Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - URS CORP /NEW/ | ex32.htm |
| EX-4.1 - EXHIBIT 4.1 - URS CORP /NEW/ | ex4-1.htm |
| EX-10.8 - EXHIBIT 10.8 - URS CORP /NEW/ | ex10-8.htm |
| EX-10.2 - EXHIBIT 10.2 - URS CORP /NEW/ | ex10-2.htm |
| EX-10.3 - EXHIBIT 10.3 - URS CORP /NEW/ | ex10-3.htm |
| EX-31.2 - EXHIBIT 31.2 - URS CORP /NEW/ | ex31-2.htm |
| EX-10.4 - EXHIBIT 10.4 - URS CORP /NEW/ | ex10-4.htm |
| EX-10.5 - EXHIBIT 10.5 - URS CORP /NEW/ | ex10-5.htm |
| EX-10.6 - EXHIBIT 10.6 - URS CORP /NEW/ | ex10-6.htm |
| EX-31.1 - EXHIBIT 31.1 - URS CORP /NEW/ | ex31-1.htm |
| EX-10.1 - EXHIBIT 10.1 - URS CORP /NEW/ | ex10-1.htm |
| EX-10.7 - EXHIBIT 10.7 - URS CORP /NEW/ | ex10-7.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
(Mark
one)
|
|
| x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
|
For
the quarterly period ended October 2, 2009
|
|
|
OR
|
|
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Transition Period from ____________ to _____________
Commission
file number 1-7567
URS
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-1381538
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
600
Montgomery Street, 26th
Floor
|
|
|
San
Francisco, California
|
94111-2728
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(415)
774-2700
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x Accelerated filer
o Non-accelerated
filer o Smaller reporting
company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
16BClass
|
Outstanding at November 2,
2009
|
|
|
Common
Stock, $.01 par value
|
83,920,206
|
URS
CORPORATION AND SUBSIDIARIES
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements may be identified by words
such as “anticipate,” “believe,” “estimate,” “expect,” “potential,” “intend,”
“may,” “plan,” “predict,” “project,” “will,” and similar terms used in reference
to our future revenues, services and other business trends; potential new
project awards and other opportunities; future accounting and actuarial
estimates, including our goodwill sensitivity analysis; future income taxes;
future stock-based compensation expenses; future bonus, pension and
post-retirement expenses; future compliance with regulations; future legal
proceedings and accruals; future bonding and insurance coverage; future interest
and debt payments; future guarantees and contingencies; future capital
expenditures and resources; our ability to create and maintain effective cost
controls; future governmental approvals of our billing practices; future
effectiveness of our disclosure and internal controls over financial reporting
and future economic and industry conditions. We believe that our
expectations are reasonable and are based on reasonable
assumptions. However, such forward-looking statements by their nature
involve risks and uncertainties. We caution that a variety of
factors, including but not limited to the following, could cause our business
and financial results, as well as the timing of events, to differ materially
from those expressed or implied in our forward-looking statements: economic
weakness and declines in client spending; changes in our book of business; our
compliance with government contract procurement regulations; impairment of our
goodwill; impact of recent liquidity constraints upon us or upon our clients;
our leveraged position and the ability to service our debt; restrictive
covenants in our 2007 Credit Facility; our ability to procure government
contracts; our reliance on government appropriations; unilateral termination
provisions in government contracts; our ability to make accurate estimates and
assumptions; our accounting policies; workforce utilization; our and our
partners’ ability to bid on, win, perform and renew contracts and projects; our
dependence on partners, subcontractors and suppliers; customer payment defaults;
our ability to recover on claims; availability of bonding and insurance;
integration of acquisitions; environmental liabilities; liabilities for pending
and future litigation; the impact of changes in laws and regulations; nuclear
energy indemnification; a decline in defense spending; industry competition; our
ability to attract and retain key individuals; employee, agent or partner
misconduct; retirement plan obligations; risks associated with international
operations; business activities in high security risk countries; third-party
software risks; terrorist and natural disaster risks; our relationships with
labor unions; our ability to protect our intellectual property rights;
anti-takeover risks and other factors discussed more fully in Management’s
Discussion and Analysis of Financial Condition and Results of Operations
beginning on page 42, Risk Factors beginning
on page 75, as well as in other reports
subsequently filed from time to time with the United States Securities and
Exchange Commission. We assume no obligation to revise or update any
forward-looking statements.
|
PART
I.
|
FINANCIAL
INFORMATION:
|
|
|
Item
1.
|
Financial
Statements
|
|
|
October
2, 2009 and January 2, 2009
|
||
|
Three
and nine months ended October 2, 2009 and September 26,
2008
|
||
|
Nine
months ended October 2, 2009 and September 26, 2008
|
4 | |
|
Nine
months ended October 2, 2009 and September 26, 2008
|
||
|
PART
II.
|
OTHER
INFORMATION:
|
|
PART
I
FINANCIAL INFOMRATION
2BURS CORPORATION AND
SUBSIDIARIES
4B(In thousands, except per share
data)
|
October
2, 2009
|
January
2, 2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 469,657 | $ | 223,998 | ||||
|
Short-term
investments
|
195,562 | — | ||||||
|
Accounts
receivable, including retentions of $43,719 and $51,141,
respectively
|
1,058,721 | 1,062,177 | ||||||
|
Costs
and accrued earnings in excess of billings on contracts
|
1,053,835 | 1,079,047 | ||||||
|
Less
receivable allowances
|
(43,992 | ) | (39,429 | ) | ||||
|
Net
accounts receivable
|
2,068,564 | 2,101,795 | ||||||
|
Deferred
tax assets
|
101,255 | 161,061 | ||||||
|
Prepaid
expenses and other assets
|
161,848 | 153,627 | ||||||
|
Total
current assets
|
2,996,886 | 2,640,481 | ||||||
|
Investments
in and advances to unconsolidated joint ventures
|
90,300 | 269,616 | ||||||
|
Property
and equipment at cost, net
|
271,274 | 347,076 | ||||||
|
Intangible
assets, net
|
471,888 | 511,508 | ||||||
|
Goodwill
|
3,158,213 | 3,158,205 | ||||||
|
Other
assets
|
80,890 | 74,266 | ||||||
|
Total
assets
|
$ | 7,069,451 | $ | 7,001,152 | ||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Book
overdrafts
|
$ | 441 | $ | 438 | ||||
|
Current
portion of long-term debt
|
116,594 | 16,506 | ||||||
|
Accounts
payable and subcontractors payable, including retentions of $64,034 and
$85,097, respectively
|
632,874 | 712,552 | ||||||
|
Accrued
salaries and wages
|
497,413 | 430,938 | ||||||
|
Billings
in excess of costs and accrued earnings on contracts
|
236,736 | 254,186 | ||||||
|
Accrued
expenses and other
|
166,262 | 172,735 | ||||||
|
Total
current liabilities
|
1,650,320 | 1,587,355 | ||||||
|
Long-term
debt
|
780,502 | 1,091,528 | ||||||
|
Deferred
tax liabilities
|
331,613 | 270,165 | ||||||
|
Self-insurance
reserves
|
117,121 | 101,930 | ||||||
|
Pension,
post-retirement, and other benefit obligations
|
189,344 | 202,520 | ||||||
|
Other
long-term liabilities
|
88,435 | 91,898 | ||||||
|
Total
liabilities
|
3,157,335 | 3,345,396 | ||||||
|
Commitments
and contingencies (Note 8)
|
||||||||
|
URS
Stockholders’ equity:
|
||||||||
|
Preferred
stock, authorized 3,000 shares; no shares outstanding
|
— | — | ||||||
|
Common
stock, par value $.01; authorized 200,000 shares; 85,983 and 85,004 shares
issued, respectively; and 83,931 and 83,952 shares outstanding,
respectively
|
859 | 850 | ||||||
|
Treasury
stock, 2,052 and 1,052 shares at cost, respectively
|
(83,810 | ) | (42,585 | ) | ||||
|
Additional
paid-in capital
|
2,871,421 | 2,838,290 | ||||||
|
Accumulated
other comprehensive loss
|
(38,209 | ) | (55,866 | ) | ||||
|
Retained
earnings
|
1,119,307 | 883,942 | ||||||
|
Total
URS stockholders’ equity
|
3,869,568 | 3,624,631 | ||||||
|
Noncontrolling
interests
|
42,548 | 31,125 | ||||||
|
Total
stockholders’ equity
|
3,912,116 | 3,655,756 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 7,069,451 | $ | 7,001,152 | ||||
See Notes
to Condensed Consolidated Financial Statements
URS
CORPORATION AND SUBSIDIARIES
(In
thousands, except per share data)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
|||||||||||||
|
Revenues
|
$ | 2,318,525 | $ | 2,588,091 | $ | 7,136,771 | $ | 7,378,062 | ||||||||
|
Cost
of revenues
|
(2,217,054 | ) | (2,448,700 | ) | (6,765,745 | ) | (7,008,457 | ) | ||||||||
|
General
and administrative expenses
|
(17,943 | ) | (20,440 | ) | (56,635 | ) | (57,076 | ) | ||||||||
|
Equity
in income of unconsolidated joint ventures
|
20,703 | 24,289 | 79,048 | 81,021 | ||||||||||||
|
Operating
income
|
104,231 | 143,240 | 393,439 | 393,550 | ||||||||||||
|
Interest
expense
|
(10,994 | ) | (21,401 | ) | (37,643 | ) | (70,146 | ) | ||||||||
|
Other
income, net (Note 2)
|
— | — | 47,914 | — | ||||||||||||
|
Income
before income taxes
|
93,237 | 121,839 | 403,710 | 323,404 | ||||||||||||
|
Income
tax expense
|
(24,640 | ) | (51,028 | ) | (151,765 | ) | (136,013 | ) | ||||||||
|
Net
income
|
68,597 | 70,811 | 251,945 | 187,391 | ||||||||||||
|
Noncontrolling
interests in income of consolidated subsidiaries, net of
tax
|
(3,840 | ) | (5,046 | ) | (16,580 | ) | (12,831 | ) | ||||||||
|
Net
income attributable to URS
|
$ | 64,757 | $ | 65,765 | $ | 235,365 | $ | 174,560 | ||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||
|
Net
income
|
$ | 68,597 | $ | 70,811 | $ | 251,945 | $ | 187,391 | ||||||||
|
Pension
and post-retirement related adjustments, net of tax
|
(542 | ) | — | (456 | ) | — | ||||||||||
|
Foreign
currency translation adjustments, net of tax
|
(405 | ) | (13,380 | ) | 9,917 | (7,962 | ) | |||||||||
|
Foreign
currency translation adjustment due to sale of investment in
unconsolidated joint venture, net of tax
|
— | — | 5,115 | — | ||||||||||||
|
Unrealized
gain (loss) on interest rate swaps, net of tax
|
826 | 1,201 | 3,081 | (1,598 | ) | |||||||||||
|
Comprehensive
income
|
68,476 | 58,632 | 269,602 | 177,831 | ||||||||||||
|
Noncontrolling
interests in comprehensive income of consolidated subsidiaries, net of
tax
|
(3,840 | ) | (5,046 | ) | (16,580 | ) | (12,831 | ) | ||||||||
|
Comprehensive
income attributable to URS
|
$ | 64,636 | $ | 53,586 | $ | 253,022 | $ | 165,000 | ||||||||
|
Earnings
per share (Note 1):
|
||||||||||||||||
|
Basic
|
$ | .80 | $ | .78 | $ | 2.89 | $ | 2.07 | ||||||||
|
Diluted
|
$ | .79 | $ | .77 | $ | 2.87 | $ | 2.06 | ||||||||
|
Weighted-average
shares outstanding (Note 1):
|
||||||||||||||||
|
Basic
|
81,418 | 82,296 | 81,419 | 82,030 | ||||||||||||
|
Diluted
|
81,780 | 82,765 | 81,895 | 82,606 | ||||||||||||
See Notes
to Condensed Consolidated Financial Statements
URS
CORPORATION AND SUBSIDIARIES
CHANGES
IN STOCKHOLDERS’ EQUITY – UNAUDITED
B(In
thousands, except shares data)
|
Additional
|
Accumulated
Other
|
Total
URS
|
||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Treasury
|
Paid-in
|
Comprehensive
|
Retained
|
Stockholders’
|
Noncontrolling
|
Total
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Stock
|
Capital
|
Income
(Loss)
|
Earnings
|
Equity
|
Interests
|
Equity
|
||||||||||||||||||||||||||||
|
Balances,
December 28, 2007
|
83,303 | $ | 833 | $ | (287 | ) | $ | 2,797,238 | $ | 16,635 | $ | 664,151 | $ | 3,478,570 | $ | 25,086 | $ | 3,503,656 | ||||||||||||||||||
|
Employee
stock purchases and exercises of stock options
|
263 | 2 | — | 2,480 | — | — | 2,482 | — | 2,482 | |||||||||||||||||||||||||||
|
Stock-based
compensation
|
939 | 10 | — | 22,087 | — | — | 22,097 | — | 22,097 | |||||||||||||||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
— | — | — | 3,923 | — | — | 3,923 | — | 3,923 | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustments, net of tax
|
— | — | — | — | (7,962 | ) | — | (7,962 | ) | — | (7,962 | ) | ||||||||||||||||||||||||
|
Interest
rate swaps, net of tax
|
— | — | — | — | (1,598 | ) | — | (1,598 | ) | — | (1,598 | ) | ||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(1,000 | ) | — | (42,298 | ) | — | — | — | (42,298 | ) | — | (42,298 | ) | |||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
— | — | — | — | — | — | — | (11,540 | ) | (11,540 | ) | |||||||||||||||||||||||||
|
Other
transactions with noncontrolling interests
|
— | — | — | — | — | — | — | 549 | 549 | |||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | 174,560 | 174,560 | 12,831 | 187,391 | |||||||||||||||||||||||||||
|
Balances,
September 26, 2008
|
83,505 | $ | 845 | $ | (42,585 | ) | $ | 2,825,728 | $ | 7,075 | $ | 838,711 | $ | 3,629,774 | $ | 26,926 | $ | 3,656,700 | ||||||||||||||||||
|
Balances,
January 2, 2009
|
83,952 | $ | 850 | $ | (42,585 | ) | $ | 2,838,290 | $ | (55,866 | ) | $ | 883,942 | $ | 3,624,631 | $ | 31,125 | $ | 3,655,756 | |||||||||||||||||
|
Employee
stock purchases and exercises of stock options
|
110 | 1 | — | 972 | — | — | 973 | — | 973 | |||||||||||||||||||||||||||
|
Stock-based
compensation
|
869 | 8 | — | 30,176 | — | — | 30,184 | — | 30,184 | |||||||||||||||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
— | — | — | 1,983 | — | — | 1,983 | — | 1,983 | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustments, net of tax
|
— | — | — | — | 9,917 | — | 9,917 | — | 9,917 | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustment due to sale of investment in
unconsolidated joint venture, net of tax
|
— | — | — | — | 5,115 | — | 5,115 | — | 5,115 | |||||||||||||||||||||||||||
|
Pension
and post-retirement related adjustments, net of tax
|
— | — | — | — | (456 | ) | — | (456 | ) | — | (456 | ) | ||||||||||||||||||||||||
|
Interest
rate swaps, net of tax
|
— | — | — | — | 3,081 | — | 3,081 | — | 3,081 | |||||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(1,000 | ) | — | (41,225 | ) | — | — | — | (41,225 | ) | — | (41,225 | ) | |||||||||||||||||||||||
|
Unrealized
loss on foreign currency forward contract, net of tax
|
— | — | — | — | (10,728 | ) | — | (10,728 | ) | — | (10,728 | ) | ||||||||||||||||||||||||
|
Reclassification
of unrealized loss on foreign currency forward contract, net of
tax
|
— | — | — | — | 10,728 | — | 10,728 | — | 10,728 | |||||||||||||||||||||||||||
|
Distributions
to noncontrolling interests
|
— | — | — | — | — | — | — | (22,238 | ) | (22,238 | ) | |||||||||||||||||||||||||
|
Contributions
from joint venture partners
|
— | — | — | — | — | — | — | 15,300 | 15,300 | |||||||||||||||||||||||||||
|
Other
transactions with noncontrolling interests
|
— | — | — | — | — | — | — | 1,781 | 1,781 | |||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | 235,365 | 235,365 | 16,580 | 251,945 | |||||||||||||||||||||||||||
|
Balances,
October 2, 2009
|
83,931 | $ | 859 | $ | (83,810 | ) | $ | 2,871,421 | $ | (38,209 | ) | $ | 1,119,307 | $ | 3,869,568 | $ | 42,548 | $ | 3,912,116 | |||||||||||||||||
See Notes
to Condensed Consolidated Financial Statements
URS
CORPORATION AND SUBSIDIARIES
6B(In thousands)
|
Nine
Months Ended
|
||||||||
|
October
2,
2009
|
September
26,
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 251,945 | $ | 187,391 | ||||
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
|
Depreciation
|
66,958 | 66,147 | ||||||
|
Amortization
of intangible assets
|
39,619 | 39,374 | ||||||
|
Amortization
of debt issuance costs
|
5,915 | 6,280 | ||||||
|
Loss
on settlement of foreign currency forward contract
|
27,675 | — | ||||||
|
Net
gain on sale of investment in unconsolidated joint venture
|
(75,589 | ) | — | |||||
|
Normal
profit
|
(10,895 | ) | (6,098 | ) | ||||
|
Provision
for doubtful accounts
|
6,415 | 3,324 | ||||||
|
Deferred
income taxes
|
102,753 | 66,242 | ||||||
|
Stock-based
compensation
|
30,184 | 22,097 | ||||||
|
Excess
tax benefits from stock-based compensation
|
(1,983 | ) | (3,923 | ) | ||||
|
Equity
in income of unconsolidated joint ventures, less dividends
received
|
(19,723 | ) | (16,192 | ) | ||||
|
Changes
in operating assets, liabilities and other, net of effects of
acquisitions:
|
||||||||
|
Accounts
receivable and costs and accrued earnings in excess of billings on
contracts
|
40,817 | (94,773 | ) | |||||
|
Prepaid
expenses and other assets
|
(998 | ) | (12,339 | ) | ||||
|
Changes
in advances to unconsolidated joint ventures
|
14,984 | (2,878 | ) | |||||
|
Accounts
payable, accrued salaries and wages and accrued expenses
|
(23,882 | ) | 9,085 | |||||
|
Billings
in excess of costs and accrued earnings on contracts
|
(9,818 | ) | 8,038 | |||||
|
Other
long-term liabilities
|
398 | 1,813 | ||||||
|
Other
assets, net
|
3,381 | 9,774 | ||||||
|
Total
adjustments and changes
|
196,211 | 95,971 | ||||||
|
Net
cash from operating activities
|
448,156 | 283,362 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Payments
for business acquisitions, net of cash acquired
|
— | (26,784 | ) | |||||
|
Proceeds
from disposal of property and equipment, and sale-leaseback
transactions
|
53,362 | 10,722 | ||||||
|
Proceeds
from sale of investment in unconsolidated joint venture, net of related
selling costs
|
282,584 | — | ||||||
|
Payment
in settlement of foreign currency forward contract
|
(273,773 | ) | — | |||||
|
Receipt
in settlement of foreign currency forward contract
|
246,098 | — | ||||||
|
Investments
in and advances to unconsolidated joint ventures
|
(13,769 | ) | (28,035 | ) | ||||
|
Changes
in restricted cash
|
(1,108 | ) | (134 | ) | ||||
|
Capital
expenditures, less equipment purchased through capital leases and
equipment notes
|
(34,455 | ) | (62,329 | ) | ||||
|
Purchase
of short-term investments
|
(195,562 | ) | — | |||||
|
Net
cash from investing activities
|
63,377 | (106,560 | ) | |||||
See Notes
to Condensed Consolidated Financial Statements
URS
CORPORATION AND SUBSIDIARIES
7BCONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS – UNAUDITED (continued)
8B(In thousands)
|
Nine
Months Ended
|
||||||||
|
October
2,
2009
|
September
26,
2008
|
|||||||
|
Cash
flows from financing activities:
|
||||||||
|
Long-term
debt principal payments
|
(215,030 | ) | (176,777 | ) | ||||
|
Net
payments under lines of credit and short-term notes
|
(483 | ) | (259 | ) | ||||
|
Net
change in book overdrafts
|
3 | 10,676 | ||||||
|
Capital
lease obligation payments
|
(4,771 | ) | (5,949 | ) | ||||
|
Excess
tax benefits from stock-based compensation
|
1,983 | 3,923 | ||||||
|
Proceeds
from employee stock purchases and exercises of stock
options
|
9,865 | 19,314 | ||||||
|
Net
distributions to noncontrolling interests
|
(16,216 | ) | (20,304 | ) | ||||
|
Purchase
of treasury stock
|
(41,225 | ) | (42,298 | ) | ||||
|
Net
cash from financing activities
|
(265,874 | ) | (211,674 | ) | ||||
|
Net
increase (decrease) in cash and cash equivalents
|
245,659 | (34,872 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
223,998 | 256,502 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 469,657 | $ | 221,630 | ||||
|
Supplemental
information:
|
||||||||
|
Interest
paid
|
$ | 31,802 | $ | 63,794 | ||||
|
Taxes
paid
|
$ | 56,094 | $ | 44,336 | ||||
|
Taxes
refunded
|
$ | 30,565 | $ | — | ||||
|
Supplemental
schedule of noncash investing and financing activities:
|
||||||||
|
Fair
value of assets acquired (net of cash acquired)
|
$ | — | $ | 9,747 | ||||
|
Liabilities
assumed
|
— | (9,747 | ) | |||||
|
Non
cash business acquisitions
|
$ | — | $ | — | ||||
|
Equipment
acquired with capital lease obligations and equipment note
obligations
|
$ | 5,463 | $ | 8,895 | ||||
See Notes
to Condensed Consolidated Financial Statements
6
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
1BOverview
The terms
“we,” “us,” and “our” used in these financial statements refer to URS
Corporation and its consolidated subsidiaries unless otherwise
indicated. We are a leading international provider of engineering,
construction and technical services. We offer a broad range of
program management, planning, design, engineering, construction and construction
management, operations and maintenance, and decommissioning and closure services
to public agencies and private sector clients around the world. We
also are a major United States (“U.S.”) federal government contractor in the
areas of systems engineering and technical assistance, and operations and
maintenance. Headquartered in San Francisco, we have more than 45,000
employees in a global network of offices and contract-specific job sites in more
than 30 countries. We operate through three divisions: the
URS Division, the EG&G Division and the Washington Division.
The
accompanying unaudited condensed consolidated financial statements and related
notes have been prepared in accordance with generally accepted accounting
principles (“GAAP”) in the U.S. for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements.
You
should read our unaudited condensed consolidated financial statements in
conjunction with the audited consolidated financial statements and related notes
contained in our Annual Report on Form 10-K for the year ended January 2,
2009. The results of operations for the nine months ended October 2,
2009 are not indicative of the operating results for the full year or for future
years.
In our
opinion, the accompanying unaudited condensed consolidated financial statements
reflect all normal recurring adjustments that are necessary for a fair statement
of our financial position, results of operations and cash flows for the interim
periods presented.
The
preparation of our unaudited condensed consolidated financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the balance sheet dates as well as the reported
amounts of revenues and costs during the reporting periods. Actual
results could differ from those estimates. On an ongoing basis, we
review our estimates based on information that is currently
available. Changes in facts and circumstances may cause us to revise
our estimates.
Principles
of Consolidation and Basis of Presentation
Our
condensed consolidated financial statements include the financial position,
results of operations and cash flows of URS Corporation and our majority-owned
subsidiaries and joint ventures required to be
consolidated. Investments in unconsolidated joint ventures are
accounted for using the equity method and are included as investments in and
advances to unconsolidated joint ventures on our Condensed Consolidated Balance
Sheets. All significant intercompany transactions and accounts have
been eliminated in consolidation.
7
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Earnings
Per Share
Effective
January 3, 2009, we adopted new accounting guidance on earnings per share
(“EPS”). This guidance requires us to include unvested restricted
stock awards and units with nonforfeitable dividend rights as participating
securities in applying the two-class method to calculate EPS. Under
the two-class method, EPS is computed by dividing earnings allocated to common
stockholders by the weighted-average number of common shares outstanding for the
period. In applying the two-class method, earnings are allocated to
both common stock shares and participating securities based on their respective
weighted-average shares outstanding for the period. Our participating
securities consisted of unvested restricted stock awards and units, issued prior
to November 2008, which had nonforfeitable dividend rights. During
the quarter ended April 3, 2009, we amended these restricted stock awards and
units to be non-participating securities until vested. As a result,
the effect of this guidance on our EPS for the three and nine months ended
October 2, 2009 was not material. However, since this guidance
requires retrospective application, our EPS for the three and nine months ended
September 26, 2008 were modified to reflect the impact of our adoption of this
guidance.
In our
computation of diluted EPS, we exclude the potential shares related to stock
options that are issued and unexercised where the exercise price exceeds the
average market price of our common stock during the period. We also
exclude nonvested restricted stock awards and units that have an anti-dilutive
effect on EPS or that currently have not met performance
conditions.
The
following table summarizes the earnings available to common stockholders for
both basic and diluted EPS calculations, the reconciliation between
weighted-average shares outstanding used in calculating basic and diluted EPS,
and the anti-dilutive shares that were excluded from the computation of diluted
EPS for the three and nine months ended October 2, 2009 and September 26,
2008:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
thousands, except per share data)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Net
income attributable to URS
|
$ | 64,757 | $ | 65,765 | $ | 235,365 | $ | 174,560 | ||||||||
|
Less: Earnings
allocated to participating securities
|
— | (1,926 | ) | — | (4,528 | ) | ||||||||||
|
Earnings
available to common stockholders – Basic and Diluted
|
$ | 64,757 | $ | 63,839 | $ | 235,365 | $ | 170,032 | ||||||||
|
Weighted-average
common stock shares outstanding (1)
|
81,418 | 82,296 | 81,419 | 82,030 | ||||||||||||
|
Effect
of dilutive stock options and restricted stock awards and
units
|
362 | 469 | 476 | 576 | ||||||||||||
|
Weighted-average
common stock outstanding – Diluted
|
81,780 | 82,765 | 81,895 | 82,606 | ||||||||||||
________________
|
(1)
|
Weighted-average
common stock outstanding excludes treasury
stock.
|
|
(In
thousands)
|
October
2,
2009
|
September
26,
2008
|
||||||
|
Anti-dilutive
equity awards not included above
|
559 | — | ||||||
8
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Cash
and Cash Equivalents
Cash and
cash equivalents include all highly liquid investments with maturities of 90
days or less at the date of purchase and include interest-bearing bank deposits
and money market funds. From time to time, we have book overdraft
positions consisting primarily of outstanding checks that have not cleared the
bank accounts by the end of the reporting period. We transfer cash on
an as-needed basis to fund these items as they clear the bank in subsequent
periods. Restricted cash was included in other current assets because
it was not material.
At
October 2, 2009 and January 2, 2009, cash and cash equivalents included $107.4
million and $95.3 million, respectively, of cash and cash equivalents held by
our consolidated joint ventures.
Short-Term
Investments
Short-term
investments consist of all highly liquid investments, including interest-bearing
time deposits, with maturities of more than 90 days, but less than a year, at
the date of purchase. The carrying values of our short-term
investments approximate their fair values.
Accounts
Receivable and Costs and Accrued Earnings in Excess of Billings on
Contracts
Accounts
receivable in the accompanying Condensed Consolidated Balance Sheets are
primarily comprised of amounts billed to clients for services already provided,
but which have not yet been collected. Occasionally, under the terms
of specific contracts, we are permitted to submit invoices in advance of
providing our services to our clients and to the extent they have not been
collected, these amounts are also included in accounts receivable.
Costs and
accrued earnings in excess of billings on contracts in the accompanying
Condensed Consolidated Balance Sheets represent unbilled amounts earned and
reimbursable under contracts. As of October 2, 2009 and January 2,
2009, costs and accrued earnings in excess of billings on contracts were $1.05
billion and $1.08 billion, respectively. These amounts become
billable according to the contract terms, which usually consider the passage of
time, achievement of milestones or completion of the
project. Generally, such unbilled amounts will be billed and
collected over the next twelve months.
Accounts
receivable and costs and accrued earnings in excess of billings on contracts
include certain amounts recognized related to unapproved change orders (amounts
representing the value of proposed contract modifications, but which are
unapproved as to both price and scope) and claims, (amounts in excess of agreed
contract prices that we seek to collect from our clients or others) that have
not been collected and, in the case of balances included in accrued earnings in
excess of billings on contracts, may not be billable until an agreement, or in
the case of claims, a settlement is reached. Most of those balances
are not material and are typically resolved in the ordinary course of
business. At October 2, 2009, significant unapproved change orders
and claims collectively represented approximately 4% of our accounts receivable
and accrued earnings in excess of billings on contracts.
9
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
The
following table summarizes the components of our accounts receivable and costs
and accrued earnings in excess of billings on contracts between the U.S. federal
government and other customers as of October 2, 2009 and January 2,
2009.
|
As
of
|
||||||||
|
(In
millions)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Accounts
receivable:
|
||||||||
|
U.S.
federal government
|
$ | 443.3 | $ | 294.5 | ||||
|
Others
|
615.4 | 767.7 | ||||||
|
Total
accounts receivable
|
$ | 1,058.7 | $ | 1,062.2 | ||||
|
Costs
and accrued earnings in excess of billings on contracts:
|
||||||||
|
U.S.
federal government
|
$ | 522.2 | $ | 471.4 | ||||
|
Others
|
531.6 | 607.6 | ||||||
|
Total
costs and accrued earnings in excess of billings on
contracts
|
$ | 1,053.8 | $ | 1,079.0 | ||||
We
perform our annual goodwill impairment review as of the end of the first month
following our September reporting period and also perform interim impairment
reviews if triggering events occur, such as the sale of a significant portion of
one of our reporting units or other changes in business
circumstances. Our 2008 annual review did not indicate an impairment
of goodwill for any of our reporting units.
We
believe the methodology that we use to review impairment of goodwill, which
includes a significant amount of judgment and estimates, provides us with a
reasonable basis to determine whether impairment has
occurred. However, many of the factors employed in determining
whether our goodwill is impaired are outside of our control and it is reasonably
likely that assumptions and estimates will change in future
periods. These changes can result in future impairments.
Goodwill
impairment reviews involve a two-step process. The first step is a
comparison of each reporting unit’s fair value to its carrying
value. We estimate fair value using market information and discounted
cash flow analyses, referred to as the income approach. The income
approach uses a reporting unit’s projection of estimated operating results and
discounts those back to the present using a weighted-average cost of capital
that reflects current market conditions. To arrive at our cash flow
projections, we use estimates of economic and market information over a
projection period of ten years, including growth rates in revenues, costs,
estimates of future expected changes in operating margins and cash
expenditures. Other significant estimates and assumptions include
terminal value growth rates, future estimates of capital expenditures and
changes in future working capital requirements.
We
validate our estimate of fair value of each reporting unit under the income
approach by comparing the resulting values to fair value estimates using a
market approach. A market approach estimates fair value by applying
cash flow multiples to the reporting unit's operating
performance. The multiples are derived from comparable publicly
traded companies with operating and investment characteristics similar to those
of the reporting units. When performing our annual impairment
analysis, we also reconcile the total of the fair values of our reporting units
with our market capitalization to determine if the sum of the individual fair
values is reasonable compared to the external market indicators. If
our reconciliations indicate a significant difference between our external
market capitalization and the fair values of our reporting units, we review and
adjust, if appropriate, our weighted-average cost of capital and consider if the
implied control premium is reasonable in light of current market
conditions.
10
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step must be performed to
measure the amount of impairment. The amount of impairment is
determined by comparing the implied fair value of the reporting unit’s goodwill
to the carrying value of the goodwill calculated in the same manner as if the
reporting unit were being acquired in a business combination. If the
implied fair value of goodwill is less than the recorded goodwill, we would
record an impairment charge for the difference.
While our
annual impairment review did not result in impairment for any of our reporting
units, there are several instances that may cause us to further test our
goodwill for impairment between the annual testing periods
including: (i) continued deterioration of market and economic
conditions that may adversely impact our ability to meet our projected results;
(ii) declines in our stock price caused by continued volatility in the financial
markets that may result in increases in our weighted-average cost of capital or
other inputs to our goodwill assessment; (iii) the occurrence of events that may
reduce the fair value of a reporting unit below its carrying amount, such as the
sale of a significant portion of one or more of our reporting
units.
If our
goodwill were impaired, we would be required to record a non-cash charge that
could have a material adverse effect on our consolidated financial
statements. However, any potential non-cash charge would not have any
adverse effect on the covenant calculations required under our 2007 Credit
Facility or our overall compliance with the covenants of our 2007 Credit
Facility.
In our
2008 annual impairment review, we identified and evaluated eight reporting
units. In determining our reporting units, we considered (i) whether
an operating segment or a component of an operating segment was a business, (ii)
whether discrete financial information was available, and (iii) whether the
financial information is regularly reviewed by management of the operating
segment. As a result of that evaluation, we concluded that the
following were our reporting units:
|
·
|
The
URS Division Operating Segment
|
|
·
|
Within
the EG&G Division Operating
Segment:
|
|
o
|
Defense
|
|
o
|
EG&G
|
|
·
|
Within
the Washington Division Operating
Segment:
|
|
o
|
Energy
& Environment
|
|
o
|
Infrastructure
|
|
o
|
Industrial/Process
|
|
o
|
Mining
|
|
o
|
Power
|
Goodwill
was allocated to the reporting units based upon the respective fair values of
the reporting units at the time of the various acquisitions that gave rise to
the recognition of goodwill.
As of the
date of our 2008 annual impairment review, the URS Division and Infrastructure
reporting units included an aggregate of $704 million of goodwill and had fair
values in excess of their carrying values of approximately 6%. It is
reasonably possible that changes in the numerous variables associated with the
judgments, assumptions and estimates we made in assessing the fair value of our
goodwill could cause these or other reporting units to become
impaired. There were no other reporting units that we deemed to have
a reasonable risk of a material impairment charge at that time.
11
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Beginning
in the first quarter of our fiscal year 2009, we merged the operations of our
Infrastructure and Mining reporting units into one reporting unit,
“Infrastructure and Mining.” On June 10, 2009, we sold our equity
investment in an incorporated mining joint venture in Germany – MIBRAG mbH
(“MIBRAG”), which was significant to our Infrastructure and Mining reporting
unit, as discussed in Note 2, “Investments in and Advances to Joint
Ventures.” The sale of MIBRAG triggered an interim impairment review
of this reporting unit in the second quarter of 2009. As of June 11,
2009, the Infrastructure and Mining reporting unit had $294 million of goodwill
and had a fair value in excess of its carrying value of approximately
2%. As a result, our review indicated that the Infrastructure and
Mining reporting unit’s goodwill had not been impaired.
On August
19, 2009, our client terminated, in its discretion, a Bolivian mining contract
performed under our Infrastructure and Mining reporting
unit. Following the termination, our former client exercised its
right under the mining contract to purchase substantially all of our mining
equipment related to the mining contract. The net book value of this
equipment was approximately $42.8 million, and we recognized a pre-tax gain of
$1.8 million included in “Cost of revenues.” We also recognized the
remaining $7.8 million of normal profit related to the mining contract during
the three months ended October 2, 2009. In addition, the termination
of this contract, which was significant to our Infrastructure and Mining
reporting unit, triggered an interim impairment review of that reporting unit’s
goodwill in the third quarter of 2009. As of August 20, 2009, the
Infrastructure and Mining reporting unit had $294 million of goodwill and had a
fair value in excess of its carrying value of approximately 4%. As a
result, our review indicated that the Infrastructure and Mining reporting unit’s
goodwill had not been impaired.
Billings
in Excess of Costs and Accrued Earnings on Contracts
Billings
in excess of costs and accrued earnings on contracts in the accompanying
Condensed Consolidated Balance Sheets consist of cash collected from clients and
billings to clients on contracts in advance of work performed; advance payments
negotiated as a contract condition; estimated losses on uncompleted contracts;
normal profit liabilities; project-related legal liabilities; and other
project-related reserves. The majority of the unearned
project-related costs will be earned over the next twelve months.
We record
provisions for estimated losses on uncompleted contracts in the period in which
such losses become known. The cumulative effects of revisions to
contract revenues and estimated completion costs are recorded in the accounting
period in which the amounts become evident and can be reasonably
estimated. These revisions can include such items as the effects of
change orders and claims, warranty claims, liquidated damages or other
contractual penalties, adjustments for audit findings on U.S. or other
government contracts and contract closeout settlements.
The
following table summarizes the components of billings in excess of costs and
accrued earnings on contracts:
|
As
of
|
||||||||
|
(In
millions)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Billings
in excess of costs and accrued earnings on contracts
|
$ | 196.7 | $ | 182.6 | ||||
|
Advance
payments negotiated as a contract condition
|
10.8 | 30.4 | ||||||
|
Estimated
losses on uncompleted contracts
|
19.6 | 21.0 | ||||||
|
Normal
profit liabilities
|
0.5 | 11.1 | ||||||
|
Project-related
legal liabilities and other project-related reserves
|
6.1 | 4.0 | ||||||
|
Other
|
3.0 | 5.1 | ||||||
|
Total
|
$ | 236.7 | $ | 254.2 | ||||
12
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Adopted
and Other Recently Issued Accounting Guidance
We
adopted new accounting guidance regarding fair value measurement of
non-financial assets and non-financial liabilities as of the beginning of our
2009 fiscal year. Our adoption of this guidance did not have a
material impact on our consolidated financial statements. Various
other updates were subsequently issued related to fair value guidance that also
were not material to our consolidated financial statements.
We
adopted new accounting guidance on collaborative arrangements at the beginning
of our 2009 fiscal year. This guidance defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement, and between participants in the
arrangement and third parties. Revenues and costs incurred with third
parties in connection with collaborative arrangements are to be presented on a
gross or a net basis in accordance with revenue recognition
guidance. The guidance requires disclosure of the nature and purpose
of collaborative arrangements along with the accounting policies and the
classification and amounts of significant financial statement transactions
related to the arrangements. The guidance also requires retrospective
application to all periods presented for all collaborative arrangements existing
as of the effective date. Our adoption of this guidance did not have
a material impact on our consolidated financial statements since we have
consistently determined our arrangements at inception as either an at-risk
relationship or an agency relationship and recorded their activities on a gross
or net basis, respectively, as required.
We
adopted new accounting guidance on noncontrolling interests in consolidated
financial statement at the beginning of our 2009 fiscal year. This
guidance establishes accounting and reporting requirements for the
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. Noncontrolling interests were previously characterized as
minority interests in our condensed consolidated financial statements and are
now presented as a separate line item under stockholders’ equity. The
net income and the comprehensive income attributed to the noncontrolling
interests are separately stated in our Consolidated Statements of Operations and
Comprehensive Income. The presentation of net income and amounts
attributable to noncontrolling interests in our Consolidated Statements of Cash
Flows was retrospectively revised to reflect the impact of this guidance.
We
adopted new accounting guidance on business combinations at the beginning of our
2009 fiscal year. This guidance revises principles and requirements
for recognizing and measuring the identifiable assets acquired, the liabilities
assumed, goodwill, noncontrolling interest in the acquiree, as well as the
contingent assets and contingent liabilities derived from business
combinations. With limited exceptions, the guidance requires
measuring and recording assets and liabilities at their acquisition-date fair
value. This guidance also requires expensing acquisition-related
costs as incurred and recording any subsequent changes to pre-acquisition tax
exposures in our income statement. The adoption of this guidance did
not have a material impact on our consolidated financial
statements.
We
adopted new accounting guidance on derivative instruments and hedging activities
at the beginning of our 2009 fiscal year. This guidance requires
enhanced qualitative and quantitative disclosures to improve the transparency of
financial reporting about an entity’s derivative and hedging activities in both
annual and interim financial statements. This guidance also requires
disclosures of additional information on how and why derivative instruments are
used.
13
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
We
adopted new accounting guidance on share-based payment awards at the beginning
of our 2009 fiscal year. This guidance defines share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
prior to vesting as participating securities. These share-based
payments are considered in the earnings allocation in computing EPS under the
two-class method. Prior to November 2008, our stock award agreements
provided nonforfeitable dividend rights to unvested restricted stock units and
unvested restricted stock awards and, consequently, were participating
securities. In November 2008, we revised our stock award agreements
for future grants so that unvested shares became non-participating securities
until vested. In addition, during our quarter ended April 3, 2009, we
amended grants issued prior to November 2008 so that they would be
non-participating securities until vested. As a result, the effect of
this guidance on our EPS for the three and nine months ended October 2, 2009 was
not material. However, because this guidance requires retrospective
application, our EPS for the quarter ended September 26, 2008 has been modified
to reflect the impact, which was to reduce our basic EPS from $0.80 to $0.78 and
from $2.13 to $2.07 for the three and nine months ended September 26, 2008,
respectively. It also reduced our diluted EPS from $0.79 to $0.77 and
from $2.11 to $2.06 for the three and nine months ended September 26, 2008,
respectively.
We
adopted new accounting guidance on equity method investments at the beginning of
our 2009 fiscal year. This guidance clarifies how the initial
carrying value of an equity investment should be determined, how an impairment
assessment of an underlying indefinite-lived intangible asset of an
equity-method investment should be performed, how an equity-method investee's
issuance of shares should be accounted for, and how to account for a change in
an investment from the equity method to the cost method. The adoption
of this guidance did not have a material impact on our consolidated financial
statements.
We adopted new accounting guidance on
subsequent events in the second quarter of our 2009 fiscal year. This
new guidance modified terminology and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued, including requiring disclosure of the date through which
subsequent events have been evaluated. Consistent with past practice,
we have evaluated subsequent events through the issuance date of our financial
statements, which, for the quarter ended October 2, 2009, was November 12,
2009.
We
adopted the Accounting Standards Codification (“Codification”) in the third
quarter of our 2009 fiscal year. Except as set forth below with
respect to rules and interpretive releases of the Securities and Exchange
Commission (“SEC”), the Codification is now the single source of authoritative
GAAP applicable to all non-governmental entities and supersedes all existing
pronouncements, Emerging Issues Task Force (“EITF”) abstracts and other
literature issued by the Financial Accounting Standards Board (“FASB”) and the
American Institute of Certified Public Accountants. The FASB no
longer issues Statements, Interpretations, Staff Positions, or EITF
abstracts. Instead, the FASB issues accounting standard updates to
provide background information about the guidance and the bases for conclusions
regarding the changes in the Codification. Rules and interpretive
releases of the SEC under authority of the federal securities laws are also
sources of authoritative GAAP for SEC registrants.
New
accounting guidance has been issued on pension and postretirement benefit plans,
which will become effective for our 2009 fiscal year-end. This
guidance requires additional annual disclosures of the factors necessary to
understand investment policies and strategies, the major categories of plan
assets, the inputs and valuation techniques used to measure the fair value of
plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period, and significant
concentrations of risk within plan assets.
New
accounting guidance has been issued on transfers of financial assets, which will
become effective for us at the beginning of our 2010 fiscal
year. This guidance eliminates the concept of a qualifying
special-purpose entity, limits the circumstances under which a financial asset
is derecognized and requires additional disclosures concerning a transferor's
continuing involvement with transferred financial assets. We are
currently in the process of evaluating the impact on our consolidated financial
statements from the adoption of this guidance.
14
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
New
accounting guidance has been issued on consolidation of variable interest
entities (“VIE”), which will become effective for us at the beginning of our
2010 fiscal year. This guidance amends the accounting and disclosure
requirements for the consolidation of a VIE. It requires additional
disclosures about the significant judgments and assumptions used in determining
whether to consolidate a VIE, the restrictions on a consolidated VIE’s assets
and on the settlement of a VIE’s liabilities, the risk associated with
involvement in a VIE, and the financial impact to a company due to its
involvement with a VIE. We are currently in the process of evaluating
the impact on our consolidated financial statements from the adoption of this
guidance.
We
participate in joint ventures, partnerships and partially-owned limited
liability companies. We consolidate entities in which we hold
majority ownership in our financial statements. In addition, we also
consolidate VIEs of which we are the primary beneficiary.
For
further discussion regarding the nature of the risks associated with our
participation in such joint ventures, see Note 8, “Commitments and
Contingencies.”
Consolidated
Ventures
We are a
60% owner and the primary beneficiary of Advatech, LLC. (“Advatech”), which
provides design, engineering, construction and construction management services
to its customers relating to specific technology involving wet flue gas
desulfurization processes. We have not guaranteed any debt on behalf
of Advatech; however, one of our subsidiaries has guaranteed the performance of
Advatech’s contractual obligations. Advatech’s total revenues were
$34.8 million and $73.6 million for the three months ended October 2, 2009 and
September 26, 2008, respectively. Advatech’s total revenues were
$146.8 million and $266.9 million for the nine months ended October 2, 2009 and
September 26, 2008, respectively. The decline in revenues for both
the three and nine months ended October 2, 2009 is due to the completion of
several major projects in 2009, as well as the delay of new projects.
Advatech
generally enters into target-price contracts. The consolidated
liabilities of Advatech represent obligations to fulfill contract
requirements. The maximum risk associated with Advatech’s contracts
is a combination of the remaining estimated costs, projected cost overruns or
other penalties. The following table presents the total assets,
liabilities and owners’ equity of Advatech.
|
(In
thousands)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Cash
and cash
equivalents
|
$ | 30,806 | $ | 23,696 | ||||
|
Net
accounts
receivable
|
29,321 | 58,838 | ||||||
|
Other
current
assets
|
— | 199 | ||||||
|
Non-current
assets
|
— | 3 | ||||||
|
Total
assets
|
$ | 60,127 | $ | 82,736 | ||||
|
Accounts
and subcontractors
payable
|
$ | 25,223 | $ | 39,801 | ||||
|
Billings
in excess of costs and accrued earnings
|
8,384 | 17,515 | ||||||
|
Accrued
expenses and
other
|
210 | — | ||||||
|
Non-current
liabilities
|
— | 349 | ||||||
|
Total
liabilities
|
33,817 | 57,665 | ||||||
|
Total
owners’
equity
|
26,310 | 25,071 | ||||||
|
Total
liabilities and owners’ equity
|
$ | 60,127 | $ | 82,736 | ||||
15
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
We also
formed a joint venture for the purpose of constructing a cement plant in
Missouri. We have a 55% interest in and are the primary beneficiary
of this joint venture. As of October 2, 2009, our scope of work on
this project was completed. The joint venture’s total revenues were
$10.7 million and $163.8 million for the three months ended October 2, 2009 and
September 26, 2008, respectively. The joint venture’s total revenues
were $188.2 million and $409.1 million for the nine months ended October 2, 2009
and September 26, 2008, respectively. The following table presents
the total assets, liabilities and owners’ equity of the consolidated joint
venture described above.
|
(In
thousands)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Cash
and cash
equivalents
|
$ | 12,005 | $ | 46,607 | ||||
|
Net
accounts
receivable
|
4,020 | 85,285 | ||||||
|
Total
assets
|
$ | 16,025 | $ | 131,892 | ||||
|
Accounts
and subcontractors
payable
|
$ | 12,186 | $ | 121,158 | ||||
|
Accrued
expenses and
other
|
— | 1,179 | ||||||
|
Total
liabilities
|
12,186 | 122,337 | ||||||
|
Total
owners’
equity
|
3,839 | 9,555 | ||||||
|
Total
liabilities and owners’ equity
|
$ | 16,025 | $ | 131,892 | ||||
For the
three and nine months ended October 2, 2009 and September 26, 2008, there were
no material changes in our ownership interests in our consolidated joint
ventures. In addition, we have immaterial amounts of other
comprehensive income attributable to the noncontrolling interests in these
ventures.
Unconsolidated
Joint Ventures
We
participate in unconsolidated joint ventures in which we do not hold a
controlling interest and are not a primary beneficiary, but do exercise
significant influence. We account for these joint ventures using the
equity method of accounting. Under the equity method, we recognize
our proportionate share of the net earnings of the joint ventures as a single
line item under “Equity in income of unconsolidated joint ventures” in our
Condensed Consolidated Statement of Operations and Comprehensive
Income.
Our
unconsolidated construction joint ventures are generally controlled by the joint
venture partners. The joint venture agreements typically limit our
interests in any profits and assets, and our respective share in any losses and
liabilities that may result from the performance of the contract are limited to
our stated percentage interest in the project. Although the joint
venture’s contract with project owners typically requires joint and several
liability, our agreements with our joint venture partners may provide that each
partner will assume, recognize and pay its full proportionate share of any
losses resulting from a project. We have no significant commitments
beyond completion of the contract. We also participate in other
unconsolidated joint ventures not related to construction projects.
16
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Sale
of Equity Investment in MIBRAG
On June
10, 2009, we completed the sale of our equity investment in MIBRAG, which
operates lignite coal mines and power plants in Germany. We received
€206.1 million (equivalent to U.S. $287.8 million) in cash proceeds from the
sale. In addition, we settled our foreign currency forward contract,
which primarily hedged our net investment in MIBRAG. (See Note 4,
“Indebtedness” for further discussion of our foreign currency loss related to
the foreign currency forward contract). The following table describes
the impact of these transactions for the nine months ended October 2,
2009:
|
(In
millions)
|
Nine
Months Ended October 2,
2009
|
|||
|
Other
income, net:
|
||||
|
Sales
proceeds
|
$ | 287.8 | ||
|
Less: carrying
value
|
(207.0 | ) | ||
|
sale-related
costs
|
(5.2 | ) | ||
|
Gain
on sale
|
75.6 | |||
|
Loss
on settlement of foreign currency forward contract
|
(27.7 | ) | ||
|
Other
income, net
|
$ | 47.9 | ||
The net
after-tax impact of these two transactions resulted in an increase to net income
and diluted EPS of $30.6 million and $0.37, respectively, for the nine months
ended October 2, 2009.
17
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
The table
below presents financial information, derived from the most recent financial
statements provided to us, on a combined 100% basis for our unconsolidated joint
ventures:
|
(In
thousands)
|
MIBRAG
Mining
Venture
(1)
|
Other
Unconsolidated
Joint
Ventures (2)
|
||||||
|
October 2, 2009
|
||||||||
|
Current
assets
|
N/A | $ | 620,843 | |||||
|
Noncurrent
assets
|
N/A | $ | 15,749 | |||||
|
Current
liabilities
|
N/A | $ | 446,925 | |||||
|
Noncurrent
liabilities
|
N/A | $ | 4,672 | |||||
|
January 2, 2009
|
||||||||
|
Current
assets
|
$ | 173,270 | $ | 587,502 | ||||
|
Noncurrent
assets
|
$ | 1,048,991 | $ | 15,097 | ||||
|
Current
liabilities
|
$ | 82,100 | $ | 444,845 | ||||
|
Noncurrent
liabilities
|
$ | 782,008 | $ | 4,348 | ||||
|
Three months ended October 2, 2009 (1)
|
||||||||
|
Revenues
|
N/A | $ | 425,389 | |||||
|
Cost
of revenues
|
N/A | (362,227 | ) | |||||
|
Income
from continuing operations before tax
|
N/A | $ | 63,162 | |||||
|
Net
income
|
N/A | $ | 61,376 | |||||
|
Three months ended September 26,
2008
|
||||||||
|
Revenues
|
$ | 133,266 | $ | 439,953 | ||||
|
Cost
of revenues
|
(114,879 | ) | (390,389 | ) | ||||
|
Income
from continuing operations before tax
|
$ | 18,387 | $ | 49,564 | ||||
|
Net
income
|
$ | 18,320 | $ | 49,564 | ||||
|
Nine months ended October 2, 2009 (1)
|
||||||||
|
Revenues
|
$ | 219,606 | $ | 1,426,963 | ||||
|
Cost
of revenues
|
(181,770 | ) | (1,235,808 | ) | ||||
|
Income
from continuing operations before tax
|
$ | 37,836 | $ | 191,155 | ||||
|
Net
income
|
$ | 37,307 | $ | 182,730 | ||||
|
Nine months ended September 26,
2008
|
||||||||
|
Revenues
|
$ | 397,274 | $ | 1,449,541 | ||||
|
Cost
of revenues
|
(343,175 | ) | (1,282,541 | ) | ||||
|
Income
from continuing operations before tax
|
$ | 54,099 | $ | 167,000 | ||||
|
Net
income
|
$ | 51,914 | $ | 167,000 | ||||
________________
|
(1)
|
The
financial information for the MIBRAG mining venture is presented through
June 10, 2009, the closing date of the sale of our equity investment in
MIBRAG.
|
|
(2)
|
Income
from unconsolidated U.S. joint ventures is generally not taxable in most
tax jurisdictions in the United States. The tax expenses on our
other unconsolidated joint ventures are primarily related to foreign
taxes.
|
18
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
For the
three and nine months ended September 26, 2008, we received $2.2 million and
$6.9 million, respectively, of distributions from our MIBRAG mining
venture. There was no distribution from MIBRAG for the three and nine
months ended October 2, 2009. We also received $12.3 million and
$15.8 million, respectively, of distributions from other unconsolidated joint
ventures for the three months ended October 2, 2009 and September 26, 2008, and
$59.3 million and $57.9 million, respectively, for the nine months ended October
2, 2009 and September 26, 2008.
Property
and Equipment
Our
property and equipment consisted of the following:
|
(In
thousands)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Equipment
and internal-use software
|
$ | 385,515 | $ | 365,855 | ||||
|
Construction
and mining equipment (1)
|
125,340 | 180,268 | ||||||
|
Furniture
and fixtures
|
56,556 | 54,214 | ||||||
|
Leasehold
improvements
|
70,898 | 63,267 | ||||||
|
Construction
in progress
|
132 | 3,564 | ||||||
|
Land
and improvements
|
584 | 584 | ||||||
| 639,025 | 667,752 | |||||||
|
Accumulated
depreciation and amortization (1)
|
(367,751 | ) | (320,676 | ) | ||||
|
Property
and equipment at cost, net
|
$ | 271,274 | $ | 347,076 | ||||
________________
|
(1)
|
During
the third quarter of 2009, we sold $55.7 million of mining equipment, with
accumulated depreciation of $12.9 million, located in Bolivia to our
former client following their termination of our mining
contract. See further discussion under the “Interim and Annual
Goodwill Impairment Review” section of Note 1, “Business, Basis of
Presentation, and Accounting Policies.”
|
Depreciation
expense related to property and equipment was $21.3 million and $22.3 million
for the three months ended October 2, 2009 and September 26, 2008,
respectively. Depreciation expense related to property and equipment
was $67.0 million and $66.1 million for the nine months ended October 2, 2009
and September 26, 2008, respectively.
Intangible Assets
Amortization
expense related to intangible assets was $13.2 million and $12.5 million for the
three months ended October 2, 2009 and September 26, 2008,
respectively. Amortization expense related to intangible assets was
$39.6 million and $39.4 million for the nine months ended October 2, 2009 and
September 26, 2008, respectively.
19
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Indebtedness
consisted of the following:
|
(In
thousands)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Bank
term loans, net of debt issuance costs
|
$ | 855,781 | $ | 1,059,377 | ||||
|
Obligations
under capital leases
|
15,834 | 14,785 | ||||||
|
Notes
payable, foreign credit lines and other indebtedness
|
25,481 | 33,872 | ||||||
|
Total
indebtedness
|
897,096 | 1,108,034 | ||||||
|
Less:
|
||||||||
|
Current
portion of long-term debt
|
116,594 | 16,506 | ||||||
|
Long-term
debt
|
$ | 780,502 | $ | 1,091,528 | ||||
2007
Credit Facility
As of
October 2, 2009 and January 2, 2009, the outstanding balance of term loan A was
$680.5 million and $842.8 million at interest rates of 1.28% and 2.69%,
respectively. As of October 2, 2009 and January 2, 2009, the
outstanding balance of term loan B was $187.5 million and $232.2 million at
interest rates of 2.53% and 3.69%, respectively.
Under our
Senior Secured Credit Facility (“2007 Credit Facility”), we are subject to two
financial covenants: 1) a maximum consolidated leverage ratio, which is
calculated by dividing consolidated total debt by consolidated EBITDA, as
defined below, and 2) a minimum interest coverage ratio, which is calculated by
dividing consolidated cash interest expense into consolidated
EBITDA. Both calculations are based on the financial data of the most
recent four fiscal quarters.
For
purposes of our 2007 Credit Facility, consolidated EBITDA is defined as
consolidated net income attributable to URS plus interest, depreciation and
amortization expense, amounts set aside for taxes, other non-cash items
(including goodwill impairments) and other pro forma adjustments related to
permitted acquisitions and the Washington Group International, Inc. (“WGI”)
acquisition in 2007. As of October 2, 2009, our consolidated leverage
ratio was 1.3, which did not exceed the maximum consolidated leverage ratio of
2.75, and our consolidated interest coverage ratio was 13.3, which exceeded the
minimum consolidated interest coverage ratio of 4.5. We were in
compliance with the covenants of our 2007 Credit Facility as of October 2,
2009.
Revolving
Line of Credit
We did
not have an outstanding debt balance on our revolving line of credit as of
October 2, 2009 and January 2, 2009. As of October 2, 2009, we issued
$207.1 million of letters of credit, leaving $492.9 million available on our
revolving credit facility. If we elected to borrow the remaining
amounts available under our revolving line of credit as of October 2, 2009, we
would remain in compliance with the covenants of our 2007 Credit
Facility.
20
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Our
revolving line of credit information is summarized as follows:
|
(In
millions, except percentages)
|
Nine
Months Ended
October
2, 2009
|
Year
Ended
January
2, 2009
|
||||||
|
Effective
average interest rates paid on the revolving line of
credit
|
3.2 | % | 5.6 | % | ||||
|
Average
daily revolving line of credit balances
|
$ | — | $ | 0.2 | ||||
|
Maximum
amounts outstanding at any one point in time
|
$ | 0.3 | $ | 7.7 | ||||
10BOther
Indebtedness
Notes payable, foreign credit lines
and other indebtedness. As of October 2, 2009 and January 2,
2009, we had outstanding amounts of $25.5 million and $33.9 million,
respectively, in notes payable and foreign lines of credit. Notes
payable primarily include notes used to finance the purchase of office
equipment, computer equipment and furniture. As of both October 2,
2009 and January 2, 2009, the weighted-average interest rate of the notes was
approximately 5.7%.
We
maintain foreign lines of credit, which are collateralized by the assets of our
foreign subsidiaries and, in some cases, parent guarantees. As of
October 2, 2009 and January 2, 2009, we had lines of credit available under
these facilities of $15.6 million and $13.3 million, respectively, with no
amount outstanding.
Capital Leases. As
of October 2, 2009 and January 2, 2009, we had obligations under our capital
leases of approximately $15.8 million and $14.8 million, respectively,
consisting primarily of leases for office equipment, computer equipment and
furniture.
Fair
Values of Debt Instruments, Short-term Investments and Derivative
Instruments
2007 Credit
Facility
As of
October 2, 2009 and January 2, 2009, the estimated current market values of term
loans A and B, net of debt issuance costs, were approximately $12.1 million and
$104.4 million less than the amount reported on our Condensed Consolidated
Balance Sheets, respectively. The fair values of our term loans A and
B were derived by taking the mid-point of the trading prices from an observable
market input in the secondary loan market and multiplying it by the outstanding
balance of our term loans. The increases in the fair values of our
loans from January 2, 2009 to October 2, 2009 were primarily due to the
improvement in the financial markets.
Interest Rate
Swaps
Our 2007
Credit Facility is a floating-rate facility. To hedge against changes
in floating interest rates, we have two floating-for-fixed interest rate swaps
with notional amounts totaling $400.0 million. As of October 2, 2009
and January 2, 2009, the fair values of our swap liabilities were $10.5 million
and $15.7 million, respectively. The short-term portion of the swap
liabilities was recorded in “Accrued expenses and other” and the long-term
portion of the swap liabilities was recorded in “Other long-term liabilities” on
our Condensed Consolidated Balance Sheets. The adjustments to the
fair values of the swap liabilities were recorded in “Accumulated other
comprehensive loss.” We have recorded no gain or loss on our
Condensed Consolidated Statements of Operations and Comprehensive Income as our
interest rate swaps are an effective hedge.
21
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Foreign Currency Forward
Contract
On March
4, 2009, we entered into a foreign currency forward contract with a notional
amount of €196.0 million (equivalent to U.S. $246.1 million per the contract)
with a maturity window from April 15, 2009 to July 31, 2009. The
primary objective of the contract was to manage our exposure to foreign currency
transaction risk related to the Euro proceeds we received from the sale of our
equity investment in MIBRAG, which closed on June 10, 2009. We
designated €128.0 million (equivalent to U.S. $160.7 million at the contractual
rate) of the contract as a hedge of our net investment in MIBRAG.
On June
12, 2009, we settled our foreign currency forward contract. For the
nine months ended October 2, 2009, we recorded a loss on the settlement of this
contract of $27.7 million in “Other income, net” in our Condensed Consolidated
Statements of Operations and Comprehensive Income. The following
table presents the components of our foreign currency forward contract
loss:
|
(In
millions)
|
Nine
Months Ended
October
2, 2009
|
|||
|
Effective
hedge portion of the contract
|
$ | 17.9 | ||
|
Unhedged
portion of the contract
|
9.8 | |||
|
Loss
on settlement of foreign currency forward contract
|
$ | 27.7 | ||
Valuation
Hierarchy
We
categorize our financial instruments using a valuation hierarchy for disclosure
of the inputs used to measure fair value. This hierarchy prioritizes
the inputs into three broad levels as follows: Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities; Level 2
inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the
financial instrument; Level 3 inputs are unobservable inputs based on our own
assumptions used to measure assets and liabilities at fair value. The
classification of a financial asset or liability within the hierarchy is
determined based on the lowest level input that is significant to the fair value
measurement.
Valuation
Our
short-term investments and derivative instruments, which consist of our interest
rate swaps, were carried at fair values as of October 2, 2009, as presented in
the following table:
|
(In
millions)
|
Total Carrying Value as of October 2, 2009 | Fair Value Measurement as of October 2, 2009 | ||||||||||
| Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
|
Interest
rate swap liabilities
|
$
|
10.5
|
$ |
—
|
$ |
10.5
|
$ |
—
|
||||
|
Short-term
investments
|
|
195.6
|
—
|
195.6
|
—
|
|||||||
22
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
Our
derivative instruments are used as risk management tools and are not used for
trading or speculative purposes. The fair value of each derivative
instrument is based on mark-to-model measurements that are interpolated from
observable market data as of October 2, 2009 and for the duration of each
derivative’s terms. The fair values of our short-term investments,
consisting of interest-bearing time deposits, approximate their carrying values
based upon the current market rates for similar instruments.
Domestic
Pension and Supplemental Executive Retirement Plans
We
sponsor a number of pension and unfunded supplemental executive retirement
plans. The components of our net periodic pension costs relating to
the domestic pension and supplemental executive retirement plans for the three
and nine months ended October 2, 2009 and September 26, 2008 were as
follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
thousands)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Service
cost
|
$ | 1,660 | $ | 1,343 | $ | 4,980 | $ | 4,711 | ||||||||
|
Interest
cost
|
4,605 | 4,460 | 13,815 | 13,460 | ||||||||||||
|
Expected
return on plan assets
|
(3,745 | ) | (3,567 | ) | (11,235 | ) | (11,395 | ) | ||||||||
|
Amortization
of:
|
||||||||||||||||
|
Prior
service costs
|
(796 | ) | (518 | ) | (2,388 | ) | (1,554 | ) | ||||||||
|
Net
loss
|
246 | 12 | 738 | 36 | ||||||||||||
|
Curtailment
gain (1)
|
— | (860 | ) | — | (860 | ) | ||||||||||
|
Net
periodic pension cost
|
$ | 1,970 | $ | 870 | $ | 5,910 | $ | 4,398 | ||||||||
______________
|
|
(1)
|
The
curtailment gain was due to the termination of a customer contract, which
resulted in a reduction in our
workforce.
|
During
the nine months ended October 2, 2009, we made employer contributions of $12.6
million to the pension plans. We currently expect to make additional
cash contributions of approximately $2.3 million for the remainder of
2009.
Final
Salary Pension Fund
As part
of the acquisition of Dames & Moore Group, Inc. in 1999, we assumed the
Dames & Moore Final Salary Pension Fund (“Final Salary Pension Fund”) in the
United Kingdom (“U.K.”). The Final Salary Pension Fund provides
retirement benefit payments for the life of participating retired employees and
their spouses. The components of our net periodic pension costs
relating to this plan for the three and nine months ended October 2, 2009 and
September 26, 2008 were as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
thousands)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Interest
cost
|
$ | 197 | $ | 306 | $ | 552 | $ | 930 | ||||||||
|
Expected
return on plan assets
|
(115 | ) | (129 | ) | (322 | ) | (392 | ) | ||||||||
|
Amortization
of:
|
||||||||||||||||
|
Net
loss
|
— | 51 | — | 154 | ||||||||||||
|
Net
periodic pension cost (1)
|
$ | 82 | $ | 228 | $ | 230 | $ | 692 | ||||||||
______________
|
(1)
|
We
used the current rate method in translating our net periodic pension costs
to the U.S. dollar.
|
23
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
During
the nine months ended October 2, 2009, we made employer contributions of $0.8
million to the Final Salary Pension Fund. We currently expect to make
additional cash contributions during 2009 of approximately $0.3
million.
Post-retirement
Benefit Plans
We
sponsor a number of retiree health and life insurance benefit plans
(post-retirement benefit plans). Post-retirement benefit plans
provide medical and life insurance benefits to employees that meet eligibility
requirements. All of these benefits may be subject to deductibles,
co-payment provisions, and other limitations.
The
components of our net periodic benefit cost relating to the post-retirement
benefit plans for the three and nine months ended October 2, 2009 and September
26, 2008 were as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
thousands)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Service
cost
|
$ | 16 | $ | 17 | $ | 48 | $ | 51 | ||||||||
|
Interest
cost
|
637 | 647 | 1,911 | 1,941 | ||||||||||||
|
Expected
return on plan assets
|
(53 | ) | (74 | ) | (159 | ) | (222 | ) | ||||||||
|
Amortization
of:
|
||||||||||||||||
|
Net
gain
|
(36 | ) | (57 | ) | (108 | ) | (171 | ) | ||||||||
|
Net
periodic benefit cost
|
$ | 564 | $ | 533 | $ | 1,692 | $ | 1,599 | ||||||||
During
the nine months ended October 2, 2009, we did not make any employer
contributions to the post-retirement benefit plans, nor do we currently expect
to make any additional cash contributions in 2009.
Equity
Incentive Plans
As of
October 2, 2009, approximately 1.3 million shares were issued as restricted
stock awards and 0.1 million shares were issuable upon the vesting of restricted
stock units under our 2008 Equity Incentive Plan (the “2008 Plan”). In
addition, approximately 3.6 million shares remained reserved for future grant
under the 2008 Plan. Although our 1999 Equity Incentive Plan (the “1999
Plan”) became inactive when the 2008 Plan was adopted, as of October 2, 2009, we
still had approximately 1.5 million shares underlying nonvested restricted stock
awards and restricted stock units and approximately 0.8 million shares
underlying outstanding unexercised stock options that had been granted under the
1999 Plan.
Stock-Based
Compensation
We
recognize stock-based compensation expense, net of estimated forfeitures, over
the vesting periods in “General and administrative expenses” and “Cost of
revenues” in our Condensed Consolidated Statements of Operations and
Comprehensive Income.
24
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
The
following table presents our stock-based compensation expenses related to
restricted stock awards and units, employee stock purchase plan and the related
income tax benefits recognized, for the three and nine months ended October 2,
2009 and September 26, 2008.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
millions)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Stock-based
compensation expenses:
|
||||||||||||||||
|
Restricted
stock awards and units
|
$ | 11.3 | $ | 7.8 | $ | 29.3 | $ | 22.1 | ||||||||
|
Employee
stock purchase plan
|
0.1 | — | 0.9 | — | ||||||||||||
|
Stock-based
compensation expenses
|
$ | 11.4 | $ | 7.8 | $ | 30.2 | $ | 22.1 | ||||||||
|
Total
income tax benefits recognized in our net income related to stock-based
compensation expenses
|
$ | 4.4 | $ | 3.0 | $ | 11.6 | $ | 8.6 | ||||||||
Employee
Stock Purchase Plan
Our 2008
Employee Stock Purchase Plan allows qualifying employees to purchase shares of
our common stock through payroll deductions of up to 10% of their compensation,
subject to Internal Revenue Code limitations, at a price of 95% of the fair
market value as of the end of each of the six-month offering
periods. The offering periods commence on January 1 and July 1 of
each year.
Restricted
Stock Awards and Units
Restricted
stock awards and units generally vest over a four-year vesting
period. Vesting of some awards is subject to both service
requirements and performance conditions. Restricted stock awards and
units with a performance condition vest upon achievement of an annual net income
target, established in the first quarter of the fiscal year preceding the
vesting date. The performance awards are measured based on the stock
price on the date that all the key terms and conditions related to the award are
known and are expensed over their respective vesting
periods. Restricted stock awards and restricted stock units that are
subject only to service requirements are expensed on a straight-line basis over
their respective vesting periods.
As of
October 2, 2009, we had estimated unrecognized stock-based compensation expense
of $98.8 million related to nonvested restricted stock awards and
units. This expense is expected to be recognized over a
weighted-average period of 2.3 years. The following table summarizes
the total fair values of vested shares, according to their contractual terms,
and the grant date fair values of restricted stock awards and units granted
during the nine months ended October 2, 2009 and September 26,
2008:
|
(In
millions)
|
October
2,
2009
|
September
26,
2008
|
||||||
|
Fair
values of shares vested
|
$ | 22.4 | $ | 17.1 | ||||
|
Grant
date fair values of restricted stock awards and units
granted
|
$ | 50.6 | $ | 38.2 | ||||
25
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
A summary
of the status of and changes in our nonvested restricted stock awards and units,
according to their contractual terms, as of October 2, 2009 and for the nine
months ended October 2, 2009 is presented below:
|
Nine
Months Ended
October
2, 2009
|
||||||||
|
Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Nonvested
at January 2, 2009
|
2,488,531 | $ | 40.37 | |||||
|
Granted
|
1,080,335 | $ | 46.86 | |||||
|
Vested
|
(547,882 | ) | $ | 40.87 | ||||
|
Forfeited
|
(160,965 | ) | $ | 42.20 | ||||
|
Nonvested
at October 2, 2009
|
2,860,019 | $ | 42.62 | |||||
Stock
Options
We have
not granted any stock options since September 2005. A summary of the
status of, and changes in, stock options granted under our 1991 Stock Incentive
Plan and 1999 Plan, as of October 2, 2009 and for the nine months ended October
2, 2009, according to their contractual terms, which provide for expiration of
the options in ten years from the date of grant, is presented
below:
|
Options
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term (in
years)
|
Aggregate
Intrinsic Value (in
millions)
|
|||||||||||||
|
Outstanding
at January 2, 2009
|
1,034,604 | $ | 22.77 | 4.31 | $ | 19.3 | ||||||||||
|
Exercised
|
(214,054 | ) | $ | 22.20 | ||||||||||||
|
Forfeited/expired/cancelled
|
(4,540 | ) | $ | 22.12 | ||||||||||||
|
Outstanding
and exercisable at October 2, 2009
|
816,010 | $ | 22.92 | 3.66 | $ | 15.1 | ||||||||||
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on our closing market price of $41.46 as of October 2,
2009, which would have been received by the option holders had all option
holders exercised their options on that date.
For the
nine months ended October 2, 2009 and September 26, 2008, the aggregate
intrinsic value of stock options exercised, determined as of the date of option
exercise, was $5.1 million and $9.9 million, respectively. All of our
stock option awards were fully vested in 2008 and, at October 2, 2009, there was
no remaining unrecognized stock-based compensation expense related to nonvested
stock option awards. The total fair value of stock options vested
during the nine months ended September 26, 2008 was $0.1 million.
Stock
Repurchase Program
During
the three months ended October 2, 2009, we repurchased an aggregate of 0.4
million shares of our common stock at an average price of $47.66 per common
share for approximately $17.3 million. During the nine months ended
October 2, 2009, we repurchased an aggregate of one million shares of our common
stock at an average price of $41.23 per common share for approximately $41.2
million. These repurchases were permitted under our 2007 Credit
Facility as amended on June 19, 2008.
26
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
We
operate our business through three segments: the URS Division, the
EG&G Division and the Washington Division. Our divisions all
provide program management, planning, design, engineering, and operations and
maintenance services to clients of differing sizes and types. In
addition, the URS and Washington Divisions provide construction and construction
management, operations and maintenance, and decommissioning and closure services
to public agencies and private sector clients in the U.S. and
internationally. The EG&G Division also provides systems
engineering and technical assistance, operations and maintenance, and
decommissioning and closure services to various U.S. federal government
agencies. The EG&G Division provides services primarily to the
Department of Defense (“DOD”), National Aeronautics and Space Administration,
and Department of Homeland Security.
These
three segments operate under separate management groups and produce discrete
financial information. Their operating results also are reviewed
separately by management. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in our Annual Report on Form 10-K for the year ended January
2, 2009. The information disclosed in our condensed consolidated
financial statements is based on the three segments that comprise our current
organizational structure.
27
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
The
following tables present summarized financial information for our reportable
segments. “Inter-segment, eliminations and other” in the following
tables include elimination of inter-segment sales and investments in
subsidiaries. The segment balance sheet information presented below
is included for informational purposes only. We do not allocate
resources based upon the balance sheet amounts of individual
segments. Our long-lived assets consist primarily of property and
equipment.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
millions)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Revenues
|
||||||||||||||||
|
URS
Division
|
$ | 793.0 | $ | 839.7 | $ | 2,436.7 | $ | 2,546.4 | ||||||||
|
EG&G
Division
|
653.5 | 606.8 | 1,940.7 | 1,732.2 | ||||||||||||
|
Washington
Division
|
886.4 | 1,154.8 | 2,810.4 | 3,137.6 | ||||||||||||
|
Inter-segment,
eliminations and other
|
(14.4 | ) | (13.2 | ) | (51.0 | ) | (38.1 | ) | ||||||||
|
Total
revenues
|
$ | 2,318.5 | $ | 2,588.1 | $ | 7,136.8 | $ | 7,378.1 | ||||||||
|
Equity
in income of unconsolidated joint ventures
|
||||||||||||||||
|
URS
Division
|
$ | 1.9 | $ | 2.8 | $ | 5.4 | $ | 7.1 | ||||||||
|
EG&G
Division
|
1.3 | 1.7 | 4.3 | 5.3 | ||||||||||||
|
Washington
Division
|
17.5 | 19.8 | 69.3 | 68.6 | ||||||||||||
|
Total
equity in income of unconsolidated joint ventures
|
$ | 20.7 | $ | 24.3 | $ | 79.0 | $ | 81.0 | ||||||||
|
Contribution (1)
|
||||||||||||||||
|
URS
Division
|
$ | 59.6 | $ | 61.5 | $ | 196.6 | $ | 189.9 | ||||||||
|
EG&G
Division
|
41.1 | 43.4 | 116.7 | 104.1 | ||||||||||||
|
Washington
Division
|
23.7 | 54.9 | 129.0 | 147.2 | ||||||||||||
|
General
and administrative expenses (2)
|
(27.1 | ) | (26.4 | ) | (78.5 | ) | (72.8 | ) | ||||||||
|
Corporate
interest expense
|
(10.4 | ) | (20.3 | ) | (35.7 | ) | (67.0 | ) | ||||||||
|
Total
contribution
|
$ | 86.9 | $ | 113.1 | $ | 328.1 | $ | 301.4 | ||||||||
|
Operating
income
|
||||||||||||||||
|
URS
Division
|
$ | 56.0 | $ | 59.7 | $ | 189.7 | $ | 184.1 | ||||||||
|
EG&G
Division
|
39.4 | 42.0 | 113.4 | 101.0 | ||||||||||||
|
Washington
Division
|
26.7 | 62.0 | 147.0 | 165.5 | ||||||||||||
|
General
and administrative expenses (2)
|
(17.9 | ) | (20.5 | ) | (56.6 | ) | (57.1 | ) | ||||||||
|
Total
operating income
|
$ | 104.2 | $ | 143.2 | $ | 393.5 | $ | 393.5 | ||||||||
|
Depreciation
and amortization
|
||||||||||||||||
|
URS
Division
|
$ | 8.7 | $ | 9.1 | $ | 25.8 | $ | 25.8 | ||||||||
|
EG&G
Division
|
6.0 | 4.4 | 17.3 | 16.0 | ||||||||||||
|
Washington
Division
|
18.1 | 19.8 | 58.0 | 59.8 | ||||||||||||
|
Corporate
and other
|
1.8 | 1.5 | 5.5 | 3.9 | ||||||||||||
|
Total
depreciation and amortization
|
$ | 34.6 | $ | 34.8 | $ | 106.6 | $ | 105.5 | ||||||||
_______________
|
(1)
|
We
define segment contribution as total segment operating income minus
interest expense and noncontrolling interests attributable to that
segment, but before allocation of various segment expenses, including
stock compensation expenses. Segment operating income
represents net income before reductions for income taxes, noncontrolling
interests and interest expense.
|
|
(2)
|
General
and administrative expenses represent expenses related to corporate
functions.
|
28
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
A
reconciliation of segment contribution to segment operating income for the three
and nine months ended October 2, 2009 and September 26, 2008 is as
follows:
|
Three
Months Ended October 2, 2009
|
||||||||||||||||||||||||||||
|
(In
millions)
|
URS
Division
|
EG&G
Division
|
Washington
Division
|
Corporate
|
Corporate
Interest
Expense
|
Eliminations
|
Consolidated
|
|||||||||||||||||||||
|
Contribution
|
$ | 59.6 | $ | 41.1 | $ | 23.7 | $ | (27.1 | ) | $ | (10.4 | ) | $ | — | $ | 86.9 | ||||||||||||
|
Noncontrolling
interests
|
0.1 | — | 6.3 | — | — | — | 6.4 | |||||||||||||||||||||
|
Stock-based
compensation expenses
|
(4.0 | ) | (1.3 | ) | (3.5 | ) | 8.8 | — | — | — | ||||||||||||||||||
|
Other
miscellaneous unallocated expenses
|
0.3 | (0.4 | ) | 0.2 | 0.4 | 10.4 | — | 10.9 | ||||||||||||||||||||
|
Operating
income (loss)
|
$ | 56.0 | $ | 39.4 | $ | 26.7 | $ | (17.9 | ) | $ | — | $ | — | $ | 104.2 | |||||||||||||
|
Three
Months Ended September 26, 2008
|
||||||||||||||||||||||||||||
|
(In
millions)
|
URS
Division
|
EG&G
Division
|
Washington
Division
|
Corporate
|
Corporate
Interest
Expense
|
Eliminations
|
Consolidated
|
|||||||||||||||||||||
|
Contribution
|
$ | 61.5 | $ | 43.4 | $ | 54.9 | $ | (26.4 | ) | $ | (20.3 | ) | $ | — | $ | 113.1 | ||||||||||||
|
Noncontrolling
interests
|
0.3 | — | 8.4 | — | — | — | 8.7 | |||||||||||||||||||||
|
Stock-based
compensation expenses
|
(2.7 | ) | (1.0 | ) | (1.7 | ) | 5.4 | — | — | — | ||||||||||||||||||
|
Other
miscellaneous unallocated expenses
|
0.6 | (0.4 | ) | 0.4 | 0.5 | 20.3 | — | 21.4 | ||||||||||||||||||||
|
Operating
income (loss)
|
$ | 59.7 | $ | 42.0 | $ | 62.0 | $ | (20.5 | ) | $ | — | $ | — | $ | 143.2 | |||||||||||||
|
Nine
Months Ended October 2, 2009
|
||||||||||||||||||||||||||||
|
(In
millions)
|
URS
Division
|
EG&G
Division
|
Washington
Division
|
Corporate
|
Corporate
Interest
Expense
|
Eliminations
|
Consolidated
|
|||||||||||||||||||||
|
Contribution
|
$ | 196.6 | $ | 116.7 | $ | 129.0 | $ | (78.5 | ) | $ | (35.7 | ) | $ | — | $ | 328.1 | ||||||||||||
|
Noncontrolling
interests
|
2.3 | — | 25.4 | — | — | — | 27.7 | |||||||||||||||||||||
|
Stock-based
compensation expenses
|
(10.3 | ) | (3.0 | ) | (7.9 | ) | 21.2 | — | — | — | ||||||||||||||||||
|
Other
miscellaneous unallocated expenses
|
1.1 | (0.3 | ) | 0.5 | 0.7 | 35.7 | — | 37.7 | ||||||||||||||||||||
|
Operating
income (loss)
|
$ | 189.7 | $ | 113.4 | $ | 147.0 | $ | (56.6 | ) | $ | — | $ | — | $ | 393.5 | |||||||||||||
29
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
|
Nine
Months Ended September 26, 2008
|
||||||||||||||||||||||||||||
|
(In
millions)
|
URS
Division
|
EG&G
Division
|
Washington
Division
|
Corporate
|
Corporate
Interest
Expense
|
Eliminations
|
Consolidated
|
|||||||||||||||||||||
|
Contribution
|
$ | 189.9 | $ | 104.1 | $ | 147.2 | $ | (72.8 | ) | $ | (67.0 | ) | $ | — | $ | 301.4 | ||||||||||||
|
Noncontrolling
interests
|
0.3 | — | 21.8 | — | — | — | 22.1 | |||||||||||||||||||||
|
Stock-based
compensation expenses
|
(7.7 | ) | (2.7 | ) | (4.5 | ) | 14.9 | — | — | — | ||||||||||||||||||
|
Other
miscellaneous unallocated expenses
|
1.6 | (0.4 | ) | 1.0 | 0.8 | 67.0 | — | 70.0 | ||||||||||||||||||||
|
Operating
income (loss)
|
$ | 184.1 | $ | 101.0 | $ | 165.5 | $ | (57.1 | ) | $ | — | $ | — | $ | 393.5 | |||||||||||||
Total
assets by segment are as follows:
|
(In
millions)
|
October
2, 2009
|
January
2, 2009
|
||||||
|
URS
Division
|
$ | 1,680.4 | $ | 1,615.3 | ||||
|
EG&G
Division
|
1,517.7 | 1,487.6 | ||||||
|
Washington
Division
|
3,536.2 | 3,596.9 | ||||||
|
Corporate
|
5,250.5 | 5,059.3 | ||||||
|
Eliminations
|
(4,915.3 | ) | (4,757.9 | ) | ||||
|
Total
assets
|
$ | 7,069.5 | $ | 7,001.2 | ||||
Total
investments in and advances to unconsolidated joint ventures are as
follows:
|
(In
millions)
|
October
2, 2009
|
January
2, 2009
|
||||||
|
URS
Division
|
$ | 10.9 | $ | 10.5 | ||||
|
EG&G
Division
|
3.2 | 6.1 | ||||||
|
Washington
Division
|
76.2 | 253.0 | ||||||
|
Total
investments in and advances to unconsolidated joint
ventures
|
$ | 90.3 | $ | 269.6 | ||||
Geographic
Areas
Our
revenues, and property and equipment at cost, net of accumulated depreciation,
by geographic areas are shown below.
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
millions)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
Revenues
|
||||||||||||||||
|
United
States
|
$ | 2,133.2 | $ | 2,351.6 | $ | 6,527.1 | $ | 6,701.3 | ||||||||
|
International
|
188.6 | 242.6 | 619.8 | 693.3 | ||||||||||||
|
Eliminations
|
(3.3 | ) | (6.1 | ) | (10.1 | ) | (16.5 | ) | ||||||||
|
Total
revenues
|
$ | 2,318.5 | $ | 2,588.1 | $ | 7,136.8 | $ | 7,378.1 | ||||||||
30
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
No
individual foreign country contributed more than 10% of our consolidated
revenues for the three and nine months ended October 2, 2009 and September 26,
2008.
|
(In
millions)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Property
and equipment at cost, net
|
||||||||
|
United
States
|
$ | 230.6 | $ | 257.1 | ||||
|
International:
|
||||||||
|
Bolivia
(1)
|
0.1 | 45.5 | ||||||
|
Other
foreign countries
|
40.6 | 44.5 | ||||||
|
Total
international
|
40.7 | 90.0 | ||||||
|
Total
property and equipment at cost, net
|
$ | 271.3 | $ | 347.1 | ||||
____________
|
(1)
|
During
the third quarter of 2009, we sold substantially all of our assets located
in Bolivia to our former client following their termination of our mining
contract. See further discussion under the “Interim and Annual
Goodwill Impairment Review” section of Note 1, “Business, Basis of
Presentation, and Accounting Policies.”
|
Except
for those shown in the table above, there are no material concentrations of our
net property and equipment in any individual foreign country.
Major
Customers
Our
largest clients are from our federal market sector. Within this
sector, we have multiple contracts with the U.S. Army, our largest customer, who
contributed 18% and 17% of our consolidated revenues for the three and nine
months ended October 2, 2009, respectively. The loss of the federal
government or the U.S. Army, as clients, would have a material adverse effect on
our business; however, we are not dependent on any single contract on an ongoing
basis, and we believe that the loss of any contract would not have a material
adverse effect on our business.
For
purposes of analyzing revenues from major customers, we do not consider the
combination of all federal departments and agencies as one customer although, in
the aggregate, the federal market sector contributed 49% and 43% of our
consolidated revenues for the three and nine months ended October 2, 2009,
respectively. The different federal agencies manage separate
budgets. As such, reductions in spending by one federal agency do not
affect the revenues we could earn from another federal agency. In
addition, the procurement processes for separate federal agencies are not
centralized and the procurement decisions are made separately by each federal
agency.
Our
revenues from the U.S. Army for the three and nine months ended October 2, 2009
and September 26, 2008 are presented below:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
(In
millions)
|
October
2,
2009
|
September
26,
2008
|
October
2,
2009
|
September
26,
2008
|
||||||||||||
|
The
U.S. Army (1)
|
||||||||||||||||
|
URS
Division
|
$ | 38.0 | $ | 26.4 | $ | 106.9 | $ | 81.9 | ||||||||
|
EG&G
Division
|
342.5 | 349.7 | 1,035.9 | 1,056.0 | ||||||||||||
|
Washington
Division
|
31.4 | 34.8 | 81.8 | 93.6 | ||||||||||||
|
Total
U.S. Army
|
$ | 411.9 | $ | 410.9 | $ | 1,224.6 | $ | 1,231.5 | ||||||||
_____________
|
(1)
|
The
U.S. Army includes U.S. Army Corps of
Engineers.
|
31
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
In the
ordinary course of business, we are subject to contractual guarantees and
governmental audits or investigations. We are also involved in
various legal proceedings that are pending against us and our subsidiaries
alleging, among other things, breach of contract or tort in connection with the
performance of professional services, the various outcomes of which cannot be
predicted with certainty. We are including information regarding the
following significant proceedings in particular:
|
·
|
Saudi
Arabia: One of our wholly owned subsidiaries, LSI,
provided aircraft maintenance support services on F-5 aircraft under
contracts (the “F-5 Contract”) with a Saudi Arabian government ministry
(the “Ministry”). LSI completed its operational performance
under the F-5 Contract in November 2000 and the Ministry has yet to pay a
$12.2 million account receivable owed to LSI for the services under the
contract. In addition, in 2004, the Ministry drew a payment
under a performance bond issued by LSI amounting to approximately $5.6
million that was outstanding under the F-5 Contract. The
following legal proceedings ensued:
|
Two Saudi
Arabian landlords pursued claims against LSI over disputed rents in Saudi
Arabia. The Saudi Arabian landlord of the Al Bilad complex received a
judgment of $7.9 million in Saudi Arabia against LSI. During the
quarter ended March 30, 2007, Al Bilad, the landlord, received payment of this
judgment out of the $12.2 million receivable held by the Ministry. As
a result, we reduced our account receivable and reserve for the Saudi Arabian
judgment regarding the Al Bilad complex to reflect the payment made by the
Ministry. Another landlord has obtained a judgment in Saudi Arabia
against LSI for $1.2 million and LSI successfully appealed this decision in June
2005 in Saudi Arabia, which was remanded for future proceedings. We
continue to review our legal position and strategy regarding these
judgments.
LSI
became involved in a dispute related to a tax assessment issued by the Saudi
Arabian taxing authority (“Zakat”) against LSI of approximately $5.1 million for
the years 1999 through 2002. LSI disagreed with the Zakat assessment
and on June 6, 2006, the Zakat and Tax Preliminary Appeal Committee ruled
partially in favor of LSI by reducing the tax assessment to approximately $2.2
million. LSI has appealed the decision of the Zakat and Tax
Preliminary Appeal Committee in an effort to eliminate or further reduce the
assessment, and, as a part of that appeal, posted a bond in the full amount of
the remaining tax assessment.
In
November 2004, LSI filed suit against the Ministry in the United States District
Court for the Western District of Texas. The suit seeks damages for,
among other things, intentional interference with commercial relations caused by
the Ministry's wrongful demand of the performance bond; breach of the F-5
Contract; unjust enrichment and promissory estoppel, and seeks payment of the
$12.2 million account receivable. In March 2005, the Ministry filed a
motion to dismiss, which the District Court initially denied, and which was
re-affirmed in July 2008 after extensive discovery proceedings. The
Ministry appealed the District Court’s motion to dismiss to the United States
Court of Appeals for the Fifth Circuit on August 19, 2008. On August
18, 2009, the Appellate Court partially reversed the prior ruling of the
District Court and determined that there was valid jurisdiction over a portion
of LSI’s original suit. The case is being remanded to the District
Court and LSI is exploring available options relating to the Appellate Court’s
ruling.
LSI will
continue to seek collection of the account receivable and the $5.6 million
performance bond due from the Ministry and related damages, and defend itself
vigorously against the remaining claims raised by the landlords and Zakat;
however, we cannot provide assurance that LSI will be successful in these
efforts. The potential loss on the claims against LSI may exceed $3.4
million; however, the resolution of these matters cannot be determined at this
time.
32
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
|
·
|
Lebanon: Our
1999 acquisition of Dames and Moore Group, Inc. included the acquisition
of a wholly owned subsidiary, Radian International, LLC
(“Radian”). Prior to the acquisition, Radian entered into a
contract with the Lebanese Company for the Development and Reconstruction
of Beirut Central District, S.A.L (“Solidere”). Under the
contract, Radian was to provide environmental remediation services at the
Normandy Landfill site located in Beirut, Lebanon. Radian
subcontracted a portion of these services to Mouawad – Edde SARL (“Mouawad
– Edde”). Radian, Solidere and Mouawad Edde asserted various
claims related to the project. Radian settled the Solidere
claims in June 2008 and the Mouawad Edde claims in August
2008. Portions of the Solidere settlement were paid by Zurich
Insurance Company, as successor in interest to Alpina Insurance Company,
American International Specialty Lines Insurance Company and Radian’s
other insurers. Radian is currently in settlement negotiations
with its insurers to recover amounts due under applicable insurance
policies. Radian is seeking recovery of approximately $30.0
million.
|
The
Solidere contract required the posting of a Letter of Guarantee, which was
issued by Saradar Bank, Sh.M.L. ("Saradar") for $8.5
million. Solidere drew upon the full value of the Letter of
Guarantee. In July 2004, Saradar filed a claim for reimbursement in
the First Court in Beirut, Lebanon, to recover the $8.5 million paid on the
Letter of Guarantee from Radian and co-defendant Wells Fargo Bank,
N.A. Saradar alleged that it was entitled to reimbursement for the
amount paid on the Letter of Guarantee. In February 2005, Radian
responded to Saradar’s claim by filing a Statement of Defense. In
April 2005, Saradar also filed a reimbursement claim against
Solidere. Radian contends that it is not obligated to reimburse
Saradar because Saradar did not comply with the contract terms. The
First Court in Beirut issued a ruling holding that Radian was not obligated to
reimburse Saradar in October 2007. However, the ruling also held that
co-defendant Wells Fargo Bank was obligated to reimburse
Saradar. Wells Fargo Bank has appealed this ruling and Radian is
assisting in the appeal pursuant to the terms of the credit agreement
obligations between Radian and Wells Fargo Bank.
Radian
will continue to seek collection of the amounts due under applicable insurance
policies and intends to vigorously defend against the remaining claims asserted
against it by Saradar; however, we cannot provide assurance that Radian will be
successful in these efforts. The potential losses may exceed $18.0
million; however, the resolution of these matters cannot be determined at this
time.
|
·
|
Tampa-Hillsborough County
Expressway Authority: In 1999, URS Corporation Southern,
our wholly owned subsidiary, entered into an agreement with the
Tampa-Hillsborough County Expressway Authority (the “Authority”) to
provide foundation design, project oversight and other services in
connection with the construction of the Lee Roy Selmon Elevated Expressway
structure (the “Expressway”) in Tampa, Florida. Also, URS
Holdings, Inc., our wholly owned subsidiary, entered into a subcontract
agreement with an unrelated third party to provide geotechnical services
in connection with the construction of roads to access the
Expressway. In 2004, during construction of the elevated
structure, one pier subsided substantially, causing significant damage to
a segment of the elevated structure, though no significant injuries
occurred as a result of the incident. The Authority has
completed remediation of the
Expressway.
|
In
October 2005, the Authority filed a lawsuit in the Thirteenth Judicial Circuit
of Florida against URS Corporation Southern, URS Holdings, Inc. and an unrelated
third party, alleging breach of contract and professional negligence resulting
in damages to the Authority exceeding $120 million.
33
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
In April
2006, the Authority's Builder's Risk insurance carrier, Westchester Surplus
Lines Insurance Company ("Westchester"), filed a subrogation action against URS
Corporation Southern in the Thirteenth Judicial Circuit of Florida for $2.9
million, which Westchester has paid to the Authority. Westchester
also filed a subrogation action for any future amounts that may be paid for
claims that the Authority has submitted for losses caused by the subsidence of
the pier. URS Corporation Southern removed Westchester's lawsuit to
the United States District Court for the Middle District of Florida and filed
multiple counterclaims against Westchester for insurance coverage under the
Westchester policy. Westchester’s lawsuit was remanded to the
Thirteenth Judicial Circuit of Florida in July 2007, and in June 2008, the court
ordered that the Authority be substituted for Westchester as the plaintiff to
the lawsuit.
One of
URS Corporation Southern’s and URS Holdings, Inc.’s excess insurance carriers,
Arch Specialty Insurance Company (“Arch”), which was responsible for $15 million
in excess coverage, claims that they believe the initial notice of claim
provided by our insurance broker was untimely under the Arch excess policies and
is, therefore, contesting $5 million of its coverage. URS Corporation
Southern and URS Holdings, Inc. rejected Arch’s position. In October
2008, Arch filed a lawsuit in the United States District Court for the Middle
District of Florida seeking a declaratory judgment that URS’ claims are not
covered by the Arch policies.
On June
29, 2009, URS Corporation Southern and URS Holdings, Inc. entered into a
settlement agreement containing no findings of liability or fault with the
Authority, Westchester, Arch and other insurers in which URS Corporation
Southern’s and URS Holdings, Inc.’s insurers agreed to pay $69.8 million to the
Authority to settle all substantial Expressway claims between the
parties. In addition, there is a remaining $5 million claim, which as
noted above is subject to further litigation, against Arch.
|
·
|
Rocky Mountain
Arsenal: In January 2002, URS Group, Inc., our wholly
owned subsidiary, was awarded a contract by Foster Wheeler Environmental,
Inc., to perform, among other things, foundation demolition and
remediation of contaminated soil at the Rocky Mountain Arsenal in
Colorado. In October 2004, URS Group, Inc. filed a complaint
asserting a breach of contract seeking recovery of the cost overruns
against Foster Wheeler Environmental, Inc. and Tetra Tech FW, Inc. both
subsidiaries of Tetra Tech, Inc. (“TTFW”), in District Court for the
County of Denver in the State of Colorado. In June 2006, the
District Court issued a $1.1 million judgment against TTFW, granting some
of URS Group, Inc.’s claims, but denying the largest claim. URS
Group, Inc. appealed the judgment to the Colorado Court of Appeals in June
2006. The Court of Appeals found that TTFW possessed
information at the time of bidding that it did not disclose to bidders and
issued a unanimous decision in favor of URS Group, Inc. in February 2008,
which remanded the matter to the trial court for further
proceedings. On April 23, 2008, TTFW filed a petition for
review with the Colorado Supreme Court. The Colorado Supreme
Court denied that petition, and the matter has been remanded to the trial
court for proceedings consistent with the findings of the Court of
Appeals.
|
URS
Group, Inc. will continue its vigorous attempt to collect the remaining contract
cost overruns; however, we cannot provide assurance that URS Group, Inc. will be
successful in these efforts, and the resolution of these matters cannot be
determined at this time.
34
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
|
·
|
Minneapolis
Bridge: On August 1, 2007, the I-35W Bridge in
Minneapolis, Minnesota collapsed resulting in 13 deaths, numerous injuries
and substantial property loss. In 2003, the Minnesota
Department of Transportation retained URS Corporation (Nevada), our wholly
owned subsidiary, to provide specific engineering analyses of components
of the I-35W Bridge. URS Corporation (Nevada) issued draft
reports pursuant to this engagement. URS Corporation (Nevada)’s
services to the Minnesota Department of Transportation were ongoing at the
time of the collapse. The National Transportation Safety Board
final report on the bridge collapse determined that the probable cause of
the collapse was inadequate load capacity due to an error by the original
bridge designer that resulted in gusset plate failures due to the
increased bridge weight from previous modifications as well as increased
traffic and concentrated construction loads on the bridge on the day of
the collapse. URS Corporation (Nevada) was not involved in the
original design or construction of the I-35W Bridge, nor were they
involved in any of the maintenance and construction work being performed
on the bridge when the collapse
occurred.
|
As of
July 30, 2009, 120 lawsuits are pending against URS Corporation (Nevada) and
other defendants in Hennepin County District Court in Minnesota. The
cases include the claims of 137 injured people, the estates of 11 of the
individuals who died as a result of the bridge collapse, one separate suit for
insurance subrogation and one lawsuit initiated by the State of
Minnesota. Each lawsuit asserts a variety of claims against URS
Corporation (Nevada) including: professional negligence, breach of
contract, subrogation, statutory reimbursement, contribution and
indemnity. Insurers have also raised subrogation claims for
intervention in 38 of the individual lawsuits.
We intend
to continue to defend these matters vigorously; however, we cannot provide
assurance that we will be successful in these efforts. The potential
range of loss and the resolution of these matters cannot be determined at this
time.
|
·
|
130 Liberty
Street: On August 18, 2007, two New York City firemen
lost their lives and others were injured fighting a fire at a skyscraper
undergoing decontamination and deconstruction at 130 Liberty Street in New
York City. One of our wholly owned subsidiaries, URS
Corporation – New York, had been retained before the accident by the 130
Liberty Street property owner to advise, monitor and report on the general
contractor’s performance as well as its compliance with the project’s
contractual requirements. In August 2007, the Manhattan
District Attorney served subpoenas related to this accident on the
property owner, URS Corporation - New York, the general contractor and its
principal subcontractors, as well as the City of New York. In
December 2008, the District Attorney issued criminal indictments against
an employee of the general contractor responsible for safety at the
project, its principal subcontractor and some of that subcontractor’s
employees; however, URS Corporation – New York was not
indicted.
|
In
February and April of 2008, URS Corporation – New York and other defendants were
sued in the New York State Supreme Court by the estates of the two firemen for
negligence, public and private nuisance, and wrongful death, as well as for
statutory violations of various local and state public safety
codes. Both estates are alleging punitive damages and one estate has
asked for damages of approximately $50 million.
Since May
of 2008, various firemen and their spouses have sued URS Corporation – New York
and URS Corporation and other defendants in the New York State Supreme Court for
an unspecified amount of damages for personal injury to the firemen occurring
during the fire. These personal injury complaints allege negligence,
public and private nuisance, and violations of various local and state public
safety codes.
35
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
URS
Corporation – New York and URS Corporation intend to continue to defend these
matters vigorously; however, we cannot provide assurance that we and URS
Corporation – New York will be successful in these efforts. The
potential range of loss and the resolution of these matters cannot be determined
at this time.
|
·
|
USAID Egyptian
Projects: In March 2003, WGI, the parent company
acquired by us on November 15, 2007, was notified by the Department of
Justice that the federal government was considering civil litigation
against WGI for potential violations of the U.S. Agency for International
Development (“USAID”) source, origin, and nationality regulations in
connection with five of WGI’s USAID-financed host-country projects located
in Egypt beginning in the early 1990s. In November 2004, the
federal government filed an action in the United States District Court for
the District of Idaho against WGI and Contrack International, Inc., an
Egyptian construction company, asserting violations under the Federal
False Claims Act, the Federal Foreign Assistance Act of 1961, and common
law theories of payment by mistake and unjust enrichment. The
federal government seeks damages and civil penalties for violations of the
statutes as well as a refund of all amounts paid under the specified
contracts of approximately $373.0 million. WGI denies any
liability in the action and contests the federal government’s damage
allegations and its entitlement to any recovery. All USAID
projects under the contracts have been completed and are fully
operational.
|
In March
2005, WGI filed motions in the Bankruptcy Court in Nevada and in the Idaho
District Court to dismiss the federal government’s claim for failure to give
appropriate notice or otherwise preserve those claims. In August
2005, the Bankruptcy Court ruled that all federal government claims were barred
in a written order. The federal government appealed the Bankruptcy
Court's order to the United States District Court for the District of
Nevada. In March 2006, the Idaho District Court stayed that action
during the pendency of the federal government's appeal of the Bankruptcy Court's
ruling. In December 2006, the Nevada District Court reversed the
Bankruptcy Court’s order and remanded the matter back to the Bankruptcy Court
for further proceedings. In December 2007, the federal government
filed a motion in Bankruptcy Court seeking an order that the Bankruptcy Court
abstain from exercising jurisdiction over this matter, which WGI
opposed. On February 15, 2008, the Bankruptcy Court denied the
federal government’s motion preventing the Bankruptcy Court from exercising
jurisdiction over WGI’s motion that the federal government’s claims in Idaho
District Court were barred for failure to give appropriate notice or otherwise
preserve those claims. In November 2008, the Bankruptcy Court ruled
that the federal government’s common law claims of unjust enrichment and payment
by mistake are barred, and may not be further pursued. WGI’s pending
motion in the Bankruptcy Court covers all of the remaining federal government
claims alleged in the Idaho action.
WGI’s
joint venture for one of the USAID projects brought arbitration proceedings
before an arbitration tribunal in Egypt in which the joint venture asserted an
affirmative claim for additional compensation for the construction of water and
wastewater treatment facilities in Egypt. The project owner, National
Organization for Potable Water and Sanitary Drainage (“NOPWASD”), an Egyptian
government agency, asserted in a counterclaim that by reason of alleged
violations of the USAID source, origin and nationality regulations, and alleged
violations of Egyptian law, WGI’s joint venture should forfeit its claim, pay
damages of approximately $6.0 million and the owner’s costs of defending
against the joint venture’s claims in arbitration. WGI denied
liability on NOPWASD’s counterclaim. On April 17, 2006, the
arbitration tribunal issued its award providing that the joint venture prevailed
on its affirmative claims in the net amount of $8.2 million, and that NOPWASD's
counterclaims were rejected. WGI’s portion of any final award
received by the joint venture would be approximately 45%.
WGI
intends to continue to defend these matters vigorously and to consider its
affirmative claims; however, we cannot provide assurance that WGI will be
successful in these efforts. The potential range of loss and the
resolution of these matters cannot be determined at this time.
36
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
|
·
|
New Orleans Levee Failure
Class Action Litigation: From July 1999 through May
2005, Washington Group International, Inc., an Ohio company (“WGI Ohio”),
a wholly owned subsidiary acquired by us on November 15, 2007, performed
demolition, site preparation, and environmental remediation services for
the U.S. Army Corps of Engineers on the east bank of the Inner Harbor
Navigation Canal (the “Industrial Canal”) in New Orleans,
Louisiana. On August 29, 2005, Hurricane Katrina devastated New
Orleans. The storm surge created by the hurricane overtopped
the Industrial Canal levee and floodwall, flooding the Lower Ninth Ward
and other parts of the city.
|
Since
September 2005, 59 personal injury, property damage and class action lawsuits
have been filed in Louisiana State and federal court naming WGI Ohio as a
defendant. Other defendants include the U.S. Army Corps of Engineers,
the Board for the Orleans Parish Levee District, and its insurer, St. Paul Fire
and Marine Insurance Company. Over 1,450 hurricane-related cases,
including the WGI Ohio cases, have been consolidated in the United States
District Court for the Eastern District of Louisiana. The plaintiffs
claim that defendants were negligent in their design, construction and/or
maintenance of the New Orleans levees. The plaintiffs are all
residents and property owners who claim to have incurred damages arising out of
the breach and failure of the hurricane protection levees and floodwalls in the
wake of Hurricane Katrina. The allegation against us is that the work
we performed adjacent to the Industrial Canal damaged the levee and floodwall
and caused and/or contributed to breaches and flooding. The
plaintiffs allege damages of $200 billion and demand attorneys’ fees and
costs. WGI Ohio did not design, construct, repair or maintain any of
the levees or the floodwalls that failed during or after Hurricane
Katrina. WGI Ohio performed the work adjacent to the Industrial Canal
as a contractor for the federal government and has pursued dismissal from the
lawsuits on a motion for summary judgment on the basis that government
contractors are immune from liability.
On
December 15, 2008, the District Court granted WGI Ohio’s motion for summary
judgment to dismiss the lawsuit on the basis that we performed the work adjacent
to the Industrial Canal as a contractor for the federal government and are
therefore immune from liability, which was appealed by a number of the
plaintiffs on April 27, 2009 to the United States Fifth Circuit Court of
Appeals.
WGI Ohio
intends to continue to defend these matters vigorously; however, we cannot
provide assurance that WGI Ohio will be successful in these
efforts. The potential range of loss and the resolution of these
matters cannot be determined at this time.
|
·
|
SR-125: WGI
Ohio has a 50% interest in a joint venture that has performed a $401
million fixed-price highway and toll road project in California that is
fully operational and essentially complete as of October 2,
2009. Prior to the acquisition, WGI Ohio recorded significant
losses on the project resulting from various developments, including final
design and other customer specifications, state regulatory agency
requirements, material quantity and cost growth, higher subcontractor and
labor costs, and the impact of schedule delays. The joint
venture is actively pursuing reimbursement of significant highway and toll
road project claims against the project owner, based on breach of
contract, disputed unilateral deductive changes from the project owner,
and the recovery of liquidated damages withheld by the project
owner. The highway claims were initiated in the Superior Court
of San Diego County (“Superior Court”) in July 2006 and the toll road
claims were initiated in arbitration, under JAMS arbitration rules, in
July 2005.
|
37
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
The
project owner has responded with a number of counterclaims in both the toll road
arbitration and highway litigation alleging breach of contract, entitlement to a
finding of contractor delays, and compensation for unilateral deductive change
orders. In October 2009, the project owner filed an amended
counterclaim in the toll road arbitration setting forth additional claims for
breach of contract, fraud in the inducement, lack of proper licensing, and
entitlement to additional liquidated damages above those previously
withheld. In the amended counterclaim, the project owner claims
damages in excess of $800 million. In addition, the project owner is
presently also seeking quantified counterclaims in the highway project of
approximately $35 million. In May 2009, an arbitration panel hearing
was held to determine whether the joint venture had previously waived multiple
contractual claims under its agreement with the project owner. On
August 5, 2009, the panel determined that the joint venture only waived
approximately $14.0 million out of the $96.5 million of claims that the project
owner contended were previously waived under the contract. In
addition, the joint venture, as the prevailing party, is entitled to an award of
reasonable attorney’s fees and costs attributable to the waiver hearing, which
the project owner is contesting.
In
December 2007, the joint venture initiated a government code claim in Superior
Court against the California Department of Transportation (“Caltrans”) asserting
that Caltrans failed to insure that the project owner had a statutorily required
payment bond. The Superior Court granted judgment on the pleadings in
favor of Caltrans in March 2009. In addition, the project owner and
Caltrans have prevailed on motions for summary judgment on other government code
claim issues (including lack of proper licensing, lack of authority to include
the toll road project in a franchise agreement between the project owner and the
state, and the enforceability of certain contractual limitations that would not
be enforceable under the government code in California). The joint
venture also recorded notices of a mechanic’s lien on the toll road properties
and, on September 24, 2009, filed an action to foreclose the mechanic’s
lien. The joint venture also initiated an inverse condemnation action
against Caltrans relating to the fee ownership of properties acquired by
Caltrans impairing the joint venture’s mechanic’s lien rights on the toll road
on July 11, 2008.
In June
2008, the project owner filed a complaint, as amended, against the joint venture
in the Supreme Court of New York County, New York, alleging that the joint
venture breached a lender agreement associated with the highway project that
impaired the enforceability of the highway project contract. On
October 1, 2008, a hearing was held on the joint venture’s motion to stay or
dismiss this action and the Supreme Court of New York County has yet to issue
its determination. On August 31, 2009, Banco Bilbao Vizcaya
Argentaria, S.A. (“BBVA”), the lender’s prime agent, filed a complaint on behalf
of the lenders alleging breach of a lending agreement entered into during the
highway and toll road contracts. The joint venture filed a motion to
dismiss the BBVA complaint on October 15, 2009.
Prior to
our acquisition of WGI, a substantial amount of their equity investment in the
joint venture was written off. We estimate that our remaining equity
investment in the joint venture will be approximately $36 million at final
completion of the contract.
The joint
venture intends to defend these matters vigorously and will seek to collect all
claimed amounts; however, we cannot provide assurance that the joint venture
will be successful in these efforts. The potential range of loss or
gain and the resolution of these matters cannot be determined at this
time.
38
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
|
·
|
Common Sulfur
Project: One of our wholly owned subsidiaries, WGI –
Middle East, Inc., whose parent company, WGI, was acquired by us on
November 15, 2007, together with a consortium partner, have contracted
under a fixed-price arrangement to engineer, procure and construct a
sulfur processing facility located in Qatar. The completed
project will gather and process sulfur produced by new liquid natural gas
processing facilities also under construction. The project has
experienced cost increases and schedule delays. The contract
gives the customer the right to assess liquidated damages of approximately
$25 million against the consortium if various project milestones are not
met. If liquidated damages are assessed, a significant portion
may be attributable to WGI – Middle East,
Inc.
|
To date,
only a portion of the cost increases have been agreed to with the customer and
acknowledged through executed change orders. During the three and
nine months ended October 2, 2009, charges to income of approximately $20
million and $31 million, respectively, have been recorded for this project,
bringing the cumulative project losses to approximately $76 million as of
October 2, 2009. The charge recorded during the three months ended
October 2, 2009 relates primarily to issues identified in the commissioning and
facility startup phases, which require rework. While the estimated
losses have been recognized, the potential range of additional loss, if any, and
the resolution of this matter cannot be determined at this time.
The
resolution of outstanding claims and litigation is subject to inherent
uncertainty, and it is reasonably possible that resolution of any of the above
outstanding claims or litigation matters could have a material adverse effect on
us.
Insurance
Generally,
our insurance program includes limits totaling $540.0 million per loss and in
the aggregate for general liability, $220.0 million per loss and in the
aggregate for professional errors and omissions liability, $140.0 million per
loss for property, $100.0 million per loss for marine property and liability,
and $100.0 million per loss and in the aggregate for contractor’s pollution
liability (in addition to other policies for specific projects). The
general liability, professional errors and omissions liability, property, and
contractor’s pollution liability limits are in excess of a self-insured
retention of $10.0 million for each covered claim. In addition, our
insurance policies contain certain exclusions and sublimits that insurance
providers may use to deny or restrict coverage.
Excess
liability insurance policies provide for coverages on a “claims-made” basis,
covering only claims actually made and reported during the policy period
currently in effect. Thus, if we do not continue to maintain these
policies, we will have no coverage for claims made after the termination date
even for claims based on events that occurred during the term of
coverage. While we intend to maintain these policies, we may be
unable to maintain existing coverage levels. We have maintained
insurance without lapse for many years with limits in excess of losses
sustained.
Guarantee
Obligations and Commitments
As of
October 2, 2009, we had the following guarantee obligations and
commitments:
We
guaranteed the credit facility of one of our unconsolidated joint ventures, in
the event of a default by the joint venture. This joint venture was
formed in the ordinary course of business to perform a contract for the U.S.
federal government. The term of the guarantee was equal to the
remaining term of the underlying credit facility. Performance on this
contract has ended and the guarantee was terminated in April 2009.
We have
guaranteed a letter of credit issued on behalf of one of our unconsolidated
construction joint ventures, in which we are a 60% owner with no significant
influence over operations. The total amount of the letter of credit
was $7.2 million as of October 2, 2009.
39
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
We have
agreed to indemnify one of our joint venture partners up to $25.0 million for
any potential losses, damages, and liabilities associated with lawsuits in
relation to general and administrative services we provide to the joint
venture. Currently, we have no indemnified claims under this
guarantee.
As of
October 2, 2009, the amount of the guarantee used to collateralize the credit
facility of our U.K. operating subsidiary and bank guarantee lines of our
European subsidiaries was $8.2 million.
We also
maintain a variety of commercial commitments that are generally made to support
provisions of our contracts. In addition, in the ordinary course of
business, we provide letters of credit to clients and others against advance
payments and to support other business arrangements. We are required
to reimburse the issuers of letters of credit for any payments they make under
the letters of credit.
In the
ordinary course of business, we may provide performance assurances and
guarantees related to our services. For example, these guarantees may
include surety bonds, arrangements among our client, a surety, and us to ensure
we perform our contractual obligations pursuant to our client
agreement. If our services under a guaranteed project are later
determined to have resulted in a material defect or other material deficiency,
then we may be responsible for monetary damages or other legal
remedies. When sufficient information about claims on guaranteed
projects is available and monetary damages or other costs or losses are
determined to be probable, we recognize such guarantee losses.
In the
ordinary course of business, we may provide performance assurances and
guarantees to clients on behalf of unconsolidated subsidiaries, joint ventures,
and other joint projects that we do not directly control. We enter
into these guarantees primarily to support the contractual obligations
associated with these joint projects. The potential payment amount of
an outstanding performance guarantee is typically the remaining cost of work to
be performed by or on behalf of third parties under engineering and construction
contracts. However, we are not able to estimate other amounts that
may be required to be paid in excess of estimated costs to complete contracts
and, accordingly, the total potential payment amount under our outstanding
performance guarantees cannot be estimated. For cost-plus contracts,
amounts that may become payable pursuant to guarantee provisions are normally
recoverable from the client for work performed under the
contract. For lump sum or fixed-price contracts, this amount is the
cost to complete the contracted work less amounts remaining to be billed to the
client under the contract. Remaining billable amounts could be
greater or less than the cost to complete. In those cases where costs
exceed the remaining amounts payable under the contract, we may have recourse to
third parties, such as owners, co-venturers, subcontractors or vendors, for
claims.
Restructuring
Costs
In
conjunction with the WGI acquisition in 2007, we accrued anticipated
restructuring costs and expect to pay out the remaining liability of $5.3
million within the next three years. The restructuring costs relate
primarily to costs for severance, associated benefits, outplacement services and
excess facilities. The following table presents a reconciliation of
the restructuring reserve balance from January 2, 2009 to October 2,
2009.
|
(In
thousands)
|
Three
Months Ended
October
2, 2009
|
Nine
Months Ended
October
2, 2009
|
||||||
|
Restructuring
reserve at beginning of period
|
$ | 8,025 | $ | 13,262 | ||||
|
Payments
|
(2,373 | ) | (6,394 | ) | ||||
|
Adjustments
|
(348 | ) | (1,564 | ) | ||||
|
Balance
as of October 2, 2009
|
$ | 5,304 | $ | 5,304 | ||||
40
URS
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Continued)
NOTE
9. INCOME TAXES
We
anticipate that cash payments for income taxes for 2009 and later years will be
substantially less than income tax expense recognized in the financial
statements. This difference results from expected tax deductions for
goodwill amortization and from use of net operating loss (“NOL”)
carryovers. As of October 2, 2009, we have remaining tax-deductible
goodwill of $444.0 million resulting from WGI’s previous acquisitions prior to
our acquisition of WGI as well as our acquisitions of Dames & Moore,
EG&G, Lear Siegler and other less significant acquisitions. The
amortization of this goodwill is deductible over various periods ranging up to
14 years. The tax deduction for goodwill for 2009 will be $86.4
million. The amount of the tax deduction for goodwill decreases
slightly over the next five years and is substantially lower after six
years.
As of
October 2, 2009, our federal NOL carryover was approximately $60.9 million; all
of the NOL was generated by recently acquired companies (WGI and CRI Resources,
Inc. (“CRI”)). These federal NOL carryovers expire in years 2020
through 2026. A total of $22.2 million of these NOL carryovers are
limited by the earnings of CRI. We anticipate that the majority of
the federal NOL will be used within the next twelve months based upon our
forecast of taxable income. In addition to the federal NOL, there are
state income tax NOL carryovers in various states which would reduce state taxes
payable in those states by approximately $31.3 million. There are
also foreign NOL carryovers of approximately $307.2 million, offset by a
valuation allowance of $293.2 million. The remaining $14.0 million of
foreign NOL carryovers are in various taxing jurisdictions. None of
these NOL carryovers are individually material and the majority have no
expiration date. Full recovery of the state and foreign NOL
carryovers will require that the appropriate legal entity generate taxable
income in the future at least equal to the amount of the NOL carryovers within
the applicable state or foreign taxing jurisdiction.
It is
also reasonably possible that we will recognize up to $3.0 million in previously
unrecognized tax benefits within the next twelve months as a result of the
settlement of federal and state tax audits. The timing and amounts of
these audit settlements are uncertain, but we do not expect any of these
settlements to have a significant impact on our financial position or results of
operations.
Our effective income tax rates
for the three months ended October 2, 2009 and September 26, 2008 were
25.4% and 41.9%, respectively. Our effective income tax rates for the nine months
ended October 2, 2009 and September 26, 2008 were 37.4% and 42.1%,
respectively. The significant reduction in our effective tax
rate during the third quarter of 2009 was due primarily to our determination,
made during the quarter, that earnings of our foreign subsidiaries will no
longer be indefinitely reinvested. This determination resulted in
accrual of deferred U.S. tax liabilities on the undistributed earnings of our
foreign subsidiaries and also recognition of foreign tax credits associated with
these undistributed earnings. Because the foreign tax credits
significantly exceeded our accrual of deferred U.S. tax liabilities on these
undistributed earnings, our effective income tax rate for the quarter was
reduced. This rate reduction was partially offset by the
establishment, during the third quarter, of valuation allowances against
existing deferred tax assets, and also by the write-off of foreign income tax
receivables associated with prior earnings of some of our foreign subsidiaries
that we determined during the quarter, could not be collected. These
valuation allowances and write-offs had the effect of increasing our income tax
expense, and so partially offset the effective rate
reduction. Because these items all impacted our income tax expense in
the third quarter of 2009, the impact on our effective income tax rate for this
quarter compared to the third quarter of 2008 was significant. For
the nine-month period ended October 2, 2009, the impact was less significant,
and is expected to be further diluted for the year ended January 1,
2010.
The
following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our
actual results and the timing of events could differ materially from those
expressed or implied in this report. See “URS Corporation and
Subsidiaries” regarding forward-looking statements on page 1. You
should read this discussion in conjunction with: Part II – Item 1A,
“Risk Factors,” beginning on page 75; the
condensed consolidated financial statements and notes thereto contained in Part
I – Item 1, “Financial Statements;” and the Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended January 2,
2009, which was previously filed with the Securities and Exchange Commission
(“SEC”).
BUSINESS
SUMMARY
URS is a
leading international provider of engineering, construction and technical
services. We offer a broad range of program management, planning,
design, engineering, construction and construction management, operations and
maintenance, and decommissioning and closure services to public agencies and
private sector clients around the world. We also are a major United
States (“U.S.”) federal government contractor in the areas of systems
engineering and technical assistance, and operations and
maintenance. We have more than 45,000 employees in a global network
of offices and contract-specific job sites in more than 30
countries.
We
generate revenues by providing fee-based professional and technical services and
by executing construction and mining contracts. As a result, our
professional and technical services are primarily labor intensive and our
construction and mining projects are labor and capital intensive. To
derive income from our revenues, we must effectively manage our
costs. We provide our services through three operating
divisions: the URS Division, the EG&G Division and the Washington
Division.
Our
revenues are dependent upon our ability to attract and retain qualified and
productive employees, identify business opportunities, allocate our labor
resources to profitable markets, execute existing contracts, secure new
contracts, and maintain existing client relationships. Moreover, as a
professional services company, the quality of the work generated by our
employees is integral to our revenue generation.
Our cost
of revenues is comprised of the compensation we pay to our employees, including
fringe benefits; the cost of subcontractors, construction materials and other
project-related expenses; as well as administrative, marketing, sales, bid and
proposal, rental and other overhead costs.
We report
our financial results on a consolidated basis and for our three operating
divisions: the URS Division, the EG&G Division and the Washington
Division.
OVERVIEW
AND BUSINESS TRENDS
Results for the Three Months
Ended October 2, 2009
Consolidated
revenues for the third quarter of 2009 were $2.3 billion compared with $2.6
billion during the same period in 2008. Net income attributable to
URS decreased 1.5% from $65.8 million during the third quarter of 2008 to $64.8
million for the third quarter of 2009.
Cash Flows and
Debt
During
the nine months ended October 2, 2009, we generated $448.2 million in cash from
operations. Cash flows from operations increased by $164.8 million
for the nine months ended October 2, 2009 compared with the same period in
2008. This increase was primarily due to the timing of payments from
clients on accounts receivable, the timing of payroll payments relative to our
fiscal quarter ends, the timing of payments to vendors and subcontractors and a
decrease in income tax and interest payments.
On June
10, 2009, we completed the sale of our equity investment in MIBRAG mbH
(“MIBRAG”) and we received €206.1 million (equivalent to U.S. $287.8 million) in
cash proceeds from the sale and incurred sale-related costs of $5.2
million. In addition, we settled our foreign currency forward
contract, which primarily hedged our net investment in MIBRAG, at a loss of
$27.7 million. During the nine months ended October 2, 2009, we used
$57.0 million of the net proceeds from the sale for debt payments and invested
$195.0 million of the net proceeds in bank certificates of deposits as
short-term investments.
During
the third quarter of our fiscal year 2009, a mining contract located in Bolivia
was terminated at our former client’s discretion and we received $47.4 million
primarily related to the sale of the mining equipment and other related
assets.
As of
October 2, 2009 and January 2, 2009, our ratios of debt to total capitalization
(total debt divided by the sum of debt and total stockholders’ equity) were 19%
and 23%, respectively.
Business
Trends
Given the
recent turmoil in global financial markets and current economic uncertainty, it
is difficult to predict the impact of the global recession on our
business. For the nine months ended October 2, 2009, we experienced a
moderate decline in revenues, as well as a slowdown in new project awards,
compared to the same period in fiscal 2008, and we instituted cost-control
measures in anticipation of these declines. We continue to monitor
the situation carefully to determine the potential impact on our business during
and beyond our 2009 fiscal year. However, the continuing global
uncertainty and challenging economic conditions may impair our ability to
forecast business trends accurately. These challenging economic
conditions could lead to further delays, curtailments or cancellations of
proposed and existing projects, thus decreasing the overall demand for our
services and adversely affecting our results of operations and weakening our
financial condition.
We
believe that our expectations regarding business trends are reasonable and are
based on reasonable assumptions. However, such forward-looking
statements, by their nature, involve risks and uncertainties. You
should read this discussion of business trends in conjunction with Part II, Item
1A, “Risk Factors,” of this report, which begins on page 75.
Power
We expect
revenues from our power market sector to decline during our 2009 fiscal year,
primarily due to the timing of new emissions control projects and the delay in
some projects resulting from the economic downturn and weak demand for
electricity. Many of our clients have completed or are in the final
phases of projects that will enable them to meet a 2010 deadline for emissions
reductions mandated by the Clean Air Interstate Rule. At the same
time, our utility clients have not yet implemented projects that will allow them
to meet the Rule’s 2015 deadline for additional reductions in
emissions. In addition, we have experienced delays on power projects
associated with the Canadian oil sands market.
Partially
offsetting this expected decline in revenues from emissions control projects, we
anticipate sustained demand for engineering and construction services related to
the development of new gas-fired power plants because these facilities are more
efficient and produce fewer emissions than coal-fired power
plants. We also expect to continue providing upgrade, retrofit and
modification services at existing nuclear facilities to increase generating
capacity and extend the operational life of these facilities.
For the
2010 fiscal year, we expect to benefit from increased planning and procurement
activity for projects that will enable our utility clients to meet the Clean Air
Interstate Rule’s 2015 deadline, as well as state mandates for emission
reductions that become effective in 2012. We also expect to continue
to benefit from strong demand for engineering and construction services for the
development of gas-fired power plants. The passage of the $787
billion American Recovery and Reinvestment Act (the “ARRA”) could result in
increased demand for the engineering and construction services we provide in the
power market sector. The ARRA authorizes increased investment in the
nation’s energy transmission and distribution systems, alternative energy power
sources and clean-coal technologies. Longer term, we anticipate that
the nuclear power market, as an emissions-free energy source, will create new
opportunities for our power business.
Infrastructure
We expect
revenues from our infrastructure market sector to remain steady or decline
moderately for our 2009 fiscal year. As a result of current economic
conditions and declining tax revenues, most state governments have reduced
spending in an effort to close budget gaps. In some cases, these
spending reductions have resulted in the delay, curtailment or cancellation of
key infrastructure programs. At the same time, our infrastructure
work also is funded through a wide variety of other sources, such as bonds,
dedicated tax measures and users fees, and, if made available, these funding
sources could partially offset reductions in spending by state
governments.
For the
2010 fiscal year, we expect an increase in the number, size and scale of
infrastructure projects funded by the ARRA, which may offer opportunities for
us. The ARRA allocates approximately $65 billion in funding for the
types of infrastructure programs for which we provide services, including
highway, mass transit, high-speed rail and water projects. We
expect that the stimulus package will not have a meaningful impact on our
business in 2009, primarily because initial ARRA-funded projects have focused on
smaller paving, repair and maintenance work. However, a major portion
of ARRA funds for infrastructure has yet to be spent, and we anticipate
increased funding in 2010 for larger design and construction projects that
require the types of services we provide. We also expect to continue
to benefit from the availability of bonds, dedicated tax measures and other
alternatives as a funding source for infrastructure projects in the year
ahead.
Federal
We expect
revenues from our federal market sector to grow for the 2009 fiscal year based
on the diversification of our federal business and stable funding for the types
of programs we support. We continue to experience sustained demand
for outsourced engineering, construction and technical services from the
Department of Defense (“DOD”), the Department of Energy (“DOE”) and other
federal agencies for a broad range of programs we support.
For 2010,
we expect our federal market sector will continue to generate growth
opportunities. In October, the President signed the $680 billion
defense authorization bill for fiscal 2010, which includes a $550 billion
baseline budget and $130 billion to support military activity in the Middle
East. The budget includes significant funding for programs that are
important to our business, including operations and maintenance; research,
development, test and evaluation services; chemical demilitarization; and the
Military Transformation Initiative. The proposed DOE budget of
approximately $27 billion includes $17 billion in funding for programs that
support virtually all our work for the DOE. In addition, the ARRA
allocates approximately $6 billion in funding to accelerate the cleanup of
former nuclear weapons productions and testing facilities, including $1.5
billion for the five major sites where we manage
operations. Finally, we expect to continue to benefit from the
diversification of our federal business. We currently support more
than 25 federal agencies, including the National Aeronautics and Space
Administration (“NASA”); the Departments of Health and Human Services, Homeland
Security, and Veterans Affairs; and the General Services
Administration.
Industrial
and Commercial
We expect
to experience a decline in revenues from our industrial and commercial market
sector for the 2009 fiscal year. The economic downturn, tightened
credit markets and fluctuations in commodity prices have resulted in reductions
in capital spending for the development of new production facilities,
particularly among clients in the oil and gas and manufacturing
industries. As a result, we have experienced and expect to continue
to experience delays, curtailments or cancellations in new capital projects, for
which we typically provide engineering, procurement and construction
services.
We also
anticipate that demand for the planning, environmental and facilities management
services we provide to industrial and commercial clients in support of existing
plant operations will continue to decline, reflecting lower levels of activities
at these facilities. In addition, many of our mining clients delayed
or cancelled mining projects and, in some cases, suspended existing mining
operations as the prices of metals and mineral resources fell. In
addition, we completed a major construction project for a new cement plant
during the 2009 fiscal year. The high level of construction activity
on this project in fiscal year 2008 generated significant revenues; however, as
the project was substantially complete as of July 3, 2009, we expect revenues
from this project to decline.
For 2010,
we expect conditions will remain challenging in our industrial and commercial
market sector. At the same time, there are several positive trends
emerging in this market sector. For example, several of our oil and
gas clients are beginning initial planning for new and previously suspended
projects, which they plan to pursue to the extent that economic conditions and
capital budgets improve. In the manufacturing sector, if the economy
continues to improve, we expect demand to increase for our facilities management
work as clients restart dormant facilities or increase production at plants
operating below capacity. In addition, we are seeing increased
opportunities to provide planning and engineering services for phosphate and
precious metal mines.
Seasonality
We
experience seasonal trends in our business in connection with federal holidays,
such as Memorial Day, Independence Day, Labor Day, Thanksgiving, Christmas and
New Year’s Day. Our revenues are typically lower during these times
of the year because many of our clients’ employees, as well as our own
employees, do not work during these holidays, resulting in fewer billable hours
charged to projects and thus, lower revenues recognized. In addition
to holidays, our business also is affected by seasonal bad weather conditions,
such as hurricanes, flooding, snowstorms or other inclement weather, which may
cause some of our offices and projects to close or reduce activities
temporarily.
Other
Business Trends
The
diversification of our business and changes in the mix and timing of our
contracts, which contain various risk and profit profiles, can cause revenues
and profit margins to vary between periods. Revenues and earnings
recognition on many contracts are measured based on progress achieved as a
percentage of the total project effort or upon the completion of milestones or
performance criteria rather than evenly or linearly over the period of
performance.
BOOK
OF BUSINESS
We
determine the amounts of all contract awards that may potentially be recognized
as revenues or equity in income of unconsolidated joint ventures over the life
of the contracts. We categorize the amount of our book of business
into backlog, option years and indefinite delivery contracts (“IDCs”), based on
the nature of the award and its current status. Starting in the first
quarter of 2009, we ceased reporting designations as part of our book of
business. As we have grown and our business mix has changed,
designations have become a less useful tool for analyzing our overall business
prospects. For comparability purposes, we also adjusted our book of
business as of January 2, 2009 to exclude designations.
As of
October 2, 2009, our total book of business was $29.5 billion, a net increase of
$0.4 billion, compared to $29.1 billion as of January 2, 2009. The
largest single addition to our book of business was a new performance-based,
cost-plus award-fee contract awarded to us by the DOE in the first quarter of
2009. This contract to provide liquid waste management services has a
potential maximum contract value of approximately $3.3 billion over a six-year
base performance period and includes an additional two-year extension
option. We included approximately $2.5 billion and $0.8 billion of
the potential value of this contract in our backlog and option years,
respectively, during the first quarter of 2009. In addition to
revenues and equity in income of unconsolidated joint ventures recognized in the
ordinary course of business during the nine months ended October 2, 2009, the
two largest individual reductions in our book of business were reductions in
backlog and consisted of $0.5 billion, which resulted from the sale of our
equity investment in MIBRAG, and $0.4 billion, which resulted from the
termination of a mining contract in Bolivia.
Backlog. Our
contract backlog represents the monetary value of signed contracts, including
task orders that have been issued and funded under IDCs and, where applicable, a
notice to proceed has been received from the client that is expected to be
recognized as revenues or equity in income of unconsolidated joint ventures when
future services are performed.
The
performance periods of our contracts vary widely from a few months to many
years. In addition, contract durations differ significantly among our
segments, although some overlap exists. As a result, the amount of
revenues that will be realized beyond one year also varies from segment to
segment. As of January 2, 2009, we estimated that approximately 64%
of our total backlog would not be realized within one year based upon the timing
of awards and the long-term nature of many of our contracts; however, no
assurance can be given that backlog will be realized at this rate, particularly
in light of the current anticipated and continuing severe recessionary
conditions.
Option Years. Our
option years represent the monetary value of option periods under existing
contracts in backlog, which are exercisable at the option of our clients without
requiring us to go through an additional competitive bidding process and would
be canceled only if a client decides to end the project (a termination for
convenience) or through a termination for default. Options years are
in addition to the “base periods” of these contracts. Base periods
for these contracts can vary from one to five years.
Indefinite Delivery
Contracts. Indefinite delivery contracts represent the
expected monetary value to us of signed contracts under which we perform work
only when the client awards specific task orders or projects to
us. When agreements for such task orders or projects are signed and
funded, we transfer their value into backlog. Generally, the terms of
these contracts exceed one year and often include a maximum term and potential
value. IDCs generally range from one to twenty years in
length.
While the
value of our book of business is a predictor of future revenues and equity in
income of unconsolidated joint ventures, we have no assurance, nor can we
provide assurance, that we will ultimately realize the maximum potential values
for backlog, option years or IDCs. Based on our historical
experience, our backlog has the highest likelihood of converting into revenues
or equity in income of unconsolidated joint ventures because it is based upon
signed and executable contracts with our clients. Option years are
not as certain as backlog because our clients may decide not to exercise one or
more option years. Because we do not perform work under IDCs until
specific task orders are issued by our clients, the value of our IDCs are not as
likely to convert into revenues or equity in income of unconsolidated joint
ventures as other categories of our book of business.
The
following tables summarize our book of business:
|
As
of
|
||||||||
|
(In
billions)
|
October
2,
2009
|
January
2,
2009
|
||||||
|
Backlog:
|
||||||||
|
Power
|
$ | 1.4 | $ | 1.8 | ||||
|
Infrastructure
|
2.7 | 2.3 | ||||||
|
Industrial
and commercial
|
1.3 | 2.9 | ||||||
|
Federal
|
12.5 | 10.2 | ||||||
|
Total
backlog
|
$ | 17.9 | $ | 17.2 | ||||
|
(In
billions)
|
URS
Division
|
EG&G
Division
|
Washington
Division
|
Total
|
||||||||||||
|
As of October 2, 2009
|
||||||||||||||||
|
Backlog
|
$ | 2.8 | $ | 7.6 | $ | 7.5 | $ | 17.9 | ||||||||
|
Option
years
|
0.4 | 2.2 | 2.3 | 4.9 | ||||||||||||
|
Indefinite
delivery contracts
|
4.2 | 1.6 | 0.9 | 6.7 | ||||||||||||
|
Total
book of business
|
$ | 7.4 | $ | 11.4 | $ | 10.7 | $ | 29.5 | ||||||||
|
As of January 2, 2009
|
||||||||||||||||
|
Backlog
|
$ | 2.8 | $ | 7.7 | $ | 6.7 | $ | 17.2 | ||||||||
|
Option
years
|
0.5 | 2.2 | 1.6 | 4.3 | ||||||||||||
|
Indefinite
delivery contracts
|
4.0 | 2.1 | 1.5 | 7.6 | ||||||||||||
|
Total
book of business (1)
|
$ | 7.3 | $ | 12.0 | $ | 9.8 | $ | 29.1 | ||||||||
_____________
|
(1)
|
We
adjusted our book of business as of January 2, 2009 to exclude
designations as we ceased reporting them within our book of business
starting in the first quarter of
2009.
|
RESULTS
OF OPERATIONS
The
Three Months Ended October 2, 2009 Compared with the Three Months Ended
September 26, 2008
Consolidated
|
Three
Months Ended
|
||||||||||||||||
|
(In
millions, except percentages and per share amounts)
|
October
2,
2009
|
September
26,
2008
|
Increase
(Decrease)
|
Percentage
Increase
(Decrease)
|
||||||||||||
|
Revenues
|
$ | 2,318.5 | $ | 2,588.1 | $ | (269.6 | ) | (10.4 | %) | |||||||
|
Cost
of revenues
|
(2,217.1 | ) | (2,448.7 | ) | (231.6 | ) | (9.5 | %) | ||||||||
|
General
and administrative expenses
|
(17.9 | ) | (20.5 | ) | (2.6 | ) | (12.7 | %) | ||||||||
|
Equity
in income of unconsolidated joint ventures
|
20.7 | 24.3 | (3.6 | ) | (14.8 | %) | ||||||||||
|
Operating
income
|
104.2 | 143.2 | (39.0 | ) | (27.2 | %) | ||||||||||
|
Interest
expense
|
(11.0 | ) | (21.4 | ) | (10.4 | ) | (48.6 | %) | ||||||||
|
Income
before income taxes
|
93.2 | 121.8 | (28.6 | ) | (23.5 | %) | ||||||||||
|
Income
tax expense
|
(24.6 | ) | (51.0 | ) | (26.4 | ) | (51.8 | %) | ||||||||
|
Net
income
|
68.6 | 70.8 | (2.2 | ) | (3.1 | %) | ||||||||||
|
Noncontrolling
interest in income of consolidated subsidiaries, net of
tax
|
(3.8 | ) | (5.0 | ) | (1.2 | ) | (24.0 | %) | ||||||||
|
Net
income attributable to URS
|
$ | 64.8 | $ | 65.8 | $ | (1.0 | ) | (1.5 | %) | |||||||
|
Diluted
earnings per share
|
$ | .79 | $ | .77 | $ | .02 | 2.6 | % | ||||||||
The
following table presents our consolidated revenues by market sector and division
for the three months ended October 2, 2009 and September 26, 2008.
|
Three
Months Ended
|
||||||||||||||||
|
(In
millions, except percentages)
|
October
2,
2009
|
September
26,
2008
|
Increase
(Decrease)
|
Percentage
Increase (Decrease)
|
||||||||||||
|
Revenues
|
||||||||||||||||
|
Power
sector
|
||||||||||||||||
|
URS
Division
|
$ | 28.8 | $ | 53.7 | $ | (24.9 | ) | (46.4 | %) | |||||||
|
EG&G
Division
|
— | — | — | — | ||||||||||||
|
Washington
Division
|
296.9 | 402.6 | (105.7 | ) | (26.3 | %) | ||||||||||
|
Power
Total
|
325.7 | 456.3 | (130.6 | ) | (28.6 | %) | ||||||||||
|
Infrastructure
sector
|
||||||||||||||||
|
URS
Division
|
354.4 | 362.0 | (7.6 | ) | (2.1 | %) | ||||||||||
|
EG&G
Division
|
— | — | — | — | ||||||||||||
|
Washington
Division
|
53.4 | 82.3 | (28.9 | ) | (35.1 | %) | ||||||||||
|
Infrastructure
Total
|
407.8 | 444.3 | (36.5 | ) | (8.2 | %) | ||||||||||
|
Federal
sector
|
||||||||||||||||
|
URS
Division
|
171.2 | 139.9 | 31.3 | 22.4 | % | |||||||||||
|
EG&G
Division
|
652.0 | 606.1 | 45.9 | 7.6 | % | |||||||||||
|
Washington
Division
|
301.8 | 166.6 | 135.2 | 81.2 | % | |||||||||||
|
Federal
Total
|
1,125.0 | 912.6 | 212.4 | 23.3 | % | |||||||||||
|
Industrial
and Commercial sector
|
||||||||||||||||
|
URS
Division
|
228.7 | 279.8 | (51.1 | ) | (18.3 | %) | ||||||||||
|
EG&G
Division
|
— | — | — | — | ||||||||||||
|
Washington
Division
|
231.3 | 495.1 | (263.8 | ) | (53.3 | %) | ||||||||||
|
Industrial
and Commercial Total
|
460.0 | 774.9 | (314.9 | ) | (40.6 | %) | ||||||||||
|
Total
revenues, net of eliminations
|
$ | 2,318.5 | $ | 2,588.1 | $ | (269.6 | ) | (10.4 | %) | |||||||
Reporting
Segments
|
(In
millions, except percentages)
|
Revenues
|
Cost
of Revenues
|
General
and Administrative Expenses
|
Equity
in Income of Unconsolidated Joint Ventures
|
Operating
Income
|
|||||||||||||||
|
Three months ended October 2,
2009
|
|
|
||||||||||||||||||
|
URS
Division
|
$ | 793.0 | $ | (738.9 | ) | $ | — | $ | 1.9 | $ | 56.0 | |||||||||
|
EG&G
Division
|
653.5 | (615.4 | ) | — | 1.3 | 39.4 | ||||||||||||||
|
Washington
Division
|
886.4 | (877.2 | ) | — | 17.5 | 26.7 | ||||||||||||||
|
Eliminations
|
(14.4 | ) | 14.4 | — | — | — | ||||||||||||||
|
Corporate
|
— | — | (17.9 | ) | — | (17.9 | ) | |||||||||||||
|
Total
|
$ | 2,318.5 | $ | (2,217.1 | ) | $ | (17.9 | ) | $ | 20.7 | $ | 104.2 | ||||||||
|
Three months ended September 26,
2008
|
|
|||||||||||||||||||
|
URS
Division
|
$ | 839.7 | $ | (782.8 | ) | $ | — | $ | 2.8 | $ | 59.7 | |||||||||
|
EG&G
Division
|
606.8 | (566.5 | ) | — | 1.7 | 42.0 | ||||||||||||||
|
Washington
Division
|
1,154.8 | (1,112.6 | ) | — | 19.8 | 62.0 | ||||||||||||||
|
Eliminations
|
(13.2 | ) | 13.2 | — | — | — | ||||||||||||||
|
Corporate
|
— | — | (20.5 | ) | — | (20.5 | ) | |||||||||||||
|
Total
|
$ | 2,588.1 | $ | (2,448.7 | ) | $ | (20.5 | ) | $ | 24.3 | $ | 143.2 | ||||||||
|
Increase (decrease) for the three months ended
October 2, 2009 and
September 26, 2008 |
|
|
||||||||||||||||||
|
URS
Division
|
$ | (46.7 | ) | $ | (43.9 | ) | $ | — | $ | (0.9 | ) | $ | (3.7 | ) | ||||||
|
EG&G
Division
|
46.7 | 48.9 | — | (0.4 | ) | (2.6 | ) | |||||||||||||
|
Washington
Division
|
(268.4 | ) | (235.4 | ) | — | (2.3 | ) | (35.3 | ) | |||||||||||
|
Eliminations
|
(1.2 | ) | (1.2 | ) | — | — | — | |||||||||||||
|
Corporate
|
— | — | (2.6 | ) | — | 2.6 | ||||||||||||||
|
Total
|
$ | (269.6 | ) | $ | (231.6 | ) | $ | (2.6 | ) | $ | (3.6 | ) | $ | (39.0 | ) | |||||
|
Percentage increase (decrease) for the three
months ended October 2, 2009 and
September 26, 2008 |
|
|
||||||||||||||||||
|
URS
Division
|
(5.6 | %) | (5.6 | %) | — | (32.1 | %) | (6.2 | %) | |||||||||||
|
EG&G
Division
|
7.7 | % | 8.6 | % | — | (23.5 | %) | (6.2 | %) | |||||||||||
|
Washington
Division
|
(23.2 | %) | (21.2 | %) | — | (11.6 | %) | (56.9 | %) | |||||||||||
|
Eliminations
|
9.1 | % | 9.1 | % | — | — | — | |||||||||||||
|
Corporate
|
— | — | (12.7 | %) | — | (12.7 | %) | |||||||||||||
|
Total
|
(10.4 | %) | (9.5 | %) | (12.7 | %) | (14.8 | %) | (27.2 | %) | ||||||||||
The
Nine Months Ended October 2, 2009 Compared with the Nine Months Ended September
26, 2008
Consolidated
|
Nine
Months Ended
|
||||||||||||||||
|
(In
millions, except percentages and per share amounts)
|
October
2,
2009
|
September
26,
2008
|
Increase
(Decrease)
|
Percentage
Increase
(Decrease)
|
||||||||||||
|
Revenues
|
$ | 7,136.8 | $ | 7,378.1 | $ | (241.3 | ) | (3.3 | %) | |||||||
|
Cost
of revenues
|
(6,765.7 | ) | (7,008.5 | ) | (242.8 | ) | (3.5 | %) | ||||||||
|
General
and administrative expenses
|
(56.6 | ) | (57.1 | ) | (0.5 | ) | (0.9 | %) | ||||||||
|
Equity
in income of unconsolidated joint ventures
|
79.0 | 81.0 | (2.0 | ) | (2.5 | %) | ||||||||||
|
Operating
income
|
393.5 | 393.5 | — | — | ||||||||||||
|
Interest
expense
|
(37.6 | ) | (70.1 | ) | (32.5 | ) | (46.4 | %) | ||||||||
|
Other
income, net
|
47.9 | — | 47.9 | N/M | ||||||||||||
|
Income
before income taxes
|
403.8 | 323.4 | 80.4 | 24.9 | % | |||||||||||
|
Income
tax expense
|
(151.9 | ) | (136.0 | ) | 15.9 | 11.7 | % | |||||||||
|
Net
income
|
251.9 | 187.4 | 64.5 | 34.4 | % | |||||||||||
|
Noncontrolling
interest in income of consolidated subsidiaries, net of
tax
|
(16.5 | ) | (12.8 | ) | 3.7 | 28.9 | % | |||||||||
|
Net
income attributable to URS
|
$ | 235.4 | $ | 174.6 | $ | 60.8 | 34.8 | % | ||||||||
|
Diluted
earnings per share
|
$ | 2.87 | $ | 2.06 | $ | .81 | 39.3 | % | ||||||||
____________
N/M = Not
meaningful
The
following table presents our consolidated revenues by market sector and division
for the nine months ended October 2, 2009 and September 26, 2008.
|
Nine
Months Ended
|
||||||||||||||||
|
(In
millions, except percentages)
|
October
2,
2009
|
September
26,
2008
|
Increase
(Decrease)
|
Percentage
Increase (Decrease)
|
||||||||||||
|
Revenues
|
||||||||||||||||
|
Power
sector
|
||||||||||||||||
|
URS
Division
|
$ | 110.6 | $ | 202.6 | $ | (92.0 | ) | (45.4 | %) | |||||||
|
EG&G
Division
|
— | — | — | — | ||||||||||||
|
Washington
Division
|
995.8 | 1,160.6 | (164.8 | ) | (14.2 | %) | ||||||||||
|
Power
Total
|
1,106.4 | 1,363.2 | (256.8 | ) | (18.8 | %) | ||||||||||
|
Infrastructure
sector
|
||||||||||||||||
|
URS
Division
|
1,083.2 | 1,063.5 | 19.7 | 1.9 | % | |||||||||||
|
EG&G
Division
|
— | — | — | — | ||||||||||||
|
Washington
Division
|
190.1 | 253.5 | (63.4 | ) | (25.0 | %) | ||||||||||
|
Infrastructure
Total
|
1,273.3 | 1,317.0 | (43.7 | ) | (3.3 | %) | ||||||||||
|
Federal
sector
|
||||||||||||||||
|
URS
Division
|
516.3 | 444.1 | 72.2 | 16.3 | % | |||||||||||
|
EG&G
Division
|
1,937.9 | 1,730.6 | 207.3 | 12.0 | % | |||||||||||
|
Washington
Division
|
635.1 | 390.3 | 244.8 | 62.7 | % | |||||||||||
|
Federal
Total
|
3,089.3 | 2,565.0 | 524.3 | 20.4 | % | |||||||||||
|
Industrial
and Commercial sector
|
||||||||||||||||
|
URS
Division
|
688.1 | 822.5 | (134.4 | ) | (16.3 | %) | ||||||||||
|
EG&G
Division
|
— | — | — | — | ||||||||||||
|
Washington
Division
|
979.7 | 1,310.4 | (330.7 | ) | (25.2 | %) | ||||||||||
|
Industrial
and Commercial Total
|
1,667.8 | 2,132.9 | (465.1 | ) | (21.8 | %) | ||||||||||
|
Total
revenues, net of eliminations
|
$ | 7,136.8 | $ | 7,378.1 | $ | (241.3 | ) | (3.3 | %) | |||||||
|
(In
millions, except percentages)
|
Revenues
|
Cost
of Revenues
|
General
and Administrative Expenses
|
Equity
in Income of Unconsolidated Joint Ventures
|
Operating
Income
|
|||||||||||||||
|
Nine months ended October 2,
2009
|
|
|
||||||||||||||||||
|
URS
Division
|
$ | 2,436.7 | $ | (2,252.4 | ) | $ | — | $ | 5.4 | $ | 189.7 | |||||||||
|
EG&G
Division
|
1,940.7 | (1,831.6 | ) | — | 4.3 | 113.4 | ||||||||||||||
|
Washington
Division
|
2,810.4 | (2,732.7 | ) | — | 69.3 | 147.0 | ||||||||||||||
|
Eliminations
|
(51.0 | ) | 51.0 | — | — | — | ||||||||||||||
|
Corporate
|
— | — | (56.6 | ) | — | (56.6 | ) | |||||||||||||
|
Total
|
$ | 7,136.8 | $ | (6,765.7 | ) | $ | (56.6 | ) | $ | 79.0 | $ | 393.5 | ||||||||
|
Nine months ended September 26,
2008
|
|
|||||||||||||||||||
|
URS
Division
|
$ | 2,546.4 | $ | (2,369.4 | ) | $ | — | $ | 7.1 | $ | 184.1 | |||||||||
|
EG&G
Division
|
1,732.2 | (1,636.5 | ) | — | 5.3 | 101.0 | ||||||||||||||
|
Washington
Division
|
3,137.6 | (3,040.7 | ) | — | 68.6 | 165.5 | ||||||||||||||
|
Eliminations
|
(38.1 | ) | 38.1 | — | — | — | ||||||||||||||
|
Corporate
|
— | — | (57.1 | ) | — | (57.1 | ) | |||||||||||||
|
Total
|
$ | 7,378.1 | $ | (7,008.5 | ) | $ | (57.1 | ) | $ | 81.0 | $ | 393.5 | ||||||||
|
Increase (decrease) for the nine months ended
October 2, 2009 and
September 26, 2008 |
|
|||||||||||||||||||
|
URS
Division
|
$ | (109.7 | ) | $ | (117.0 | ) | $ | — | $ | (1.7 | ) | $ | 5.6 | |||||||
|
EG&G
Division
|
208.5 | 195.1 | — | (1.0 | ) | 12.4 | ||||||||||||||
|
Washington
Division
|
(327.2 | ) | (308.0 | ) | — | 0.7 | (18.5 | ) | ||||||||||||
|
Eliminations
|
(12.9 | ) | (12.9 | ) | — | — | — | |||||||||||||
|
Corporate
|
— | — | (0.5 | ) | — | 0.5 | ||||||||||||||
|
Total
|
$ | (241.3 | ) | $ | (242.8 | ) | $ | (0.5 | ) | $ | (2.0 | ) | $ | — | ||||||
|
Percentage increase (decrease) for the nine months
ended October 2, 2009 and
September 26, 2008 |
|
|||||||||||||||||||
|
URS
Division
|
(4.3 | %) | (4.9 | %) | — | (23.9 | %) | 3.0 | % | |||||||||||
|
EG&G
Division
|
12.0 | % | 11.9 | % | — | (18.9 | %) | 12.3 | % | |||||||||||
|
Washington
Division
|
(10.4 | %) | (10.1 | %) | — | 1.0 | % | (11.2 | %) | |||||||||||
|
Eliminations
|
33.9 | % | 33.9 | % | — | — | — | |||||||||||||
|
Corporate
|
— | — | (0.9 | %) | — | (0.9 | %) | |||||||||||||
|
Total
|
(3.3 | %) | (3.5 | %) | (0.9 | %) | (2.5 | %) | — | |||||||||||
Revenues
Our consolidated revenues for
the three months ended October 2, 2009 were $2.3 billion, a decrease of $269.6
million or 10.4% compared with the three months ended September 26,
2008. The URS
Division’s revenues for the three months ended October 2, 2009 were
$793.0 million, a decrease of $46.7 million or 5.6% compared with the three
months ended September 26, 2008. The EG&G Division’s
revenues for the three months ended October 2, 2009 were $653.5 million,
an increase of $46.7 million or 7.7% compared with the three months ended
September 26, 2008. The Washington Division’s
revenues for the three months ended October 2, 2009 were $886.4 million,
a decrease of $268.4 million or 23.2% compared with the three months ended
September 26, 2008.
Our consolidated revenues for
the nine months ended October 2, 2009 were $7.1 billion, a decrease of $241.3
million or 3.3% compared with the nine months ended September 26,
2008. The URS
Division’s revenues for the nine months ended October 2, 2009 were $2.4
billion, a decrease of $109.7 million or 4.3% compared with the nine months
ended September 26, 2008. The EG&G Division’s
revenues for the nine months ended October 2, 2009 were $1.9 billion, an
increase of $208.5 million or 12.0% compared with the nine months ended
September 26, 2008. The Washington Division’s
revenues for the nine months ended October 2, 2009 were $2.8 billion, a
decrease of $327.2 million or 10.4% compared with the nine months ended
September 26, 2008.
The
divisional revenues reported above are presented prior to elimination of
interdivisional transactions. Our analysis of these changes in
revenues is set forth below.
Power
Consolidated revenues from our power
market sector for the three months ended October 2, 2009 were $325.7
million, a decrease of $130.6 million or 28.6% compared with the three months
ended September 26, 2008. The decline in revenues in the power sector
reflects completion of several major emissions control projects that experienced
high levels of activity in the comparable period in fiscal 2008, as well as the
timing of mandates established by the Clean Air Interstate Rule for further
reductions in emissions. These projects involved the retrofit of
coal-fired power plants with clean air technology that reduces sulfur dioxide,
mercury and other emissions. Many of our clients have completed, or
will soon complete, projects that will enable them to meet a 2010 deadline for
reductions in sulfur dioxide emissions established by the Clean Air Interstate
Rule. As these projects are completed, we are experiencing a delay
before utilities move forward with projects to meet the Rule’s 2015 deadline for
further reductions. In addition, as a result of the economic
downturn, several power clients have deferred or cancelled large capital
improvement projects. This decrease in revenues was partially offset
by increased demand for the engineering and construction services we provide to
expand generating capacity at existing fossil fuel power plants and to develop
new gas-fired power plants.
Consolidated revenues from our power
market sector for the nine months ended October 2, 2009 were $1,106.4
million, a decrease of $256.8 million or 18.8% compared with the nine months
ended September 26, 2008. Revenues declined due to the completion of
several large emissions control projects, as well as the delay among some of our
clients in large capital improvement projects due to current economic
conditions. In addition, revenues declined due to the completion of a
large project to construct a uranium enrichment facility, which experienced a
high level of activity in the comparable period last year. These
factors were partially offset by steady demand for engineering and construction
services to expand generating capacity at existing fossil fuel power plants and
to develop new gas-fired power plants.
The URS Division’s revenues from
our power market
sector for the three months ended October 2, 2009 were $28.8 million, a
decrease of $24.9 million or 46.4% compared with the three months ended
September 26, 2008. Power revenues declined in the URS Division due
to the completion of several major emissions control projects. In the
comparable period in fiscal 2008, these projects experienced higher levels of
construction and procurement activity and generated higher
revenues. Additionally, as we are awarded new contracts to provide
emissions control services, these assignments are typically being performed
within our Washington Division. During the quarter, revenues also
declined from the engineering, process design and environmental services we
provide for power generating and transmission facilities.
The URS Division’s revenues from
our power market
sector for the nine months ended October 2, 2009 were $110.6 million, a
decrease of $92.0 million or 45.4% compared with the nine months ended September
26, 2008. The decrease was due to the completion of several emissions
control projects that had high levels of activity in the comparable period in
fiscal 2008. Additionally, as we are awarded new contracts to provide
emissions control services, these assignments are typically being performed
within our Washington Division. The decline was partially offset by
an increase in revenues from the engineering, process design and environmental
services we provide for power generating and transmission facilities, compared
to the same period last year.
The Washington Division’s revenues
from our power market sector for the three months ended October 2, 2009
were $296.9 million, a decrease of $105.7 million or 26.3% compared with the
three months ended September 26, 2008. The decline in revenues was
primarily due to the wind down or completion of several major projects involving
the retrofit of coal-fired power plants with clean air technologies that reduce
sulfur dioxide, mercury and other emissions, and a project to construct a
uranium enrichment facility. The completion of these projects
resulted in a $203.1 million decline in revenues, compared with the third
quarter of fiscal 2008. The impact of the completion of these
projects was partially offset by an increase in revenues of $71.1 million from
new projects to provide engineering and construction services for the expansion
of generating capacity at existing fossil fuel power plants and the development
of new gas-fired power plants, which produce fewer emissions than coal-fired
facilities.
The Washington Division’s revenues
from our power market sector for the nine months ended October 2, 2009
were $995.8 million, a decrease of $164.8 million or 14.2% compared with the
nine months ended September 26, 2008. The decrease was primarily due
to the wind down or completion of several major projects involving the retrofit
of coal-fired power plants with clean air technologies and a project to
construct a uranium enrichment facility. The completion of these
projects resulted in a $457.2 million decline in revenues compared with the same
period in fiscal 2008. The impact of these factors was partially
offset by an increase in revenues of $255.9 million from new and continuing
projects to provide engineering and construction services for the expansion of
generating capacity at existing fossil fuel power plants and the development of
new facilities, particularly single and combined cycle gas power
plants. In addition, we experienced an increase in revenues of $22.1
million from ongoing projects to provide engineering and maintenance services at
nuclear power generating facilities.
Infrastructure
Consolidated revenues from our
infrastructure market sector for the three months ended October 2, 2009
were $407.8 million, a decrease of $36.5 million or 8.2% compared with the three
months ended September 26, 2008. The decrease in revenues from our
infrastructure market sector was primarily due to the timing of performance on
several major infrastructure construction projects, which generated significant
revenues in the comparable period last year, but were completed during the prior
fiscal year and did not generate revenues in fiscal 2009. In
addition, current economic conditions have, in some cases, led to spending
reductions by state and local governments for key infrastructure programs, and
ARRA funded contracts have not been awarded for infrastructure projects as
quickly as expected. As a result, revenues declined from the program
management, planning, design and engineering services we provide for surface
transportation projects. By contrast, we continued to experience
strong demand for the services we provide to expand and rehabilitate air and
rail/transit infrastructure. Many of these projects are being funded
through alternative sources, such as bond sales, dedicated tax measures and user
fees.
Consolidated revenues from our
infrastructure market sector for the nine months ended October 2, 2009
were $1,273.3 million, a decrease of $43.7 million or 3.3% compared with the
nine months ended September 26, 2008. The decline in revenues from
our infrastructure market sector was primarily due to the timing of performance
on several major infrastructure construction projects, which generated
significant revenues in the comparable period last year, but were completed
during the prior fiscal year and did not generate revenues in fiscal
2009. We also experienced a moderate decline in revenues from program
management, planning, design and engineering services for surface transportation
projects. By contrast, we continued to benefit from strong demand for
services we provide to expand and rehabilitate air and rail/transit
infrastructure. Revenues also increased from engineering and
construction services for the modernization of educational, healthcare and
government facilities.
The URS Division’s revenues from our
infrastructure market sector for the three months ended October 2, 2009
were $354.4 million, a decrease of $7.6 million or 2.1% compared with the three
months ended September 26, 2008. The moderate decline was largely the
result of spending reductions by state and local governments for key
infrastructure programs. In addition, ARRA-funded contracts have not
been awarded for infrastructure projects as quickly as expected. At
the same time, we continued to benefit from other sources of infrastructure
funding, including bond sales, dedicated tax measures and users
fees. While revenues declined moderately from the services we provide
to rehabilitate and expand surface transportation systems, we generated
increased revenues from airport and rail/transit improvement
projects.
The URS Division’s revenues from our
infrastructure market sector for the nine months ended October 2, 2009
were $1,083.2 million, an increase of $19.7 million or 1.9% compared with the
nine months ended September 26, 2008. We continued to benefit from
sustained demand for the program management, planning, design and engineering
services we provide to expand and modernize air and rail/transit
infrastructure. Revenues also increased from the program and
construction management services for capital improvement projects involving
schools, healthcare facilities and government buildings.
The Washington Division’s revenues
from our infrastructure market sector for the three months ended October
2, 2009 were $53.4 million, a decrease of $28.9 million or 35.1% compared with
the three months ended September 26, 2008. This decrease was
primarily due to the completion of a highway construction project in
California. This project, which was substantially completed during
the prior fiscal year, generated revenues that were $9.4 million lower than in
the comparable period in fiscal 2008. Additionally, we completed work
on several other projects, involving the expansion of a prison in Idaho, the
design of infrastructure at an oil sands site in Canada, and the rebuilding of
infrastructure in Iraq. The completion of these projects contributed
to a decline of $12.9 million in revenues for the third quarter of
2009.
The Washington Division’s revenues
from our infrastructure market sector for the nine months ended October
2, 2009 were $190.1 million, a decrease of $63.4 million or 25.0% compared with
the nine months ended September 26, 2008. The decline in revenues was
primarily due to the completion of a highway project in California and a project
to expand a transit system in Texas. The completion of these projects
resulted in a decrease in revenues of $52.6 million compared to the same period
in fiscal 2008. Additionally, we completed work on projects to expand
a prison in Idaho, to design the infrastructure at an oil sands site in Canada
and to rebuild infrastructure in Iraq. The completion of these
projects resulted in a $30.9 million decline in revenues, compared with the same
period of fiscal 2008. The impact of the completion of these projects
was partially offset by a $13.7 million change order recovery on a highway
construction project in California and the receipt of a $7.0 million project
development success fee for a transit project in Washington, D.C., both of which
occurred in the first quarter of fiscal 2009.
Federal
Consolidated revenues from our
federal market sector for the three months ended October 2, 2009 were
$1,125.0 million, an increase of $212.4 million or 23.3% compared with the three
months ended September 26, 2008. This increase reflects continuing
strong demand for the systems engineering and technical assistance services we
provide to the DOD to design and develop new weapons systems and modernize aging
weapons systems. We also benefited from increased demand for the
operations and installation management services we provide at military and other
government installations for the DOD, the National Aeronautics and Space
Administration (“NASA”) and other federal agencies. In addition,
revenues increased from our work managing chemical demilitarization programs to
eliminate chemical and biological weapons, as well as from the environmental and
nuclear management services we provide to the DOE for programs involving the
storage, treatment and disposal of radioactive waste. We also
benefited from increased demand for the engineering, construction and
environmental services at military installations in the U.S. and internationally
in support of DOD initiatives to realign military bases and redeploy troops to
meet evolving security needs.
Consolidated revenues from our
federal market sector for the nine months ended October 2, 2009 were
$3,089.3 million, an increase of $524.3 million or 20.4% compared with the nine
months ended September 26, 2008. We continued to experience strong
demand for the systems engineering and technical assistance services we provide
to the DOD to design and develop new weapons systems and modernize aging weapons
systems. These results were also driven by strong demand for the
operations and installation management services we provide at military and other
government installations for the DOD, NASA and other federal
agencies. In addition, revenues increased from our work managing
chemical demilitarization programs to eliminate chemical and biological weapons,
as well as from several large DOE contracts involving the storage, treatment and
disposal of radioactive waste.
The URS Division’s revenues from our
federal market sector for the three months ended October 2, 2009 were
$171.2 million, an increase of $31.3 million or 22.4% compared with the three
months ended September 26, 2008. This increase was largely driven by
growth in infrastructure, environmental and facilities projects under existing
and new contract awards with the DOD. Many of these assignments
support the DOD’s long-term Military Transformation initiative to realign
military bases and redeploy troops, both in the U.S. and internationally, to
meet the security needs of the post-Cold War era. We also experienced
significant work involving the design and construction of aircraft hangars,
barracks, military hospitals and other government buildings, as well as the
environmental remediation and restoration of military
installations. Revenues also increased from the services we provide
to the Federal Emergency Management Agency (“FEMA”) for the mapping and risk
analysis of flood hazards and in support of the National Flood Insurance
Program.
The URS Division’s revenues from our
federal market sector for the nine months ended October 2, 2009 were
$516.3 million, an increase of $72.2 million or 16.3% compared with the nine
months ended September 26, 2008. We continued to experience sustained
demand for the engineering, construction and environmental services we provide
to the DOD both in the U.S. and internationally. This work involves
the design and construction of aircraft hangars, barracks, military hospitals
and other government buildings, as well as the environmental remediation and
restoration of military installations. Revenues also increased from
the services we provide to FEMA for ongoing disaster recovery services resulting
from damage caused by Hurricanes Gustav and Ike in the Gulf Coast region in
2008, as well as for the mapping and risk analysis of flood
hazards.
The EG&G Division’s revenues
from our federal market sector for the three months ended October 2, 2009
were $652.0 million, an increase of $45.9 million or 7.6% compared with the
three months ended September 26, 2008. Revenues increased from the
specialized systems engineering and technical assistance services we provide to
the DOD for the development, testing and evaluation of new weapons systems and
the modernization of aging weapons systems. We also benefited from
strong demand for the operations and installation management services we provide
to support the operations of complex government and military installations, such
as military bases, test ranges and space flight centers. In addition,
demand was strong for the services we provide in support of chemical
demilitarization programs involving the elimination of chemical and biological
weapons of mass destruction.
The EG&G Division’s revenues
from our federal market sector for the nine months ended October 2, 2009
were $1,937.9 million, an increase of $207.3 million or 12.0% compared with the
nine months ended September 26, 2008. We continued to benefit from
strong demand for the services we provide to the DOD in support of military
activities, including engineering and technical assistance services for the
deployment, testing and evaluation of new weapons systems and the modernization
of aging weapons systems. In addition, revenues increased from our
work managing the destruction of chemical weapons stockpiles at Army
demilitarization facilities throughout the United States, as well as from the
operations and installation management services we provide at military
installations and other government facilities for the DOD, NASA and other
federal agencies.
The Washington Division’s revenues
from our federal market sector for the three months ended October 2, 2009
were $301.8 million, an increase of $135.2 million or 81.2% compared with the
three months ended September 26, 2008. The increase in federal
revenues in our Washington Division was due primarily to a new DOE contract to
provide liquid waste management services.
The Washington Division’s revenues
from our federal market sector for the nine months ended October 2, 2009
were $635.1 million, an increase of $244.8 million or 62.7% compared with the
nine months ended September 26, 2008. The increase in federal
revenues in our Washington Division was primarily due to a new DOE contract to
provide liquid waste management services, which generated revenues of $140.3
million during the nine months ended October 2, 2009. Revenues also
increased by $91.0 million as a result of the acceleration of activity on
several other contracts for the DOE involving the deactivation, decommissioning
and disposal of nuclear weapons stockpiles and other nuclear
waste. In addition, we experienced revenue growth of $54.1 million
from projects, which were awarded during our 2008 fiscal year, to provide
nuclear cleanup and waste management services in the U.K. The impact
of these factors was partially offset by a decrease in revenues of $41.5 million
due to the loss of a DOE management services contract that generated revenues
during the same period of fiscal 2008.
Industrial and
Commercial
Consolidated revenues from our
industrial and commercial market sector for the three months ended
October 2, 2009 were $460.0 million, a decrease of $314.9 million or 40.6%
compared with the three months ended September 26, 2008. The
industrial and commercial market sector, which includes the work we perform for
oil and gas, mining and manufacturing clients, continues to be the most exposed
to the current economic downturn because many of these clients are dependent on
oil and gas and commodity prices to support capital expenditure
programs. In the third quarter of our 2009 fiscal year, we
experienced a significant decline in revenues, due largely to a decrease in
activity on several major construction contracts and the delay or deferral of
new, large-scale capital improvement projects. Revenues also declined
significantly because of the curtailment of mining activities and, in some
cases, mine closures, which resulted in decreased demand for the services we
provide to develop and operate mines. We also experienced a decline
in demand for the planning, environmental and facilities management services we
provide to industrial clients to support existing plant operations, reflecting
lower levels of activity at these facilities.
Consolidated revenues from our
industrial and commercial market sector for the nine months ended October
2, 2009 were $1,667.8 million, a decrease of $465.1 million or 21.8% compared
with the nine months ended September 26, 2008. The decline in
revenues was largely due to a decline in activity on several major construction
contracts and the delay or deferral of large-scale capital improvement programs
by industrial and commercial clients. The economic downturn,
tightened credit markets, and decline in commodity prices have resulted in
reductions in spending for new production facilities, particularly among clients
in the oil and gas and manufacturing industries. Revenues also
declined because of the curtailment of mining activities and, in some cases,
mine closures, which resulted in decreased demand for the services we provide to
develop and operate mines. In addition, as a result of declining
industrial activity, demand also decreased for the planning, environmental and
facilities management services we provide to industrial clients to support
existing plant operations.
The URS Division’s revenues from our industrial and
commercial market sector for the three months ended October 2, 2009 were
$228.7 million, a decrease of $51.1 million or 18.3% compared with the three
months ended September 26, 2008. Revenues declined due to a decrease
in demand for the engineering and construction-related services we provide to
clients in the oil and gas and manufacturing industries related to major capital
improvement projects. In addition, demand also declined for planning
and environmental services in support of existing plant operations, reflecting a
decrease in activity at these facilities. Due to the economic
downturn and its effect on the businesses of our commercial clients, such as
real estate developers, transportation/freight carriers, telecommunications
providers and financial services providers, we also experienced decreased demand
for the environmental, engineering and construction management services we
provide to these clients.
The URS Division’s revenues from our industrial and
commercial market sector for the nine months ended October 2, 2009 were
$688.1 million, a decrease of $134.4 million or 16.3% compared with the nine
months ended September 26, 2008. Revenues in the industrial and
commercial sector declined due to a decrease in demand for the engineering,
procurement and construction-related services we provide to oil and gas and
manufacturing clients for major capital improvement programs, as well as for
planning and environmental services in support of existing plant
operations. As a result of the economic downturn, revenues also
declined from the services we provide to commercial clients, such as real estate
developers, transportation/freight carriers, telecommunications providers and
financial services providers. In addition, demand fell for the
environmental and engineering services we provide to mining clients.
The Washington Division’s revenues
from our industrial and commercial market sector for the three months
ended October 2, 2009 were $231.3 million, a decrease of $263.8 million or 53.3%
compared with the three months ended September 26, 2008. The decline
in revenues was largely due to a decrease in activity on major construction
projects compared to the third quarter of fiscal 2008, as well as the delay or
deferral of new, large-scale capital improvement projects by many of our
industrial clients. During the quarter, we experienced reduced
activity on a cement plant construction project and a project to build a natural
gas production facility. Both of these projects are nearing
completion and, as a result, they generated revenues that were $233.3 million
lower than in the comparable period last year. We also experienced a
decline in revenues of $44.6 million due to the curtailment of mining activities
and, in some cases, mine closures, caused by falling commodity
prices. These declines were partially offset by increased revenues of
$13.2 million on a variety of ongoing oil and gas projects.
The Washington Division’s revenues
from our industrial and commercial market sector for the nine months
ended October 2, 2009 were $979.7 million, a decrease of $330.7 million or 25.2%
compared with the nine months ended September 26, 2008. Revenues
declined largely due to a decrease in activity on major construction projects,
including projects to build a cement manufacturing plant and natural gas
production facility. Both projects are nearing completion and, as a
result, they generated revenues that were $349.5 million lower than in the
comparable period last year. Revenues also declined $72.2 million for
the services we provide to develop and operate mines because, as the prices of
metals and mineral resources fell, many of our mining clients have curtailed
their operations and some have closed mines. These declines were
partially offset by increased revenues of $118.5 million from a variety of
ongoing oil and gas projects.
Cost
of Revenues
Our consolidated cost of
revenues, which consists of labor, subcontractor costs, and other
expenses related to projects and services provided to our clients, decreased by
9.5% for the three months ended October 2, 2009 compared with the three months
ended September 26, 2008. Our consolidated cost of revenues for the
nine months ended October 2, 2009 decreased by 3.5% compared with the nine
months ended September 26, 2008. Because our revenues are primarily
project-based, the factors that caused revenues to decline also drove a
corresponding decrease in our cost of revenues. Consolidated cost of
revenues as a percent of revenues increased from 94.6% for the third quarter of
2008 to 95.6% for the third quarter of 2009. Consolidated cost of
revenues as a percent of revenues decreased from 95.0% for the nine months ended
September 26, 2008 to 94.8% for the nine months ended October 2,
2009.
General
and Administrative Expenses
Our consolidated general and
administrative (“G&A”)expenses for the three months
ended October 2, 2009 decreased by 12.7% compared with the three months ended
September 26, 2008. The decrease was primarily due to reductions in
external services and travel. Consolidated G&A expenses as a
percent of revenues remained the same at 0.8% for the three months ended
September 26, 2008 and for the three months ended October 2,
2009. Our consolidated G&A expenses for the nine months ended
October 2, 2009 decreased by 0.9% compared with the nine months ended September
26, 2008. The decrease was primarily due to reductions in external
services and travel. Consolidated G&A expenses as a percent of
revenues remained the same at 0.8% for the nine months ended October 2, 2009 and
September 26, 2008.
Equity
in Income of Unconsolidated Joint Ventures
Our consolidated equity in income of
unconsolidated joint ventures for the three months ended October 2, 2009
decreased by $3.6 million or 14.8% compared with the three months ended
September 26, 2008. The decrease for the three-month period
comparisons was attributable primarily to the Washington Division’s
unconsolidated joint ventures as discussed below. Our consolidated
equity in income of unconsolidated joint ventures for the nine months
ended October 2, 2009 decreased by $2.0 million or 2.5% compared with the nine
months ended September 26, 2008. The decrease was primarily due to
the timing and completion of projects.
The Washington Division’s equity in
income of unconsolidated joint ventures for the three months ended
October 2, 2009 decreased by $2.3 million or 11.6% compared with the three
months ended September 26, 2008. The decrease was primarily due to a
$9.2 million decrease in equity in income resulting from the sale of our equity
investment in MIBRAG on June 10, 2009. This decrease was partially offset by a
$5.5 million increase in equity in income from a new contract to provide nuclear
cleanup and waste management services in the U.K.
The Washington Division’s equity in
income of unconsolidated joint ventures for the nine months ended October
2, 2009 increased by $0.7 million or 1.0% compared with the nine months ended
September 26, 2008. The increase resulted primarily from $14.9
million of earnings on the new nuclear cleanup and waste management services
contract in the U.K and a $5.8 million increase in equity in income from a
contract modification for a DOE nuclear site cleanup project. These
increases were partially offset by the timing and completion of projects, which
resulted in decreases in equity in income, including $7.4 million from a joint
venture that performs replacement of major components of nuclear power plants,
$7.3 million resulting from the sale of our equity investment in MIBRAG on June
10, 2009, and $6.9 million from a light rail construction project in California
that experienced cost growth during the final phase of the project involving
startup and commissioning of the systems.
Operating
Income
Our consolidated operating income
for the three months ended October 2, 2009 decreased by $39.0 million or
27.2% compared with the three months ended September 26, 2008. As a
percentage of revenues, operating income was 4.5% for the three months ended
October 2, 2009 compared to 5.5% for the three months ended September 26,
2008. The decrease in operating income was caused primarily by the
decrease in revenues and equity in income of unconsolidated joint ventures
previously described. In addition, the decline in earnings was due to
various completed, delayed, or cancelled projects that generated operating
income in the third quarter of 2008. Furthermore, the decline was
also due to earnings recognized in the prior year on a DOE nuclear waste
processing facility construction project as a result of negotiations with the
DOE to modify the overall fee and structure. These decreases were
partially offset by reductions in overhead costs resulting from the
implementation of cost-control measures. These items are discussed
further below.
Our consolidated operating income
for the nine months ended October 2, 2009 was $393.5 million, relatively
unchanged from the nine months ended September 26, 2008. As a
percentage of revenues, operating income was 5.5% for the nine months ended
October 2, 2009 compared to 5.3% for the nine months ended September 26,
2008. The increase in operating income as a percentage of revenues
was caused primarily by higher earnings on various contract items that we do not
expect to recur on a regular basis as well as cost savings resulting from the
implementation of cost-control measures. These increases were offset
by the decline in earnings that was due to various completed, delayed, or
cancelled projects that generated operating income during the same period of
2008. These items are discussed further below.
The URS Division’s operating
income for the three months ended October 2, 2009 decreased by $3.7
million or 6.2% compared with the three months ended September 26,
2008. The decrease in operating income was caused primarily by the
decrease in revenues previously described. The decline in earnings
was offset in part by reductions in the use of subcontractors and purchases of
project-related materials, which provide lower profit margins than activities
performed directly by our employees. In addition, the implementation
of cost-control measures reduced our overhead costs, and this reduction was
partially offset by an increase in sales and business development costs for
pursuing new business opportunities. Overhead costs as a percentage
of revenues decreased slightly from 31.7% for the three months ended September
26, 2008 to 31.4% for the three months ended October 2,
2009. Operating income as a percentage of revenues remained the same
at 7.1% for both three-month periods ended October 2, 2009 and September 26,
2008.
The URS Division’s operating
income for the nine months ended October 2, 2009 increased by $5.6
million or 3.0% compared with the nine months ended September 26,
2008. While revenues declined, we improved our operating income by
reducing the use of subcontractors and purchases of project-related materials,
which provide lower profit margins than activities performed directly by our
employees. In addition, the implementation of cost-control measures
reduced our overhead costs, and this reduction was partially offset by an
increase in sales and business development costs for pursuing new business
opportunities. Overhead costs as a percentage of revenues remained
relatively constant at 31.2% for the nine months ended October 2, 2009 compared
to 31.1% for the nine months ended September 26, 2008. Operating
income as a percentage of revenues was 7.8% for the nine months ended October 2,
2009 compared to 7.2% for the nine months ended September 26, 2008.
The EG&G Division’s operating
income for the three months ended October 2, 2009 decreased by $2.6
million or 6.2% compared with the three months ended September 26,
2008. The decline in operating income was due to the higher use of
subcontractors and increase in other direct costs, which provide lower profit
margins. The decline in earnings was also caused by timing of several
performance-based award fees or completion of projects that were recognized in
the three months ended September 26, 2008. Offsetting the impact of
these factors, various overhead costs, such as travel and rental expenses,
decreased compared to the prior year because of cost-control measures taken in
response to the current economic downturn. Operating income as a
percentage of revenues was 6.0% for the three months ended October 2, 2009
compared to 6.9% for the three months ended September 26, 2008.
The EG&G Division’s operating
income for the nine months ended October 2, 2009 increased by $12.4
million or 12.3% compared with the nine months ended September 26,
2008. The increase was primarily due to the increase in revenue
volume previously described and award fees and performance-based incentive fees
earned on various DOD projects. In addition, higher billing rates
related to the performance of project activities requiring specialized labor
skills and efficiency improvements on some of EG&G Division’s fixed-price
contracts also contributed to the increase in operating
income. Despite the increase in revenues, various overhead costs,
such as travel and rental expenses, decreased compared to the prior year because
of cost-control measures taken in response to the current economic downturn. The
increase of operating income was offset by the higher use of subcontractors and
increase in other direct costs, which provide lower profit
margins. Operating income as a percentage of revenues remained the
same at 5.8% for both nine-month periods ended October 2, 2009 and September 26,
2008.
The Washington Division’s operating
income for the three months ended October 2, 2009 decreased $35.3 million
or 56.9% compared with the three months ended September 26, 2008. The
decrease in operating income was primarily due to the following:
|
·
|
A
$10.3 million decline in earnings due to the completion of several major
projects in 2009 that generated higher operating income in the third
quarter of 2008, combined with delays of new projects primarily in the
power and industrial and commercial
sectors.
|
|
·
|
A
charge of $20.0 million on an oil and gas construction project that has
experienced cost increases and schedule delays, compared with a charge of
$15.0 million in the third quarter of
2008.
|
|
·
|
Earnings
of $17.7 million recognized in the prior year on a DOE nuclear waste
processing facility construction project as a result of negotiations with
the DOE to modify the overall fee and
structure.
|
|
·
|
A
decrease in equity in income of $2.3 million as previously
discussed.
|
These
declines were partially offset by a decrease of $3.3 million in overhead costs,
including lower business development costs resulting from the timing of major
proposals and costs savings resulting from the integration of the Washington
Division into our overall operations, as well as the implementation of
cost-control measures taken in response to the current economic
environment. Operating income as a percentage of revenues was 3.0%
for the three months ended October 2, 2009 compared to 5.4% for the three months
ended September 26, 2008.
The Washington Division’s operating
income for the nine months ended October 2, 2009 decreased $18.5 million
or 11.2% compared with the nine months ended September 26, 2008. The
same factors that impacted equity in income of unconsolidated joint ventures
also affected operating income. The decrease in operating income was
primarily due to the following:
|
·
|
A
$35.2 million decline in earnings due to the completion of several major
projects in 2009 that generated higher operating income during the same
period of fiscal 2008, combined with delays of new projects, primarily in
the power and industrial and commercial sectors.
|
|
·
|
A
$19.0 million reduction from the loss of a re-bid of a DOE management
services contract that was active during the same period of
2008.
|
|
·
|
Charges
of $31.4 million on an oil and gas construction project that has
experienced cost increases and schedule delays, compared with charges of
$27.9 million in the same period of
2008.
|
|
·
|
Earnings
of $17.7 million recognized in the prior year on a DOE nuclear waste
processing facility construction project as a result of negotiations with
the DOE to modify the overall fee and
structure.
|
These
decreases were partially offset by higher contract earnings on some projects
caused by events we do not expect to recur on a regular basis. These
included $13.7 million of change order recovery on a highway project, a $9.0
million contract termination fee related to a mining contract, a $7.0 million
project development success fee related to a transit project and a $4.8 million
global settlement of legacy project matters. In addition, there was a
decrease of $21.7 million in overhead costs, including lower business
development costs resulting from the timing of major proposals and costs savings
resulting from the integration of the Washington Division into our overall
operations, as well as the implementation of cost-control measures taken in
response to the current economic environment. Operating income as a percentage
of revenues was 5.2% for the nine months ended October 2, 2009 compared to 5.3%
for the nine months ended September 26, 2008.
Interest
Expense
Our consolidated interest
expense for the three months ended October 2, 2009 decreased by $10.4
million or 48.6% compared with the three months ended September 26,
2008. Our consolidated interest expense for the nine months ended
October 2, 2009 decreased by $32.5 million or 46.4% compared with the nine
months ended September 26, 2008. These decreases were due to lower
debt balances as a result of debt payments on our Senior Secured Credit Facility
(“2007 Credit Facility”), in addition to lower LIBOR interest rates and lower
interest rate margins in 2009.
Other
Income, Net
Our consolidated other income,
net for the nine months ended October 2, 2009 consisted of a $75.6
million gain associated with the sale of our equity investment in MIBRAG, net of
$5.2 million of sale-related costs, that was completed during the second quarter
of 2009. This gain was partially offset by a $27.7 million loss on
the settlement of a foreign currency forward contract during the second quarter
of 2009, which primarily hedged our net investment in MIBRAG.
Income
Tax Expense
Our effective income tax rates
for the three months ended October 2, 2009 and September 26, 2008 were
25.4% and 41.9%, respectively. Our effective income tax rates for the nine months
ended October 2, 2009 and September 26, 2008 were 37.4% and 42.1%,
respectively. The significant reduction in our effective tax
rate during the third quarter of 2009 was due primarily to our determination,
made during the quarter, that earnings of our foreign subsidiaries will no
longer be indefinitely reinvested. This determination resulted in
accrual of deferred U.S. tax liabilities on the undistributed earnings of our
foreign subsidiaries and also recognition of foreign tax credits associated with
these undistributed earnings. Because the foreign tax credits
significantly exceeded our accrual of deferred U.S. tax liabilities on these
undistributed earnings, our effective income tax rate for the quarter was
reduced. This rate reduction was partially offset by the
establishment, during the third quarter, of valuation allowances against
existing deferred tax assets, and also by the write-off of foreign income tax
receivables associated with prior earnings of some of our foreign subsidiaries
that we determined during the quarter, could not be collected. These
valuation allowances and write-offs had the effect of increasing our income tax
expense, and so partially offset the effective rate
reduction. Because these items all impacted our income tax expense in
the third quarter of 2009, the impact on our effective income tax rate for this
quarter compared to the third quarter of 2008 was significant. For
the nine-month period ended October 2, 2009, the impact was less significant,
and is expected to be further diluted for the year ended January 1,
2010.
|
Nine
Months Ended
|
||||||||
|
(In
millions)
|
October
2,
2009
|
September
26,
2008
|
||||||
|
Cash
flows from operating activities
|
$ | 448.2 | $ | 283.4 | ||||
|
Cash
flows from investing activities
|
63.4 | (106.6 | ) | |||||
|
Cash
flows from financing activities
|
(265.9 | ) | (211.7 | ) | ||||
During
the nine months ended October 2, 2009, our primary sources of liquidity were
cash flows from operations and proceeds from the sale of our equity investment
in MIBRAG, as well as proceeds from the sale of mining equipment and other
assets located in Bolivia following the termination of a mining
contract. Our primary use of cash was to fund our working capital,
capital expenditures, and short-term investments; to invest in our
unconsolidated joint ventures; to service our debt; to purchase treasury stock;
and to fund distributions to the noncontrolling interests in our consolidated
subsidiaries.
Our cash
flows from operations are primarily impacted by fluctuations in working capital,
which is affected by numerous factors including billing and payment terms of our
contracts, stage of completion of contracts performed by us, timing of our
payroll payments relative to our fiscal quarter ends, or unforeseen events or
issues that may have an impact on our working capital.
We
believe that we have sufficient resources to fund our operating and capital
expenditure requirements, as well as to service our debt, for at least the next
twelve months. If we experience a significant change in our business
such as the consummation of a significant acquisition, we may need to acquire
additional sources of financing. We believe that we would be able to
obtain adequate sources of funding to address significant changes in our
business. However, continuing credit constraints in the financial
markets could limit our ability to access credit on reasonable
terms.
Under the
terms of our 2007 Credit Facility, we are generally required to remit as debt
repayments any net proceeds we receive from the sale of assets, which include
the sale of our equity investment in MIBRAG. On June 10, 2009, we
completed the sale of our equity investment in MIBRAG. As of October
2, 2009, we used $57.0 million of the net cash proceeds from the sale for debt
payments and we expect to remit approximately $100.0 million from the remaining
net cash proceeds to pay down our debt within the next twelve
months.
As of
October 2, 2009, we have remaining tax-deductible goodwill of $444.0 million and
net operating loss (“NOL”) carryovers of approximately $60.9
million. We anticipate that cash payments for income taxes for 2009
and later years will be substantially less than income tax expense recognized in
the financial statements.
Accounts
receivable and costs and accrued earnings in excess of billings on contracts
represent our primary source of operational cash inflows. Costs and
accrued earnings in excess of billings on contracts represent amounts that will
be billed to clients as soon as invoice support can be assembled, reviewed and
provided to our clients, or when specific contractual billing milestones are
achieved. In some cases, unbilled amounts may not be billable for
periods generally extending from two to six months and, rarely, beyond a
year. All costs and accrued earnings in excess of billings on
contacts are evaluated on a regular basis to assess the risk of collectability
and allowances are provided as deemed appropriate. Based on the
nature of our customer base, including U.S. federal, state and local governments
and large reputable companies, and contracts, we have not historically
experienced significant write-offs related to receivables and costs and accrued
earnings in excess of billings. The size of our allowance for
uncollectible receivables as a percentage of the combined totals of our accounts
receivable and accrued earnings in excess of billings on contracts is indicative
of our history of successfully billing costs and accrued earnings in excess of
billings on contracts and collecting the billed amounts from our
clients.
As of
October 2, 2009 and January 2, 2009, our receivable allowances represented 2.08%
and 1.84%, respectively, of the combined total accounts receivable and costs and
accrued earnings in excess of billings on contracts. We believe that
our allowance for doubtful accounts receivable as of October 2, 2009 is
adequate. We have placed significant emphasis on collection efforts
and continually monitor our receivable allowance. However, future
economic conditions may adversely impact some of our clients’ ability to make
payments or the timeliness of their payments; consequently, it may also affect
our ability to consistently collect cash from our clients and meet our operating
needs. The other significant factors that typically affect our
realization of our accounts receivable include the billing and payment terms of
our contracts, as well as the stage of completion of our performance under the
contracts. Changes in contract terms or the position within the
collection cycle of contracts, for which our joint ventures, partnerships and
partially-owned limited liability companies have received advance payments, can
affect our operating cash flows. In addition, substantial advance
payments or billings in excess of costs also have an impact on our
liquidity. Billings in excess of costs as of October 2, 2009 and
January 2, 2009 were $236.7 million and $254.2 million,
respectively.
We use
Days Sales Outstanding (“DSO”) to monitor the average time, in days, that it
takes us to convert our accounts receivable into cash. We calculate
DSO by dividing net accounts receivable less billings in excess of costs and
accrued earnings on contracts as of the end of the quarter into the amount of
revenues recognized during the quarter, and multiplying the result of that
calculation by the number of days in that quarter. Our DSO increased
from 67 days as of January 2, 2009 to 72 days as of October 2,
2009. Because of implementation of a new billing system in 2007 that
has not been audited by the U.S. Defense Contract Audit Agency (“DCAA”), in May
2009, the DCAA suspended the EG&G Division’s direct billing privileges for
contracts subject to direct billing. We believe that our billing
system complies with the governmental system requirements and we anticipate that
the DCAA will perform an audit of the billing system in the near
future. Upon the successful completion of the audit, we anticipate
that the DCAA will reinstate the EG&G Division’s direct billing privileges,
although no assurance can be given as to the timing of any potential
reinstatement. The increase in DSOs resulted primarily from this
suspension of the direct billing privileges.
In the
ordinary course of our business, we may experience various loss contingencies
including, but not limited to, the pending legal proceedings identified in Note
8, “Commitments and Contingencies,” to our Condensed Consolidated Financial
Statements included under Part 1 – Item 1 of this report, which may adversely
affect our liquidity and capital resources.
Operating
Activities
The
increase in cash flows from operating activities for the nine months ended
October 2, 2009, compared to the nine months ended September 26, 2008, was
primarily due to fluctuations in receivables and payables as a result of the
timing of payroll payments, payments from clients on accounts receivable, and
payments to vendors and subcontractors. In addition, income tax and
interest payments decreased.
During
the first nine months of 2009, we made significant cash disbursements of $91.2
million and $91.7 million for retirement plan contributions and bonus
payments. We received a $30 million tax refund in March 2009 due to
an overpayment of estimated taxes in 2008. Our actual NOLs available
for deduction were higher than we estimated during 2008. In addition,
deferred tax assets related to depreciation expense and the timing of income
from partnerships were lower than we originally estimated during
2008. We were able to claim more actual tax depreciation expense than
we originally anticipated, thus reducing the amount of income taxes we owed for
fiscal year 2008.
We expect
to make estimated payments of $20.2 million to pension, post-retirement, and
defined contribution plans for the remaining quarter of fiscal year
2009.
Investing
Activities
With the
exception of the construction and mining activities of the Washington Division,
we are not capital intensive. Our mining activities require the use
of heavy equipment, which are either owned or leased. Our other
capital expenditures are primarily for various information systems to support
our professional and technical services and administrative
needs. Capital expenditures, excluding purchases financed through
capital leases and equipment notes, during the nine months ended October 2, 2009
and September 26, 2008 were $34.5 million and $62.3 million,
respectively. In addition, we disbursed $13.8 million and $28.0
million in cash related to investments in and advances to unconsolidated joint
ventures for the nine months ended October 2, 2009 and September 26, 2008,
respectively.
On June
10, 2009, we completed the sale of our equity investment in MIBRAG and we
received €206.1 million (equivalent to U.S. $287.8 million) in cash proceeds
from the sale and incurred sale-related costs of $5.2 million. In
addition, we settled our foreign currency forward contract, which primarily
hedged our net investment in MIBRAG, at a loss of $27.7
million. During the nine months ended October 2, 2009, we used $57.0
million of the net proceeds from the sale for debt payments and invested $195.0
million of the net proceeds in bank certificates of deposits as short-term
investments.
During
the third quarter of our 2009 fiscal year, a Washington Division mining contract
located in Bolivia was terminated at our former client’s
discretion. Pursuant to the termination, we received $47.4 million
primarily related to the sale of the mining equipment and other related
assets.
For the
remaining quarter of fiscal year 2009, we expect to incur approximately $16
million in capital expenditures, a portion of which will be financed through
capital leases or equipment notes.
Financing
Activities
The
decrease in net cash flows from financing activities for the nine months ended
October 2, 2009, compared to the nine months ended September 26, 2008, was
primarily due to an increase in principal payments on our 2007 Credit Facility,
changes in book overdrafts, and a decrease in proceeds collected from employee
stock purchases and exercises of stock options.
Currently,
we expect to remit approximately $100.0 million from the remaining net cash
proceeds from the sale of our equity investment in MIBRAG to pay down our debt
within the next twelve months. The timing of debt repayment may be
substantially different from the actual net cash inflow due to the impact of
repatriation methods, taxes and allowable exclusions in our 2007 Credit
Facility.
Contractual
Obligations and Commitments
The
following table contains information about our contractual obligations and
commercial commitments followed by narrative descriptions as of October 2,
2009.
|
Payments
and Commitments Due by Period
|
||||||||||||||||||||||||
|
Contractual
Obligations
(Debt
payments include principal only)
(In
millions)
|
Total
|
Less
Than 1 Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Other
|
||||||||||||||||||
|
2007
Credit Facility (1)
|
$ | 868.0 | $ | 100.0 | $ | 432.2 | $ | 335.8 | $ | — | $ | — | ||||||||||||
|
Capital
lease obligations and equipment notes (1)
|
15.8 | 6.4 | 7.3 | 2.1 | — | — | ||||||||||||||||||
|
Notes
payable, foreign credit lines and other indebtedness (1)
|
25.5 | 10.2 | 13.0 | 2.3 | — | — | ||||||||||||||||||
|
Total
debt
|
909.3 | 116.6 | 452.5 | 340.2 | — | — | ||||||||||||||||||
|
Operating
lease obligations (2)
|
505.4 | 143.1 | 203.0 | 113.7 | 45.6 | — | ||||||||||||||||||
|
Pension
and other retirement plans funding requirements (3)
|
256.3 | 30.3 | 39.7 | 61.0 | 125.3 | — | ||||||||||||||||||
|
Interest
(4)
|
93.3 | 27.4 | 61.4 | 4.5 | — | — | ||||||||||||||||||
|
Purchase
obligations (5)
|
7.6 | 6.2 | 1.4 | — | — | — | ||||||||||||||||||
|
Asset
retirement obligations (6)
|
3.7 | 0.6 | 1.2 | 1.5 | 0.4 | — | ||||||||||||||||||
|
Other
contractual obligations (7)
|
49.8 | 29.9 | 8.2 | 1.7 | — | 10.0 | ||||||||||||||||||
|
Total
contractual obligations
|
$ | 1,825.4 | $ | 354.1 | $ | 767.4 | $ | 522.6 | $ | 171.3 | $ | 10.0 | ||||||||||||
______________
|
(1)
|
Amounts
shown exclude unamortized debt issuance costs of $12.2 million for the
2007 Credit Facility. For capital lease obligations, amounts
shown exclude interest of $1.5
million.
|
|
(2)
|
Operating
leases are predominantly real estate
leases.
|
|
(3)
|
Amounts
consist of estimated pension and other retirement plan funding
requirements for various pension, post-retirement, and other retirement
plans.
|
|
(4)
|
Interest
for the next five years, which excludes non-cash interest, was determined
based on the current outstanding balance of our debt and payment schedule
at the estimated interest rate including the effect of the interest rate
swaps.
|
|
(5)
|
Purchase
obligations consist primarily of software maintenance
contracts.
|
|
(6)
|
Asset
retirement obligations represent the estimated costs of removing and
restoring our leased properties to the original condition pursuant to our
real estate lease agreements.
|
|
(7)
|
Other
contractual obligations include net liabilities for anticipated
settlements of our tax liabilities, including
interest. Generally, it is not practicable to forecast or
estimate the payment dates for the above-mentioned tax
liabilities. Therefore, we included the estimated liabilities
under the “Other” column above. In addition, we do not expect
that the payment of these tax liabilities will have a material impact on
our liquidity.
|
Off-balance
Sheet Arrangements
In the
ordinary course of business, we may use off-balance sheet arrangements if we
believe that such an arrangement would be an efficient way to lower our cost of
capital or help us manage the overall risks of our business
operations. We do not believe that such arrangements have had a
material adverse effect on our financial position or our results of
operations.
The
following is a list of our off-balance sheet arrangements:
|
·
|
Letters
of credit primarily to support project performance, insurance programs,
bonding arrangements and real estate leases. As of October 2,
2009, we had $207.1 million in standby letters of credit under our 2007
Credit Facility. We are required to reimburse the issuers of
letters of credit for any payments they make under the outstanding letters
of credit. Our 2007 Credit Facility covers the issuance of our
standby letters of credit and is critical for our normal
operations. If we default on the 2007 Credit Facility, our
inability to issue or renew standby letters of credit would impair our
ability to maintain normal
operations.
|
|
·
|
We
have guaranteed a letter of credit issued on behalf of one of our
unconsolidated construction joint ventures, in which we are a 60% owner
with no significant influence over operations. The total amount
of the letter of credit was $7.2 million as of October 2,
2009.
|
|
·
|
We
have agreed to indemnify one of our joint venture partners up to $25.0
million for any potential losses and damages, and liabilities associated
with lawsuits in relation to general and administrative services we
provide to the joint venture. Currently, we have not been
advised of any indemnified claims under this
guarantee.
|
|
·
|
As
of October 2, 2009, the amount of a guarantee used to collateralize the
credit facility of our U.K. operating subsidiary and bank guarantee lines
of our European subsidiaries was $8.2
million.
|
|
·
|
From
time to time, we provide guarantees related to our services or
work. If our services under a guaranteed project are later
determined to have resulted in a material defect or other material
deficiency, then we may be responsible for monetary damages or other legal
remedies. When sufficient information about claims on
guaranteed projects is available and monetary damages or other costs or
losses are determined to be probable, we recognize such guarantee
losses.
|
|
·
|
In
the ordinary course of business, we enter into various agreements
providing performance assurances and guarantees to clients on behalf of
certain unconsolidated subsidiaries, joint ventures, and other jointly
executed contracts. We entered into these agreements primarily
to support the project execution commitments of these
entities. The potential payment amount of an outstanding
performance guarantee is typically the remaining cost of work to be
performed by or on behalf of third parties under engineering and
construction contracts. However, we are not able to estimate
other amounts that may be required to be paid in excess of estimated costs
to complete contracts and, accordingly, the total potential payment amount
under our outstanding performance guarantees cannot be
estimated. For cost-plus contracts, amounts that may become
payable pursuant to guarantee provisions are normally recoverable from the
client for work performed under the contract. For lump sum or
fixed-price contracts, this amount is the cost to complete the contracted
work less amounts remaining to be billed to the client under the
contract. Remaining billable amounts could be greater or less
than the cost to complete. In those cases where costs exceed
the remaining amounts payable under the contract, we may have recourse to
third parties, such as owners, co-venturers, subcontractors or vendors,
for claims.
|
|
·
|
In
the ordinary course of business, our clients may request that we obtain
surety bonds in connection with contract performance obligations that are
not required to be recorded in our condensed consolidated balance
sheets. We are obligated to reimburse the issuer of our surety
bonds for any payments made hereunder. Each of our commitments
under performance bonds generally ends concurrently with the expiration of
our related contractual obligation.
|
2007
Credit Facility
As of
October 2, 2009 and January 2, 2009, the outstanding balance of term loan A was
$680.5 million and $842.8 million at interest rates of 1.28% and 2.69%,
respectively. As of October 2, 2009 and January 2, 2009, the
outstanding balance of term loan B was $187.5 million and $232.2 million at
interest rates of 2.53% and 3.69%, respectively.
Under our
2007 Credit Facility, we are subject to two financial covenants: 1) a maximum
consolidated leverage ratio, which is calculated by dividing consolidated total
debt by consolidated EBITDA, as defined below, and 2) a minimum interest
coverage ratio, which is calculated by dividing consolidated cash interest
expense into consolidated EBITDA. Both calculations are based on the
financial data of the most recent four fiscal quarters.
For
purposes of our 2007 Credit Facility, consolidated EBITDA is defined as
consolidated net income attributable to URS plus interest, depreciation and
amortization expense, amounts set aside for taxes, other non-cash items
(including goodwill impairments) and other pro forma adjustments related to
permitted acquisitions and the Washington Group International, Inc. acquisition
in 2007. As of October 2, 2009, our consolidated leverage ratio was
1.3, which did not exceed the maximum consolidated leverage ratio of 2.75, and
our consolidated interest coverage ratio was 13.3, which exceeded the minimum
consolidated interest coverage ratio of 4.5. We were in compliance
with the covenants of our 2007 Credit Facility as of October 2,
2009.
13BRevolving Line of
Credit
We did
not have an outstanding debt balance on our revolving line of credit as of
October 2, 2009 and January 2, 2009. As of October 2, 2009, we issued
$207.1 million of letters of credit, leaving $492.9 million available on our
revolving credit facility. If we elected to borrow the remaining
amounts available under our revolving line of credit as of October 2, 2009, we
would remain in compliance with the covenants of our 2007 Credit
Facility.
Our
revolving line of credit information is summarized as follows:
|
(In
millions, except percentages)
|
Nine
Months Ended
October
2, 2009
|
Year
Ended
January
2, 2009
|
||||||
|
Effective
average interest rates paid on the revolving line of
credit
|
3.2 | % | 5.6 | % | ||||
|
Average
daily revolving line of credit balances
|
$ | — | $ | 0.2 | ||||
|
Maximum
amounts outstanding at any one point in time
|
$ | 0.3 | $ | 7.7 | ||||
14B
Other
Indebtedness
Notes payable, foreign credit lines
and other indebtedness. As of October 2, 2009 and January 2,
2009, we had outstanding amounts of $25.5 million and $33.9 million,
respectively, in notes payable and foreign lines of credit. Notes
payable primarily include notes used to finance the purchase of office
equipment, computer equipment and furniture. As of both October 2,
2009 and January 2, 2009, the weighted-average interest rate of the notes was
approximately 5.7%.
We
maintain foreign lines of credit, which are collateralized by the assets of our
foreign subsidiaries and, in some cases, parent guarantees. As of
October 2, 2009 and January 2, 2009, we had lines of credit available under
these facilities of $15.6 million and $13.3 million, respectively, with no
amounts outstanding.
Capital Leases. As
of October 2, 2009 and January 2, 2009, we had obligations under our capital
leases of approximately $15.8 million and $14.8 million, respectively,
consisting primarily of leases for office equipment, computer equipment and
furniture.
Operating
Leases. As of October 2, 2009 and January 2, 2009, we had
obligations under our operating leases of approximately $505.3 million and
$583.5 million, respectively, consisting primarily of real estate
leases.
Other
Activities
Interest Rate
Swaps. Our 2007 Credit Facility is a floating-rate
facility. To hedge against changes in floating interest rates, we
have two floating-for-fixed interest rate swaps with notional amounts totaling
$400.0 million. As of October 2, 2009 and January 2, 2009, the fair
values of our interest rate swap liabilities were $10.5 million and $15.7
million, respectively. The short-term portion of the swap liabilities
was recorded in “Accrued expenses and other” on our Condensed Consolidated
Balance Sheets, and the long-term portion of the swap liabilities was recorded
in “Other long-term liabilities.” The adjustments to fair values of
the swap liabilities were recorded in “Accumulated other comprehensive
loss.” We have recorded no gain or loss on our Condensed Consolidated
Statements of Operations and Comprehensive Income as our interest rate swaps are
effective hedges.
Foreign Currency Forward
Contract. On March 4, 2009, we entered into a foreign currency
forward contract with a notional amount of €196.0 million (equivalent to U.S.
$246.1 million per the contract) with a maturity window from April 15, 2009 to
July 31, 2009. The primary objective of the contract was to manage
our exposure to foreign currency transaction risk related to the Euro proceeds
we received from the sale of our equity investment in MIBRAG, which was
completed on June 10, 2009. We designated €128.0 million (equivalent
to U.S. $160.7 million at contract rate) of the contract as a hedge of our net
investment in MIBRAG.
On June
12, 2009, we settled our foreign currency forward contract. For the
nine months ended October 2, 2009, we recorded a loss on the settlement of this
contract of $27.7 million in “Other income, net” in our Condensed Consolidated
Statements of Operations and Comprehensive Income.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles (“GAAP”) requires us to make estimates and
assumptions in the application of certain accounting policies that affect
amounts reported in our consolidated financial statements and related footnotes
included in Item 1 of this report. In preparing these financial
statements, we have made our estimates and judgments of certain amounts, after
considering materiality. Historically, our estimates have not
materially differed from actual results. Application of these
accounting policies, however, involves the exercise of judgment and the use of
assumptions as to future uncertainties. Consequently, actual results
could differ from our estimates.
The
accounting policies that we believe are most critical to an investor’s
understanding of our financial results and condition and that require complex
judgments by management are included in our Annual Report on Form 10-K for the
year ended January 2, 2009. There were no material changes to these
critical accounting policies during the nine months ended October 2,
2009. We have expanded our discussion related to at-risk and agency
contracts and goodwill sensitivity analysis below.
“At-risk”
and “Agency” Contracts
We
recognize revenues based on characteristics of the contract or the type of
relationship we have with the client, including at-risk or agency
relationships. For at-risk relationships where we act as the
principal to the transaction, the revenues and the costs of materials, services,
payroll, benefits, and other costs are recognized at gross
amounts. For agency relationships, where we act as an agent for our
client, only the fee revenues are recognized, meaning that direct project costs
and the related reimbursement from the client are netted. From time
to time, we may also collaborate with other parties by sharing our assets,
services and knowledge for a joint marketing and business development
arrangement, as well as other third-party contractual agreements to perform
other services or specific activities required by our
clients. Significant accounting presentation and measurements are
determined at inception based on the structure of the legal entity and the
contractual agreement. For the three and nine months ended October 2,
2009 and September 26, 2008, we recognized immaterial amounts of revenues from
agency contracts and collaborative arrangements.
Goodwill
Sensitivity Analysis
While our
2008 annual impairment review did not result in impairment for any of our
reporting units, there are several instances that may cause us to further test
our goodwill for impairment between the annual testing periods
including: (i) continued deterioration of market and economic
conditions that may adversely impact our ability to meet our projected results;
(ii) declines in our stock price caused by continued volatility in the financial
markets that may result in increases in our weighted-average cost of capital or
other inputs to our goodwill assessment; (iii) the occurrence of events that
would reduce the fair value of a reporting unit below its carrying amount, such
as the sale of a significant portion of one or more of our reporting
units.
On June
10, 2009, we sold our equity investment in MIBRAG, which triggered an interim
impairment review of our Infrastructure and Mining reporting
unit. This review did not indicate an impairment of the goodwill
relating to that reporting unit. On August 19, 2009, a Bolivian mining
contract also performed under this reporting unit was terminated at our former
client’s discretion. This event also triggered an interim impairment
review of the Infrastructure and Mining reporting unit’s
goodwill. This review did not indicate an impairment of the goodwill
relating to that reporting unit.
The key
assumptions we used to estimate the fair values of our reporting units
are: (i) discount rate, (ii) compounded annual revenue growth rate,
(iii) average operating margin, and (iv) terminal value capitalization rate
(“capitalization rate”). The following table summarizes the key
assumptions we used in conducting our interim goodwill impairment review for the
Infrastructure and Mining reporting unit as of August 20 2009:
|
Infrastructure
and Mining
as
of August 20, 2009
|
||||
|
Discount
rate
|
13.0 | % | ||
|
Compounded
annual revenue growth rate (1)
|
13.7 | % | ||
|
Average
operating margin (1)
|
5.7 | % | ||
|
Capitalization
rate
|
8.0 | % | ||
________________
|
(1)
|
Based
on 2009-2018 projected information.
|
The
company-dependent key assumptions are the compounded annual revenue growth rate
and the average operating margin and are subject to much greater influence from
our actions. The market-driven key assumptions are the discount rate
and the capitalization rate. These rates are derived from the use of
market data and employment of the Capital Asset Pricing Model. These
assumptions represent our best estimate of current market conditions, have been
calculated solely for purposes of these analyses and are not intended to
indicate that these levels will be achieved, particularly in light of the
current, anticipated and continuing recessionary conditions.
Market-Driven Key
Assumptions. Outlined below is a sensitivity analysis of the
key market-driven assumptions, the discount rate and the capitalization rate,
affecting our goodwill impairment review for the Infrastructure and Mining
reporting unit.
To
demonstrate the sensitivity of our Infrastructure and Mining reporting unit’s
fair value, we indicate below the extent of the change required in each of the
discount rate and the capitalization rate to cause the fair value of each
reporting unit to reduce to an amount equal to its carrying value as of August
20, 2009:
|
Discount
Rate Used
|
Breakeven
Discount Rate
|
Capitalization
Rate Used
|
Breakeven
Capitalization Rate
|
|||||||||||||
|
As
of August 20, 2009
|
||||||||||||||||
|
Infrastructure
& Mining
|
13.00 | % | 13.29 | % | 8.00 | % | 8.60 | % | ||||||||
Placing
the discount rates into context, over the five-year period prior to 2008, we
note that the discount rates used in our goodwill impairment tests have ranged
from 10.0% to 12.0% and the capitalization rates have ranged from 7.0% to
8.5%. The discount rate and the capitalization rate utilized in the
current analysis were a result of the current market turbulence, which resulted
in the use of historically high rates. We believe this corroboration
between the analysis and market pricing provided support that the assumptions
utilized were meaningful and representative of current market participants’
assumptions.
Company-Dependent Key
Assumptions. Given the contractual nature of our business, the
key assumptions over which we have greater control are the average operating
margin in the short-term and compound annual revenue growth forecast over the
long-term. These two key assumptions could materially impact the fair
values of our reporting units.
Operating
Margin. Based on the variance observed in our operating margin
over the past five years, we tested the analysis by applying a downward
sensitivity of 5% and 10% to forecasted operating margin to the projected years
of 2012 through 2018.
Revenue
Growth. Our current contractual commitments and typical
renewal expectations provide significant visibility into the revenue forecast
over the next three years. Therefore, we used a 15% and 30% reduction
in the forecasted growth rate, based on the variance observed from historical
results to the projected years of 2012 through 2018, to calculate the
sensitivity in fair value to the assumed revenue growth. No assurance
can be given, however, that revenues will increase at these rates, or at all,
particularly in light of the current, anticipated and continuing severe
recessionary conditions.
The table
below summarizes the sensitivity analysis for the Infrastructure and Mining
reporting unit based on hypothetical changes in the four key assumptions
discussed above as of August 20, 2009:
|
(In
millions)
|
Infrastructure
and Mining
as
of
August
20, 2009
|
||||
|
Excess
of fair value over carrying value
|
$ | 19 | |||
|
A Decrease in the Excess of Fair Value Over
Carrying Value Resulting from Changes in Key
Assumptions:
|
|
||||
|
Increase
of 50 basis points in discount rate
|
(32 | ) | |||
|
Increase
of 50 basis points in capitalization rate
|
(16 | ) | |||
|
Reduction
in operating margin of 5%
|
(23 | ) | |||
|
Reduction
in operating margin of 10%
|
(45 | ) | |||
|
Reduction
in revenue growth of 15%
|
(41 | ) | |||
|
Reduction
in revenue growth of 30%
|
(78 | ) | |||
As shown
in the table above, these changes in the key assumptions would eliminate the
excess of fair value over carrying value of the Infrastructure and Mining
reporting unit. In such cases, it would be necessary to perform the
second step of the goodwill impairment analysis to determine whether impairment
actually existed and, if it did, the amount of that impairment.
ADOPTED
AND OTHER RECENTLY ISSUED ACCOUNTING GUIDANCE
We
adopted new accounting guidance on collaborative arrangements at the beginning
of our 2009 fiscal year. This guidance defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement, and between participants in the
arrangement and third parties. Revenues and costs incurred with third
parties in connection with collaborative arrangements are to be presented on a
gross or a net basis in accordance with revenue recognition
guidance. The guidance requires disclosure of the nature and purpose
of collaborative arrangements along with the accounting policies and the
classification and amounts of significant financial statement transactions
related to the arrangements. The guidance also requires retrospective
application to all periods presented for all collaborative arrangements existing
as of the effective date. Our adoption of this guidance did not have
a material impact on our consolidated financial statements since we have
consistently determined our arrangements at inception as either an at-risk
relationship or an agency relationship and recorded their activities on a gross
or net basis, respectively, as required.
We
adopted new accounting guidance on noncontrolling interests in consolidated
financial statement at the beginning of our 2009 fiscal year. This
guidance establishes accounting and reporting requirements for the
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. Noncontrolling interests were previously characterized as
minority interests in our condensed consolidated financial statements and are
now presented as a separate line item under stockholders’ equity. The
net income and the comprehensive income attributed to the noncontrolling
interests are separately stated in our Consolidated Statements of Operations and
Comprehensive Income. The presentation of net income and amounts
attributable to noncontrolling interests in our Consolidated Statements of Cash
Flows was retrospectively revised to reflect the impact of this
guidance.
We
adopted new accounting guidance on business combinations at the beginning of our
2009 fiscal year. This guidance revises principles and requirements
for recognizing and measuring the identifiable assets acquired, the liabilities
assumed, goodwill, noncontrolling interest in the acquiree, as well as the
contingent assets and contingent liabilities derived from business
combinations. With limited exceptions, the guidance requires
measuring and recording assets and liabilities at their acquisition-date fair
value. This guidance also requires expensing acquisition-related
costs as incurred and recording any subsequent changes to pre-acquisition tax
exposures in our income statement. The adoption of this guidance did
not have a material impact on our consolidated financial
statements.
We
adopted new accounting guidance on derivative instruments and hedging activities
at the beginning of our 2009 fiscal year. This guidance requires
enhanced qualitative and quantitative disclosures to improve the transparency of
financial reporting about an entity’s derivative and hedging activities in both
annual and interim financial statements. This guidance also requires
disclosures of additional information on how and why derivative instruments are
used.
We
adopted new accounting guidance on share-based payment awards at the beginning
of our 2009 fiscal year. This guidance defines share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
prior to vesting as participating securities. These share-based
payments are considered in the earnings allocation in computing earnings per
share (“EPS”) under the two-class method. Prior to November 2008, our
stock award agreements provided nonforfeitable dividend rights to unvested
restricted stock units and unvested restricted stock awards and, consequently,
were participating securities. In November 2008, we revised our stock
award agreements for future grants so that unvested shares became
non-participating securities until vested. In addition, during our
quarter ended April 3, 2009, we amended grants issued prior to November 2008 so
that they would be non-participating securities until vested. As a
result, the effect of this guidance on our EPS for the three and nine months
ended October 2, 2009 was not material. However, because this
guidance requires retrospective application, our EPS for the quarter ended
September 26, 2008 has been modified to reflect the impact, which was to reduce
our basic EPS from $0.80 to $0.78 and from $2.13 to $2.07 for the three and nine
months ended September 26, 2008, respectively. It also reduced our
diluted EPS from $0.79 to $0.77 and from $2.11 to $2.06 for the three and nine
months ended September 26, 2008, respectively.
We
adopted new accounting guidance on equity method investments at the beginning of
our 2009 fiscal year. This guidance clarifies how the initial
carrying value of an equity investment should be determined, how an impairment
assessment of an underlying indefinite-lived intangible asset of an
equity-method investment should be performed, how an equity-method investee's
issuance of shares should be accounted for, and how to account for a change in
an investment from the equity method to the cost method. The adoption
of this guidance did not have a material impact on our consolidated financial
statements.
We
adopted new accounting guidance on subsequent events in the second quarter of
our 2009 fiscal year. This new guidance modified terminology and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, including
requiring disclosure of the date through which subsequent events have been
evaluated. Consistent with past practice, we have evaluated
subsequent events through the issuance date of our financial statements, which,
for the quarter ended October 2, 2009, was November 12, 2009.
We
adopted the Accounting Standards Codification (“Codification”) in the third
quarter of our 2009 fiscal year. Except as set forth below with
respect to rules and interpretive releases of the SEC, the Codification is now
the single source of authoritative GAAP applicable to all non-governmental
entities and supersedes all existing pronouncements, Emerging Issues Task Force
(“EITF”) abstracts and other literature issued by the Financial Accounting
Standards Board (“FASB”) and the American Institute of Certified Public
Accountants. The FASB no longer issues Statements, Interpretations,
Staff Positions, or EITF abstracts. Instead, the FASB issues
accounting standard updates to provide background information about the guidance
and the bases for conclusions regarding the changes in the
Codification. Rules and interpretive releases of the SEC under
authority of the federal securities laws are also sources of authoritative GAAP
for SEC registrants.
New
accounting guidance has been issued on pension and postretirement benefit plans,
which will become effective for our 2009 fiscal year-end. This
guidance requires additional annual disclosures of the factors necessary to
understand investment policies and strategies, the major categories of plan
assets, the inputs and valuation techniques used to measure the fair value of
plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period, and significant
concentrations of risk within plan assets.
New
accounting guidance has been issued on transfers of financial assets, which will
become effective for us at the beginning of our 2010 fiscal
year. This guidance eliminates the concept of a qualifying
special-purpose entity, limits the circumstances under which a financial asset
is derecognized and requires additional disclosures concerning a transferor's
continuing involvement with transferred financial assets. We are
currently in the process of evaluating the impact on our consolidated financial
statements from the adoption of this guidance.
New
accounting guidance has been issued on consolidation of variable interest
entities (“VIE”), which will become effective for us at the beginning of our
2010 fiscal year. This guidance amends the accounting and disclosure
requirements for the consolidation of a VIE. It requires additional
disclosures about the significant judgments and assumptions used in determining
whether to consolidate a VIE, the restrictions on a consolidated VIE’s assets
and on the settlement of a VIE’s liabilities, the risk associated with
involvement in a VIE, and the financial impact to a company due to its
involvement with a VIE. We are currently in the process of evaluating
the impact on our consolidated financial statements from the adoption of this
guidance.
Interest
Rate Risk
We are
exposed to changes in interest rates as a result of our borrowings under our
2007 Credit Facility. We have two floating-for-fixed interest rate
swaps with notional amounts totaling $400.0 million to hedge against changes in
floating interest rates. The notional amount of the swaps is less
than the outstanding debt and, as such, we are exposed to increasing or
decreasing market interest rates on the unhedged portion. Based on
the expected outstanding indebtedness of approximately $868 million under our
2007 Credit Facility, if market rates used to calculate interest expense were to
average 1% higher in the next twelve months, our net-of-tax interest expense
would increase approximately $3.9 million. As market rates are at
historically low levels, the index rate used to calculate our interest expense
cannot drop by more than 0.28%, which would lower our net-of-tax interest
expense by approximately $1.1 million. This analysis is computed
taking into account the current outstanding balances of our 2007 Credit
Facility, assumed interest rates, current debt payment schedule and the existing
swaps, which include $200.0 million expiring in December 2009. The
result of this analysis would change if the underlying assumptions were
modified.
Foreign
Currency Risk
The
majority of our transactions are in U.S. dollars; however, our foreign
subsidiaries conduct businesses in various foreign
currencies. Therefore, we are subject to currency exposures and
volatility because of currency fluctuations. We attempt to minimize
our exposure to foreign currency fluctuations by matching our revenues and
expenses in the same currency for our operating contracts. We had
foreign currency translation losses, net of tax, of $0.4 million and $13.4
million for the three months ended October 2, 2009 and September 26, 2008,
respectively. We had foreign currency translation gains, net of tax,
of $9.9 million and foreign currency translation losses, net of tax, of $8.0
million for the nine months ended October 2, 2009 and September 26, 2008,
respectively.
On March
4, 2009, we entered into a foreign currency forward contract to manage our
currency exposure related to Euro proceeds from the sale of our equity
investment in MIBRAG, which closed on June 10, 2009. At the
settlement date, we recorded a foreign exchange loss of $27.7 million in our
Condensed Consolidated Statements of Operations and Comprehensive
Income.
Attached
as exhibits to this Form 10-Q are certifications of our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). This “Controls and Procedures” section includes
information concerning the controls and controls evaluation referred to in the
certifications and should be read in conjunction with the certifications for a
more complete understanding.
Evaluation
of Disclosure Controls and Procedures
Based on
the evaluation by our management, with the participation of our CEO and CFO, of
our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act), our CEO and CFO have concluded that our
disclosure controls and procedures were effective, as of the end of the period
covered by this report, to provide reasonable assurance that the information
required to be disclosed by us in the reports that we filed or submitted to the
SEC under the Exchange Act were (1) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (2)
accumulated and communicated to our management, including our principal
executive and principal financial officers, to allow timely decisions regarding
required disclosures.
Changes
in Internal Control over Financial Reporting
During
the quarter ended October 2, 2009, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Inherent
Limitations on Effectiveness of Controls
Our
management, including the CEO and CFO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any system’s design will succeed in
achieving its stated goals under all potential future
conditions. Projections of any evaluation of a system’s control
effectiveness into future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
PART
II
OTHER
INFORMATION
Various
legal proceedings are pending against us and our subsidiaries. The
resolution of outstanding claims and litigation is subject to inherent
uncertainty, and it is reasonably possible that resolution of any of the
outstanding claims or litigation matters could have a material adverse effect on
us. See Note 8, “Commitments and Contingencies,” to our “Condensed
Consolidated Financial Statements” included under Part I – Item 1 of this report
for a discussion of some of these recent changes in our legal proceedings, which
Note is incorporated herein by reference.
In
addition to the other information included or incorporated by reference in this
quarterly report on Form 10-Q, the following risk factors could also affect our
financial condition and results of operations:
Demand
for our services is cyclical and vulnerable to economic downturns and reductions
in government and private industry spending. If the economy remains
weak or client spending declines further, then our revenues, profits and our
financial condition may deteriorate.
For the
three and nine months ended October 2, 2009, we experienced a decline in our
revenues compared to the same period in 2008 and a slowdown in project
awards. If the economy remains weak or client spending declines
further, then our revenues, book of business, net income and overall financial
condition may deteriorate. In light of current macroeconomic
conditions, we are projecting declines in revenues in our power and industrial
and commercial market sectors for the remainder of 2009. Demand for
our services is cyclical and vulnerable to economic downturns and reductions in
government and private industry spending, which may result in delaying,
curtailing or canceling proposed and existing projects by clients.
The
global economic conditions caused by the decline in the worldwide economy and
constraints in the credit market has caused, and may continue to cause, clients
to delay, curtail or cancel proposed and existing projects, thus decreasing the
overall demand for our services and weakening our financial
results.
Our
clients have been impacted by the global economic conditions caused by the
decline in the overall economy and constraints in the credit
market. As a result, some clients have delayed, curtailed or
cancelled proposed and existing projects and may continue to do so, thus
decreasing the overall demand for our services and adversely impacting our
results of operations. For example, we have experienced and expect to
continue to experience delays or cancellations in new projects for which we
typically provide engineering and construction services. The current
economic volatility has also made it very difficult for us to predict the
short-term and long-term impacts on our business and made it more difficult to
forecast our business and financial trends. In addition, our clients
may find it more difficult to raise capital in the future due to substantial
limitations on the availability of credit and other uncertainties in the
federal, municipal and corporate credit markets. Also, our clients
may find it increasingly difficult to timely pay invoices for our services,
which would impact our future cash flows and liquidity. Any inability
to timely collect our invoices may lead to an increase in our accounts
receivable and potentially to increased write-offs of uncollectible
invoices. The economic downturn and tightened credit markets have
resulted in reductions in spending capital for the development of new production
facilities, particularly among clients in our power market sector, as well as in
the oil and gas and manufacturing industries, adversely affecting our revenues
in our power and industrial and commercial market sectors. Also,
rapid changes in the prices of commodities make it difficult for our clients and
us to forecast future capital expenditures on projects. Lastly,
ongoing credit constraints in the market could limit our ability to access
credit markets in the future and, therefore, impact our liquidity.
We
may not realize the full amount of revenues reflected in our book of business,
particularly in light of the current economic conditions, which could harm our
operations and could significantly reduce our expected profits and
revenues.
If we do
not realize a substantial amount of our book of business, our operations could
be harmed and our expected profits and revenues could be significantly
reduced. We account for all contract awards that may eventually be
recognized as revenues or equity in income of unconsolidated joint ventures as
our “book of business,” which includes backlog, option years and indefinite
delivery contracts (“IDCs”). Our backlog consists of the monetary
value of signed contracts, including task orders that have been issued and
funded under IDCs and, where applicable, a notice to proceed has been received
from the client that is expected to be recognized as revenues when future
services are performed. As of October 2, 2009, our book of business
was estimated at approximately $29.5 billion, which included $17.9 billion of
our backlog. Our option year contracts are multi-year contracts with
base periods, plus option years that are exercisable by our clients without the
need for us to go through another competitive bidding process and would be
cancelled only if a client decides to end the project (a termination for
convenience) or through a termination for default. Our IDCs are
signed contracts under which we perform work only when our clients issue
specific task orders. Our book of business estimates may not result
in realized profits and revenues in any particular period because clients may
delay, modify or terminate projects and contracts and may decide not to exercise
contract options or issue task orders. This uncertainty is
particularly acute in light of the current economic conditions.
As
a government contractor, we must comply with various procurement laws and
regulations and are subject to regular government audits; a violation of any of
these laws and regulations could result in sanctions, contract termination,
forfeiture of profit, harm to our reputation or loss of our status as an
eligible government contractor. Any interruption or termination of
our government contractor status could reduce our profits and revenues
significantly.
As a
government contractor, we enter into many contracts with federal, state and
local government clients. For example, revenues from our federal
market sector represented 43% of our total revenues for the nine months ended
October 2, 2009. We are affected by and must comply with federal,
state, local and foreign laws and regulations relating to the formation,
administration and performance of government contracts. For example,
we must comply with the Federal Acquisition Regulation (“FAR”), the Truth in
Negotiations Act, Cost Accounting Standards (“CAS”), the American Recovery and
Reinvestment Act (“ARRA”) and the Services Contract Act security regulations, as
well as many other laws and regulations. These laws and regulations
affect how we transact business with our clients and in some instances, impose
additional costs on our business operations. Even though we take
precautions to prevent and deter fraud, misconduct and non-compliance, we face
the risk that our employees or outside partners may engage in misconduct, fraud
or other improper activities. Government agencies, such as the U.S.
Defense Contract Audit Agency (“DCAA”), routinely audit and investigate
government contractors. These government agencies review and audit a
government contractor’s performance under its contracts, a government
contractor’s direct and indirect cost structure, and a government contractor’s
compliance with applicable laws, regulations and standards. For
example, during the course of its audits, the DCAA may question our incurred
project costs and, if the DCAA believes we have accounted for these costs in a
manner inconsistent with the requirements for the FAR or CAS, the DCAA auditor
may recommend to our U.S. government corporate administrative contracting
officer to disallow such costs. We can provide no assurance that the
DCAA or other government audits will not result in material disallowances for
incurred costs in the future. In addition, government contracts are
subject to a variety of other socioeconomic requirements relating to the
formation, administration, performance and accounting for these
contracts. We may also be subject to qui tam litigation brought by
private individuals on behalf of the government under the Federal Civil False
Claims Act, which could include claims for treble damages. Government
contract violations could result in the imposition of civil and criminal
penalties or sanctions, contract termination, forfeiture of profit, and/or
suspension of payment, any of which could make us lose our status as an eligible
government contractor. We could also suffer serious harm to our
reputation. Any interruption or termination of our government
contractor status could reduce our profits and revenues
significantly.
If
our goodwill or intangible assets become impaired, then our profits may be
reduced.
A decline
in our stock price and market capitalization (such as our stock price decline in
2008) could result in an impairment of a material amount of our goodwill, which
would reduce our earnings. Goodwill may be impaired if the estimated
fair value of one or more of our reporting units’ goodwill is less than the
carrying value of the unit’s goodwill. Because we have grown through
acquisitions, goodwill and other intangible assets represent a substantial
portion of our assets. Goodwill and other net intangible assets were
$3.6 billion as of October 2, 2009. We perform an analysis on our
goodwill balances to test for impairment on an annual basis and whenever events
occur that indicate an impairment could exist. There are several
instances that may cause us to further test our goodwill for impairment between
the annual testing periods including: (i) continued deterioration of
market and economic conditions that may adversely impact our ability to meet our
projected results; (ii) declines in our stock price caused by continued
volatility in the financial markets that may result in increases in our
weighted-average cost of capital or other inputs to our goodwill assessment;
(iii) the occurrence of events that may reduce the fair value of a reporting
unit below its carrying amount, such as the sale of a significant portion of one
or more of our reporting units.
On August
19, 2009, a Bolivian mining contract performed under our Infrastructure and
Mining reporting unit was terminated at our former client’s discretion, which
triggered an interim impairment review of this reporting unit. Our
interim impairment review of this reporting unit did not indicate an impairment
of the goodwill relating to that reporting unit. While this review
indicated that the estimated fair value exceeded the carrying value of goodwill
relating to that reporting unit by approximately 4% as of August 20, 2009, it is
reasonably possible that changes in the numerous variables associated with the
judgments, assumptions and estimates we made in assessing the fair value of our
goodwill, could cause the value of this or other reporting units to become
impaired. If our goodwill is impaired or if a material contract is
terminated, causing our intangible assets to be impaired, we would be required
to record a non-cash charge that could have a material adverse effect on our
condensed consolidated financial statements.
The
completion of our merger with WGI substantially increased our indebtedness,
which could adversely affect our liquidity, cash flows and financial
condition.
On
November 15, 2007, in order to complete the WGI acquisition, we entered into the
2007 Credit Facility, which provided for two term loan facilities in the
aggregate amount of $1.4 billion and a revolving credit facility in the amount
of $700.0 million, which is also available for issuing letters of
credit. All loans outstanding under the 2007 Credit Facility bear
interest, at our option, at either the base rate or LIBOR plus, in each case, an
applicable margin. The applicable margin will adjust to a
leverage-based performance pricing grid based on our Consolidated Leverage
Ratio. As of October 2, 2009, our outstanding balance under the 2007
Credit Facility was $868 million. We have hedged $400.0 million of
interest payments on our 2007 Credit Facility borrowings using
floating-for-fixed interest rate swaps. The $400.0 million notional
amount of the swaps is less than the outstanding debt and, as such, we are
exposed to increasing or decreasing market interest rates on the unhedged
portion.
Based on
assumed interest rates and a margin determined by the Consolidated Leverage
Ratio (our ratio of consolidated total funded debt to consolidated earnings
before interest, taxes, depreciation and amortization), our debt service
obligations, consisting of interest payments during the next twelve months, will
be approximately $24.9 million, excluding amortization of financing fees,
tax-related interest expense and other interest expense not related to the term
loan facilities. If our Consolidated Leverage Ratio is higher than
assumed, our interest expense and unused revolving line of credit fees will
increase.
Based on
the expected outstanding indebtedness of approximately $868 million under our
2007 Credit Facility, if market rates used to calculate interest expense were to
average 1% higher over the next twelve-month period, our net-of-tax interest
expense would increase approximately $3.9 million. As market rates
are at historically low levels, the index rate used to calculate our interest
expense cannot drop by more than 0.28%, which would lower our net-of-tax
interest expense by approximately $1.1 million. This analysis is
computed taking into account the current outstanding balance of our 2007 Credit
Facility, assumed interest rates, current debt payment schedule and the existing
swaps, which include $200 million expiring in December 2009. The
result of this analysis would change if the underlying assumptions were
modified. As a consequence of the increase in our indebtedness
resulting from the WGI acquisition, demands on our cash resources have increased
and potentially could further increase. The increased level of debt
relative to pre-acquisition levels could, among other things:
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require
us to dedicate a substantial portion of our cash flow from operations to
the servicing and repayment of our debt, thereby reducing funds available
for working capital, capital expenditures, dividends, acquisitions and
other purposes;
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increase
our vulnerability to, and limit flexibility in planning for, adverse
economic and industry conditions;
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adversely
affect our ability to obtain surety
bonds;
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limit
our ability to obtain additional financing to fund future working capital,
capital expenditures, additional acquisitions and other general corporate
initiatives;
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create
competitive disadvantages compared to other companies with less
indebtedness;
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adversely
affect our stock price; and
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limit
our ability to apply proceeds from an offering or asset sale to purposes
other than the servicing and repayment of
debt.
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We
may not be able to generate or borrow enough cash to service our indebtedness,
which could result in bankruptcy or otherwise impair our ability to maintain
sufficient liquidity to continue our operations.
We rely
primarily on our ability to generate cash in the future to service our
indebtedness. If we do not generate sufficient cash flows to meet our
debt service and working capital requirements, we may need to seek additional
financing. If we are unable to obtain financing on terms that are
acceptable to us, we could be forced to sell our assets or those of our
subsidiaries to make up for any shortfall in our payment obligations under
unfavorable circumstances. Our 2007 Credit Facility limits our
ability to sell assets and also restricts our use of the proceeds from any such
sale. If we default on our debt obligations, our lenders could
require immediate repayment of our entire outstanding debt. If our
lenders require immediate repayment on the entire principal amount, we will not
be able to repay them in full, and our inability to meet our debt obligations
could result in bankruptcy or otherwise impair our ability to maintain
sufficient liquidity to continue our operations.
Because
we are a holding company, we may not be able to service our debt if our
subsidiaries do not make sufficient distributions to us.
We have
no direct operations and no significant assets other than investments in the
stock of our subsidiaries. Because we conduct our business operations
through our operating subsidiaries, we depend on those entities for payments and
dividends to generate the funds necessary to meet our financial
obligations. Legal restrictions, including state and local tax
regulations and contractual obligations associated with secured loans, such as
equipment financings, could restrict or impair our subsidiaries’ ability to pay
dividends or make loans or other distributions to us. The earnings
from, or other available assets of, these operating subsidiaries may not be
sufficient to make distributions to enable us to pay interest on our debt
obligations when due or to pay the principal of such debt at
maturity.
Restrictive
covenants in our 2007 Credit Facility may restrict our ability to pursue
business strategies.
Our 2007
Credit Facility and our other outstanding indebtedness include covenants
limiting our ability to, among other things:
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incur
additional indebtedness;
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pay
dividends to our stockholders;
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repurchase
or redeem our stock;
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repay
indebtedness that is junior to our 2007 Credit
Facility;
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make
investments and other restricted
payments;
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create
liens securing debt or other encumbrances on our
assets;
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enter
into sale-leaseback transactions;
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enter
into transactions with our stockholders and
affiliates;
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sell
or exchange assets; and
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acquire
the assets of, or merge or consolidate with, other
companies.
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Our 2007
Credit Facility also requires that we maintain various financial ratios, which
we may not be able to achieve. The covenants may impair our ability
to finance future operations or capital needs or to engage in other favorable
business activities.
Because
we depend on governments for a significant portion of our revenues, our
inability to win or renew government contracts during regulated procurement
processes could harm our operations and reduce our profits and revenues
significantly.
Revenues
from our federal market sector represented approximately 43% of our total
revenues for the nine months ended October 2, 2009. Government
contracts are awarded through a regulated procurement process. The
federal government has increasingly relied upon multi-year contracts with
pre-established terms and conditions, such as IDCs, that generally require those
contractors that have previously been awarded the IDC to engage in an additional
competitive bidding process before a task order is issued. The
increased competition, in turn, may require us to make sustained efforts to
reduce costs in order to realize revenues and profits under government
contracts. If we are not successful in reducing the amount of costs
we incur, our profitability on government contracts will be negatively
impacted. Moreover, even if we are qualified to work on a government
contract, we may not be awarded the contract because of existing government
policies designed to protect small businesses and under-represented minority
contractors. Our inability to win or renew government contracts
during regulated procurement processes could harm our operations and reduce our
profits and revenues.
Each
year, client funding for some of our government contracts may rely on government
appropriations or public-supported financing. If adequate public
funding is delayed or is not available, then our profits and revenues could
decline.
Each
year, client funding for some of our government contracts may directly or
indirectly rely on government appropriations or public-supported
financing. For example, the ARRA enacted in February 2009 provides
funding for various clients’ state transportation projects, for which we provide
services. However, ARRA-funded contracts have not been awarded for
infrastructure projects as quickly as we had expected, and it is possible that
ARRA funding will never be allocated to projects that represent opportunities
for us to the extent that we anticipate, if at all. Legislatures may
appropriate funds for a given project on a year-by-year basis, even though the
project may take more than one year to perform. In addition,
public-supported financing such as state and local municipal bonds, may be only
partially raised to support existing infrastructure projects. As a
result, a project we are currently working on may only be partially funded and
thus additional public funding may be required in order to complete our
contract. Public funds and the timing of payment of these funds may
be influenced by, among other things, the state of the economy, competing
political priorities, curtailments in the use of government contracting firms,
rise in raw material costs, delays associated with a lack of a sufficient number
of government staff to oversee contracts, budget constraints, the timing and
amount of tax receipts and the overall level of government
expenditures. If adequate public funding is not available or is
delayed, then our profits and revenues could decline.
Our
government contracts may give government agencies the right to modify, delay,
curtail, renegotiate or terminate existing contracts at their convenience at any
time prior to their completion, which may result in a decline in our profits and
revenues.
Government
projects in which we participate as a contractor or subcontractor may extend for
several years. Generally, government contracts include the right for
government agencies to modify, delay, curtail, renegotiate or terminate
contracts and subcontracts at their convenience any time prior to their
completion. Any decision by a government client to modify, delay,
curtail, renegotiate or terminate our contracts at their convenience may result
in a decline in our profits and revenues.
If
we are unable to accurately estimate and control our contract costs, then we may
incur losses on our contracts, which could decrease our operating margins and
reduce our profits.
It is
important for us to accurately estimate and control our contract costs so that
we can maintain positive operating margins and profitability. We
generally enter into four principal types of contracts with our clients:
cost-plus, fixed-price, target-price and time-and-materials.
Under
cost-plus contracts, which may be subject to contract ceiling amounts, we are
reimbursed for allowable costs and fees, which may be fixed or
performance-based. If our costs exceed the contract ceiling or are
not allowable under the provisions of the contract or any applicable
regulations, we may not be reimbursed for all of the costs we
incur. Under fixed-price contracts, we receive a fixed price
regardless of what our actual costs will be. Consequently, we realize
a profit on fixed-price contracts only if we can control our costs and prevent
cost over-runs on our contracts. Under target-price contracts,
project costs are reimbursable and our fee is established against a target
budget that is subject to changes in project circumstances and
scope. As a result of the WGI acquisition, the number and size of our
target-price and fixed-price contracts have increased, which may increase the
volatility of our profitability. Under time-and-materials contracts,
we are paid for labor at negotiated hourly billing rates and for other
expenses.
Profitability
on our contracts is driven by billable headcount and our ability to estimate and
manage costs. If we are unable to control costs, we may incur losses
on our contracts, which could decrease our operating margins and significantly
reduce or eliminate our profits. Many of our contracts require us to
satisfy specified design, engineering, procurement or construction milestones in
order to receive payment for the work completed or equipment or supplies
procured prior to achievement of the applicable milestone. As a
result, under these types of arrangements, we may incur significant costs or
perform significant amounts of services prior to receipt of
payment. If the customer determines not to proceed with the
completion of the project or if the customer defaults on its payment
obligations, we may face difficulties in collecting payment of amounts due to us
for the costs previously incurred or for the amounts previously expended to
purchase equipment or supplies.
Our
actual business and financial results could differ from the estimates and
assumptions that we use to prepare our financial statements, which may reduce
our profits.
To
prepare financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions as of the
date of the financial statements, which affect the reported values of assets and
liabilities, revenues and expenses, and disclosures of contingent assets and
liabilities. For example, we may recognize revenues over the life of
a contract based on the proportion of costs incurred to date compared to the
total costs estimated to be incurred for the entire project. Areas
requiring significant estimates by our management include, but are not limited
to the following:
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the
application of the percentage-of-completion method of revenue recognition
on contracts, change orders and contract
claims;
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provisions
for uncollectible receivables and customer claims and recoveries of costs
from subcontractors, vendors and
others;
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provisions
for income taxes and related valuation
allowances;
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value
of goodwill and recoverability of other intangible
assets;
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valuation
of assets acquired and liabilities assumed in connection with business
combinations;
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valuation
of defined benefit pension plans and other employee benefit
plans;
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valuation
of stock-based compensation expense;
and
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accruals
for estimated liabilities, including litigation and insurance
reserves.
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Our
actual business and financial results could differ from those estimates, which
may reduce our profits.
Our
profitability could suffer if we are not able to maintain adequate utilization
of our workforce.
The cost
of providing our services, including the extent to which we utilize our
workforce, affects our profitability. The rate at which we utilize
our workforce is affected by a number of factors, including:
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our
ability to transition employees from completed projects to new assignments
and to hire and assimilate new
employees;
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our
ability to forecast demand for our services and thereby maintain an
appropriate headcount in each of our geographies and
workforces;
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our
ability to manage attrition;
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our
need to devote time and resources to training, business development,
professional development and other non-chargeable activities;
and
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our
ability to match the skill sets of our employees to the needs of the
marketplace.
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If we
overutilize our workforce, our employees may become disengaged, which will
impact employee attrition. If we underutilize our workforce, our
profit margin and profitability could suffer.
Our
use of the percentage-of-completion method of revenue recognition could result
in a reduction or reversal of previously recorded revenues and
profits.
A
substantial portion of our revenues and profits are measured and recognized
using the percentage-of-completion method of revenue recognition. Our
use of this accounting method results in recognition of revenues and profits
ratably over the life of a contract, based generally on the proportion of costs
incurred to date to total costs expected to be incurred for the entire
project. The effects of revisions to revenues and estimated costs are
recorded when the amounts are known or can be reasonably
estimated. Such revisions could occur in any period and their effects
could be material. Although we have historically made reasonably
reliable estimates of the progress towards completion of long-term engineering,
program management, construction management or construction contracts, the
uncertainties inherent in the estimating process make it possible for actual
costs to vary materially from estimates, including reductions or reversals of
previously recorded revenues and profits.
Our
failure to successfully bid on new contracts and renew existing contracts could
reduce our profits.
Our
business depends on our ability to successfully bid on new contracts and renew
existing contracts with private and public sector clients. Contract
proposals and negotiations are complex and frequently involve a lengthy bidding
and selection process, which are affected by a number of factors, such as market
conditions, financing arrangements and required governmental
approvals. For example, a client may require us to provide a surety
bond or letter of credit to protect the client should we fail to perform under
the terms of the contract. If negative market conditions arise, or if
we fail to secure adequate financial arrangements or the required governmental
approval, we may not be able to pursue particular projects, which could
adversely reduce or eliminate our profitability.
If
we fail to timely complete a project, miss a required performance standard or
otherwise fail to adequately perform on a project, then we may incur a loss on
that project, which may reduce or eliminate our overall
profitability.
We may
commit to a client that we will complete a project by a scheduled
date. We may also commit that a project, when completed, will achieve
specified performance standards. If the project is not completed by
the scheduled date or fails to meet required performance standards, we may
either incur significant additional costs or be held responsible for the costs
incurred by the client to rectify damages due to late completion or failure to
achieve the required performance standards. The uncertainty of the
timing of a project can present difficulties in planning the amount of personnel
needed for the project. If the project is delayed or canceled, we may
bear the cost of an underutilized workforce that was dedicated to fulfilling the
project. In addition, performance of projects can be affected by a
number of factors beyond our control, including unavoidable delays from
governmental inaction, public opposition, inability to obtain financing, weather
conditions, unavailability of vendor materials, changes in the project scope of
services requested by our clients, industrial accidents, environmental hazards,
labor disruptions and other factors. In some cases, should we fail to
meet required performance standards, we may also be subject to agreed-upon
financial damages, which are determined by the contract. To the
extent that these events occur, the total costs of the project could exceed our
estimates and we could experience reduced profits or, in some cases, incur a
loss on a project, which may reduce or eliminate our overall
profitability.
We
may be required to pay liquidated damages if we fail to meet milestone
requirements in some of our contracts.
We may be
required to pay liquidated damages if we fail to meet milestone requirements in
some of our contracts. For example, our common sulfur project in
Qatar gives the client the right to assess approximately $25 million against a
consortium in which our subsidiary is a member if project milestones are not
completed by a pre-determined date. Failure to meet any of the
milestone requirements could result in additional costs, and the amount of such
additional costs could exceed the projected profits on the
project. These additional costs include liquidated damages paid under
contractual penalty provisions, which can be substantial and can accrue on a
regular basis.
If
our partners fail to perform their contractual obligations on a project, we
could be exposed to joint and several liability and financial penalties that
could reduce our profits and revenues.
We often
partner with unaffiliated third parties to jointly bid on and perform on a
particular project. For example, for the three and nine months ended
October 2, 2009, our equity in income of unconsolidated joint ventures amounted
to $20.7 million and $79.0 million, respectively. The success of our
partnerships and joint ventures depends, in large part, on the satisfactory
performance of contractual obligations by each member. In addition,
when we operate through a joint venture in which we are a minority holder, we
have limited control over many project decisions, including decisions related to
the joint venture’s internal controls, which may not be subject to the same
internal control procedures that we employ. If our partners do not
fulfill their contract obligations, the partnerships or joint ventures may be
unable to adequately perform and deliver its contracted
services. Under these circumstances, we may be obligated to pay
financial penalties, provide additional services to ensure the adequate
performance and delivery of the contracted services and may be jointly and
severally liable for the other’s actions or contract
performance. These additional obligations could result in reduced
profits and revenues or, in some cases, significant losses for us with respect
to the joint venture, which could also affect our reputation in the industries
we serve.
Our
dependence on subcontractors and equipment and material providers could reduce
our profits.
As the
size and complexity of our projects increase, we increasingly rely on
third-party subcontractors and equipment and material providers. For
example, we procure heavy equipment and construction materials as needed when
performing large construction and contract mining projects. To the
extent that we cannot engage subcontractors or acquire equipment and materials
at reasonable costs, our ability to complete a project in a timely fashion or at
a profit may be impaired. If the amount we are required to pay for
these goods and services exceed our estimates, we could experience reduced
profit or experience losses in the performance of these contracts. In
addition, if a subcontractor or a manufacturer is unable to deliver its
services, equipment or materials according to the negotiated terms for any
reason, including the deterioration of its financial condition, we may be
required to purchase the services, equipment or materials from another source at
a higher price. This may reduce the profit to be realized or result
in a loss on a project for which the services, equipment or materials are
needed.
If
we experience delays and/or defaults in client payments, we could suffer
liquidity problems or we may be unable to recover all working capital or equity
investments.
Because
of the nature of our contracts, at times we may commit resources in a client’s
projects before receiving payments to cover our
expenditures. Sometimes, we incur and record expenditures for a
client project before receiving any payment to cover our expenses. In
addition, we may make equity investments in majority or minority controlled
large-scale client projects and other long-term capital projects before the
project completes operational status or completes its project
financing. If a client project is unable to make its payments, we
could incur losses including our working capital or equity
investments.
The
current tightening of credit could exacerbate this risk, as more clients may be
unable to secure sufficient liquidity to pay their obligations. If a
client delays or defaults in making its payments on a project to which we have
devoted significant resources, it could have an adverse effect on our financial
position and cash flows.
Our
failure to adequately recover on claims brought by us against project owners for
additional contract costs could have a negative impact on our liquidity and
profitability.
We have
brought claims against project owners for additional costs exceeding the
contract price or for amounts not included in the original contract
price. These types of claims occur due to matters such as
owner-caused delays or changes from the initial project scope, both of which may
result in additional cost. Often, these claims can be the subject of
lengthy arbitration or litigation proceedings, and it is difficult to accurately
predict when these claims will be fully resolved. When these types of
events occur and unresolved claims are pending, we have used working capital in
projects to cover cost overruns pending the resolution of the relevant
claims. A failure to promptly recover on these types of claims could
have a negative impact on our liquidity and profitability.
Maintaining
adequate bonding capacity is necessary for us to successfully bid on and win
fixed-price contracts.
In line
with industry practice, we are often required to provide performance or payment
bonds to clients under fixed-price contracts. These bonds indemnify
the customer should we fail to perform our obligations under the
contract. If a bond is required for a particular project and we are
unable to obtain an appropriate bond, we cannot pursue that
project. We have bonding capacity but, as is typically the case, the
issuance of a bond is at the surety’s sole discretion. Moreover, due
to events that affect the insurance and bonding markets generally, bonding may
be more difficult to obtain in the future or may only be available at
significantly higher costs. There can be no assurance that our
bonding capacity will continue to be available to us on reasonable
terms. Our inability to obtain adequate bonding and, as a result, to
bid on new fixed-price contracts could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Our
inability to successfully integrate acquisitions could impede us from realizing
all of the benefits of the acquisition, which could severely weaken our results
of operations.
Our
inability to successfully integrate future acquisitions could impede us from
realizing all of the benefits of those acquisitions and could severely weaken
our business operations. The integration process may disrupt our
business and, if implemented ineffectively, may preclude realization of the full
benefits expected by us and could seriously harm our results of
operations. In addition, the overall integration of two combining
companies may result in unanticipated problems, expenses, liabilities,
competitive responses, loss of customer relationships, and diversion of
management’s attention, and may cause our stock price to decline. The
difficulties of integrating an acquisition include, among others:
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unanticipated
issues in integrating information, communications and other
systems;
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unanticipated
incompatibility of logistics, marketing and administration
methods;
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maintaining
employee morale and retaining key
employees;
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integrating
the business cultures of both
companies;
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preserving
important strategic and customer
relationships;
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consolidating
corporate and administrative infrastructures and eliminating duplicative
operations;
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the
diversion of management’s attention from ongoing business concerns;
and
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coordinating
geographically separate
organizations.
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In
addition, even if the operations of an acquisition are integrated successfully,
we may not realize the full benefits of the acquisition, including the
synergies, cost savings, or sales or growth opportunities that we
expect. These benefits may not be achieved within the anticipated
time frame, or at all.
We
may be subject to substantial liabilities under environmental laws and
regulations.
A portion
of our environmental business involves the planning, design, program management,
construction and construction management, and operation and maintenance of
pollution control and nuclear facilities, hazardous waste or Superfund sites and
military bases. In addition, we have contracts with U.S. federal
government entities to destroy hazardous materials, including chemical agents
and weapons stockpiles, as well as to decontaminate and decommission nuclear
facilities. These activities may require us to manage, handle,
remove, treat, transport and dispose of toxic or hazardous
substances. We must comply with a number of governmental laws that
strictly regulate the handling, removal, treatment, transportation and disposal
of toxic and hazardous substances. Under Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, (“CERCLA”) and
comparable state laws, we may be required to investigate and remediate regulated
hazardous materials. CERCLA and comparable state laws typically
impose strict, joint and several liabilities without regard to whether a company
knew of or caused the release of hazardous substances. The liability
for the entire cost of clean up could be imposed upon any responsible
party. Other principal federal environmental, health and safety laws
affecting us include, but are not limited to, the Resource Conservation and
Recovery Act, the National Environmental Policy Act, the Clean Air Act, the
Clean Air Mercury Rule, the Occupational Safety and Health Act, the Toxic
Substances Control Act and the Superfund Amendments and Reauthorization
Act. Our business operations may also be subject to similar state and
international laws relating to environmental protection. Our past
waste management practices and contract mining activities as well as our current
and prior ownership of various properties may also expose us to such
liabilities. Liabilities related to environmental contamination or
human exposure to hazardous substances, or a failure to comply with applicable
regulations could result in substantial costs to us, including clean-up costs,
fines and civil or criminal sanctions, third-party claims for property damage or
personal injury or cessation of remediation activities. Our
continuing work in the areas governed by these laws and regulations exposes us
to the risk of substantial liability.
Our
profits and revenues could suffer if we are involved in legal proceedings,
investigations and disputes.
We engage
in engineering and construction services that can result in substantial injury
or damages that may expose us to legal proceedings, investigations and
disputes. For example, in the ordinary course of our business, we may
be involved in legal disputes regarding project cost overruns and liquidated
damages, personal injury and wrongful death claims, labor disputes, professional
negligence claims, commercial disputes as well as other claims. See
Note 8, “Commitments and Contingencies,” to our “Condensed Consolidated
Financial Statements and Supplementary Data” included under Part I – Item 1 for
a discussion of some of our legal proceedings. In addition, in the
ordinary course of our business, we frequently make professional judgments and
recommendations about environmental and engineering conditions of project sites
for our clients. We may be deemed to be responsible for these
judgments and recommendations if they are later determined to be
inaccurate. Any unfavorable legal ruling against us could result in
substantial monetary damages or even criminal violations. We maintain
insurance coverage as part of our overall legal and risk management strategy to
minimize our potential liabilities. Generally, our insurance program
includes limits totaling $540.0 million per loss and in the aggregate for
general liability; $220.0 million per loss and in the aggregate for professional
errors and omissions liability; $140.0 million per loss for property; $100.0
million per loss for marine property and liability; and $100.0 million per loss
and in the aggregate for contractor’s pollution liability (in addition to other
policies for specific projects). The general liability, professional
errors and omissions liability, property, and contractor’s pollution liability
limits are in excess of a self-insured retention of $10.0 million for each
covered claim. In addition, our insurance policies contain certain
exclusions and sublimits that insurance providers may use to deny or restrict
coverage. If we sustain liabilities that exceed our insurance
coverage or for which we are not insured, it could have a material adverse
impact on our results of operations and financial condition, including our
profits and revenues.
Unavailability
or cancellation of third-party insurance coverage would increase our overall
risk exposure as well as disrupt the management of our business
operations.
We
maintain insurance coverage from third-party insurers as part of our overall
risk management strategy and because some of our contracts require us to
maintain specific insurance coverage limits. If any of our
third-party insurers fail, suddenly cancel our coverage or otherwise are unable
to provide us with adequate insurance coverage then our overall risk exposure
and our operational expenses would increase and the management of our business
operations would be disrupted. In addition, there can be no assurance
that any of our existing insurance coverage will be renewable upon the
expiration of the coverage period or that future coverage will be affordable at
the required limits.
Changes
in environmental, defense, or infrastructure industry laws could directly or
indirectly reduce the demand for our services, which could in turn negatively
impact our revenues.
Some of
our services are directly or indirectly impacted by changes in federal, state,
local or foreign laws and regulations pertaining to the environmental, defense
or infrastructure industries. For example, passage of the Clean Air
Mercury environmental rules increased demand for our emission control services,
and any repeal of these rules would have a negative impact on our
revenues. Relaxation or repeal of laws and regulations, or changes in
governmental policies regarding the environmental, defense or infrastructure
industries could result in a decline in demand for our services, which could in
turn negatively impact our revenues.
Limitations
of or modifications to indemnification regulations of the U.S. or foreign
countries could adversely affect our business.
The
Price-Anderson Act (“PAA”) comprehensively regulates the manufacture, use and
storage of radioactive materials in the U.S., while promoting the nuclear energy
industry by offering broad indemnification to nuclear energy plant operators and
Department of Energy (“DOE”) contractors. Because we provide services
to the DOE relating to its nuclear weapons facilities and the nuclear energy
industry in the ongoing maintenance and modification, as well as the
decontamination and decommissioning, of its nuclear energy plants, we may be
entitled to some of the indemnification protections under the
PAA. However, the PAA’s indemnification provisions do not apply to
all liabilities that we might incur while performing services as a radioactive
materials cleanup contractor for the DOE and the nuclear energy
industry. If the PAA’s indemnification protection does not apply to
our services or our exposure occurs outside of the U.S., our business could be
adversely affected by either a refusal to retain us by new facilities operations
or our inability to obtain commercially adequate insurance and
indemnification.
A decline in U.S. defense spending or
a change in budgetary priorities could reduce our profits and revenues.
Revenues
under contracts with the DOD and other defense-related clients represented
approximately 29.9% of our total revenues for the nine months ended October 2,
2009. Past increases in spending authorization for defense-related
programs and in outsourcing of federal government jobs to the private sector are
not expected to be sustained on a long-term basis. For example, the
DOD budget declined in the late 1980s and the early 1990s, resulting in DOD
program delays and cancellations. Future levels of expenditures and
authorizations for defense-related programs, including foreign military
commitments, may decrease, remain constant or shift to programs in areas where
we do not currently provide services. As a result, a general decline
in U.S. defense spending or a change in budgetary priorities could reduce our
profits and revenues.
Our
overall market share and profits will decline if we are unable to compete
successfully in our industry.
Our
industry is highly fragmented and intensely competitive. For example,
according to the publication Engineering News-Record, based on voluntarily
reported information, the top ten engineering design firms accounted only for
approximately 35% of the total top 500 design firm revenues in
2007. The top 20 U.S. contractors accounted for approximately 36% of
the top 500 U.S. contractors revenues in 2007, as reported by the Engineering
News Record. Our competitors are numerous, ranging from small private
firms to multi-billion dollar companies. In addition, the technical
and professional aspects of some of our services generally do not require large
upfront capital expenditures and provide limited barriers against new
competitors.
Some of
our competitors have achieved greater market penetration in some of the markets
in which we compete and have substantially more financial resources and/or
financial flexibility than we do. As a result of the number of
competitors in the industry, our clients may select one of our competitors on a
project due to competitive pricing or a specific skill set. If we are
unable to maintain our competitiveness, our market share, revenues and profits
will decline. If we are unable to meet these competitive challenges,
we could lose market share to our competitors and experience an overall
reduction in our profits.
Our
failure to attract and retain key employees could impair our ability to provide
services to our clients and otherwise conduct our business
effectively.
As a
professional and technical services company, we are labor intensive, and,
therefore, our ability to attract, retain and expand our senior management and
our professional and technical staff is an important factor in determining our
future success. From time to time, it may be difficult to attract and
retain qualified individuals with the expertise and in the timeframe demanded by
our clients. For example, some of our government contracts may
require us to employ only individuals who have particular government security
clearance levels. We may occasionally enter into contracts before we
have hired or retained appropriate staffing for that project. In
addition, we rely heavily upon the expertise and leadership of our senior
management. If we are unable to retain executives and other key
personnel, the roles and responsibilities of those employees will need to be
filled, which may require that we devote time and resources in identifying,
hiring and integrating new employees. In addition, the failure to
attract and retain key individuals could impair our ability to provide services
to our clients and conduct our business effectively.
We
may be required to contribute cash to meet our underfunded benefit obligations
in our employee retirement plans.
We have
various employee retirement plan obligations that require us to make
contributions to satisfy, over time, our underfunded benefit obligations, which
are determined by calculating the projected benefit obligations minus the fair
value of plan assets. For example, as of January 2, 2009, our defined
benefit pension and post-retirement benefit plans were underfunded by $179.3
million and we made employer cash contributions of approximately $19.2 million
into our defined benefit pension and post-retirement benefit plans in fiscal
year 2008. In addition, the actual loss on plan assets in fiscal year
2008 was $47.6 million. In the future, our retirement plan
obligations may increase or decrease depending on changes in the levels of
interest rates, pension plan asset performance and other factors. If
we are required to contribute a significant amount of the deficit for
underfunded benefit plans, our cash flows could be materially and adversely
affected.
Employee,
agent or partner misconduct or our overall failure to comply with laws or
regulations could harm our reputation, reduce our revenues and profits, and
subject us to criminal and civil enforcement actions.
Misconduct,
fraud, non-compliance with applicable laws and regulations, or other improper
activities by one of our employees, agents or partners could have a significant
negative impact on our business and reputation. Such misconduct could
include the failure to comply with government procurement regulations,
regulations regarding the protection of classified information, regulations
prohibiting bribery and other foreign corrupt practices, regulations regarding
the pricing of labor and other costs in government contracts, regulations on
lobbying or similar activities, regulations pertaining to the internal controls
over financial reporting, environmental laws and any other applicable laws or
regulations. For example, we regularly provide services that may be
highly sensitive or that relate to critical national security matters; if a
security breach were to occur, our ability to procure future government
contracts could be severely limited. The precautions we take to
prevent and detect these activities may not be effective, since our internal
controls are subject to inherent limitations, including human error, the
possibility that controls could be circumvented or become inadequate because of
changed conditions, and fraud.
Our
failure to comply with applicable laws or regulations or acts of misconduct
could subject us to fines and penalties, loss of security clearances, and
suspension or debarment from contracting, any or all of which could harm our
reputation, reduce our revenues and profits and subject us to criminal and civil
enforcement actions.
Our
international operations are subject to a number of risks that could
significantly reduce our profits and revenues or subject us to criminal and
civil enforcement actions.
As a
multinational company, we have operations in more than 30 countries and we
derived 9% of our revenues and equity in income of unconsolidated joint ventures
from international operations for the nine months ended October 2,
2009. International business is subject to a variety of risks,
including:
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lack
of developed legal systems to enforce contractual
rights;
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greater
risk of uncollectible accounts and longer collection
cycles;
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currency
fluctuations;
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logistical
and communication challenges;
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potentially
adverse changes in laws and regulatory practices, including export license
requirements, trade barriers, tariffs and tax
laws;
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changes
in labor conditions;
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general
economic, political and financial conditions in foreign markets;
and
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exposure
to civil or criminal liability under the Foreign Corrupt Practices Act,
anti-boycott rules, trade and export control rules and other international
regulations, for example:
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Foreign Corrupt Practices
Act: Practices in the local business community outside
the U.S. might not conform to international business standards and could
violate anticorruption regulations, including the U.S. Foreign Corrupt
Practices Act, which prohibits giving or offering to give anything of
value with the intent to influence the awarding of government contracts;
and
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Export Control
Regulations: To the extent that we export products,
technical data and services outside the U.S., we are subject to U.S. laws
and regulations governing international trade and exports, including but
not limited to the International Traffic in Arms Regulations, the Export
Administration Regulations and trade sanctions against embargoed
countries, which are administered by the Office of Foreign Assets Control
within the Department of the
Treasury.
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International
risks and violations of international regulations may significantly reduce our
profits and revenues and subject us to criminal or civil enforcement actions,
including fines, suspensions or disqualification from future U.S. federal
procurement contracting. Although we have policies and procedures to
ensure legal and regulatory compliance, our employees, subcontractors and agents
could take actions that violate these requirements. As a result, our
international risk exposure may be more or less than the percentage of revenues
attributed to our international operations.
Our
international operations may require our employees to travel to and work in high
security risk countries, which may result in employee death or injury,
repatriation costs or other unforeseen costs.
As a
multinational company, our employees often travel to and work in high security
risk countries around the world that are undergoing political, social and
economic upheavals resulting in war, civil unrest, criminal activity, acts of
terrorism, or public health crises. For example, we have employees
working in high security risk countries located in the Middle East and Southwest
Asia. As a result, we risk loss of or injury to our employees and may
be subject to costs related to employee death or injury, repatriation or other
unforeseen circumstances.
We
rely on third-party internal and outsourced software to run our critical
accounting, project management and financial information systems and, as a
result, any sudden loss, disruption or unexpected costs to maintain these
systems could significantly increase our operational expense as well as disrupt
the management of our business operations.
We rely
on third-party internal and outsourced software to run our critical accounting,
project management and financial information systems. For example, we
rely on one software vendor’s products to process a majority of our total
revenues. We also depend on our software vendors to provide long-term
software maintenance support for our information systems. Software
vendors may decide to discontinue further development, integration or long-term
software maintenance support for our information systems, in which case we may
need to abandon one or more of our current information systems and migrate some
or all of our accounting, project management and financial information to other
systems, thus increasing our operational expense as well as disrupting the
management of our business operations.
Force
majeure events, including natural disasters and terrorists’ actions have
negatively impacted and could further negatively impact our business, which may
affect our financial condition, results of operations or cash
flows.
Force
majeure or extraordinary events beyond the control of the contracting parties
could negatively impact the economies in which we operate. For
example, in August 2005, Hurricane Katrina caused several of our Gulf Coast
offices to close, interrupted a number of active client projects and forced the
relocation of our employees in that region from their homes. In
addition, during the September 11, 2001 terrorist attacks, many client records
were destroyed when our office at the World Trade Center was
destroyed.
We
typically remain obligated to perform our services after a terrorist action or
natural disaster unless the contract contains a force majeure clause relieving
us of our contractual obligations in such an extraordinary event. If
we are not able to react quickly to force majeure, our operations may be
affected significantly, which would have a negative impact on our financial
condition, results of operations or cash flows.
Negotiations
with labor unions and possible work actions could divert management attention
and disrupt operations. In addition, new collective bargaining
agreements or amendments to agreements could increase our labor costs and
operating expenses.
As of
October 2, 2009, approximately 16% of our employees were covered by collective
bargaining agreements. The outcome of any future negotiations
relating to union representation or collective bargaining agreements may not be
favorable to us. We may reach agreements in collective bargaining
that increase our operating expenses and lower our net income as a result of
higher wages or benefit expenses. In addition, negotiations with
unions could divert management attention and disrupt operations, which may
adversely affect our results of operations. If we are unable to
negotiate acceptable collective bargaining agreements, we may have to address
the threat of union-initiated work actions, including
strikes. Depending on the nature of the threat or the type and
duration of any work action, these actions could disrupt our operations and
adversely affect our operating results.
We
have a limited ability to protect our intellectual property rights, which are
important to our success. Our failure to protect our intellectual
property rights could adversely affect our competitive position.
Our
success depends, in part, upon our ability to protect our proprietary
information and other intellectual property. We rely principally on a
combination of trade secrets, confidentiality policies and other contractual
arrangements to protect much of our intellectual property where we do not
believe that patent or copyright protection is appropriate or
obtainable. Trade secrets are generally difficult to
protect. Although our employees are subject to confidentiality
obligations, this protection may be inadequate to deter or prevent
misappropriation of our confidential information. In addition, we may
be unable to detect unauthorized use of our intellectual property or otherwise
take appropriate steps to enforce our rights. Failure to obtain or
maintain our intellectual property rights would adversely affect our competitive
business position. In addition, if we are unable to prevent third
parties from infringing or misappropriating our intellectual property, our
competitive position could be adversely affected.
Delaware
law and our charter documents may impede or discourage a merger, takeover or
other business combination even if the business combination would have been in
the best interests of our stockholders.
We are a
Delaware corporation and the anti-takeover provisions of Delaware law impose
various impediments to the ability of a third-party to acquire control of us,
even if a change in control would be beneficial to our
stockholders. In addition, our Board of Directors has the power,
without stockholder approval, to designate the terms of one or more series of
preferred stock and issue shares of preferred stock, which could be used
defensively if a takeover is threatened. Our incorporation under
Delaware law, the ability of our Board of Directors to create and issue a new
series of preferred stock and provisions in our certificate of incorporation and
by-laws, such as those relating to advance notice of certain stockholder
proposals and nominations, could impede a merger, takeover or other business
combination involving us or discourage a potential acquirer from making a tender
offer for our common stock, even if the business combination would have been in
the best interests of our current stockholders.
Our
stock price could become more volatile and stockholders’ investments could lose
value.
In
addition to the macroeconomic factors that have recently affected the prices of
many securities generally, all of the factors discussed in this section could
affect our stock price. The timing of announcements in the public
markets regarding new services or potential problems with the performance of
services by us or our competitors or any other material announcements could
affect our stock price. Speculation in the media and analyst
community, changes in recommendations or earnings estimates by financial
analysts, changes in investors’ or analysts’ valuation measures for our stock
and market trends unrelated to our stock can cause the price of our stock to
change. Continued volatility in the financial markets could also
cause further declines in our stock price, which could trigger an impairment of
the goodwill of our individual reporting units that could be material to our
condensed consolidated financial statements. A significant drop in
the price of our stock could also expose us to the risk of securities class
action lawsuits, which could result in substantial costs and divert managements’
attention and resources, which could adversely affect our business.
Stock
Purchases
The
following table sets forth all purchases made by us or any “affiliated
purchaser” as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of
1934, as amended, of our common shares during the three monthly periods that
comprise our third quarter of 2009.
|
Period
(In
thousands, except average price paid per share)
|
(a)
Total Number of Shares Purchased (1)
|
(b)
Average Price Paid per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or
Programs (2)
|
(d)
Maximum Number of Shares that May Yet be Purchased Under the Plans or
Programs
|
||||||||||||
|
July
4, 2009 – July
31, 2009
|
— | $ | — | — | — | |||||||||||
|
August
1, 2009 – August
28, 2009
|
— | — | 362 | — | ||||||||||||
|
August
29, 2009 – October
2, 2009
|
22 | 41.70 | — | 2,614 | ||||||||||||
|
Total
|
22 | 362 | 2,614 | |||||||||||||
_______________
|
(1)
|
All
purchases were made pursuant to awards issued under our equity incentive
plans, which allow our employees to surrender shares of our common stock
as payment toward the exercise cost and tax withholding obligations
associated with the exercise of stock options or the vesting of restricted
or deferred stock.
|
|
(2)
|
On
March 26, 2007, we announced that our Board of Directors approved a common
stock repurchase program that will allow the repurchase of up to one
million shares of our common stock plus additional shares issued or deemed
issued under our stock incentive plans and Employee Stock Purchase Plan
for the period from December 30, 2006 through January 1, 2010 (excluding
shares issuable upon the exercise of options granted prior to December 30,
2006). Our stock repurchase program will terminate on January
1, 2010. Pursuant to our 2007 Credit Facility, we are subject
to covenants that will limit our ability to repurchase our common
stock. However, we amended our 2007 Credit Facility on June 19,
2008 so that we are allowed to repurchase up to one million shares of
common stock annually if we maintain various designated financial
criteria. During the three and nine months ended October 2,
2009, we repurchased an aggregate of 0.4 million shares and one million
shares of our common stock, respectively.
|
We
are precluded by provisions in our 2007 Credit Facility from paying cash
dividends on our outstanding common stock until our Consolidated Leverage Ratio
is equal to or less than 1.00:1.00.
None.
None.
None.
(a) Exhibits
|
Incorporated
by Reference
|
|||||||||||||||
|
Exhibit
Number
|
Exhibit
Description
|
Form
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
||||||||||
| 3.01 |
Restated
Certificate of Incorporation of URS Corporation, as filed with the
Secretary of State of Delaware on September 9, 2008.
|
8-K | 3.01 |
9/11/2008
|
|||||||||||
| 3.02 |
By-laws
of URS Corporation as amended and restated on September 5,
2008.
|
8-K | 3.02 |
9/11/2008
|
|||||||||||
| 4.1 | X | ||||||||||||||
| 10.1* | X | ||||||||||||||
| 10.2* | X | ||||||||||||||
| 10.3* | X | ||||||||||||||
| 10.4* | X | ||||||||||||||
| 10.5* | X | ||||||||||||||
| 10.6* | X | ||||||||||||||
| 10.7* | X | ||||||||||||||
| 10.8* | X | ||||||||||||||
| 31.1 | X | ||||||||||||||
| 31.2 | X | ||||||||||||||
| 32 | X | ** | |||||||||||||
|
|
|
*
|
Represents
a management contract or compensatory plan or
arrangement.
|
|
**
|
Document
has been furnished and not filed and not to be incorporated into any of
our filings under the Securities Act of 1933 or the Securities Exchange
Act of 1934, irrespective of any general incorporation language included
in any such filing.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
URS
CORPORATION
|
|||
|
Dated:
November 12, 2009
|
By:
|
/s/ Reed N. Brimhall | |
|
Reed
N. Brimhall
|
|||
|
Vice
President, Controller and
Chief Accounting Officer
|
|||
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