10-Q 1 d40005_urs-10q.txt QUARTERLY REPORT 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