. In particular we’ve been successful in winning new contracts and expanding existing agreements to support manufacturing clients in the United States, in China and in India.

Turning now to the Federal sector, the revenues were $1.2 billion in the second quarter, essentially flat with the second quarter of last year. And during the first half of the year Federal sector revenues were $2.3 billion, an increase of 5% from the comparable period in 2011. Our results for the quarter include incentive awards for the early completion of key milestones at two large chemical weapons demilitarization sites. Given our ability to provide services across the entire lifecycle and our existing well-established relationships with numerous U.S. agencies, we’re able to address an increasing set of programs for the government.

We also see a large number of opportunities with the United Kingdom nuclear decommissioning authority. In fact, due to our performance at Sellafield in West Cumbria in the United Kingdom, and the low-level waste repository at DRIG, we’re seeing increased opportunities with the U.K. government through its Ministry of Defense. Overall the pipeline of bidding opportunities for our Federal businesses is at record levels. And our successful entry into high-growth markets such as federal IT is resulting in significant new opportunities. We’re actively supporting a number of cyber security, cloud computing and data consolidation initiatives as part of a digital government strategy, a program of the federal government.

In the Infrastructure sector second quarter revenues were $448 million, a 6% decrease from the same period last year. Revenues were off for the second quarter due to delays in the start of major civil construction projects. However, the demand for our engineering and design services remains steady. And this is reflected in our $3.1 billion infrastructure backlog. The majority of this backlog is planning and design work, and should lead to increased opportunities for higher revenue construction projects in the future.

We were pleased with the passage in June of MAP-21. That’s the new two-year $105 billion federal transportation funding bill. This program is expected to give our state and local government clients increased confidence to move forward with large surface transportation programs. And you’ve probably been reading that state tax revenues year-to-date are up about 5%. And the aggregate state deficit has been decreased from 60 something billion dollars to about half that.

Outside North America we continue to realize the operational benefits of the restructuring initiatives we undertook in our international business. As you recall, late last year following the economic slowdown in Europe and the Middle East we adjusted our cost structure and consolidated our systems and offices. We’re encouraged by the company’s outlook in several countries. For example, as part of its efforts to stimulate the economy, the UK government recently announced a 50 billion pound loan guarantee program to help restart delayed infrastructure work. And more than 500 infrastructure projects could benefit including many highway transit and water assignments that URS already is supporting.

And Tom Hicks will now discuss our financial results in more detail. Tom?

Tom Hicks

Thanks, Martin. To summarize our second quarter results, on a GAAP basis revenues were $2.7 billion, including approximately $278 million from seven weeks of operations at Flint. And net income was $53.6 million, and fully diluted EPS was $0.72. As Martin discussed earlier, our second quarter results included $11.3 million in pre-tax expenses related to the Flint acquisition. And this equates to about $0.16 per share. In order to enhance the economic value of Flint acquisition we’ve put in place two intercompany loans between two URS subsidiaries, one based in Canada and the other in the United States.

One of these loans, which has a principal balance of $200 million, will need to be mark-to-market through the income statement each quarter based on the U.S.-Canadian dollar exchange rate. This noncash expense or income item will be a recurring entry each quarter as long as the loan stays in place. However, we plan to pay down the loan. And as the principal decreases, exchange rate changes will have less and less of an impact. And from the establishment of the loan up until June 29, 2012, the Canadian dollar weakened versus the U.S. dollar resulting in an after tax noncash charge of $6.4 million or $0.08 per share.

We also took a charge of $2.8 million during the quarter related to the foreign currency forward contracts we entered into in the first quarter to hedge the purchase price of Flint, which was in Canadian dollars. The charge resulted in an after tax impact of $0.04 per share. Excluding these charges, net income would’ve been $74.7 million and earnings per share would’ve been $1.00. And a reconciliation of income and earnings per share with and without the acquisition related expenses, and the foreign currency charges is provided in the reconciliation schedule on our website at www.urs.com, and in our earnings press release.

Interest in the quarter was $20.7 million. Operating cash flow for the quarter was $31.3 million. DSOs were 84 days at the end of the quarter, and that’s down from 85 days at the end of the first quarter, but up from 79 days at the end of 2011. In the second quarter our tax rate was 33.9% and our diluted weighted average shares outstanding for the quarter were $74.6 million. CapEx, excluding the equipment purchased from capital leases, was $31.2 million.

Our second quarter results included a pre-tax expense of $25.4 million for the amortization of intangible assets. The amortization of intangible assets is expected to be approximately $100 million for fiscal 2012 and approximately $110 million for 2013. On July 6, 2012 we paid a quarterly cash dividend of $0.20 per common share to stockholders of record as of June 15. Our next quarterly dividend of $0.20 per share will be paid on October 5 to stockholders of record as of September 14. And with the addition of Flint we now report separate financial information for our four business segments, Infrastructure & Environment, Federal Services, Energy & Construction and Oil & Gas.

For the second quarter of 2012 Infrastructure & Environment reported revenues of $966 million and operating income of $62.6 million. Federal Services reported revenues of $718 million and operating income of $59.8 million. Energy & Construction reported revenues of $778 million and operating income of $54.8 million. And Oil & Gas reported revenues of $278 million and operating income of $30 million. And once again that represents just seven weeks of the results from Flint.

Our press release contained a detailed description of our book of business, including backlog, option years and indefinite delivery contracts for IDCs; and we ended the second quarter with a book of business of $27.3 billion as compared to $27 billion at the end of 2011. Backlog was $14.3 billion at the end of the second quarter and that includes $1.1 billion from the Flint acquisition. The value of option years was $5.1 billion and for the second quarter IDCs were $7.9 billion including $824 million from the Flint acquisition.

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

Martin Koffel

And Tom, thank you. Turning now to 2012 guidance, we’ve updated and raised our guidance to include Flint and to reflect the current outlook for each sector, including now of course the Oil and Gas.

Specifically, we now expect that revenues from the Federal sector will be approximately $4.5 billion. Revenues from the Infrastructure sector will be approximately $1.9 billion. Revenues from the Power sector will be approximately $1.3 billion. And revenues from the Oil and Gas sector will be approximately $2.1 billion. And revenues from the Industrial sector will be approximately $1.2 billion. Based on these assumptions, we now expect that consolidated revenues of the company for 2012 will be approximately $11 billion.

And as a footnote to our revenue guidance before speaking to income, I should like to mention two things. Firstly, as I noted earlier, in the second half of the year we expect that our Oil and Gas business will contribute approximately 25% of our total revenue. Secondly, the change in our revenue guidance for the Power sector reflects the decision made by a single client to self-procure a portion of an EPC contract we’re performing for that clients. These are almost entirely pass-through revenues that do not materially affect the profitability of our Power business, just the revenue line.

Turning now to net income, we now expect that net income for 2012 will be between $311 million and $319 million and that earnings per share will be between $4.15 and $4.25 per share on a fully diluted basis. I should like to remind you that our net income and EPS guidance is on a GAAP basis. It includes all of the Flint acquisition-related expenses, the currency fluctuations that we discussed, the foreign currency loss related to the foreign currency forward contracts and the additional amortization of intangible assets resulting from the Flint acquisition.

We expect that our tax rate will be approximately 33%, but the rate may fluctuate depending on the amount of non-controlling interests that will be included in our results. We also now expect that the number of weighted shares outstanding used to calculate our EPS for 2012 will be approximately 75 million shares.

So in summary we indeed had a successful quarter operationally, and we’re well positioned for the rest of the year and beyond. The team here could not be more pleased with how the integration of Flint is proceeding. The level of interest from customers has been outstanding. And we’re already winning and executing on assignments that use the combined capabilities of the company. So I think Flint has been just a great step for us. So we look forward to updating you on continued progress. And with that we’ll open the call up for your questions.

Samantha, if you would open up for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tahira Afzal with KeyBanc.

Tahira Afzal – KeyBanc

Congratulations on the completion of Flint and the quarterly results to begin with.

Tom Hicks

Thanks, Tahira.

Tahira Afzal – KeyBanc

I guess first question is you know you’ve got Flint out of the way. And you know as you look up now as you integrate Flint and I know margin touched on this to some extent. Would you talk about you know your strategy on the Oil & Gas side as you continue to build out that aspect of your business?

Martin Koffel

You know the background to us buying Flint is that we wanted to build a prominent position in North America. I mean clearly we’re moving towards North American energy independence. Oil and gas and you know other forms of energy. But oil and gas is the focus here for us. And with Flint we’ve acquired a substantial position in Canada. We’ve acquired a foundation position in the United States. So the first order of business will be to continue to build Canada, its growth opportunity there, but also to build the United States so it’s on scale with our Canadian business. That will take some time.

We’re not going to be distracted by oil and gas opportunities outside the United States at this stage. I mean they obviously you know abound. We do have a global platform through which we serve many multinational corporations. I think we serve every large multinational oil company. Obviously, we would perform if requested through our exiting platform the network we’ve built would fall under these MSA contracts. At some point in the future we might be interested in for example unconventional methane gas in Australia, that type of thing. But not for the time being; the focus is on integrating Flint, building a really great and competitive North American oil and gas position.

Tahira Afzal – KeyBanc

Thank you, Martin. And I have one follow-up question and then I’ll hope back into the queue. You know as you look at your business outside of Flint, you know the one thing I did notice was that you had fairly notable reversal in your Federal backlog. And I guess the question is for Tom. Would you elaborate on what happened there and whether we should reconcile? Thank you.

Martin Koffel

I’m going to ask Randy Wotring. You know he’s president of our Federal Services business to comment. But first of all I probably wouldn’t have said it was a reverse in the backlog. You know we’ve been performing very well and met early milestones on our Ken Demil business. And some of that work’s come out of backlog and you know has not yet been replaced. Randy can comment further.

Randy Wotring

Hi, Tahira. You know as we indicated in past calls, we’ve seen a significant change in government procurement practices that have really impacted how we look at backlog going forward. Historically we’ve seen a lot of five-year contracts. And now the policy says that those should be no longer than three years in total term. Base periods on those contracts, on the five-year contracts they were usually three-year period with two one-year options; now we’re seeing base periods on these three-year contracts at one year and still two one-year options. A lot of movement towards the use of IDCs and task order periods of performance are usually only one year in length. So we’re seeing a lot of book and burn.

In fact, nearly 40% of our new order input in Federal came via task orders in the second quarter. And as we look forward, you know across the corporation, we’re bidding on a large number of very large government contracts that will employ agency accounting. So in the future you may not see large increases in our backlog. But if we are successful on these you’ll see the earnings impact will certainly be noticeable. We’ve positioned the company in areas that have higher margins, more secure funding and higher barriers to entry. We have a strong inventory of IDC contracts.

And as Martin said in his remarks, that we have a record pipeline in terms of the bids that we’ve submitted, those that are away in award, those that we’re currently preparing bids on and those we will bid on in the next 12 to 18 months. So we have a strong backlog relatively speaking and as you’ve noticed, even though we’ve had some reductions in our backlog over the last few years, we’ve seen strong revenue and consistent growth in our earnings associated with the federal programs. So we still – we’re very optimistic about this business.

Tahira Afzal – KeyBanc

Thank you.

Operator

Your next question comes from the line of Alex Rygiel with FBR.

Alex Rygiel – FBR

Thank you, and also congratulations on a nice closing and a quarter.

Tom Hicks

Thanks, Alex.

Alex Rygiel – FBR

Two questions, first the Flint integration, can you expand a little bit more on that? I know you’re only seven weeks into it, but are you on track to achieve your $10 million to $15 million of savings this year and $20 million to $30 million next year? Or have you modified those targets? And then secondly, Tom, you mentioned something with regards to two incentive awards in the quarter. Could you possibly quantify those or give us a little bit more color on them?

Martin Koffel

Let me start with – It’s Martin. Let me start commenting on the integration and then Tom will talk about the synergy savings. I mean obviously you appreciate tracking this, the savings, is important and we always seem to do better on the projected savings. That obviously is not why we make the acquisition. We make the acquisition for un-quantified strategic and revenue reasons. And the measure of how well Flint is doing to me is – will be the additional revenue or the additional backlog that we get by combining the engineering and environmental skill sets that URS had with Flint’s fuel construction and other activities. We do – that outlook is very promising. We’re talking to many clients. I mean most of the opportunities we’re talking to found us. Clients called up and said are you ready to talk?

So by far the dominant measure is how are we doing in the marketplace. Are we, as a consolidated company, making inroads into projects that need a company, could it pursued or executed beforehand, the answer is yes both in Canada and in the United States. And then I think the next question was about how are we tracking on synergy savings. Six weeks, seven, eight weeks into it, a bit soon to ask but I think Tom could probably answer it.

Tom Hicks

Hey, Alex. I think we told you $10 million to $15 million this year, and we’ve identified several million dollars already and captured that from – the low-hanging fruit issues like duplicate Boards and outside services that relate to being a public company. We’re just getting to the meat of it right now, which includes renegotiating purchase contracts for various things. So I’d say we’re on track. We haven’t gotten to the $10 million to $15 million range yet but we’re still hopeful we can hit that number.

The second part of your question related to incentive awards. We commented earlier on that in that we continue to see, or have, incentive awards and performance awards as a key part of our performance, especially in federal contracts. And the comment we made earlier really was just that we continue to see those awards and they’re still happening and we still have a lot of them out in front of us and they’re incorporated in our results.

Alex Rygiel – FBR

That’s very helpful. Thank you.

Tom Hicks

Thank you.

Operator

Your next question comes from the line of Jamie Cook with Credit Suisse.

Andrew Biscotti – Credit Suisse

Hi. This is Andrew Biscotti on behalf of Jamie Cook.

Tom Hicks

Oh, hi.

Andrew Biscotti – Credit Suisse

Hi. I had a question on – I’m curious to hear a little more about – sounds like there was a pretty robust bidding environment out there and I’m curious if you could sort of rank file which, where you see the most imminent awards coming from? And then as a follow-up just sort of any comment you have in terms of competition in terms of your bidding environment would be great. Thanks.

Martin Koffel

Yeah. You asked the question broadly, I think the most illustrative answer’s probably if Gary talks about his business and particularly infrastructure. He runs a very diverse business, so here’s Gary Jandegian.

Gary Jandegian

Hi, Andrew. I’m just going to cover some of the segments in the Infrastructure business that we’re seeing a lot of robust bidding opportunities. Right now airports and aviation are strong, highways is getting stronger, particularly with MAP-21 we expect to see even more opportunities there as states and local municipal governments move forward on their pent-up projects. And the finally transit systems, light rail across the country and in the U.K. as well as heavy rail and other rail facilities are moving forward. A little bit slower on the educational facilities side and the water projects side, so that that kind of describes Infrastructure.

We’re also seeing heavy procurement activity out of the private sector, MSA clients or the multi-national service agreements that we hold with many of the larger multi-nationals. So that goes across the Mining sector, the Oil & Gas sector and Manufacturing is also picking up nicely.

Martin Koffel

So you know I think to be more complete I’m going to ask Bill Lingard to also comment on Oil & Gas. You know now a major amount of drilling activity going on there.

Bill Lingard

So Andrew, on the Oil & Gas side many opportunities throughout North America. But oil sands would be the area of heaviest concentration there. And it’s almost staggering the number of very large projects coming at us in oil sands. You know today we’re quite busy on three major projects. And when we look forward in the pipeline there’s probably about a dozen projects that would be in the $300 million to $400 million size that are available on either a construction basis or an EPC basis. So we are certainly engaged in negotiating with several clients.

Now becoming part of URS changed things for the Flint family quite a bit in that we were limited in how many big projects we could take on by working with the E&C group and the I&E group so we can add to our project management, construction management skills. And we’re able to take on – the biggest year we’ve ever had in Flint for oil sands construction has been about $600 million of revenues. We’ll do about $500 million this year. But certainly being part of URS we can greatly expand that and we can get those revenues for oil sands, EPC or construction projects up substantially.

So that’s a big, big opportunity for us. In the lower 48, lots of process facilities, lots of pipeline, construction jobs. Lots of midstream type facilities as the shale, oil shale gas projects get built out. So we’ve got lots of opportunities coming at us. That would be the next biggest area of opportunity. And we’re working very close there again. In some cases a client wants EPC. So we’re working close with all divisions of URS to make sure we capture those opportunities.

I think with that we’ll turn it back to...

Martin Koffel

I think we’ll perhaps take another question at this point.

Andrew Biscotti – Credit Suisse

Thanks, guys.

Operator

Your next question comes from the line of Michael Bivins with Sterne, Agee.

Michael Bivins – Sterne Agee

Hey, everybody.

Tom Hicks

Hey, Mike.

Michael Bivins – Sterne Agee

Hi, Tom. Maybe following up further on from the bill on Oil & Gas, how do we look forward to the variability of historical Flint margins and results and how you model it out going forward given the cycle we’re in today versus maybe last peak oil sand cycle, energy cycle we saw in 2006, 2007 and 2008.

Tom Hicks

Let me make a preliminary comment and then I’ll let Bill expand on it.

Bill Lingard

Sure.

Tom Hicks

We, as part of the acquisition, we did quite a bit of diligence and talked to Bill and his team and looked at the market quite extensively. We think there’s a good run here the rest of this year and into 2013 for sure and maybe beyond. So we think we’re in a real strong cycle. And on the profitability standpoint as far as that goes, Flint traditionally has run at about 6% operating income and we think that’s a good number to plan for. Now of course that’s adjusted for the amortization that we’re making them take as part of the acquisition and the interest expense that we’re incurring, but that’s kind of the general parameter and I’ll let Bill get more specific on what he sees in the cycle and the future of that.

Bill Lingard

Certainly the profitability, what we’ve done in Oil & Gas business is tried to have a diversified portfolio of types of projects, and if you look at just pipelines and the construction of pipelines yes, the margins and the profitability would go up with activity levels and would drop off some. But on the maintenance side which is a big part of our business, the profitability tends to be very, very stable and they don’t fluctuate. So we’d like to get a good mix of both the construction-type projects as well as maintenance beyond the construction, kind of a build it and maintain it strategy.

On the Oilfield Services side, the rig moving and fluid hauling, the rig moving tends to swing the most in terms of profits. It always stays profitable, it’s that you can make additional projects when activity, the levels are high and demand is up and utilization is up on your equipment. And certainly what we’re seeing, as Tom said, is a good long stretch ahead here of activities because of the success that our clients are having with finding new liquids-rich plays, shale gas plays and oil plays in places like Saskatchewan and Alberta.

Michael Bivins – Sterne Agee

All right. Just one follow-up to that, are you finding pricing for some of your services and equipment improving, staying the same or more competitive first half of 2012 now as you look into 2013?

Bill Lingard

Slightly improving on the Oilfield side. We had some hangover contracts from 2010 and 2011 that weren’t as good and we’ve been able to improve those in 2012. So our margins should be slightly improving.

Michael Bivins – Sterne Agee

And just one final follow-up, maybe for Martin, as you look at the addition of Oil & Gas into the rest of your distinct businesses here, can we – how can we infer were you going to allocate manpower and capital over the next 12 to 24 months given the outlooks for the I guess four divisions you’re going to be breaking out now. Is there a way to think about are we going to see better activity in one area and maybe a little less elsewhere? How do you think about that as we move forward? Thank you for your thoughts.

Martin Koffel

Well first of all in terms of capital Flint obviously is slightly more capital intensive than the original URS businesses. I mean I wouldn’t describe Flint as a capital intensive business, but it’ll have a little more appetite for capital investment, which we will gladly make. Furthermore, it could in the short term be our fastest growing business and as such would have slightly higher appetite for working capital. So I think that’s where the capital goes.

In terms of manpower, we certainly have the management team. Remember each time we’ve made a substantial acquisition you know we haven’t been in the position of stretching the people we had. It was always to find our way into a new market, but more importantly, to have a leading industry team joined us. So in terms of manpower, the entire Flint organization has joined URS in becoming the core of our Oil & Gas business. I mean everybody is there.

And then in terms of direct labor, labor in the field, Flint has an ambitious hiring program. And if you get into Western Canada the employment market doesn’t resemble what you read about the U.S. generally. I mean talking about you know serious labor shortages and so on; Flint highly professional, very skilled and aggressive on the hiring front. I remember in my first visit up there after the closing. I mean obviously I’d visited many times before that. But in my first visit as someone involved with Flint they sat me down and they said well October – by October we have to hire 1,600 net additional people. And we’re on track to doing that.

So finding the people always a challenge, but Flint is skilled at doing that. And I think we can certainly react to the – we have the management team and we can certainly deliver the direct labor that’s needed. And of course, as we move into these larger projects where we’re using the combined skills of URS project management skills, engineering skills, Flint will reach back to the U.S., particularly our EC division with all that legacy of Washington Group and Construction to augment their needs in Canada and in the U.S. oilfields with additional people. It’s a good...

Michael Bivins – Sterne Agee

Thank you very much.

Martin Koffel

It’s a good problem, believe me.

Michael Bivins – Sterne Agee

It certainly is. Thank you, gentlemen.

Tom Hicks

Thanks, Mike.

Operator

Your next question comes from the line of Richard Paget with Imperial Capital.

Tom Hicks

Hello, Richard.

Richard Paget – Imperial Capital

This is I guess maybe a question for Gary, if I look at the new awards in the second quarter, in Infrastructure they were a little bit lighter than they had been. Do you think you were experiencing maybe a pause in the market as people are waiting to see what was happening with MAP-21? And now that it has been signed, have you tangibly seen activity pick up specifically in your markets where the bids have ramped up? Or this is just something you’re expecting and you’re hearing there’s going to be more bids but you haven’t seen it specifically yet?

Gary Jandegian

No, I think you’re right on, Richard. As you know, we have a strong Infrastructure backlog overall $3.1 billion. And that is up from the year-end backlog. So we’re pleased with that position. What we have seen in the second quarter is the rate of conversion of that backlog has been lower on the front end of our work. And generally our front end backlog converts in 18 to 24 months. That’s been stretched by about 6 months. I mentioned where the strengths are coming from, but the states and local agencies have been somewhat slower in authorizing notices to proceed or in some cases have authorized limited notices to proceed.

So while we’ve had a good sales record, turning that backlog into revenue has been a bit slower than we’re used to but we are seeing many opportunities. I think the new MAP-21 as well as the U.K. Infrastructure investment plan, a trillion dollars of Infrastructure pent-up demand in the U.S. is going to break some of these projects loose and move the projects forward. So I think I’m rather optimistic about things that are in front of us on Infrastructure.

Martin Koffel

Richard, I’d add that the fiscal year for the states really just started in July and so they’re getting things together. The other thing that’s going on is that the rate at which municipal bonds have been sold is really up substantially on last year; in fact I think it’s up something like oh 64% or 65% over the same – year-to-date over the same period last year. And that’s in all states and all categories, everything from education through transportation and public facilities and environmental facilities. All the elements seem to be there but they do need to congeal and momentum needs to start.

Richard Paget – Imperial Capital

Okay. And I know you mentioned transit, but any updates on high-speed rail?

Martin Koffel

Yes.

Gary Jandegian

Yeah, we continue to do well with high-speed rail. We’re negotiating our fiscal 2012-2013 budget for California high-speed rail with the high-speed rail authority there. Our business with Amtrak continues to grow. You know going back to 2009 when we became Amtrak’s PMO for their system in the Northeast our original contract was about a $15 million contract. We’ve expanded that to $60 million. They just added the ADA program at 682 stations nationally to our work program, as well as given us another contract in the Northeast. So Amtrak’s going well. In addition, we are the preliminary designer on the Chicago to St. Louis high-speed rail program. And we were just awarded a planning study for high-speed rail in Arkansas. So between California Amtrak, Chicago to St. Louis, and now Arkansas, high-speed rail continues to fund projects that we have in our book of business.

Martin Koffel

Richard, you’re probably aware that the California legislature just passed a bill authorizing the state to start selling...

Richard Paget – Imperial Capital

Right.

Martin Koffel

Over $2.5 billion in bonds. And that tapped $3.2 billion of federal matching money.

Richard Paget – Imperial Capital

But I mean I’ve also heard that there’s a lot of challenges with the farmers and other environmentalists that might hold it up. I mean are – what are they telling you with the project at this point?

Martin Koffel

No, there are a lot of challenges, as always with these things. The group most certain to enjoy a good income are the law firms.

Richard Paget – Imperial Capital

All right. Thanks. That’s all I got.

Tom Hicks

Thanks a lot, Richard.

Operator

Your next question comes from the line of Andy Kaplowitz with Barclays.

Andy Kaplowitz – Barclays

Evening, guys. Nice quarter.

Tom Hicks

Hey, Andy. Thanks.

Andy Kaplowitz – Barclays

So I wanted to ask you about Power. You mentioned that you took – one of those projects was going to come through as pass through only and that’s why you took your revenue forecast down there. Backlog is lumpy. It was down sequentially in the quarter a bit. My question really is you know the drivers of Power have been environmental control and gas plants and such. Have you seen any slowdown in either of those? And you know what is that – what does that outlook look like in the near to medium term?

Martin Koffel

Andy, Bob Zaist is right here.

Bob Zaist

Andy, I would tell you that we still continue to see a good pipeline of opportunities on the AQCS side. We haven’t stalled or modified about 60,000 megawatts of facility over the last decade or so. We are actively engaged with about 15,000 megawatts of opportunity in various stages of progression. We’ve got regulations that have moved around a bit relative to the EPA regulations and some of those are under review and protest at this point, but having said that, the horizon of opportunities for the next four years seems to be solid.

And we’re enjoying a good, good mix of AQCS opportunities coupled with our Nuclear Services business as the renaissance really never developed on Nuclear Power side, we have seen a very strong demand for our Nuclear Services to look at power up rates in existing – on the existing fleet of units throughout the country coupled with the implementation of the Post-Fukushima NRC regulations which really have driven our business and we are in fact in a hiring mode in our Fort Mill office as well as our Princeton office to support those activities.

On the new generation side, the demand really hasn’t presented itself yet in the economy. As it does present itself, we believe that gas will be the predominant fuel of choice and we are starting to see some selected opportunities but they’re early yet.

Andy Kaplowitz – Barclays

Bob, just one quick follow-up on that, do you see, the utilities you talked to, are they talking about the election as an element of uncertainty that once they get past there they will do more spending? Once the regulatory environment clears itself up a little bit?

Bob Zaist

Well, I mean I think all those – we have a consent decree in many states which is a key driver, regardless of the election results. We do see the EPA regulations have moved out about a year and we’ll see where they go, but I think at the end of the day we are going to see some form of regulation relative to clean air which will support the business.

Andy Kaplowitz – Barclays

Okay. That’s very helpful. If I could switch gears, back to Infrastructure for one second, you talked about the U.K. and investment plans there, could you talk about what’s going on over there now? Have you seen the inflection yet in U.K. Infrastructure or has is still been a little bit weak and will get better over time but it’s still kind of stagnant?

Martin Koffel

Well, as a general statement, obviously it’s been weak. The U.K. economy’s continued to be in decline. But the Treasurer, George Osborne, announced the program in which U.K. government would make available 50 billion pounds in matching funds to back about 500 projects that had been identified or were already under way. Now we – when we bought Scott Wilson in 2010 one of the attractions was that Scott Wilson’s skillset in rail, highways, bridges and water works was directly in line. And their backlog was directly aligned with the government’s national priorities. So we’re hiring people in the United Kingdom to work on infrastructure and work right now. How many open positions do we have, Gary?

Gary Jandegian

We hired a net of 77.

Martin Koffel

Yeah. And I think we’ve got a couple of hundred open positions. So we’re hiring direct labor. As you know we realigned our cost structure last year to reduce – get some operating efficiencies. But we are hiring engineers, billable engineers. So I think we’re in the sweet spot. It’s no accident. I mean that’s why we bought Scott Wilson. Scott Wilson has always marketed the program to the financed. But I think there are other substantial parts of the U.K. infrastructure market that are doing less well. That’s not where our emphasis lies. I’m reasonably confident in our U.K. infrastructure business. I mean the fact that we’re hiring people is the best signal of all to me.

Andy Kaplowitz – Barclays

That is a good sign that you’re hiring people. Thanks, Martin.

Operator

Your next question comes from the line of John Rogers with DA Davidson.

John Rogers – DA Davidson

Afternoon.

Tom Hicks

Hey, John.

John Rogers – DA Davidson

Tom, first in terms of your corporate overhead or SG&A expenses, is that just under $20 million. Is that a – will that drop off through the year? Or you know with the addition of Flint does that come up a little bit and sort of how do you think about that?

Tom Hicks

You know, John, we track that as a percent or bps of total revenue. And we’ve been at between 70 bps and 75 bps over the last couple years. And that’s where we think we’ll end up this year, in that range.

John Rogers – DA Davidson

Okay.

Tom Hicks

There’s some one-time stuff going on in that quarter you know related to a whole bunch of things that you can imagine that showed up in that line item. And it was an unusual quarter. But I think – I think if you look at the full year plan or the full year expectation, I think 75 bps is a reasonable guess; certainly less than 80 bps of revenue.

John Rogers – DA Davidson

Okay. And then a modeling question, just in terms of the currency swings through the end of the year. How should I think about your exposure to changes in the exchange rate?

Tom Hicks

Well of course we have now significant portion of our, probably in our history the largest portion of our income coming from – in a foreign currency, in Canadian dollars. So that’ll have an impact. But Flint is not 100% Canadian; it’s probably 70/30 Canadian/U.S., something like that Bill. Does that...

Bill Lingard

75/25.

Tom Hicks

75/25. And then the Canadian/U.S. dollar movement has not traditionally been dramatic in the short term. So I think from our perspective we think it’s included in our estimate for the full year EPS. We’ve taken into account the moves that it might make. So we’ve included that in our guidance for you, the 4.15 to 4.25. And we do have, as Martin and I both mentioned, we have an intercompany loan there that needs to be mark-to-market but that’s a $200 million loan that we’ll pay down over time and its impact will decrease as you go forward. So I don’t know how else to give you any thought about the...

John Rogers – DA Davidson

No.

Tom Hicks

About that.

John Rogers – DA Davidson

That helps.

Tom Hicks

Okay.

John Rogers – DA Davidson

And I guess last thing for I guess Bill, the large oil sand programs that – projects that you referred to, what do you expect most of the major awards to be made there? Is that early 2013, the next round?

Bill Lingard

You know I think – I think throughout 2013 you’ll see awards. There’s quite a few at that point where they need to pick engineer and constructor and I think you may even possibly see some later this year because we are negotiating on some. So you could have one of those come earlier and then several come next year.

John Rogers – DA Davidson

Okay.

Bill Lingard

Throughout the year. We’ll go...

John Rogers – DA Davidson

Okay. I’m sorry, go ahead.

Bill Lingard

The other possible new contracts coming would be on the maintenance side. There’s some nice-size contracts coming and we’re going to be pursuing those, so that would be another potential add for next year.

John Rogers – DA Davidson

Okay. Great. Thank you.

Tom Hicks

Thanks, John.

Operator

Your next question comes from the line of Steven Fisher with UBS.

Steven Fisher – UBS

Good afternoon.

Tom Hicks

Hi, Steve.

Steven Fisher – UBS

Tom, just a question on the working capital; wondering how quickly you expect to recapture what looks like some headwinds in the first half of the year? I know Martin mentioned I guess Flint is a little bit more of a working capital user-type business, but wondering what we can expect there.

Tom Hicks

Yeah, we, as you might expect during the transition of buying and integrating Flint and making all the adjustments necessary to that. We saw some working capital usage in the quarter and some probably a lower cash flow, operating cash flow than will normalize that as we get settled. So we expect to – third and fourth quarter to see cash flow generation and working capital levels in line with our traditional levels. So we’re – there’s nothing – there’s no trend there that we see. There’s just some I guess not necessarily one-time, but things associated with integrating the acquisition that will settle down as we get into third and fourth quarter.

Steven Fisher – UBS

Okay. Great. And then maybe can you guys just comment on what you’re seeing in terms of pricing trends in the federal business?

Tom Hicks

Yeah. We should probably let Randy Wotring respond to that.

Randy Wotring

Yeah, Steve. You know there is significant price competition in the federal business at this point in time. Many of the changes in procurement practices that I mentioned earlier, the valuation on many of these contracts have changed from a best value to a – to a more of a low price selection. And the contract types have changed from cost reimbursement to fixed price on a number of these contracts. We are finding that we can execute better than we had planned on many of these – or bid on many of these contracts. And so from a margin standpoint I don’t think we’re seeing much margin erosion from the result of the price competitions. But we are seeing pricing pressure in the bidding activities for government contracts.

Steven Fisher – UBS

And is that spurring you guys to reduce some of the cost structure in your organization?

Randy Wotring

Absolutely. We are constantly looking at our organization and trying to drive out costs. I mean it’s the nature of the federal business. So we continually look at that. And today you know we’re making changes that will make us more competitive in the marketplace. But at the same time, much of that cost savings is being plowed back into business development and growth activities. So you can’t cut your way to growth. We’re – you know we are cutting, but plowing that money back to good investment and growth activities.

Steven Fisher – UBS

Okay. Thank you very much.

Operator

Your next question comes from the line of Andrew Wittmann with Robert W Baird.