FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
( ) 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
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(Exact name of registrant as specified in its charter)
Delaware 94-1381538
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
100 California Street, Suite 500
San Francisco, California 94111-4529
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415-774-2700
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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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 4,1998
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Common stock, $.01 par value 15,049,338
URS CORPORATION AND SUBSIDIARIES
This Form 10-Q for the third quarter ended July 31, 1998 contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. Factors that
might cause such a difference include, but are not limited to, those discussed
elsewhere in this Form 10-Q and those incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997
and Form S-4/A Registration Statement (File No. 333-37531), filed with the
Securities and Exchange Commission.
PART I. FINANCIAL INFORMATION:
In the opinion of management, the information furnished reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair statement of the interim financial information.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1997. The results of operations for the three and nine month periods ended July
31, 1998 are not necessarily indicative of the operating results for the full
year.
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
July 31, 1998 and October 31, 1997.................. 3
Consolidated Statements of Operations
Three and nine months ended July 31,
1998 and 1997...................................... 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 1998 and 1997............ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................... 6
PART II.OTHER INFORMATION:
Item 5. Other Information.................................. 13
Item 6. Exhibits and Reports on Form 8-K.................. 13
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
July 31, October 31,
ASSETS 1998 1997
---- ----
(Unaudited)
Current assets:
Cash $ 26,499 $ 22,134
Accounts receivable, less allowance for doubtful
accounts of $2,879 and $1,488 171,731 80,251
Costs and accrued earnings in excess of
billings on contracts in process, less
allowances for losses of $8,981 and $1,838 60,276 37,741
Deferred income taxes 954 3,843
Prepaid expenses and other assets 3,209 2,885
--------- ---------
Total current assets 262,669 146,854
Property and equipment at cost, net 30,544 17,848
Goodwill, net 121,343 42,485
Deferred income taxes 3,607 --
Other assets 8,151 2,904
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$ 426,314 $ 210,091
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 18,477 $ 4,775
Accounts payable 38,396 20,198
Accrued salaries and wages 32,447 17,769
Accrued expenses and other 21,693 17,863
Billings in excess of costs and accrued earnings
on contracts in process 36,242 23,013
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Total current liabilities 147,255 83,618
Long-term debt 100,397 41,448
Deferred compensation and other 22,285 7,874
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Total liabilities 269,937 132,940
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Stockholders' equity:
Common shares, par value $.01; authorized 20,000
shares; issued 15,038 and 10,741 shares 150 107
Treasury stock (287) (287)
Additional paid-in capital 114,767 51,085
Retained earnings since February 21, 1990, date of
quasi-reorganization 41,747 26,246
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Total stockholders' equity 156,377 77,151
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$ 426,314 $ 210,091
========= =========
3
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
July 31, July 31,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $207,484 $100,196 $588,822 $295,496
-------- -------- -------- --------
Expenses:
Direct operating 130,262 58,813 361,849 174,887
Indirect, general and
administrative 62,951 35,103 191,708 103,789
Interest expense, net 2,582 989 6,864 3,806
-------- -------- -------- --------
195,795 94,905 560,421 282,482
-------- -------- -------- --------
Income before taxes 11,689 5,291 28,401 13,014
Income tax expense 5,300 2,110 12,900 5,180
-------- -------- -------- --------
Net income $ 6,389 $ 3,181 $ 15,501 $ 7,834
======== ======== ======== ========
Net income per share:
Basic $ .43 $ .30 $ 1.04 $ .80
======== ======== ======== ========
Diluted $ .40 $ .28 $ .98 $ .74
======== ======== ======== ========
4
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
July 31,
1998 1997
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,501 $ 7,834
--------- --------
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 11,045 5,791
Allowance for doubtful accounts and losses (109) (1,427)
Changes in current assets and liabilities:
Accounts receivable and costs and accrued earnings
in excess of billings on contracts in process (3,104) (8,773)
Prepaid expenses and other assets 197 (832)
Accounts payable, accrued salaries and wages
and accrued expenses (9,709) (1,740)
Billings in excess of costs and accrued earnings on
contracts in process 810 2,211
Deferred taxes 250 (202)
Other, net 503 (44)
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Total adjustments (117) (5,016)
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Net cash provided by operating activities 15,384 2,818
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CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of cash acquired (36,937) --
Capital expenditures (7,747) (3,010)
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Net cash (used) by investing activities (44,684) (3,010)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 110,000 --
Principal payments on long-term debt (77,977) (12,508)
Proceeds from sale of common shares 755 444
Proceeds from exercise of stock options 887 402
Proceeds from exercise of warrants -- 3,895
Other -- (43)
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Net cash provided (used) by financing activities 33,665 (7,810)
--------- --------
Net increase (decrease) in cash 4,365 (8,002)
Cash at beginning of period 22,134 22,370
--------- --------
Cash at end of period $ 26,499 $ 14,368
========= ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 7,482 $ 4,107
========= ========
Taxes paid $ 11,565 $ 6,777
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Equipment subject to capital lease obligations $ 2,176 $ 2,429
========= ========
Noncash purchase allocation adjustment $ 11,600 $ 3,000
========= ========
Retirement of debt, related parties $ -- $ 3,028
========= ========
Issuance of common stock in business acquisition $ 61,936 $ --
========= ========
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URS CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company reports the results of its operations on a fiscal year which
ends on October 31. This Management Discussion and Analysis (MD&A) should be
read in conjunction with the MD&A and the footnotes to the Consolidated
Financial Statements included in the Annual Report on Form 10-K for the fiscal
year ended October 31, 1997 which was previously filed with the Securities and
Exchange Commission.
Reclassifications
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation with no effect on net income as
previously reported.
Income Per Common Share
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, effective
November 1, 1997. SFAS 128 requires the presentation of basic and diluted income
per common share. Basic income per common share is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted income per common share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of stock options for all periods. All
prior period income per common share amounts have been restated to comply with
SFAS 128.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted income per
common share is provided as follows (in thousands, except per share amounts):
Three Months Ended July 31,
---------------------------
1998 1997
---- ----
Numerator - Basic
Net Income $ 6,389 $ 3,181
======= =======
Denominator - Basic
Weighted average common stock outstanding 15,018 10,563
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Basic income per share $ .43 $ .30
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Numerator - Diluted
Net Income $ 6,389 $ 3,181
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Denominator - Diluted
Weighted average common stock outstanding 15,018 10,563
Effect of dilutive securities:
Stock options 952 731
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15,970 11,294
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Diluted income per share $ .40 $ .28
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6
Nine Months Ended July 31,
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1998 1997
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Numerator - Basic
Net Income $15,501 $ 7,834
======= =======
Denominator - Basic
Weighted average common stock outstanding 14,925 9,804
======= =======
Basic income per share $ 1.04 $ .80
======= =======
Numerator - Diluted
Net Income $15,501 $ 7,834
======= =======
Denominator - Diluted
Weighted average common stock outstanding 14,925 9,804
Effect of dilutive securities:
Stock options 830 564
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15,755 10,368
======= =======
Diluted income per share $ .98 $ .74
======= =======
Stock options to purchase 13,525 shares of common stock at prices
ranging from $13.625 to $31.25 per share were outstanding at July 31, 1997, but
were not included in the computation of diluted income per share because the
exercise price was greater than the average market value of the common shares.
Convertible subordinated debt was not included in the computation of diluted
income per share because it would be anti-dilutive.
Stock options to purchase 3,325 shares of common stock at $31.25 per
share were outstanding at July 31, 1998, but were not included in the
computation of diluted income per share because the exercise price was greater
than the average market value of the common shares. Convertible subordinated
debt was not included in the computation of diluted income per share because it
would be anti-dilutive.
Acquisition
On November 14, 1997, the Company acquired Woodward-Clyde Group, Inc., a
Denver, Colorado, engineering services firm ("W-C"), for approximately
$110,000,000.
The purchase was partially financed by a $110,000,000 term loan payable
over six years beginning April 30, 1998. The loan bears interest based on rate
indexes selected by the Company, with variable spreads over the selected index
based on loan maturity and the Company's financial performance. At July 31,
1998, the interest rate on this loan was based on the London Interbank Offered
Rate ("LIBOR") of 5.625%, plus a spread of 1.500%.
7
The acquisition has been accounted for by the purchase method of
accounting and the excess of the fair value of the net assets acquired over the
purchase price has been allocated to goodwill. The excess purchase price over
net assets acquired resulting from the acquisition will be amortized on a
straight-line basis over thirty years. The operating results of W-C are included
in the Company's results of operations from November 1, 1997.
The purchase price consisted of: (in thousands)
Cash paid $ 16,866
Term debt 31,198
Common Stock 61,936
--------
$110,000
========
Purchase price
(net of prepaid loan fees of $4.0 million) $106,000
Fair value of assets acquired (38,194)
--------
Excess purchase price over net assets acquired $ 67,806
========
The following unaudited pro forma summary presents the consolidated
results of operations as if the W-C acquisition had occurred at the beginning of
the periods presented and does not purport to indicate what would have occurred
had the acquisition been made as of those dates or of results which may occur in
the future.
Three Months Ended Nine Months Ended
July 31, 1997 July 31, 1997
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(in thousands, except per share amounts)
Revenues $186,058 $531,581
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Net income $ 5,680 $ 12,124
======== ========
Net income per share $ .50 $ 1.17
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Results of Operations
Third quarter ended July 31, 1998 vs. July 31, 1997.
The Company's revenues were $207,484,000 for the third quarter ended
July 31, 1998, an increase of $107,288,000, or 107%, over the amount reported
for the same period last year. The growth in revenue is primarily attributable
to the acquisition of W-C, the results of which are included commencing November
1, 1997, and to a lesser extent due to an increase in demand for the Company's
on-going services on both infrastructure and environmental projects.
Direct operating expenses for the quarter ended July 31, 1998, which
consist of direct labor and other direct expenses, including subcontractor
costs, increased $71,449,000, an 121% increase over the amount reported for the
same period last year. This increase is primarily due to the addition of the
direct operating expenses of W-C.
Indirect, general and administrative expenses for the quarter ended July
31, 1998 increased $27,848,000, or 79%, over the amount reported for the same
period last year as a result of the W-C acquisition as well as an increase in
business activity.
8
The Company earned $11,689,000 before income taxes for the third quarter
ended July 31, 1998 compared to $5,291,000 for the same period last year. The
Company's effective income tax rate for the quarters ended July 31, 1998 and
1997 was approximately 45% and 40%, respectively. The increase in the effective
income tax rate for the quarter ended July 31, 1998 is due to operating in
countries outside the United States with higher tax rates.
The Company reported net income of $6,389,000, or $.40 per share for the
third quarter ended July 31, 1998, compared with $3,181,000 or $.28 per share
for the same period last year.
Nine months ended July 31, 1998 vs. July 31, 1997.
The Company's revenues were $588,822,000 for the nine months ended July
31, 1998, an increase of $293,326,000, or 99%, over the amount reported for the
same period last year. The growth in revenues is attributable to the W-C
acquisition and to a lesser extent, all areas of the Company's business
including infrastructure projects involving transportation systems,
institutional and commercial facilities and environmental projects.
Direct operating expenses for the nine months ended July 31, 1998, which
consist of direct labor and other direct expenses including subcontractor costs,
increased $186,962,000, or 107%, over the amount reported in the same period
last year. This increase is attributable to the W-C acquisition as well as the
overall increase in the Company's business as compared to the same period last
year. Indirect, general and administrative expenses were $191,708,000 for the
nine months ended July 31, 1998, an increase of $87,919,000, or 85%, over the
amount reported for the same period last year. The increase in indirect, general
and administrative expenses is due to the addition of the W-C overhead and, to a
lesser extent, an increase in business activity.
The Company earned $28,401,000 before income taxes for the nine months
ended July 31, 1998 compared to $13,014,000 for the same period last year. The
Company's effective income tax rate for the nine months ended July 31, 1998 and
1997 was approximately 45% and 40%, respectively. The increase in the effective
tax rate for the nine months ended July 31, 1998 is due to operating in
countries outside the United States with higher tax rates.
The Company reported net income of $15,501,000 or $.98 per share, for
the nine months ended July 31, 1998, compared with $7,834,000, or $.74 per share
for the same period last year.
The Company's backlog at July 31, 1998 was $740,470,000 compared to
$470,400,000 at October 31, 1997.
9
Liquidity and Capital Resources
At July 31, 1998, the Company had working capital of $115,414,000, an
increase of $52,178,000 from October 31, 1997, due primarily to the W-C
acquisition.
The Company's current revolving line of credit is $40,000,000, of which
after issuance of letters of credit aggregating $3,500,000, $36,500,000 was
available at July 31, 1998. The Company had no borrowings on its revolving line
of credit during the nine months ended July 31, 1998.
The Company's credit agreement requires compliance with certain
financial and other covenants. The Company was in compliance with such covenants
at July 31, 1998.
The Company believes that its existing financial resources, together
with its planned cash flow from operations and its unused bank line of credit,
will provide sufficient capital to fund its operations and capital expenditure
needs for the foreseeable future.
Year 2000 Compliance
Globally. For the past thirty years, most computer systems and software
products have been coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. Any programs that have
time-sensitive software may recognize a date using"00" as the year 1900 rather
than the year 2000. This could result in the computer shutting down or
performing incorrect computations. As a result, before December 31, 1999,
computer systems and software used by many governmental entities and private
sector businesses throughout the world may need to be upgraded to comply with
such "Year 2000" requirements.
The Company's Year 2000 Issues; State of Readiness. Year 2000 issues
which may affect the Company fall into two basic categories:
1. Business Disruption Issues. In certain situations, a Year 2000
problem could interfere with the operation of the Company's business. For
example, a Year 2000 problem could adversely impact: (a) the Company's ability
to interface with third parties, such as receiving payments from clients or
supplies from vendors on a timely basis, (b) the reliability of the Company's
internal information management systems, such as accounting systems, or (c) the
physical operation of systems owned and operated by outside parties but used by
the Company in its leased and rented facilities which have embedded technology,
such as elevator and telephone systems, security systems and other physical
office infrastructure. Such business disruption issues could arise from internal
Year 2000 problems in software used by the Company or from external Year 2000
problems encountered by third parties.
10
The Company has commenced a Year 2000 compliance program to address such
issues:
+ Third Party Interfaces: The Company is discussing with its
clients and vendors the potential impact the Year 2000 issue will
have on their systems, including possible delays in receiving
payment from clients resulting from Year 2000 problems affecting
such clients' accounting systems. As the Company assesses these
issues, it expects to develop contingency plans against such
payment delays and other Year 2000 problems.
+ Internal Information Systems: The Company has completed an
inventory of its internal hardware and software and is currently
performing a Year 2000 readiness assessment and impact analysis
for these systems. The Company believes that its vendor supplied
e-mail software is currently Year 2000 compliant and anticipates
that in the near future its vendor supplied upgraded company-wide
accounting and financial reporting system and its payroll and
human resources system will be Year 2000 compliant.
+ Embedded Technology Systems: The Company currently is examining
infrastructure issues on an office-by-office basis. As the
Company renegotiates its office leases or enters into new leases,
it is incorporating language designed to protect the Company
against potential business interruption stemming from Year 2000
problems. The Company expects to develop contingency plans to
address any such embedded technology issues as they are
identified.
2. Client Deliverables. A limited number of projects undertaken by the
Company include the specification of computer-based components as part of the
work delivered to clients, and in even fewer projects involve the actual
development of software and hardware. The Company has a plan of action related
to such client deliverables, which includes developing an inventory of affected
projects and contacting affected clients and offering assistance with their Year
2000 compliance issues. However, because the Company generally has not
manufactured or designed this hardware or software, it anticipates that the
responsibility for any Year 2000 problems associated with these deliverables
ultimately will rest with the hardware or software manufacturer. The Company
also has drafted contract clauses to address Year 2000 issues which have been
distributed to all officers with contracting authority for insertion in the
Company's future client contracts.
11
Costs. The Company has not incurred substantial incremental costs in
connection with its Year 2000 compliance programs. The Company has, however,
devoted internal resources and hired some external resources to assist with the
implementation and monitoring of its Year 2000 compliance programs. The Company
currently estimates that the total cost of its Year 2000 compliance program will
not be material to the financial position of the Company.
Risks. At this time, the Company does not anticipate that costs of
its Year 2000 compliance program or the risks to the Company which might arise
from the Year 2000 problem are likely to be material. However, because the
Company has no control over third parties' products or services, the Company
cannot ensure Year 2000 compliance by third parties. Problems encountered by the
Company's clients and vendors arising from the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if the Company's plans to address the Year
2000 issue are not successfully or timely implemented, the Company may need to
devote more resources to the process and additional costs may be incurred, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The costs of the Company's Year 2000 compliance programs and the
timetable on which the Company plans to complete such programs are based on
management's best estimates, and reflect assumptions regarding the availability
and cost of personnel trained in this area, the compliance plans of third
parties and similar uncertainties. However, due to the complexity and
pervasiveness of the Year 2000 issue and in particular the uncertainty regarding
the compliance programs of third parties, no assurance can be given that these
estimates will be achieved, and actual results could differ materially from
those anticipated.
12
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to recent changes to the proxy rules, unless a stockholder
who wishes to bring a matter before the stockholders at the Company's 1999
Annual Meeting of Stockholders notifies the Company of such matter prior to
January 4, 1999, management will have discretionary authority to vote all shares
for which it has proxies in opposition to such matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (electronic version only)
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.
Dated September 14, 1998
URS CORPORATION
/s/ Kent Ainsworth
- ------------------------------
Kent P. Ainsworth
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
13