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 July 31, 2001
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
(Exact name of registrant as specified in its charter)
Delaware 94-1381538
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
100 California Street, Suite 500
San Francisco, California 94111-4529
(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 [_]
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, 2001
----- --------------------------------
Common Stock, $.01 par value 17,886,520
URS CORPORATION AND SUBSIDIARIES
This Form 10-Q for the quarter ended July 31, 2001, contains
forward-looking statements, including statements about the continued strength of
our business and opportunities for future growth. 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 to differ materially
from those expressed or implied in forward-looking statements; our highly
leveraged position; our ability to service our debt; our ability to pursue
business strategies; our continued dependence on federal, state and local
appropriations for infrastructure spending; pricing pressures; changes in the
regulatory environment; outcomes of pending and future litigation; our ability
to attract and retain qualified professionals; industry competition; changes in
international trade, monetary and fiscal policies; our ability to integrate
future acquisitions successfully; our ability to successfully integrate our
accounting and management information systems; and other factors discussed more
fully in the attached Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as in our Annual Report on Form
10-K for the year ended October 31, 2000, and other reports subsequently filed
from time to time with the Securities and Exchange Commission. We assume no
obligation to update any forward-looking statements.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets
July 31, 2001 and October 31, 2000 ............................ 3
Consolidated Statements of Operations
Three and nine months ended July 31, 2001 and 2000 ............ 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 2001 and 2000 ...................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 22
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ................................................. 23
Item 2. Changes in Securities and Use of Proceeds ......................... 23
Item 3. Defaults Upon Senior Securities ................................... 23
Item 4. Submission of Matters to a Vote of Security Holders ............... 23
Item 5. Other Information ................................................. 23
Item 6. Exhibits and Reports on Form 8-K .................................. 23
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
July 31, 2001 October 31, 2000
------------- ----------------
(unaudited)
ASSETS
Current assets:
Cash ........................................................................ $ 19,007 $ 23,693
Accounts receivable ......................................................... 486,893 464,074
Costs and accrued earnings in excess of billings on contracts in process .... 293,713 281,757
Less receivable allowances .................................................. (29,576) (36,826)
----------- -----------
Net accounts receivable ............................................ 751,030 709,005
----------- -----------
Income taxes recoverable .................................................... -- 16,668
Deferred income taxes ....................................................... 4,926 4,859
Prepaid expenses and other assets ........................................... 23,967 22,325
----------- -----------
Total current assets ............................................... 798,930 776,550
Property and equipment, net ..................................................... 104,925 88,661
Goodwill, net ................................................................... 504,666 514,611
Other assets .................................................................... 49,747 47,312
----------- -----------
$ 1,458,268 $ 1,427,134
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 47,102 $ 45,223
Accounts payable ............................................................ 128,691 125,165
Accrued salaries and wages .................................................. 59,187 92,212
Accrued expenses and other .................................................. 26,077 28,915
Billings in excess of costs and accrued earnings on contracts in process .... 100,129 90,475
----------- -----------
Total current liabilities .......................................... 361,186 381,990
Long-term debt .................................................................. 609,101 603,128
Deferred income taxes ........................................................... 32,611 33,157
Deferred compensation and other ................................................. 39,457 40,052
----------- -----------
Total liabilities .................................................. 1,042,355 1,058,327
----------- -----------
Commitments and contingencies (Note 2)
Mandatorily redeemable Series B exchangeable convertible preferred stock, par
value $1.00; authorized 150 shares; issued 54 and 51, respectively; liquidation
preference $117,744 and $111,013, respectively .................................. 117,744 111,013
----------- -----------
Stockholders' equity:
Common shares, par value $.01; authorized 50,000 shares; issued 17,834 and
16,834 shares, respectively ............................................... 178 168
Treasury stock .............................................................. (287) (287)
Additional paid-in capital .................................................. 147,201 137,389
Other comprehensive income (loss) ........................................... (3,098) (2,412)
Retained earnings ........................................................... 154,175 122,936
----------- -----------
Total stockholders' equity ......................................... 298,169 257,794
----------- -----------
$ 1,458,268 $ 1,427,134
=========== ===========
See Notes to Consolidated Financial Statements
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,
----------------------------- ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Revenues ................................................ $ 591,198 $ 558,534 $ 1,652,818 $ 1,606,812
----------- ----------- ----------- -----------
Expenses:
Direct operating ................................... 361,735 343,660 986,995 963,045
Indirect, general and administrative ............... 184,748 170,930 545,977 526,395
Interest expense, net .............................. 16,211 17,163 50,736 54,376
----------- ----------- ----------- -----------
562,694 531,753 1,583,708 1,543,816
----------- ----------- ----------- -----------
Income before taxes ..................................... 28,504 26,781 69,110 62,996
Income tax expense ...................................... 12,830 12,600 31,100 29,100
----------- ----------- ----------- -----------
Net income .............................................. 15,674 14,181 38,010 33,896
Preferred stock dividend ................................ 2,322 2,143 6,771 6,254
----------- ----------- ----------- -----------
Net income available for common stockholders ............ 13,352 12,038 31,239 27,642
Other comprehensive income (loss) ....................... 131 (592) (686) (2,005)
----------- ----------- ----------- -----------
Comprehensive income .................................... $ 13,483 $ 11,446 $ 30,553 $ 25,637
=========== =========== =========== ===========
Net income per common share:
Basic .............................................. $ .76 $ .73 $ 1.81 $ 1.71
=========== =========== =========== ===========
Diluted ............................................ $ .64 $ .64 $ 1.61 $ 1.55
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic .............................................. 17,695 16,498 17,262 16,161
=========== =========== =========== ===========
Diluted ............................................ 24,696 22,328 23,594 21,884
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
4
URS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
July 31,
--------------------------
2001 2000
-------- --------
(unaudited)
Cash flows from operating activities:
Net income ..................................................................... $ 38,010 $ 33,896
-------- --------
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization ............................................. 31,324 31,722
Amortization of financing fees ............................................ 2,692 2,581
Receivable allowances ..................................................... 564 (6,241)
Stock compensation ........................................................ 1,330 814
Changes in current assets and liabilities:
Accounts receivable and costs and accrued earnings in excess of
billings on contracts in process ........................................ (34,775) 2,279
Income taxes recoverable .................................................. 4,997 --
Prepaid expenses and other assets ......................................... (3,354) (2,498)
Accounts payable, accrued salaries and wages and accrued expenses ......... (28,520) (17,241)
Billings in excess of costs and accrued earnings on contracts in process .. 9,654 (943)
Deferred income taxes ..................................................... (613) 68
Deferred compensation and other ........................................... (595) (22,522)
Other, net ................................................................ (5,489) (7,521)
-------- --------
Total adjustments .................................................. (22,785) (19,502)
-------- --------
Net cash provided by operating activities .................................... 15,225 14,394
-------- --------
Cash flows from investing activities:
Proceeds from sale of subsidiaries ............................................. -- 20,000
Capital expenditures, less equipment purchased through capital
leases of $19,958 and $6,336, respectively .................................. (19,085) (13,626)
-------- --------
Net cash (used) provided by investing activities ............................... (19,085) 6,374
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt ........................................... (12,261) (37,219)
Borrowings under the line of credit ............................................ 75,000 --
Repayments on the line of credit ............................................... (65,000) --
Repayments on capital lease obligations ........................................ (6,963) (2,512)
Borrowings under short-term notes .............................................. 5,830 --
Repayments on short-term notes ................................................. (5,924) --
Proceeds from sale of common shares and exercise of stock options .............. 8,492 3,848
-------- --------
Net cash (used) by financing activities ....................................... (826) (35,883)
-------- --------
Net decrease in cash .............................................................. (4,686) (15,115)
Cash at beginning of period ....................................................... 23,693 45,687
-------- --------
Cash at end of period ............................................................. $ 19,007 $ 30,572
======== ========
Supplemental Information:
Interest paid .................................................................. $ 54,914 $ 55,648
======== ========
Taxes paid ..................................................................... $ 25,070 $ 21,657
======== ========
Equipment acquired subject to capital lease obligations ........................ $ 19,958 $ 6,336
======== ========
Non-cash dividends paid in-kind ................................................ $ 6,731 $ 5,586
======== ========
Net book value of business sold ................................................ $ -- $ 20,000
======== ========
See Notes to Consolidated Financial Statements
5
URS CORPORATION AND SUBSIDIARIES
NOTE 1. Accounting Policies
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, 2000.
The results of operations for the nine months ended July 31, 2001 are not
necessarily indicative of the operating results for the full year.
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 and conversion of preferred
stock. Diluted income per share is computed by dividing net income available to
common stockholders plus the preferred stock dividend by the weighted average
dilutive potential common shares that were outstanding during the period.
In accordance with the disclosure requirement of SFAS 128, a reconciliation
of the numerator and denominator of basic and diluted income per common share is
provided as follows:
Three months ended Nine months ended
July 31 July 31
----------------------------------------------------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands, except per share amounts)
Numerator--Basic
Net income available for common stockholders .............. $13,352 $12,038 $31,239 $27,642
======= ======= ======= =======
Denominator--Basic
Weighted-average common stock outstanding ................. 17,695 16,498 17,262 16,161
======= ======= ======= =======
Basic income per share .................................... $ .76 $ .73 $ 1.81 $ 1.71
======= ======= ======= =======
Numerator--Diluted
Net income available for common stockholders .............. $13,352 $12,038 $31,239 $27,642
Preferred stock dividend .................................. 2,322 2,143 6,771 6,254
------- ------- ------- -------
Net income ................................................... $15,674 $14,181 $38,010 $33,896
======= ======= ======= =======
Denominator--Diluted
Weighted-average common stock outstanding ................. 17,695 16,498 17,262 16,161
Effect of dilutive securities:
Stock options ............................................. 1,650 878 1,084 1,001
Convertible preferred stock ............................... 5,351 4,952 5,248 4,722
------- ------- ------- -------
24,696 22,328 23,594 21,884
======= ======= ======= =======
Diluted income per share ..................................... $ .64 $ .64 $ 1.61 $ 1.55
======= ======= ======= =======
Derivative Financial Instruments
The Company is exposed to risk of changes in interest rates as a result of
borrowings under the senior collateralized credit facility. From time to time,
the Company may enter into interest rate derivatives to protect against this
risk. At July 31, 2001, the only derivative instrument held by the Company was
the interest rate cap agreement. From an economic standpoint, the cap agreement
provides the Company with protection against LIBOR interest rate increases above
7%. For accounting purposes, the Company has elected not to designate the cap
agreement as a hedge, and accordingly, changes in the fair market value of the
cap agreement are included in other expenses in the Consolidated Statements of
Operations. The value of the interest rate cap agreement at July 31, 2001 was
zero.
6
Impairment of Long-Lived Assets
In accordance with SFAS #121, the Company assesses impairment of long-lived
assets. Long-lived assets, including goodwill, are assessed for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When an asset is deemed impaired, an impairment loss is
measured and recorded as a charge against earnings in an amount equal to the
excess of the book value of the asset over the estimated fair value of the asset
at the time of the impairment.
Statement of Financial Accounting Standards No. 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Statndards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 supercedes Accounting Principles Board
Opinion No. 17 and addresses the financial accounting and reporting standards
for goodwill and intangible assets subsequent to their initial recognition. SFAS
142 requires that goodwill be separately disclosed from other intangible assets
in the statement of financial position, and no longer be amortized. It also
requires that goodwill and other intangible assets be tested for impairment at
least annually. The provisions of SFAS 142 are effective for fiscal years
beginning after December 15, 2001 and must be applied to all goodwill and other
intangible assets that are recognized in an entity's balance sheet at the
beginning of that fiscal year. Early application of SFAS 142 is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim period financial statements have not been issued previously. The
Company is completing its evaluation of the impact of SFAS 142 on its financial
position and its results of operations and intends to adopt SFAS 142 on November
1, 2001. The Company does not expect any material adverse impact on its
financial position or its results of operations upon adoption of SFAS 142.
Reclassifications
Certain reclassifications have been made to the 2000 financial statements
to conform to the 2001 presentation with no effect on net income, equity or cash
flows as previously reported.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Currently, the Company has limits of $125.0 million per loss and $125.0
million in the annual aggregate for general liability, professional errors and
omissions liability, and contractor's pollution liability insurance. These
programs each have a self-insured claim retention of $0.1 million, $1.0 million
and $0.25 million, respectively. With respect to various claims of Dames and
Moore Group ("D-M"), an engineering and construction services firm acquired in
June 1999, that arose from professional errors and omissions prior to the
acquisition, the Company has maintained a self-insured retention of $5.0 million
per claim. Excess limits provided for these coverages are on a "claims made"
basis, covering only claims actually made during the policy period currently in
effect. Thus, if the Company does not continue to maintain these excess
policies, it will have no coverage for claims made after its termination date
even if the occurrence was during the term of coverage. The Company intends to
maintain these policies, but there can be no assurance that the Company can
maintain existing coverages or that claims will not exceed the available amount
of insurance.
Various legal proceedings are pending against the Company or its
subsidiaries alleging, among other things, breaches of contract or negligence in
connection with the performance of professional services. In some actions,
parties are seeking damages, including punitive or treble damages, that
substantially exceed the Company's insurance coverage. Based on the Company's
previous experience with claims settlement and the nature of the pending legal
proceedings, the Company does not believe that any of the legal proceedings are
likely to result in a judgment against or settlement by the Company, that would
materially exceed its insurance coverage or have a material adverse effect on
its consolidated financial position or operations.
NOTE 3. SEGMENT AND RELATED INFORMATION
Management has organized the Company by geographic divisions. The
geographic divisions are Parent, Domestic and International. The Parent division
comprises the Parent Company. The Domestic division comprises all offices
located in the United States. The International division comprises all offices
in the Americas, Europe and Asia/Pacific (e.g., Australia, Indonesia, Singapore,
New Zealand and the Philippines).
7
Accounting policies for each of the reportable segments are the same as
those of the Company. The Company provides services throughout the world.
Services to other countries may be performed within the United States, and
generally, revenues are classified within the geographic area where the services
are performed.
The following table shows summarized financial information (in thousands)
on the Company's reportable segments. Included in the "Eliminations" column are
elimination of inter-segment sales and elimination of investment in
subsidiaries.
As of July 31, 2001: Parent Domestic International Eliminations Total
-------------------- ------ -------- ------------- ------------ -----
Total accounts receivable ................... $ -- $ 672,189 $ 78,841 $ -- $ 751,030
Total assets ................................ $ 641,892 $1,349,716 $ 105,818 $ (639,158) $1,458,268
For the Three Months Ended
July 31, 2001: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ..................................... $ -- $ 541,441 $ 52,351 $ (2,594) $ 591,198
Segment operating income (loss) ............. $ (8,306) $ 51,864 $ 1,157 $ -- $ 44,715
For the Nine Months Ended
July 31, 2001: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ..................................... $ -- $1,504,568 $ 153,426 $ (5,176) $1,652,818
Segment operating income (loss) ............. $ (23,804) $ 140,186 $ 3,464 $ -- $ 119,846
As of October 31, 2000: Parent Domestic International Eliminations Total
----------------------- ------ -------- ------------- ------------ -----
Total accounts receivable ................... $ (7,814) $ 634,350 $ 82,469 $ -- $ 709,005
Total assets ................................ $ 680,824 $1,272,340 $ 116,310 $ (642,340) $1,427,134
For the Three Months Ended
July 31, 2000: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ..................................... $ -- $ 496,891 $ 62,308 $ (665) $ 558,534
Segment operating income (loss) ............. $ (10,158) $ 50,982 $ 3,120 $ -- $ 43,944
For the Nine Months Ended
July 31, 2000: Parent Domestic International Eliminations Total
-------------- ------ -------- ------------- ------------ -----
Revenue ..................................... $ -- $1,430,518 $ 177,503 $ (1,209) $1,606,812
Segment operating income (loss) ............. $ (21,419) $ 132,203 $ 6,588 $ -- $ 117,372
Operating income is defined as income before income taxes and interest.
NOTE 4. SUPPLEMENTAL GUARANTOR INFORMATION
In June 1999, the Company completed a private placement of $200 million
principal amount of its 12 1/4% Senior Subordinated Exchange Notes due 2009,
which were exchanged in August 1999 for 12 1/4% Senior Subordinated Notes (the
"Notes"). The Notes are fully and unconditionally guaranteed on a joint and
several basis by certain of the Company's wholly owned subsidiaries.
Substantially all of the Company's income and cash flow is generated by its
subsidiaries. The Company has no operating assets or operations other than its
investments in its subsidiaries. As a result, funds necessary to meet the
Company's debt service obligations are provided mainly by distributions to or
advances from its subsidiaries. Under certain circumstances, contractual and
legal restrictions, as well as the financial condition and operating
requirements of the Company's subsidiaries, could limit the Company's ability to
obtain cash from its subsidiaries for the purpose of meeting its debt service
obligations, including the payment of principal and interest on the Notes.
The following information sets forth the condensed consolidating balance
sheets of the Company as of July 31, 2001 and October 31, 2000, the condensed
consolidating statements of operations for the three and nine months ended July
31, 2001 and 2000, and the condensed consolidating statements of cash flows for
the nine months ended July 31, 2001 and 2000. Investments in subsidiaries are
accounted for using the equity method; accordingly, entries necessary to
consolidate the Company and all of its subsidiaries are reflected in the
eliminations column. Separate complete financial statements of the Company and
its subsidiaries that guarantee the Notes would not provide additional material
information that would be useful in assessing the financial composition of such
subsidiaries.
8
URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
(Unaudited)
July 31, 2001
-----------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
ASSETS
Current assets:
Cash ................................................ $ (9,916) $ 15,383 $ 13,540 $ -- $ 19,007
Accounts receivable, net ............................ -- 672,189 78,841 -- 751,030
Prepaid expenses and other assets ................... 9,952 16,848 2,093 -- 28,893
----------- ----------- ----------- ----------- -----------
Total current assets .......................... 36 704,420 94,474 -- 798,930
Property and equipment, net .............................. 1,021 92,932 10,972 -- 104,925
Goodwill, net ............................................ 388,314 151,185 -- (34,833) 504,666
Investment in unconsolidated subsidiaries ................ 239,852 365,014 (541) (604,325) --
Other assets ............................................. 12,669 36,165 913 -- 49,747
----------- ----------- ----------- ----------- -----------
$ 641,892 $ 1,349,716 $ 105,818 $ (639,158) $ 1,458,268
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................... $ 33,989 $ 7,518 $ 5,595 $ -- $ 47,102
Accounts payable .................................... (1,726) 116,393 14,024 -- 128,691
Inter-company payable ............................... (78,519) 29,281 53,244 (4,006) --
Accrued expenses and other .......................... 5,021 63,566 16,677 -- 85,264
Billings in excess of costs and accrued earnings
on contracts in process ........................... -- 88,986 11,143 -- 100,129
----------- ----------- ----------- ----------- -----------
Total current liabilities ..................... (41,235) 305,744 100,683 (4,006) 361,186
Long-term debt ........................................... 584,101 24,558 442 -- 609,101
Other .................................................... 37,639 34,232 197 -- 72,068
----------- ----------- ----------- ----------- -----------
Total liabilities ............................. 580,505 364,534 101,322 (4,006) 1,042,355
----------- ----------- ----------- ----------- -----------
Mandatorily redeemable Series B exchangeable
convertible preferred stock .......................... 117,744 -- -- -- 117,744
Total stockholders' equity ............................... (56,357) 985,182 4,496 (635,152) 298,169
----------- ----------- ----------- ----------- -----------
$ 641,892 $ 1,349,716 $ 105,818 $ (639,158) $ 1,458,268
=========== =========== =========== =========== ===========
9
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended July 31, 2001
-------------------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
Revenues ....................................... $ -- $ 541,441 $ 52,351 $ (2,594) $ 591,198
----------- ----------- ----------- ----------- -----------
Expenses:
Direct operating ............................ -- 335,640 28,689 (2,594) 361,735
Indirect, general and administrative ........ 8,306 153,937 22,505 -- 184,748
Interest expense, net ....................... 15,742 307 162 -- 16,211
----------- ----------- ----------- ----------- -----------
24,048 489,884 51,356 (2,594) 562,694
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes ..................... (24,048) 51,557 995 -- 28,504
Income tax expense ............................. 12,230 356 244 -- 12,830
----------- ----------- ----------- ----------- -----------
Net income (loss) .............................. (36,278) 51,201 751 -- 15,674
Preferred stock dividend ....................... 2,322 -- -- -- 2,322
----------- ----------- ----------- ----------- -----------
Net income (loss) available for common
stockholders ................................ (38,600) 51,201 751 -- 13,352
Other comprehensive income (loss) .............. -- -- 131 -- 131
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss) .................... $ (38,600) $ 51,201 $ 882 $ -- $ 13,483
=========== =========== =========== =========== ===========
Nine Months Ended July 31, 2001
-------------------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- -----------
Revenues ....................................... $ -- $ 1,504,568 $ 153,426 $ (5,176) $ 1,652,818
----------- ----------- ----------- ----------- -----------
Expenses:
Direct operating ............................ -- 908,931 83,240 (5,176) 986,995
Indirect, general and administrative ........ 23,804 455,451 66,722 -- 545,977
Interest expense, net ....................... 49,392 814 530 -- 50,736
----------- ----------- ----------- ----------- -----------
73,196 1,365,196 150,492 (5,176) 1,583,708
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes ..................... (73,196) 139,372 2,934 -- 69,110
Income tax expense ............................. 29,042 1,265 793 -- 31,100
----------- ----------- ----------- ----------- -----------
Net income (loss) .............................. (102,238) 138,107 2,141 -- 38,010
Preferred stock dividend ....................... 6,771 -- -- -- 6,771
----------- ----------- ----------- ----------- -----------
Net income (loss) available for common
stockholders ................................ (109,009) 138,107 2,141 -- 31,239
Other comprehensive income (loss) .............. -- -- (686) -- (686)
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss) .................... $ (109,009) $ 138,107 $ 1,455 $ -- $ 30,553
=========== =========== =========== =========== ===========
10
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended July 31, 2001
------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
--------- --------- --------- ------------ ------------
Cash flows from operating activities:
Net income (loss) ......................................... $(102,238) $ 138,107 $ 2,141 $ -- $ 38,010
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ............................. 7,901 21,252 2,171 -- 31,324
Amortization of financing fees ............................ 2,692 -- -- -- 2,692
Receivable allowances ..................................... -- (1,137) 1,701 -- 564
Stock compensation ........................................ 1,330 -- -- -- 1,330
Changes in current assets and liabilities:
Accounts receivable and costs
and accrued earnings in excess of billings on
contracts in process ................................... -- (36,702) 1,927 -- (34,775)
Prepaid expenses and other
assets ................................................. 3,816 525 (2,698) -- 1,643
Accounts payable, accrued salaries and wages and
accrued expenses ....................................... 58,118 (89,513) 1,444 1,431 (28,520)
Billings in excess of costs and accrued earnings
on contracts in process ................................ -- 4,817 4,837 -- 9,654
Deferrals and other, net .................................. (1,869) 7,304 (10,701) (1,431) (6,697)
--------- --------- --------- --------- ---------
Total adjustments ...................................... 71,988 (93,454) (1,319) -- (22,785)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities ............................................. (30,250) 44,653 822 -- 15,225
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures ...................................... (684) (16,293) (2,108) -- (19,085)
--------- --------- --------- --------- ---------
Net cash (used) by investing activities ................... (684) (16,293) (2,108) -- (19,085)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in long-term debt, bank
borrowings and capital lease obligations ............... 1,625 (7,157) (3,786) -- (9,318)
Proceeds from sale of common shares and exercise
of stock options ....................................... 8,492 -- -- -- 8,492
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities ............................................. 10,117 (7,157) (3,786) -- (826)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash .............................. (20,817) 21,203 (5,072) -- (4,686)
Cash at beginning of period .................................. 10,901 (5,820) 18,612 -- 23,693
--------- --------- --------- --------- ---------
Cash at end of period ........................................ $ (9,916) $ 15,383 $ 13,540 $ -- $ 19,007
========= ========= ========= ========= =========
11
URS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
October 31, 2000
-----------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ------------ ------------
ASSETS
Current assets:
Cash .............................................. $ 10,901 $ (5,820) $ 18,612 $ -- $ 23,693
Accounts receivable, net .......................... (7,814) 634,350 82,469 -- 709,005
Prepaid expenses and other assets ................. 22,086 21,303 463 -- 43,852
----------- ----------- ----------- ----------- -----------
Total current assets .......................... 25,173 649,833 101,544 -- 776,550
Property and equipment, net .............................. 442 77,184 11,035 -- 88,661
Goodwill, net ............................................ 395,063 154,631 -- (35,083) 514,611
Investment in unconsolidated subsidiaries ................ 245,127 361,210 920 (607,257) --
Other assets ............................................. 15,019 29,482 2,811 -- 47,312
----------- ----------- ----------- ----------- -----------
$ 680,824 $ 1,272,340 $ 116,310 $ (642,340) $ 1,427,134
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................. $ 28,924 $ 6,576 $ 9,723 $ -- $ 45,223
Accounts payable ................................... 15,606 99,214 10,345 -- 125,165
Inter-company payable .............................. (174,043) 150,053 36,099 (12,109) --
Accrued expenses and other ......................... 33,291 55,478 32,358 -- 121,127
Billings in excess of costs and
accrued earnings on contracts in process ........ -- 84,169 6,306 -- 90,475
----------- ----------- ----------- ----------- -----------
Total current liabilities .................... (96,222) 395,490 94,831 (12,109) 381,990
Long-term debt ........................................... 587,136 15,892 100 -- 603,128
Other .................................................... 19,902 51,712 1,595 -- 73,209
----------- ----------- ----------- ----------- -----------
Total liabilities ............................ 510,816 463,094 96,526 (12,109) 1,058,327
Mandatorily redeemable Series B exchangeable convertible
preferred stock ....................................... 111,013 -- -- -- 111,013
Total stockholders' equity ............................... 58,995 809,246 19,784 (630,231) 257,794
----------- ----------- ----------- ----------- -----------
$ 680,824 $ 1,272,340 $ 116,310 $ (642,340) $ 1,427,134
=========== =========== =========== =========== ===========
12
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended July 31, 2000
--------------------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ------------ ------------
Revenues ...................................... $ -- $ 496,891 $ 62,308 $ (665) $ 558,534
----------- ----------- ----------- ----------- -----------
Expenses:
Direct operating ............................. -- 307,826 36,499 (665) 343,660
Indirect, general and administrative ......... 10,158 138,083 22,689 -- 170,930
Interest expense, net ........................ 17,102 (150) 211 -- 17,163
----------- ----------- ----------- ----------- -----------
27,260 445,759 59,399 (665) 531,753
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes .................... (27,260) 51,132 2,909 -- 26,781
Income tax expense ............................ 11,733 657 210 -- 12,600
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. (38,993) 50,475 2,699 -- 14,181
Preferred stock dividend ...................... 2,143 -- -- -- 2,143
----------- ----------- ----------- ----------- -----------
Net income (loss) available for common
stockholders ............................... (41,136) 50,475 2,699 -- 12,038
Other comprehensive income (loss) ............. -- -- (592) -- (592)
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss) ................... $ (41,136) $ 50,475 $ 2,107 $ -- $ 11,446
=========== =========== =========== =========== ===========
Nine Months Ended July 31, 2000
--------------------------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ------------ ------------
Revenues ...................................... $ -- $ 1,430,518 $ 177,503 $ (1,209) $ 1,606,812
----------- ----------- ----------- ----------- -----------
Expenses:
Direct operating ............................. -- 860,311 103,943 (1,209) 963,045
Indirect, general and administrative ......... 21,419 438,004 66,972 -- 526,395
Interest expense, net ........................ 54,120 (396) 652 -- 54,376
----------- ----------- ----------- ----------- -----------
75,539 1,297,919 171,567 (1,209) 1,543,816
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes .................... (75,539) 132,599 5,936 -- 62,996
Income tax expense ............................ 27,707 1,101 292 -- 29,100
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. (103,246) 131,498 5,644 -- 33,896
Preferred stock dividend ...................... 6,254 -- -- -- 6,254
----------- ----------- ----------- ----------- -----------
Net income (loss) available for common
stockholders ............................... (109,500) 131,498 5,644 -- 27,642
Other comprehensive income (loss) ............. -- -- (2,005) -- (2,005)
----------- ----------- ----------- ----------- -----------
Comprehensive income (loss) ................... $ (109,500) $ 131,498 $ 3,639 $ -- $ 25,637
=========== =========== =========== =========== ===========
13
URS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended July 31, 2000
----------------------------------------------------------------
Subsidiary
Subsidiary Non-
Parent Guarantors Guarantors Eliminations Consolidated
--------- --------- --------- ------------ ------------
Cash flows from operating activities:
Net income (loss) ......................................... $(103,246) $ 131,498 $ 5,644 $ -- $ 33,896
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ............................. 7,542 22,291 1,889 -- 31,722
Amortization of financing fees ............................ 2,581 -- -- -- 2,581
Receivable allowances ..................................... (7,517) 3,380 (2,104) -- (6,241)
Stock compensation ........................................ 814 -- -- -- 814
Changes in current assets and liabilities:
Accounts receivable and costs and accrued earnings in
excess of billings on contracts in process ............. -- (6,443) 8,722 -- 2,279
Prepaid expenses and other
assets ................................................. (3,107) (777) 1,386 -- (2,498)
Accounts payable, accrued salaries and wages and
accrued expenses ....................................... 114,569 (152,489) (530) 21,209 (17,241)
Billings in excess of costs and accrued earnings on
contracts in process ................................... -- (4,367) 3,424 -- (943)
Deferrals and other, net .................................. (5,412) 751 (4,105) (21,209) (29,975)
--------- --------- --------- --------- ---------
Total adjustments ...................................... 109,470 (137,654) 8,682 -- (19,502)
--------- --------- --------- --------- ---------
Net cash provided (used) by
operating activities ................................... 6,224 (6,156) 14,326 -- 14,394
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of subsidiaries ........................ 20,000 -- -- -- 20,000
Capital expenditures ...................................... (123) (10,011) (3,492) -- (13,626)
--------- --------- --------- --------- ---------
Net cash provided (used) by
investing activities ................................... 19,877 (10,011) (3,492) -- 6,374
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in long-term debt, bank
borrowings and capital lease obligations ............... (31,741) (1,210) (6,780) -- (39,731)
Proceeds from sale of common
shares and exercise of stock options ................... 3,848 -- -- -- 3,848
--------- --------- --------- --------- ---------
Net cash (used) by financing activities ................... (27,893) (1,210) (6,780) -- (35,883)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash .............................. (1,792) (17,377) 4,054 -- (15,115)
Cash at beginning of period .................................. 6,722 17,028 21,937 -- 45,687
--------- --------- --------- --------- ---------
Cash at end of period ........................................ $ 4,930 $ (349) $ 25,991 $ -- $ 30,572
========= ========= ========= ========= =========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We report the results of our 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, 2000, which was previously filed with the Securities and Exchange
Commission.
Results of Operations
Third quarter ended July 31, 2001 vs. July 31, 2000
Consolidated
------------
Our revenues were $591.2 million for the quarter ended July 31, 2001, an
increase of $32.7 million, or 5.8%, over the amount reported for the same period
last year. The increase is due to increased demand for our services.
Direct operating expenses for the quarter ended July 31, 2001, which
consist of direct labor and other direct expenses, including subcontractor
costs, increased $18.1 million, a 5.3% increase over the amount reported for the
same period last year as a result of an increase in the use of subcontractors.
Indirect, general and administrative expenses for the quarter ended July 31,
2001, increased $13.8 million, or 8.1%, from the amount reported for the same
period last year due to an increase in marketing and business development
expenses, benefits and rental expense. Interest expense decreased $1.0 million
due to repayments of our long-term debt and decrease in interest rates.
Our earnings before income taxes were $28.5 million for the third quarter
ended July 31, 2001, compared to $26.8 million for the same period last year.
Our effective income tax rates for the quarters ended July 31, 2001 and 2000
were approximately 45% and 47%, respectively.
We reported net income of $15.7 million, or $0.64 per share, on a diluted
basis for the third quarter ended July 31, 2001, compared to $14.2 million, or
$0.64 per share on a diluted basis, for the same period last year.
Our backlog at July 31, 2001, was $1,655.4 million, as compared to $1,656.5
million at October 31, 2000.
Domestic Segment Including Parent Company
-----------------------------------------
Revenues for the domestic segment were $541.4 million for the quarter ended
July 31, 2001, an increase of $44.5 million or 9.0%, over the amount reported
for the same period last year. The increase is due to increased demand for our
services.
Domestic direct operating expenses for the quarter ended July 31, 2001
increased $27.8 million, a 9.0% increase over the amount reported for the same
period last year as a result of an increase in pass-through expenses. Indirect,
general and administrative expenses for the quarter ended July 31, 2001,
increased $14.0 million, or 9.4%, from the amount reported for the same period
last year, due to increases in marketing and business development expenses,
benefits and rental expenses during the quarter. Interest expense decreased $0.9
million due to repayments of our long-term debt and a decrease in interest
rates.
International Segment
---------------------
Revenues for the international segment were $52.4 million for the quarter
ended July 31, 2001, a decrease of $10.0 million, or 16.0%, from the amount
reported for the same period last year. The decrease is mainly due to decreases
in foreign currency exchange rates versus the U.S. dollar and a decrease in the
demand for our services in the Asia Pacific region.
Foreign direct operating expenses for the quarter ended July 31, 2001
decreased $7.8 million, a 21.4% decrease from the amount reported for the same
period last year primarily due to the decrease in foreign currency exchange
rates versus the U.S. dollar, as well as decreases in the use of subcontractors
and decreases in pass-through expenses. Indirect, general and administrative
expenses for the quarter ended July 31, 2001, decreased $0.2 million, or 0.8%,
from the amount reported for the same period last year.
15
Nine months ended July 31, 2001 vs. July 31, 2000
Consolidated
------------
Our revenues were $1,652.8 million for the nine months ended July 31, 2001,
an increase of $46.0 million, or 2.9%, over the amount reported for the same
period last year. The increase is due to increased demand for our services.
Direct operating expenses for the nine months ended July 31, 2001, which
consist of direct labor and other direct expenses, including subcontractor
costs, increased $24.0 million, a 2.5% increase over the amount reported for the
same period last year. Indirect, general and administrative expenses for the
nine months ended July 31, 2001, increased $19.6 million, or 3.7%, from the
amount reported for the same period last year. The increase is primarily due to
increases in marketing and business development expenses, benefits and rental
expense. Interest expense decreased $3.6 million due to repayments of our
long-term debt and a decrease in interest rates.
Our earnings before income taxes were $69.1 million for the nine months
ended July 31, 2001, compared to $63.0 million for the same period last year.
Our effective income tax rates for the nine months ended July 31, 2001 and 2000
were approximately 45% and 46%, respectively.
We reported net income of $38.0 million, or $1.61 per share on a diluted
basis, for the nine months ended July 31, 2001, compared to $33.9 million, or
$1.55 per share on a diluted basis, for the same period last year.
Domestic Segment Including Parent Company
-----------------------------------------
Revenues for the domestic segment were $1,523.4 million for the nine months
ended July 31, 2001, an increase of $74.1 million, or 5.2%, over the amount
reported for the same period last year. The increase is due to increased demand
for our services.
Domestic direct operating expenses for the nine months ended July 31, 2001
increased $48.6 million, a 5.7% increase over the amount reported for the same
period last year as a result of an increase in the use of subcontractors and an
increase in pass-through expenses. Indirect, general and administrative expenses
for the nine months ended July 31, 2001, increased $19.8 million, or 4.3%, from
the amount reported for the same period last year, due to increases in marketing
and business development expenses, benefits and rental expense. Interest expense
decreased $3.5 million due to repayments of our long-term debt and decrease in
interest rates.
International Segment
---------------------
Revenues for the international segment were $153.4 million for the nine
months ended July 31, 2001, a decrease of $24.1 million, or 13.6%, from the
amount reported for the same period last year. The decrease is mainly due to
decreases in foreign currency exchange rates versus the U.S. dollar and a
decrease in the demand for our services in the Asia Pacific region.
Foreign direct operating expenses for the nine months ended July 31, 2001,
decreased $20.7 million, a 19.9% decrease from the amount reported for the same
period last year primarily as a result of the decrease in foreign currency
exchange rates versus the U.S. dollar, as well as the decrease in the use of
subcontractors and a decrease in pass-through expenses. Indirect, general and
administrative expenses for the nine months ended July 31, 2001, decreased $0.2
million, or 0.4%, from the amount reported for the same period last year.
Liquidity and Capital Resources
At July 31, 2001, we had working capital of $437.7 million, an increase of
$43.1 million from October 31, 2000.
Substantially all of our cash flow is generated by our subsidiaries. As a
result, funds necessary to meet our debt service obligations are provided mainly
by receipts from our subsidiaries. Under certain circumstances, legal and
contractual restrictions, as well as the financial condition and operating
requirements of the subsidiaries, may limit our ability to obtain cash from our
subsidiaries.
16
Our liquidity and capital measurements are set forth below:
As of As of
July 31, 2001 October 31, 2000
------------- ----------------
Working capital (in thousands) ....... $437,744 $394,560
Working capital (current) ratio ...... 2 to 1 2 to 1
Average days to convert billed
accounts receivable to cash ....... 72 68
Percentage of debt to equity ......... 158% 176%
Our cash and cash equivalents amounted to $19.0 million at July 31, 2001, a
decrease of $4.7 million from October 31, 2000, primarily as a result of $9.3
million in net repayments of debt, and $19.1 million in payment for capital
expenditures, offset by $15.2 million generated from operations and $8.5 million
of proceeds generated from the sale of common stock and the exercise of stock
options.
During the third quarter ended July 31, 2001, we borrowed $45.0 million and
repaid $35.0 million under our revolving line of credit. Our primary sources of
liquidity will be cash flow from operations and borrowings under the senior
collateralized credit facility, if necessary. Our primary uses of cash will be
to fund our working capital and capital expenditures and to service our debt. We
believe that our existing financial resources, together with our planned cash
flow from operations and existing credit facilities, will provide sufficient
resources to fund our combined operations and capital expenditure needs for the
foreseeable future.
During the fiscal year ended October 31, 1999, we paid $376.2 million for
the purchase of D-M. To fund this transaction and to refinance outstanding bank
debt, we incurred new borrowings of $650 million from the establishment of a
long-term senior collateralized credit facility with a syndicate of banks led by
Wells Fargo Bank, N.A. ("the Bank") and from the issuance of 12 1/4% Senior
Subordinated Exchange Notes subsequently exchanged for 12 1/4% Senior
Subordinated Notes. In addition, we sold 46,083 shares of our Series B Preferred
Stock to RCBA Strategic Partners, L.P. for aggregate consideration of $100
million.
Senior Collateralized Credit Facility. The senior collateralized credit
facility was funded on June 9, 1999 ("Funding Date"), and provides for three
term loan facilities in the aggregate amount of $450 million and a revolving
credit facility in the amount of $100 million. The term loan facilities consist
of Term Loan A, a $250 million tranche, Term Loan B, a $100 million tranche and
Term Loan C, another $100 million tranche.
Principal amounts under Term Loan A became due, commencing on October 31,
1999, in the amount of approximately $3 million per quarter for the following
four quarters. Thereafter and through June 9, 2005, annual principal payments
under Term Loan A range from $25 million up to a maximum of $58 million with
Term Loan A expiring and the then-outstanding principal amount becoming due and
repayable in full on June 9, 2005. Principal amounts under Term Loan B became
due, commencing on October 31, 1999, in the amount of $1 million in each year
through July 31, 2005, with Term Loan B expiring and the then-outstanding
principal amount becoming due and repayable in full in four equal quarterly
installments in 2006. Principal amounts under Term Loan C became due, commencing
on October 31, 1999, in the amount of $1 million in each year through July 31,
2006, with Term Loan C expiring and the then-outstanding principal amount
becoming due and repayable in full in equal quarterly installments in 2007. The
revolving credit facility expires, and is repayable in full, on June 9, 2005.
The term loans each bear interest at a rate per annum equal to, at our
option, either the Base Rate or LIBOR, in each case plus an applicable margin.
The revolving credit facility bears interest at a rate per annum equal to, at
our option, either the Base Rate, LIBOR or the Adjusted Sterling Rate, in each
case plus an applicable margin. The applicable margin adjusts according to a
performance-pricing grid based on our ratio of Consolidated Total Funded Debt to
Consolidated Earnings Before Income Taxes, Depreciation and Amortization
("EBITDA"). The "Base Rate" is defined as the higher of the Bank's Prime Rate
and the Federal Funds Rate plus 0.50%. "LIBOR" is defined as the offered
quotation by first class banks in the London interbank market to the Bank for
dollar deposits, as adjusted for reserve requirements. The "Adjusted Sterling
Rate" is defined as the rate per annum displayed by Reuters at which Sterling is
offered to the Bank in the London interbank market as determined by the British
Bankers' Association. We may determine which interest rate options to use and
interest periods will apply for such periods for both the term loans and the
revolving credit facility.
17
At July 31, 2001, our revolving credit facility with the Bank provides for
advances of up to $100.0 million, of which $15.0 million was outstanding. Also
at July 31, 2001, we had outstanding letters of credit aggregating $23.8
million, which reduced the amount available to us under our revolving credit
facility to $61.2 million.
The senior collateralized credit facility is governed by affirmative and
negative covenants. These covenants include restrictions on incurring additional
debt, paying dividends or making distributions to our stockholders, repurchasing
or retiring capital stock and making subordinated junior debt payments. The
financial covenants include maintenance of a minimum current ratio of 1.20 to
1.00, a minimum fixed charge coverage ratio of 1.10 to 1.00, an EBITDA minimum
of $160 million and a maximum leverage ratio of 3.50 to 1.00 for the period
ended July 31, 2001. We are required to submit quarterly compliance
certification to the bank. We were fully compliant with these covenants as of
July 31, 2001.
12 1/4% Senior Subordinated Notes. Our notes are due in 2009. Each note
bears interest at 12 1/4% per annum. Interest on the notes is payable
semi-annually on May 1 and November 1 of each year, commencing November 1, 1999.
The notes are subordinate to the senior collateralized credit facility. As of
July 31, 2001, we owed $200.0 million on our notes.
Certain of our wholly owned subsidiaries fully and unconditionally
guarantee the notes on a joint and several basis. We may redeem any of the notes
beginning May 1, 2004. The initial redemption price is 106.125% of their
principal amount, plus accrued and unpaid interest. The redemption price will
decline each year after 2004 and will be 100% of their principal amount, plus
accrued and unpaid interest beginning on May 1, 2007. In addition, at any time
prior to May 1, 2002, we may redeem up to 35% of the principal amount of the
notes with net cash proceeds from the sale of capital stock. The redemption
price will be equal to 112.25% of the principal amount of the redeemed notes.
Interest Rate Swap Agreement. We entered into an interest rate swap
agreement with the Bank. This interest rate swap effectively fixed the interest
rate on $48.8 million of our LIBOR-based borrowings at 5.97% plus the applicable
margin. This interest rate swap expired on November 30, 2000.
Interest Rate Cap Agreement. We entered into an interest rate cap agreement
with the Bank. This agreement caps the interest rate at 7% for $211.0 million of
our LIBOR-based borrowings through July 31, 2002. From an economic standpoint,
the cap agreement provides us with protection against LIBOR interest rate
increases above 7%. For accounting purposes, we have elected not to designate
the cap agreement as a hedge, and accordingly, changes in the fair market value
of the cap agreement are included in other expenses in the Consolidated
Statements of Operations. The value of the interest rate cap agreement at July
31, 2001 was zero.
Enterprise Resource Program (ERP). During the current year, we commenced a
project to consolidate all of our accounting and project management information
systems. The costs of implementing this project, including software, consulting
and hardware costs, are estimated to be approximately $30 million, to be
incurred over the next two years. As of July 31, 2001, we had incurred a total
of approximately $7 million for this project. We plan to finance most of the
implementation costs through capital lease arrangements with various vendors.
If, and to the extent, that financing cannot be obtained through capital leases,
we will draw on our line of credit as alternative financing for expenditures to
be incurred for this project.
18
Risk Factors That Could Affect Our Financial Condition and Results of Operations
In addition to the other information included or incorporated by reference
in this Form 10-Q, the following factors could affect our actual results:
Our substantial indebtedness could adversely affect our financial condition.
We are a highly leveraged company. As of July 31, 2001, we had
approximately $656.2 million of outstanding indebtedness following consummation
of the D-M acquisition and the related financing plan. This level of
indebtedness could have important consequences, including the following:
o it may limit our ability to borrow money or sell stock for working
capital, capital expenditures, debt service requirements or other
purposes;
o it may limit our flexibility in planning for, or reacting to, changes
in our business;
o we could be more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage;
o it may make us more vulnerable to a downturn in our business or the
economy; and
o a substantial portion of our cash flow from operations is dedicated to
the repayment of our indebtedness and would not be available for other
purposes.
To service our indebtedness, we require a significant amount of cash. The
ability to generate cash depends on many factors beyond our control.
Our ability to make payments on our indebtedness depends on our ability to
generate cash in the future. If we do not generate sufficient cash flow to meet
our debt service and working capital requirements, we may need to seek
additional financing or sell assets. This need may make it more difficult for us
to obtain financing on terms that are acceptable to us, or at all. Without this
financing, we could be forced to sell assets to make up for any shortfall in our
payment obligations under unfavorable circumstances.
Our senior collateralized credit facility and our obligations under the
notes limit our ability to sell assets and also restrict the use of proceeds
from any such sale. Moreover, the senior collateralized credit facility is
secured by substantially all of our assets. Furthermore, substantial portions of
our assets are, and may continue to be, intangible assets. Therefore, we cannot
assure you that our assets could be sold quickly enough or for sufficient
amounts to enable us to meet our debt obligations.
Restrictive covenants in our senior collateralized credit facility and the
indenture relating to the notes may restrict our ability to pursue business
strategies.
Our senior collateralized credit facility and indenture relating to the
notes restrict our ability, among other things, to:
o incur additional indebtedness or contingent obligations;
o pay dividends or make distributions to our stockholders;
o repurchase or redeem our stock;
o make investments;
o grant liens;
o make capital expenditures;
o enter into transactions with our stockholders and affiliates;
19
o sell assets; and
o acquire the assets of, or merge or consolidate with, other companies.
In addition, our senior collateralized credit facility requires us to
maintain certain financial ratios. We may not be able to maintain these ratios.
Additionally, covenants in the senior collateralized credit facility and the
indenture relating to the notes may impair our ability to finance future
operations or capital needs or to engage in other favorable business activities.
If we default under our various debt obligations, the lenders could require
immediate repayment of the entire principal. If the lenders require immediate
repayment on the entire principal, we will not be able to repay them, and our
inability to meet our debt obligations could have a material adverse effect on
our business, financial condition and results of operations.
We derive approximately 60% of our revenues from contracts with government
agencies. Any disruption in government funding or in our relationship with those
agencies could adversely affect our business and our ability to meet our debt
obligations.
We derive approximately 60% of our revenues from local, state and federal
government agencies. The demand for our services will be directly related to the
level of government program funding that is allocated to rebuild and expand the
nation's infrastructure. We believe that the success and further development of
our business depend upon the continued funding of these government programs and
upon our ability to participate in these government programs. We cannot assure
you that governments will have the available resources to fund these programs,
that these programs will continue to be funded even if governments have
available financial resources, or that we will continue to win government
contracts.
Some of these government contracts are subject to renewal or extension
annually, so we cannot assure you of our continued work under these contracts in
the future. Unsuccessful bidders may protest or challenge the award of these
contracts. In addition, government agencies can terminate these contracts at
their convenience. As a result, we may incur costs in connection with the
termination of these contracts and suffer a loss of business. Also, contracts
with government agencies are subject to substantial regulation and an audit of
actual costs incurred. Consequently, there may be a downward adjustment in our
revenues if actual recoverable costs exceed billed recoverable costs.
We have a responsibility to maintain our eligibility to perform government
contracts. From time to time allegations of improper conduct in connection with
government contracting have been made against us, and these could be the
subjects of suspension or debarment consideration. We investigate all such
allegations thoroughly and believe that appropriate actions have been taken in
all cases. Additionally, we maintain a compliance program in an effort to assure
that no improper conduct occurs in connection with government contracting.
We may be unable to estimate accurately our cost in performing services for our
clients. This may cause us to have low profit margins or incur losses.
We submit some proposals on projects based on an estimate of the costs that
we will likely incur. To the extent we cannot control overhead, general and
administrative and other costs, or if we underestimate such costs, we may have
low profit margins or may incur losses.
We are subject to risks from changes in environmental legislation, regulation
and governmental policies.
Federal laws, such as the Resource Conservation and Recovery Act of 1976,
as amended, and the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, ("CERCLA"), and various state and local laws,
strictly regulate the handling, removal, treatment and transportation of toxic
and hazardous substances and impose liability for environmental contamination
caused by such substances. Moreover, so-called "toxic tort" litigation has
increased markedly in recent years as people injured by hazardous substances
seek recovery for personal injuries or property damages. We handle, remove,
treat and transport toxic or hazardous substances. Consequently, we may be
exposed to claims for damages caused by environmental contamination.
20
Federal and state laws, regulations, and programs related to environmental
issues will generate, either directly or indirectly, much of our environmental
business. Accordingly, a reduction of these laws and regulations, or changes in
governmental policies regarding the funding, implementation or enforcement of
these programs, could have a material effect on our business. Environmental
laws, regulations and enforcement policies remained essentially unchanged during
fiscal year 2000 and for the first nine months of fiscal year 2001, including
further deferral of congressional reauthorization of CERCLA. The outlook for
congressional action on CERCLA legislation in fiscal year 2001 remains unclear.
Our liability for damages due to legal proceedings may be significant. Our
insurance may not be adequate to cover this risk.
Various legal proceedings are pending against us alleging, among other
things, breaches of contract or negligence in connection with our performance of
professional services. In some actions, punitive or treble damages are sought
that substantially exceed our insurance coverage. If we sustain damages greater
than our insurance coverage, there could be a material adverse effect on our
business, financial condition and results of operations.
Our engineering practices, including general engineering and civil
engineering services, involve professional judgments about the nature of soil
conditions and other physical conditions, including the extent to which toxic
and hazardous materials are present, and about the probable effect of procedures
to mitigate problems or otherwise affect those conditions. If the judgments and
the recommendations based upon those judgments are incorrect, we may be liable
for resulting damages that our clients incur.
The failure to attract and retain key professional personnel could adversely
affect our business.
The ability to attract, retain and expand our staff of qualified technical
professionals is an important factor in determining our future success. A
shortage of professionals qualified in certain technical areas exists from time
to time in the engineering and design industry. The market for these
professionals is competitive, and we cannot assure you that we will be
successful in our efforts to continue to attract and retain such professionals.
In addition, we rely heavily upon the experience and ability of our senior
executive staff and the loss of a significant number of such individuals could
have a material adverse effect on our business, financial condition and results
of operations.
We may be unable to compete successfully in our industry.
We are engaged in highly fragmented and very competitive markets in our
service areas. We compete with firms of various sizes, some of which are
substantially larger than us and which possess greater resources. Furthermore,
the engineering and design industry is undergoing consolidation, particularly in
the United States. These competitive forces could have a material adverse effect
on our business, financial condition and results of operations.
Our international operations are subject to a number of risks that could
adversely affect the results from these operations and our overall business.
As a worldwide provider of engineering services, we have operations in over
30 countries and derive approximately 9% of our revenues from international
operations. International business is subject to the customary risks associated
with international transactions, including political risks, local laws and
taxes, the potential imposition of trade or currency exchange restrictions,
tariff increases and difficulties or delays in collecting accounts receivable.
Weak foreign economies and/or a weakening of foreign currencies against the U.S.
dollar could have a material adverse effect on our business, financial condition
and results of operations.
Additional acquisitions may adversely affect our ability to manage our business.
Historically, we have completed numerous acquisitions and, in implementing
our business strategy, we may continue to do so in the future. We cannot assure
you that we will identify, finance and complete additional suitable acquisitions
on acceptable terms. We may not successfully integrate future acquisitions. Any
acquisitions may require substantial attention from our management, which may
limit the amount of time that management can devote to daily operations. Our
inability to find additional attractive acquisition candidates or to effectively
manage the integration of any businesses acquired in the future could adversely
affect our business, financial condition and results of operations.
21
We may not be able to successfully integrate our accounting and project
management systems.
We are in the process of designing, testing and installing a company-wide
accounting and project management system. In the event we do not complete the
project successfully, we may experience reduced cash flow due to an inability to
issue invoices to our customers and collect cash in a timely manner.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates as a result of our borrowings
under our senior collateralized credit facility. If market rates average 1% more
in fiscal year 2001 than in fiscal year 2000, our net of tax interest expense,
after considering the effect of the interest rate cap agreement, would increase
by approximately $1.6 million. Conversely, if market rates average 1% less in
fiscal year 2001 than in fiscal year 2000, our net of tax interest expense would
decrease by approximately $2.2 million.
The final interest rate settlement for our interest rate swap agreement had
been determined prior to the close of fiscal year 2000. Therefore, changes in
interest rates did not impact our then-existing interest rate swap agreement,
which expired on November 30, 2000.
22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
23
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 13, 2001 URS CORPORATION
/s/ Kent Ainsworth
------------------------------
Kent P. Ainsworth
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
24