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| URS > SEC Filings for URS > Form 10-Q on 7-Nov-2007 | All Recent SEC Filings |
7-Nov-2007
Quarterly Report
The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described here. See "Forward-Looking Statements" on page 1. You should read this discussion in conjunction with: Part II, Item 1A, "Risk Factors," beginning on page 54; the consolidated financial statements and notes thereto contained in Part I, Item 1, "Consolidated Financial Statements;" and the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2006, which was previously filed with the Securities and Exchange Commission ("SEC").
Business Summary
We are one of the world's largest engineering design services firms and a major federal government contractor for systems engineering and technical assistance, and operations and maintenance services. Our business focuses primarily on providing fee-based professional and technical services in the engineering and defense markets, although we also perform some construction work. As a result, we are labor and not capital intensive. We derive income from our ability to generate revenues and collect cash from our clients through the billing of our employees' time and our ability to manage our costs. We operate our business through two segments: the URS Division and the EG&G Division.
Our revenues are dependent upon our ability to attract qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts, renew existing client agreements and provide outstanding services. Moreover, as a professional services company, the quality of the work generated by our employees is integral to our revenue generation.
Our costs are driven primarily by the compensation we pay to our employees, including fringe benefits, the cost of hiring subcontractors and other project-related expenses, and administrative, marketing, sales, bid and proposal, rental and other overhead costs.
Revenues for Three Months Ended September 28, 2007
Consolidated revenues for the three months ended September 28, 2007 increased approximately 17% compared with the corresponding period last year. This increase was the result of robust growth in the services we provide to U.S. federal government, state and local government, and international clients, compared to the third quarter of fiscal 2006. We also experienced an acceleration in revenue growth in the services we provide to private sector clients, particularly in the power and oil and gas sectors.
Because our business continues to grow and change, during the fiscal year ended December 29, 2006, we implemented a new process and refined our definitions for identifying contract revenues by client type. For our discussion and analysis of the quarter ended September 28, 2007, to provide comparability with the allocation for the quarter ended September 29, 2006, we have reallocated the revenues identified with each market sector for the quarter ended September 29, 2006 based upon the new system adopted in fiscal 2006. This reallocation of revenues had no effect on our segment reporting.
Revenues from our federal government clients for the three months ended September 28, 2007 increased approximately 9% compared with the corresponding period last year. This increase reflected revenue growth from infrastructure and facilities projects we perform for Department of Defense ("DoD") agencies in the U.S. and overseas, as well as strong demand for the planning and design, and program and construction management services we provided to the U.S. Army Corps of Engineers. We also benefited from strong demand for the operations and maintenance services we provide to the U.S. Army related to military activities in the Middle East. In addition, our DoD clients continued to fund contracts to perform systems engineering and logistics management services at a level consistent with the corresponding period last year. In contrast, revenues from our contracts with the Federal Emergency Management Agency ("FEMA") to provide services on a contingency basis during emergencies and natural disasters declined compared to the third quarter of fiscal 2006. In fiscal 2006, we experienced unusually high activity under these contracts due to hurricane recovery activities following the destructive 2005 Atlantic hurricane season.
Revenues from our state and local government clients for the three months ended
September 28, 2007 increased approximately 14% compared with the corresponding
period last year. In the third quarter, we experienced favorable funding
conditions as our government clients continued spending on infrastructure
improvement programs, including highway, transit, school and water/wastewater
projects. The approval of major bond initiatives to fund infrastructure projects
in the past two years, and the overall strength of state economic conditions and
budgets continued to support a strong level of infrastructure spending. In
addition, the Safe, Accountable, Flexible, Efficient Transportation Equity Act:
A Legacy for Users ("SAFETEA-LU"), which authorizes federal matching funds for
transportation projects through the 2009 fiscal year, continued to have a
positive effect on revenues as our state and local government clients were
accessing more SAFETEA-LU funds and, as a result, awarding more transportation
projects.
Revenues from our domestic private industry clients for the three months ended September 28, 2007 increased 30% compared with the corresponding period last year. High procurement activity in the emission control portion of our power sector business, as well as growth in demand for the traditional engineering and environmental services we provide to power clients were the primary factors in driving this growth. Our emission control business involves helping utilities comply with federal emissions regulations, such as the Clean Air Interstate and Clean Air Mercury Rules, which have accelerated mandates to reduce sulfur and mercury emissions. We also saw a significant increase in the engineering and environmental work we perform for multinational corporations under Master Service Agreements ("MSAs"), particularly for clients in the oil and gas, and mining sectors. Many of our oil and gas sector clients continued to use profits derived from the sustained high-level of energy prices to reinvest in capital improvement projects. In addition, an increasing level of subcontractor services and equipment cost pass-throughs caused a portion of our revenue growth from private sector clients.
Revenues from our international clients for the three months ended September 28, 2007 increased approximately 30% compared with the corresponding period last year. Excluding the effect of foreign currency fluctuations, international revenues increased 21% due to favorable market trends in Europe and Asia-Pacific, as well as growth in the work we perform for multinational clients outside the United States under MSAs. In Europe, stringent environmental regulations continued to drive demand for the services we provide under our MSAs, particularly with multinational clients in the oil and gas industry. We also experienced strong demand for the engineering, and operations and maintenance services we provide for highway projects in the United Kingdom. In addition, we experienced growth in structural assessment and environmental assessment services related to commercial real estate transactions in Continental Europe. In the Asia-Pacific region, we continued to benefit from strong economic growth, particularly in Australia and New Zealand, as well as increased growth from services in the transportation, mining and water/wastewater sectors.
Cash Flows and Debt
During the nine months ended September 28, 2007, we generated $148.9 million in cash from operations. (See "Consolidated Statements of Cash Flows" to our "Consolidated Financial Statements" included under Item 1 of this report.) Cash flows from operations increased by $24.1 million for the nine months ended September 28, 2007 compared with the same period in 2006 due primarily to an increase in net income. In addition, various balance sheet line items fluctuated because of Advatech, a joint venture we consolidate. See Operating Cash Flows under the Liquidity and Capital Resources section for more details.
Our ratios of debt to total capitalization (total debt divided by the sum of debt and total stockholders' equity) were 5% and 10% as of September 28, 2007 and December 29, 2006, respectively.
Business Trends
We continue to see favorable trends in the federal sector, including sustained demand for the operations & maintenance services we provide to the DoD to support military operations, as well as continuing opportunities in the area of systems engineering and technical assistance services for the research, development, testing and evaluation of weapons systems. We expect defense spending to remain strong during fiscal 2008. In February, the President submitted a $481 billion base line DoD budget for fiscal 2008, representing an 11% increase from the baseline budget for 2007. An additional request for $189.3 billion to fund the global War on Terror was also submitted. The House Appropriations Committee is also recommending a 7% increase to the Department of Homeland Security ("DHS") budget for the 2008 fiscal year. As a result, assuming that budgets are adopted at these levels, we expect stable funding for the work we perform for the DHS, including threat assessments of public buildings, planning and conducting emergency preparedness exercises and designing force protection and security systems.
In addition, we anticipate that revenues from infrastructure, facilities and environmental projects at military sites under new and existing DoD contracts will remain strong for the remainder of the 2007 fiscal year. We may also see additional opportunities through the increasing use of large "bundled" contracts issued by the DoD, which typically require the provision of a full range of services at multiple sites throughout the world.
Finally, we expect that the most recent round of Base Realignment and Closure ("BRAC") activities, which will be used to realign and reduce U.S. military infrastructure worldwide, will provide additional growth opportunities for our federal business over the next several years. Many of the U.S.'s military bases will require planning, design and environmental services before they can be realigned, closed or re-developed. In February, Congress approved $2.5 billion to fund BRAC projects during fiscal 2007 and the supplemental funding bill that was approved in May included an additional $3.1 billion in funding for BRAC. The President's 2008 budget request includes $8.2 billion in BRAC funding.
We expect infrastructure spending by state and local government clients to continue to grow for the remainder of the 2007 fiscal year. The long-term need and strong government commitments to rebuild and modernize aging infrastructure have resulted in steady spending on infrastructure programs for which we provide services. We also anticipate that the high level of state and municipal bond activity over the last few years will continue to support funding for surface transportation, schools and other public building projects. During the first three quarters of 2007, states and municipalities sold $323 billion in new bonds, a 21% increase over the same period in 2006. In addition to bond financing, states are increasingly using other innovative ways to fund infrastructure projects, such as public-private partnerships and privatization transactions.
At the federal level, we expect the $287 billion highway funding bill, SAFETEA-LU, to continue to provide stable funding for current and new transportation projects through 2009. In July, Congress approved $50 billion for new highway and transit projects under SAFETEA-LU for fiscal 2008, a 4% increase from the $48 billion approved in fiscal 2007.
However, the recent downturn in the housing market could have an adverse impact on state and local revenues and, ultimately, on funding for infrastructure work. Overall, general fund spending by the states is expected to grow by 4.2% in fiscal 2008, which ends on June 30, 2008 for most states. While less robust than the 8.6% growth rate we experienced in fiscal 2007, we anticipate stability in state budgets through next spring. Although growth in the income tax collections of some states may begin to slow after fiscal 2008, several states are proposing sales tax increases, which could offset these slowing collections.
While increased spending on infrastructure projects is beneficial to our business, rising costs of raw materials are leading to higher construction costs and depleting funds more quickly than many state and municipal agencies anticipated. Also, some states are not collecting the amounts of tax revenues anticipated in their original state budgets. In some cases, these events may result in delays in the start-up of planning, design, or construction projects. We may also experience some project delays because of staffing shortages at some state and municipal agencies, which is affecting their ability to manage multiple large infrastructure programs concurrently.
We expect revenues from our domestic private industry clients to continue to be strong for the remainder of 2007. Many of our private industry clients have increased capital expenditures to meet strong demand for oil and gas, power and mineral resources and to comply with new environmental regulations. We anticipate that the oil and gas industry will remain a key source of revenue growth as companies continue to reinvest a portion of their revenues from the sustained high-level of fuel prices into capital improvement projects.
In the power sector, we anticipate continued growth in our emission control business, resulting from the requirements of the federal government's Clean Air Interstate and Clean Air Mercury Rules. These new rules are accelerating the requirements for power companies to cut sulfur and mercury emissions. In addition, legislation has been introduced in the U.S. Senate that would cap greenhouse-gas emissions in 2012 at 2005 levels, and then reduce this amount by 70% by 2050. The passage of this legislation could support additional investment by utilities in the types of emission control solutions we provide. We also expect to benefit from increased investment in alternative energy power plants, such as solar power facilities and coal gasification plants. Finally, we expect to continue to benefit from our growing number of MSA contracts with multinational companies, reducing our stand-alone consulting assignments and marketing costs associated with pursuing these assignments.
The growth in MSAs in our domestic private sector business also has strengthened revenues from our international private sector clients. In Europe, we expect increasing demand for our engineering and facilities design services for the United Kingdom Ministry of Defense and for the U.S. DoD at military installations overseas. In addition, we may see further international opportunities due to more stringent environmental regulations from the European Union and increased investment in infrastructure. In the Asia-Pacific region, we expect strong economic growth to increase opportunities in the infrastructure market, particularly in Australia and New Zealand, for transportation and water/wastewater projects. We also anticipate that the increased global demand for mineral resources will provide additional opportunities in the mining sector.
Other
Our federal government and state and local government clients have been increasing their use of design-build delivery mechanisms, where we are the designer, but we generally team up with a construction contractor in order to obtain the design-build contract. Design-build delivery mechanisms provide high margins, but also involve greater financial risk than traditional design-bid-build programs, where we contract directly with our clients for design services.
As the size and complexity of our projects have increased, particularly in the emission control portion of our power business, we are involved more frequently in materials and equipment procurement and subcontracting. Our revenues from these activities generate lower profit margins than do our direct labor services. Although we have been successful in obtaining modest labor rate increases, our operating income margin rate only increased slightly because an increasing portion of our revenues is derived from pass-through activities.
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