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URS CORP /NEW/ - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results and the timing of events could differ materially from those described
herein. See "URS Corporation and Subsidiaries" regarding forward-looking
statements on page 1. You should read this discussion in conjunction with Item
1A, "Risk Factors," beginning on page H20; the consolidated financial
statements and notes thereto contained in Item 8, "Consolidated Financial
Statements and Supplementary Data," of this report.
BUSINESS SUMMARY
We are a leading international provider of engineering, construction and
technical services. We offer a broad range of program management, planning,
design, engineering, construction and construction management, operations and
maintenance, and decommissioning and closure services to public agencies and
private sector clients around the world. We also are a U.S. federal government
contractor in the areas of systems engineering and technical assistance,
operations and maintenance, and IT services. With approximately 54,000
employees, as of January 25, 2013, in a global network of offices and
contract-specific job sites in nearly 50 countries, we provide services for
federal, infrastructure, oil and gas, power and industrial programs and
projects. On May 14, 2012, we completed the acquisition of Flint, a provider of
construction and maintenance services to clients in the oil and gas industry,
expanding our presence in the oil and gas market sector in North America. At the
close of the acquisition, the operations of Flint became our new Oil & Gas
Division.
Our strategy is to maintain a balanced portfolio of diversified businesses that
serve a variety of markets worldwide. We believe that this strategy helps to
mitigate our exposure to industrial, technological, environmental, financial,
economic and political risks that may affect a particular market or geographic
region. Our growth strategy involves both organic growth as well as expansion
through acquisitions of other companies that complement or enhance our technical
capabilities or enable us to address new markets or geographic regions.
We generate revenues by providing fee-based professional and technical services
and by executing construction contracts. As a result, our professional and
technical services are primarily labor intensive and our construction projects
are labor and capital intensive. To derive income from our revenues, we must
effectively manage our costs.
Our revenues are dependent upon our ability to attract and retain qualified and
productive employees, identify business opportunities, allocate our labor
resources to profitable markets, secure new contracts, execute existing
contracts, and maintain existing client relationships. Moreover, as a
professional services company, the quality of the work generated by our
employees is integral to our revenue generation.
Our cost of revenues is comprised of the compensation we pay to our employees,
including fringe benefits; the cost of subcontractors, construction materials
and other project-related expenses; and segment administrative, marketing,
sales, bid and proposal, rental and other overhead costs.
We report our financial results on a consolidated basis and for our four
reporting segments: the Infrastructure & Environment Division, the Federal
Services Division, the Energy & Construction Division and the Oil & Gas
Division.
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OVERVIEW AND BUSINESS TRENDSFiscal Year 2012 Results
Consolidated revenues for the year ended December 28, 2012 were $11.0 billion,
an increase of $1.4 billion, or 15.0%, compared to revenues for fiscal year
2011. Our results for the 2012 fiscal year include revenues resulting from the
acquisition of Flint in May 2012. Flint generated $1.5 billion in revenues from
the completion of the acquisition on May 14, 2012, through the end of our fiscal
year on December 28, 2012. During the 2012 fiscal year, revenues increased
significantly from our work in the oil and gas market sector, as a result of the
Flint acquisition, and from our work in the power market sector. By contrast, we
experienced a decline in revenues from our work in the industrial, federal and
infrastructure market sectors.
Net income attributable to URS for the year ended December 28, 2012 was $310.6
million compared with a net loss of $465.8 million for the year ended December
30, 2011. Included in the fiscal year 2011 net loss attributable to URS was an
after-tax goodwill impairment charge of $732.2 million.
Cash Flows and Debt
During the year ended December 28, 2012, we generated $430.2 million in net cash
from operations. (See "Consolidated Statements of Cash Flows" to our
"Consolidated Financial Statements and Supplementary Data" included under Item 8
of this report.) Cash flows from operations decreased by $75.7 million for
fiscal year 2012 compared with fiscal year 2011. This decrease was primarily due
to the timing of: collections from clients on accounts receivable, advance
project payments from clients, project performance payments, vendor and
subcontractor payments, employer contribution payments to our retirement plans,
and dividend distributions from our unconsolidated joint ventures. In addition,
our interest payments were higher due to increased debt.
On March 15, 2012, in a private placement, we issued $400.0 million in 3.85%
Senior Notes due on April 1, 2017 and $600.0 million in 5.00% Senior Notes due
on April 1, 2022 (collectively, the "Senior Notes"). We used the net proceeds
from the notes together with borrowings from our senior credit facility ("2011
Credit Facility") to finance our acquisition of Flint.
During March and April 2012, we entered into various foreign currency forward
contracts with an aggregate notional amount of C$1.25 billion (equivalent to
US$1.25 billion), which settled during the second quarter of 2012.
In addition, we had cash outflows of $44.7 million of cash dividends and $40.0
million related to repurchases of our common stock for the year ended December
28, 2012.
Acquisitions
On May 14, 2012, we acquired the outstanding common shares of Flint for C$25.00
per share in cash, or C$1.24 billion (US$1.24 billion based on the exchange rate
on the date of acquisition) and paid $110.3 million of Flint's debt prior to the
closing of the transaction in exchange for a promissory note from Flint. The
operating results of Flint from the acquisition date through December 28, 2012
are included in our consolidated financial statements under the Oil & Gas
Division.
On June 1, 2011, we completed the acquisition of Apptis for a total purchase
consideration of $283.0 million. Since the acquisition date, the operating
results of Apptis have been included in our consolidated financial statements
under the Federal Services Division.
On September 10, 2010, we completed the acquisition of Scott Wilson for a total
purchase consideration of $343.0 million. Since the acquisition date, the
operating results of Scott Wilson have been included in our consolidated
financial statements under the Infrastructure & Environment Division.
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Dividend Program
On February 24, 2012, our Board of Directors authorized the implementation of a
dividend program and authorized a $0.20 per share quarterly dividend. On
February 22, 2013, our Board of Directors approved the continuation of this
program and authorized a $0.21 per share quarterly dividend. Future dividends
are subject to approval by our Board of Directors or the Audit Committee of the
Board of Directors.
Book of Business
As of December 28, 2012 and December 30, 2011, our total book of business was
$24.9 billion and $27.0 billion, respectively. Our backlog decreased primarily
due to reductions resulting from the recognition of revenues and equity in
earnings of unconsolidated joint ventures, and from the removal of $560 million
from federal backlog resulting from a decision by the DOE to remove funding of
pension obligations from the scope of one of our contracts, which otherwise
would have resulted in recognition of revenues as reimbursement for offsetting
pension expenses on that contract. Additional decreases in backlog and IDCs were
caused primarily by lower than expected activity on an IDC contract with the
DOD, and reductions in project scope and project cancellations by a power
client. These decreases were partially offset by additions of $1.4 billion to
our book of business resulting from our acquisition of Flint.
Business Trends
Given the current economic uncertainty, it is difficult to predict the impact of
the continuing global economic weakness on our business or to forecast business
trends accurately. Federal deficits, weak state budgets, the national debt, the
potential budgetary sequestration, economic disruption in Europe, a relatively
anemic recovery in the U.S., and efforts made to address any of these issues,
could negatively affect our business. In particular, federal expenditures on
defense, as well as expenditures, both private and public, on other programs
that we support or in markets that we participate in, could be adversely
affected. For example, the Budget Control Act of 2011 could impose an estimated
$1.2 trillion in automatic federal budget cuts, or sequestrations, beginning in
fiscal year 2013. These budget cuts are in addition to the $917 billion in
budget cuts required over the next 10 years, and would severely impact our
defense and other federal services, unless Congress acts to resolve the budget
issues or postpone the expected cuts. Any significant reduction in federal
government spending could reduce the demand for our overall services, and result
in the cancellation or delay of existing projects as well as potential projects
in our book of business. It is also difficult to determine the extent to which
concerns over the public debt of, and recessionary conditions in, the U.K. and
various European countries could affect demand for, and spending on, the
services we provide to our clients. Many of these uncertainties are difficult to
predict and are beyond our control.
We believe that our expectations regarding business trends are reasonable and
are based on reasonable assumptions. However, such forward-looking statements,
by their nature, involve risks and uncertainties and, in the current economic
climate, may be subject to an unusual degree of uncertainty. You should read
this discussion of business trends in conjunction with Part II, Item 1A, "Risk
Factors," of this report, which begins on page 20.
Federal Market Sector
Due to federal budget uncertainty, we expect to continue to experience delays
and cancellations in procurement decisions and reductions in spending on some
existing contracts. The Budget Control Act of 2011 could impose significant and
automatic federal budget cuts, or sequestrations, beginning in fiscal year 2013,
if Congress fails to pass a budget reduction bill. A large portion of these
budget cuts would affect defense spending. Although we expect that we will
continue to be adversely affected by these budget challenges, some of the
specialized technical services we provide and programs we support are vital to
national security or mandated by law, and may have more predictable funding. As
a result, we expect that many of these services and programs, including the
management of chemical demilitarization sites; the provision of nuclear
management services; and the support of unmanned aerial vehicles, electronic
warfare, threat reduction, and cyber-security programs would be more likely to
continue receiving stable funding, if automatic federal budget cuts are imposed.
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Infrastructure Market Sector
We anticipate that the passage in 2012 of the two-year, $105 billion federal
transportation funding bill, Moving Ahead for Progress in the 21st Century Act
("MAP-21"), will provide states and municipalities with stable funding for
highway and transit projects. In addition, the $50.5 billion Hurricane Sandy
federal aid package includes $13 billion to repair roads and transit systems
damaged by the storm, as well as $1.7 billion to the State of New York and $1.8
billion to New York City in block grants to address other public infrastructure
needs.
Oil & Gas Market Sector
During the second quarter of the 2012 fiscal year, we acquired Flint, a provider
of construction and maintenance services to clients in the North American oil
and gas industry. The acquisition significantly expanded our presence in the
North American oil and gas market sector, which we anticipate will create new
opportunities for our business in 2013. As a result of the acquisition, we
expect that any increase in capital spending to develop North American oil and
gas resources could lead to increased demand for the engineering, construction
and operations and maintenance services that we provide to clients in the oil
and gas market sector.
Power Market Sector
For the 2013 fiscal year, we expect steady demand for our air quality control
services, which involve the retrofit of coal-fired power plants with clean air
technology to reduce sulfur dioxide, mercury and other emissions. We are
currently working on 18 retrofit projects to help utilities comply with state
consent decrees and federal regulatory mandates. Following events at the
Fukushima nuclear power plant in Japan, the Nuclear Regulatory Commission issued
new safety requirements to strengthen containment structures and to improve
on-site flood control and seismic safety plans. We also expect to benefit from
new investments being made in transmission and distribution systems to improve
the efficiency and reliability of these systems and accommodate the transmission
of electricity from alternative and renewable energy sources.
Industrial Market Sector
For the 2013 fiscal year, we expect our industrial clients to continue to
experience challenges as a result of economic conditions. However, if our
clients experience increased demand for durable goods, we may see increased
demand for the engineering, construction and facilities management services we
provide. We also anticipate growth in our mining business in the U.S. and
Australia, as a result of new contract awards in 2012.
Seasonality
We experience seasonal trends in our business in connection with federal
holidays, such as Memorial Day, Independence Day, Labor Day, Thanksgiving,
Christmas and New Year's Day. Our revenues typically are lower during these
times of the year because many of our clients' employees, as well as our own
employees, do not work during these holidays, resulting in fewer billable hours
charged to projects and thus, lower revenues recognized. In addition to
holidays, our business also is affected by seasonal bad weather conditions, such
as hurricanes, floods, snowstorms or other inclement weather, which may cause
some of our offices and projects to close or reduce activities temporarily. For
example, in the first quarter of the year, winter weather sometimes results in
intermittent office closures and work interruptions. In our Oil & Gas Division,
winter weather enables increased access to remote work areas in Northern Canada,
while spring road bans limit access to work areas in Canada and the Northern
U.S.
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Other Business Trends
The diversification of our business and changes in the mix and timing of our
fixed-cost, target-price and other contracts can cause earnings and profit
margins to vary between periods. For example, we have, for some time,
experienced an increase in the number of fixed-price contracts we are awarded,
particularly among clients in the federal sector. The increase in fixed-price
contracting creates additional risks of incurring losses and opportunities for
achieving higher margins on these contracts. There is also an increase in the
award of federal contracts based on a low-price, technically acceptable criteria
emphasizing price over qualitative factors, such as past performance. As a
result, pricing pressure may reduce our profit margins on future federal
contracts. Also, our government clients are increasingly using IDCs that require
us to engage in a competitive procurement process before any task orders are
issued as compared to traditional award contracts. Additionally, the traditional
award relationship between backlog and revenues, resulting in smaller, shorter
term increments moving from IDCs and option years into backlog and then
potentially realized as revenues. Ultimately, however, revenues from IDC task
orders and option years will typically lower our reported backlog and increase
our reported IDC and option years in our book of business. In addition, earnings
recognition on many contracts is measured based on progress achieved as a
percentage of the total project effort or upon the completion of milestones or
performance criteria rather than evenly or linearly over the period of
performance.
The achievement of early completion milestones on several chemical weapons
stockpile processing projects indicates that those projects are approaching the
end of their contract life cycle. We expect to continue to generate revenues and
operating income at these sites and other sites over the next several years, but
in declining amounts as the projects approach final completion.
We cannot determine if proposed climate change and greenhouse gas regulations
would have a material impact on our business or our clients' businesses at this
time; however, any new regulations could affect demand for the services we
provide to our clients. For example, depending on legislation enacted, we could
see reduced client demand for our services related to fossil fuel and industrial
projects, and increased demand for services related to environmental,
infrastructure and nuclear and alternative energy.
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REVENUES BY MARKET SECTOR
The Year Ended December 28, 2012 Compared with the Year Ended December 30, 2011
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages) 2012 (1) 2011 (2) (Decrease) (Decrease)
Revenues by Market Sector:
Federal $ 4,435.0 $ 4,639.7 $ (204.7 ) (4.4 %)
Infrastructure 1,791.4 1,861.3 (69.9 ) (3.8 %)
Oil & Gas (3) 2,310.6 692.1 1,618.5 233.9 %
Power 1,304.4 1,126.6 177.8 15.8 %
Industrial (3) 1,131.1 1,225.3 (94.2 ) (7.7 %)Total revenues, net of eliminations $ 10,972.5 $ 9,545.0
$ 1,427.5 15.0 %
(1) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(3) Historically, we have included revenues from the oil & gas market sector as
part of our industrial & commercial market sector. Effective at the
beginning of our 2012 fiscal year, we revised our presentation to show our
revenues from the oil & gas market sector separately. In addition, we
changed the name of our "industrial and commercial" market sector to the
"industrial" market sector. For comparative purposes, we reclassified the prior period's data to conform them to the current period's presentation.
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Consolidated Revenues by Market Sector
Our consolidated revenues for the year ended December 28, 2012 were $11.0
billion, an increase of $1.4 billion, or 15.0%, compared with the year ended
December 30, 2011.
See the discussion of revenues by market sector below for more detail.
Federal
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages) 2012 2011 (Decrease) (Decrease)
Federal Market Sector:
Infrastructure & Environment $ 670.1 $ 636.5 $ 33.6 5.3 %
Federal Services 2,720.8 2,694.3 26.5 1.0 %
Energy & Construction 1,044.1 1,308.9 (264.8 ) (20.2 %)
Federal total $ 4,435.0 $ 4,639.7 $ (204.7 ) (4.4 %)
Consolidated revenues from our federal market sector for the year ended December
28, 2012 declined compared with the year ended December 30, 2011. During the
2012 fiscal year, revenues declined from the nuclear management services we
provide to the DOE, due largely to the completion of ARRA stimulus-funded
projects, the completion of a cleanup and closure project at a former nuclear
fuel reprocessing/treatment facility, as well as lower activity on on-going DOE
contracts. In addition, we experienced decreased demand for the systems
engineering and technical assistance services we provide to the DOD for the
development, testing and evaluation of new weapons systems and the modernization
of aging weapons systems. The decrease in revenues from these activities was
largely the result of delays in the award of new contracts and task orders under
existing contracts. Revenues also declined from our work managing the
destruction of chemical weapons stockpiles at chemical agent disposal facilities
throughout the U.S. This decline reflects the transition at several facilities
from the operations phase of the project to the closure phase, which is
characterized by lower levels of activity.
By contrast, revenues increased from the federal IT market as a result of the
acquisition of Apptis in June 2011. In addition, revenues grew from the services
we provide to the DOD to maintain, repair and overhaul aircraft, ground vehicles
and other equipment returning from military operations, as well as from
increased activity on a contract to provide operations and installations
management support at a space flight center. We also experienced increased
demand for the design and construction services we provide to the DOD for the
development of military facilities and related infrastructure.
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Infrastructure
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages) 2012 2011 (Decrease) (Decrease)
Infrastructure Market Sector:
Infrastructure & Environment $ 1,550.1 $ 1,544.0 $ 6.1 0.4 %
Energy & Construction 241.3 317.3 (76.0 ) (24.0 %)
Infrastructure total $ 1,791.4 $ 1,861.3 $ (69.9 ) (3.8 %)
Consolidated revenues from our infrastructure market sector for the year ended
December 28, 2012 decreased compared with the year ended December 30, 2011. The
decline in infrastructure revenues was primarily due to the completion early in
the 2012 fiscal year of a levee construction project in New Orleans, which
experienced higher levels of activity and generated significant revenues during
the 2011 fiscal year. The revenue decline also reflects a close-out and
settlement agreement reached on a light rail project and a toll road project. In
addition, demand decreased for the services we provide to modernize and expand
airports and educational facilities.
By contrast, revenues increased from the planning, design, engineering, program
and construction management services we provide to develop surface and rail
transportation infrastructure, and water storage, conveyance and treatment
systems. We also benefited from higher demand for our work providing program
management services to international agencies in support of economic development
efforts.
Oil & Gas
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages) 2012 2011 (Decrease) (Decrease)
Oil & Gas Market Sector: (1)
Infrastructure & Environment $ 552.5 $ 529.7 $ 22.8 4.3 %
Energy & Construction 288.9 162.4 126.5 77.9 %
Oil & Gas (2) 1,469.2 - 1,469.2 N/M
Oil & Gas total $ 2,310.6 $ 692.1 $ 1,618.5 233.9 %
N/M = Not meaningful
(1) Historically, we have included revenues from the oil & gas market sector as
part of our presentation of revenues from the industrial & commercial market
sector. Effective at the beginning of our 2012 fiscal year, we revised our
presentation to show our revenues from the oil & gas market sector
separately. In addition, we changed the name of our "industrial and commercial" market sector to the "industrial" market sector. For comparative
purposes, we reclassified the prior period's data to conform them to the
current period's presentation.
(2) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
Consolidated revenues from our oil & gas market sector for the year ended
December 28, 2012 increased compared with the year ended December 30, 2011. Our
results reflect the acquisition of Flint on May 14, 2012. At the completion of
the acquisition, Flint became our new Oil & Gas Division. For the fiscal year
ended December 28, 2012, the Oil & Gas Division generated revenues of $1.5
billion from work providing construction and maintenance services to the North
American oil and gas industry. We also benefited from strong demand for the
environmental and engineering services we provide to multinational oil and gas
clients at facilities worldwide through long-term master service agreements
("MSAs"), as well as from increased activity on contracts to provide
construction, facility management, and operations and maintenance services at
refineries and other oil and gas facilities.
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Power
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages) 2012 2011 (Decrease) (Decrease)
Power Market Sector:
Infrastructure & Environment $ 209.8 $ 201.1 $ 8.7 4.3 %
Energy & Construction 1,094.6 925.5 169.1 18.3 %
Power total $ 1,304.4 $ 1,126.6 $ 177.8 15.8 %
Consolidated revenues from our power market sector for the year ended December
28, 2012 increased compared with the year ended December 30, 2011. During the
2012 fiscal year, revenues increased from services we provide to retrofit and
upgrade existing nuclear power plants to increase the generating capacity and
extend the service life of these facilities. We also continued to experience a
steady demand for our work in retrofitting coal-fired power plants with air
quality control systems that reduce emissions and help utilities comply with
regulatory mandates, as well as from the compliance, permitting and remediation
services we provide to mitigate the environmental impact of their operations. By
contrast, revenues declined from the engineering, procurement and construction
services we provide for the development of new fossil fuel and nuclear
power-generating facilities.
Industrial
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages) 2012 2011 (Decrease) (Decrease)
Industrial Market Sector: (1)
Infrastructure & Environment $ 700.5 $ 763.8 $ (63.3 ) (8.3 %)
Energy & Construction 430.6 461.5 (30.9 ) (6.7 %)
Industrial total $ 1,131.1 $ 1,225.3 $ (94.2 ) (7.7 %)
(1) Historically, we have included revenues from the oil & gas market sector as
part of our presentation of revenues from the industrial & commercial market
sector. Effective at the beginning of our 2012 fiscal year, we revised our
presentation to show our revenues from the oil & gas market sector
separately. In addition, we changed the name of our "industrial and commercial" market sector to the "industrial" market sector. For comparative
purposes, we reclassified the prior period's data to conform them to the
current period's presentation.
Consolidated revenues from our industrial market sector for the year ended
December 28, 2012 declined compared with the year ended December 30, 2011. The
decline in revenues was largely driven by decreased demand for the
environmental, engineering and construction services we provide to mining
clients. During the 2011 fiscal year, we experienced high levels of activity and
generated significant revenues from an engineering and construction mining
project in Australia; the project has not been replaced by a comparable
assignment. The decrease was partially offset by a moderate increase in revenues
from the facilities management services we provide to manufacturing clients,
resulting from increased activity on ongoing contracts and increased activities
with other mining clients.
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CONSOLIDATED RESULTS BY DIVISION
The Year Ended December 28, 2012 Compared with the Year Ended December 30, 2011
Year Ended
Percentage
December 28, December 30, Increase Increase
(In millions, except percentages and per
share amounts) 2012 (1) 2011 (2) (Decrease) (Decrease)
Revenues $ 10,972.5 $ 9,545.0 $ 1,427.5 15.0 %
Cost of revenues (10,294.5 ) (8,988.8 ) 1,305.7 14.5 %
General and administrative expenses (83.6 ) (79.5 ) 4.1 5.2 %
Acquisition-related expenses (16.1 ) (1.0 ) 15.1 N/M
Restructuring costs - (5.5 ) (5.5 ) N/M
Goodwill impairment - (825.8 ) (825.8 ) N/M
Equity in income of unconsolidated
joint ventures 107.6 132.2 (24.6 ) (18.6 %)
Operating income (loss) 685.9 (223.4 ) 909.3 407.0 %
Interest expense (70.7 ) (22.1 ) 48.6 219.9 %
Other income (expenses) 0.5 - 0.5 N/M
Income (loss) before income taxes 615.7 (245.5 ) 861.2 350.8 %
Income tax expense (189.9 ) (91.8 ) 98.1 106.9 %
Net income (loss) including
noncontrolling interests 425.8 (337.3 ) 763.1 226.2 %
Noncontrolling interests in income
of consolidated subsidiaries (115.2 ) (128.5 ) (13.3 ) (10.4 %)
Net income (loss) attributable to URS $ 310.6 $ (465.8 ) $ 776.4
166.7 %
Diluted earnings (loss) per share $ 4.17 $ (6.03 ) $ 10.20
169.2 %
N/M = Not meaningful
(1) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
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Revenues
Infrastructure & Federal Energy &
(In millions, except percentages) Environment Services (1) Construction Oil & Gas (2) Eliminations Total
Year ended
December 28, 2012 $ 3,792.1 $ 2,721.6 $ 3,138.1 $ 1,475.1 $ (154.4) $ 10,972.5
December 30, 2011 3,760.9 2,695.4 3,251.1 - (162.4) 9,545.0
Increase (decrease) 31.2 26.2 (113.0) 1,475.1 (8.0) 1,427.5
Percentage increase (decrease) 0.8% 1.0% (3.5%) N/M N/M 15.0%
N/M = Not meaningful
(1) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(2) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
The revenues reported are presented prior to the elimination of inter-segment
transactions. Our analysis of the changes in revenues by reporting segment is
discussed below.
The Infrastructure & Environment Division's Revenues
The Infrastructure & Environment Division's revenues were essentially flat for
the year ended December 28, 2012 compared to the year ended December 30,
2011. During the 2012 fiscal year, revenues increased from the services we
provide to expand and modernize surface and rail transportation infrastructure,
as well as from our work providing program management services to international
aid agencies in support of economic development efforts. We also benefited from
strong demand for our work providing engineering and construction services to
the DOD for the development of military facilities and related
infrastructure. In addition, demand grew for the compliance, permitting and
remediation services we perform in the power sector to assist utilities in
meeting regulatory requirements and mitigating the environmental impact of their
operations.
By contrast, we experienced a decline in revenues from the environmental and
engineering services we provide to industrial and mining clients. The results in
our mining market reflect the completion of an engineering and construction
assignment, which generated significant revenues in the comparable period last
year and was not replaced by a similar project. In the oil and gas sector,
revenues declined from our work supporting a major pipeline project in Alaska,
due to the postponement of the project, while we continued to benefit from
strong demand for the environmental and engineering services we provide to
multinational oil and gas clients at facilities worldwide through long-term
MSAs.
The Federal Services Division's Revenues
The Federal Services Division's revenues were essentially flat for the year
ended December 28, 2012 compared to the year ended December 30, 2011. Revenues
increased from the IT services we now provide to federal clients, as a result of
our June 2011 acquisition of Apptis. Revenues from the services we provide to
the DOD to maintain, repair and overhaul aircraft, ground vehicles and other
equipment were essentially flat.
Revenues from our work managing the destruction of chemical weapons stockpiles
at chemical agent disposal facilities declined. This decline reflects the
transition at several facilities from the operations phase of the project to the
closure phase, which is characterized by lower levels of activity.
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The Energy & Construction Division's Revenues
The Energy & Construction Division's revenues for the year ended December 28,
2012 decreased compared with the year ended December 30, 2011. The decrease was
primarily due to the completion of a large power project and a large levee
construction project in the prior year. In addition, revenues declined from our
work providing nuclear management services to the DOE, as a result of completing
ARRA stimulus-funded projects and lower activity on ongoing DOE projects
compared to the same period last year.
These decreases were partially offset by the start-up of new projects, including
a new air quality control project at a coal-fired power plant and projects to
replace steam generators at nuclear power plants. However, revenues during the
engineering and early construction phases associated with the start-up of
projects tend to be lower than revenues during the active construction
phases. During the year ended December 30, 2011, there were more projects in
active construction compared to the year ended December 28, 2012. As a result,
revenues for the year ended December 28, 2012 were relatively lower than for the
year ended December 30, 2011.
The Oil & Gas Division's Revenues
The Oil & Gas Division's revenues for the year ended December 28, 2012 were
derived from the construction and construction management, and operations and
maintenance services that we provide, including facility and pipeline
construction, transportation, and asset management and maintenance services, for
the North American oil and gas industry. Since the acquisition on May 14, 2012,
the revenues of Flint have been included in our consolidated results under our
Oil & Gas Division.
Cost of Revenues
Infrastructure & Federal Energy &
(In millions, except percentages) Environment Services (1) Construction Oil & Gas (2) Eliminations Total
Year ended
December 28, 2012 $ (3,575.2) $ (2,478.7) $ (2,976.9) $ (1,418.1) $ 154.4 $ (10,294.5)
December 30, 2011
(3,537.2) (2,503.9) (3,110.1) - 162.4 (8,988.8)
Increase (decrease) 38.0 (25.2) (133.2) 1,418.1 (8.0) 1,305.7
Percentage increase (decrease) 1.1% (1.0%) (4.3%) N/M N/M 14.5%
N/M = Not meaningful
(1) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(2) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
Our consolidated cost of revenues, which consists of labor, subcontractor costs,
and other expenses related to projects, and services provided to our clients,
for the year ended December 28, 2012 increased compared with the year ended
December 30, 2011. Because our revenues are primarily project-based, the factors
that generally caused revenues to increase or decrease also drove a
corresponding increase or decrease in our cost of revenues.
Consolidated cost of revenues as a percent of revenues decreased from 94.2% for
the year ended December 30, 2011 to 93.8% for the year ended December 28, 2012.
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General and Administrative Expenses
Our consolidated general and administrative ("G&A") expenses for the year ended
December 28, 2012 increased by 5.2% compared with the year ended December 30,
2011. The increase in G&A expenses was due primarily to increases in employee
salaries and the related benefit expenses of $2.4 million, foreign currency loss
of $1.5 million, legal expenses of $1.2 million, and corporate communication and
information technology-related expenses of $0.8 million, partially offset by the
release of $2.1 million of sales tax reserve. Consolidated G&A expenses as a
percent of revenues was 0.8% for both years ended December 28, 2012 and December
30, 2011.
Acquisition-related Expenses
Our consolidated acquisition-related expenses generally include legal fees,
consultation fees, travel expenses, and other miscellaneous direct and
incremental administrative expenses. For the year ended December 28, 2012, we
recorded $16.1 million of acquisition-related expenses for our acquisition of
Flint.
Restructuring Costs
Restructuring costs consisted primarily of costs for severance and associated
benefits. We did not incur restructuring costs for the year ended December 28,
2012. For the year ended December 30, 2011, our restructuring costs were $5.5
million, the majority of which resulted from the integration of Scott Wilson
into our existing U.K. and European business and necessary responses to
reductions in market opportunities in Europe.
Goodwill Impairment
Our 2012 annual review, performed as of October 26, 2012, did not indicate any
further adjustment to our goodwill. For the year ended December 30, 2011, we
recognized an impairment charge of $825.8 million affecting five of our six
reporting units. On a net, after-tax basis, this charge resulted in decreases to
net income and diluted EPS of $732.2 million and $9.46, respectively, for the
year ended December 30, 2011.
Equity in Income of Unconsolidated Joint Ventures
Infrastructure & Federal Energy &
(In millions, except percentages) Environment Services (1) Construction Oil & Gas (2) Total
Year ended
December 28, 2012 $ 4.0 $ 6.4 $ 93.0 $ 4.2 $ 107.6
December 30, 2011 3.9 6.2 122.1 - 132.2
Increase (decrease) 0.1 0.2 (29.1 ) 4.2 (24.6 )
Percentage increase (decrease) 2.6 % 3.2 % (23.8 %) N/M (18.6 %)
N/M = Not meaningful
(1) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(2) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
Our consolidated equity in income of unconsolidated joint ventures for the year
ended December 28, 2012 decreased compared with the year ended December 30,
2011. The decrease was primarily attributable to a $21.1 million decrease in
earnings from nuclear management, operations and cleanup projects in the U.K., a
$9.5 million favorable settlement on a highway construction project during the
year ended December 30, 2011, and a $5.9 million decrease in earnings on a DOE
cleanup project due to the timing of recognizing target-cost savings and other
performance-based earnings. These decreases were partially offset by an $8.2
million increase in earnings from a light rail project.
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Operating Income (Loss)
Federal
Infrastructure & Services Energy &
(In millions, except percentages) Environment (1) Construction Oil & Gas (2) Corporate Total
Year ended
December 28, 2012 $ 220.9 $ 249.3 $ 254.2 $ 61.2 $ (99.7) $ 685.9
December 30, 2011
222.0 (151.5) (214.4) - $ (79.5) (223.4)
Increase (decrease) (1.1) 400.8 468.6 61.2 $ 20.2 909.3
Percentage increase (decrease) (0.5%) 264.6% 218.6% N/M 25.4% 407.0%
N/M = Not meaningful
(1) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(2) The operating results of Flint have been included in our consolidated
results since the acquisition on May 14, 2012.
As a percentage of revenues, operating income for the year ended December 28,
2012 was 6.3% compared to (2.3)% for the year ended December 30, 2011. The
increase in operating income in fiscal year 2012 relative to the corresponding
period of 2011 was primarily due to the goodwill impairment charge recorded
during the year ended December 30, 2011. In addition, operating income increased
due to the inclusion of operating income resulting from the acquisition of Flint
and an increase in net performance-based incentive fees from work, performed by
our Federal Services Division, managing chemical demilitarization programs in
the U.S. These increases were partially offset by the decrease in operating
income resulting from the wind down and completion of projects, and delayed
awards of new task orders. See the detailed discussion of operating income by
segment below.
The Infrastructure & Environment Division's Operating Income
Operating income as a percentage of revenues was 5.8% for the year ended
December 28, 2012 compared to 5.9% for the year ended December 30, 2011. The
change in operating income was primarily attributable to our contract mix, which
in 2012, utilized more subcontractors with higher associated costs. The increase
in subcontract costs was partially offset by higher revenues and decreases in
employee benefits and other indirect costs. Overhead costs as a percentage of
revenues decreased to 31.1% for the year ended December 28, 2012 from 32.0% for
the year ended December 30, 2011.
The Federal Services Division's Operating Income (Loss)
Operating income (loss) as a percentage of revenues was 9.2% for the year ended
December 28, 2012 compared to (5.6)% for the year ended December 30, 2011. For
the year ended December 30, 2011, the operating loss was the result of a $348.3
million goodwill impairment charge. Operating income included a $75.7 million
increase in net performance-based incentive fees from work managing chemical
demilitarization programs recognized in the current year compared to the prior
year. This increase was partially offset by delayed awards of new task orders
under existing contracts and lower margins on federal operations and support
services contracts due to low-price, technically acceptable contracting
strategies, which emphasize price over qualitative factors, such as past
performance.
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The Energy & Construction Division's Operating Income (Loss)
Operating income (loss) as a percentage of revenues was 8.1% for the year ended
December 28, 2012 compared to (6.6)% for the year ended December 30, 2011. The
operating loss was the result of a $477.5 million goodwill impairment charge
recorded in the year ended December 30, 2011. The decrease in operating income
after considering the goodwill impairment charge was due to the $29.1 million
decrease in equity in income of unconsolidated joint ventures described above,
and a $31.5 million decline resulting from the substantial completion of a levee
construction project in New Orleans in the prior year. These decreases were
partially offset by an increase of $22.8 million, consisting of a $3.4 million
current year insurance recovery compared to a prior year loss of $19.4 million
on a common sulfur project and an increase of $20.6 million on a new air quality
control project.
The Oil & Gas Division's Operating Income
The Oil & Gas Division's operating income for the year ended December 28, 2012
was $61.2 million, which reflects activities from May 14, 2012, the effective
date of the Flint acquisition and includes $38.6 million of amortization of
intangible assets in connection with the Flint acquisition.
Interest Expense
Our consolidated interest expense for the year ended December 28, 2012 increased
by $48.6 million or 219.9% compared with the year ended December 30, 2011. This
increase was primarily due to the interest expense incurred on the additional
borrowings and the assumption of debt in connection with the Flint acquisition.
Other Income (Expenses)
Our consolidated other income (expenses) for the year ended December 28, 2012
represents a foreign currency gain of $0.8 million recognized on intercompany
financing arrangements and a net loss of $0.3 million recognized on foreign
currency forward contracts.
Income Tax Expense
The change in the effective income tax rate for the year ended December 28, 2012
compared with the comparable period in 2011 was primarily due to the
non-deductibility of the goodwill impairment charge taken in 2011.
Noncontrolling Interests in Income of Consolidated Subsidiaries
Our noncontrolling interests in income of consolidated subsidiaries decreased by
$13.3 million or 10.4% in the year ended December 28, 2012 compared with the
year ended December 30, 2011. The decrease in noncontrolling interests in income
of consolidated subsidiaries, net of tax was primarily due to lower earnings
from one of our U.K. joint ventures, the substantial completion of a levee
construction project in New Orleans in the prior year, and lower earnings from
certain DOE nuclear cleanup projects. These decreases were partially offset by
increases related to higher activity at air quality control services projects
and steam generator replacement projects performed through consolidated joint
ventures.
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REVENUES BY MARKET SECTOR
The Year Ended December 30, 2011 Compared with the Year Ended December 31, 2010
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages) 2011 (1) 2010 (2) (Decrease) (Decrease)
Revenues by Market Sector:
Federal $ 4,639.7 $ 4,523.4 $ 116.3 2.6 %
Infrastructure 1,861.3 1,902.4 (41.1 ) (2.2 %)
Oil & Gas (3) 692.1 685.1 7.0 1.0 %
Power 1,126.6 1,109.2 17.4 1.6 %
Industrial (3) 1,225.3 957.0 268.3 28.0 %Total revenues, net of eliminations $ 9,545.0 $ 9,177.1 $ 367.9
4.0 %
(1) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(2) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
(3) Historically, we have included revenues from the oil & gas market sector as
part of our presentation of revenues from the industrial & commercial market
sector. Effective at the beginning of our 2012 fiscal year, we revised our
presentation to show our revenues from the oil & gas market sector
separately. In addition, we changed the name of our "industrial and commercial" market sector to the "industrial" market sector. For comparative
purposes, we reclassified the prior period's data to conform them to the
current period's presentation.
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Consolidated Revenues by Market Sector
Our consolidated revenues for the year ended December 30, 2011 were $9.5
billion, an increase of $367.9 million, or 4.0%, compared with the year ended
December 31, 2010.
See the discussion of revenues by market sector below for more detail.
Federal
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages) 2011 2010 (Decrease) (Decrease)
Federal Market Sector:
Infrastructure & Environment (1) $ 636.5 $ 682.7 $ (46.2 ) (6.8 %)
Federal Services (2) 2,694.3 2,581.2 113.1 4.4 %
Energy & Construction 1,308.9 1,259.5 49.4 3.9 %
Federal total $ 4,639.7 $ 4,523.4 $ 116.3 2.6 %
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
Consolidated revenues from our federal market sector for the year ended December
30, 2011 were $4.6 billion, an increase of $116.3 million, or 2.6%, compared
with the year ended December 31, 2010. During the 2011 fiscal year, we benefited
from the growth of our business in the federal IT market through the acquisition
of Apptis, which generated $180.0 million in revenues, commencing with the
acquisition date. We also experienced increased demand for the environmental and
nuclear management services we provide to the DOE and NDA involving the storage,
treatment and disposal of radioactive waste. In addition, revenues increased
from our work managing chemical demilitarization programs at chemical agent
disposal facilities in the U.S., as well as from the global threat reduction
services we provide to secure and eliminate weapons of mass destruction at
locations worldwide. By contrast, revenues declined from the services we provide
to modernize aging weapons systems, develop new systems, and maintain and repair
military vehicles and aircraft. Revenues also declined from the operations and
installations management support we provide at military bases, test ranges and
space flight centers. The decline in revenues from these activities was
primarily due to delays in the award of new contracts and task orders under
existing contracts. Revenues also decreased from projects involving the design
and construction of military facilities and other government installations,
compared to the 2010 fiscal year.
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Infrastructure
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages) 2011 2010 (Decrease) (Decrease)
Infrastructure Market Sector:
Infrastructure & Environment (1) $ 1,544.0 $ 1,402.8 $ 141.2 10.1 %
Energy & Construction 317.3 499.6 (182.3 ) (36.5 %)
Infrastructure total $ 1,861.3 $ 1,902.4 $ (41.1 ) (2.2 %)
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
Consolidated revenues from our infrastructure market sector for the year ended
December 30, 2011 were $1.9 billion, a decrease of $41.1 million, or 2.2%,
compared with the year ended December 31, 2010. The decline in infrastructure
revenues was primarily due to a decline in revenues resulting from the
completion of a levee construction project in New Orleans, which experienced
greater levels of activity and generated higher revenues during the 2010 fiscal
year. We also experienced decreased activity on an ongoing dam construction
project in Illinois, primarily as a result of adverse weather conditions and
flooding, which resulted in project delays. The decrease in revenues was
partially offset by the growth of our infrastructure business outside the U.S.
resulting from the acquisition of Scott Wilson in September 2010. Scott Wilson
generated $282.4 million in infrastructure revenues during the year ended
December 30, 2011. During our 2010 fiscal year, we recognized revenues of $92.8
million from the operations of Scott Wilson from the date of the acquisition
through December 31, 2010. We also benefited from steady demand for the services
we provide to expand and modernize surface and rail transportation systems, and
ports and harbors.
Oil & Gas
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages) 2011 2010 (Decrease) (Decrease)
Oil & Gas Market Sector: (1)
Infrastructure & Environment (2) $ 529.7 $ 418.8 $ 110.9 26.5 %
Energy & Construction 162.4 266.3 (103.9 ) (39.0 %)
Oil & Gas total $ 692.1 $ 685.1 $ 7.0 1.0 %
(1) Historically, we have included revenues from the oil & gas market sector as
part of our presentation of revenues from the industrial & commercial market
sector. Effective at the beginning of our 2012 fiscal year, we revised our
presentation to show our revenues from the oil & gas market sector
separately. In addition, we changed the name of our "industrial and commercial" market sector to the "industrial" market sector. For comparative
purposes, we reclassified the prior period's data to conform them to the
current period's presentation.
(2) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
Consolidated revenues from our oil & gas market sector for the year ended
December 30, 2011 increased compared with the year ended December 31, 2010. Our
results reflect the sustained high level of oil prices, which resulted in
increased capital spending by many of our clients in the oil and gas industry on
the initial phases of projects that had previously been deferred, increasing
demand for the front-end engineering and design services we provide. We also
benefited from strong demand for the environmental and engineering services we
provide to oil and gas clients through long-term MSAs. In addition, revenues
increased due to high levels of activity on an assignment to construct a natural
gas storage facility in Louisiana.
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Power
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages) 2011 2010 (Decrease) (Decrease)
Power Market Sector:
Infrastructure & Environment (1) $ 201.1 $ 156.5 $ 44.6 28.5 %
Energy & Construction 925.5 952.7 (27.2 ) (2.9 %)
Power total $ 1,126.6 $ 1,109.2 $ 17.4 1.6 %
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
Consolidated revenues from our power market sector for the year ended December
30, 2011 were $1.1 billion, an increase of $17.4 million, or 1.6%, compared with
the year ended December 31, 2010. During fiscal year 2011, we benefited from
demand for the engineering, compliance, permitting and remediation services we
provide to utilities to assist them in meeting regulatory requirements and in
mitigating the environmental impact of their operations. Revenues also increased
from projects involving the development of new nuclear power facilities. By
contrast, we experienced a decline in revenues from our work retrofitting
coal-fired power plants with air quality control systems, due primarily to the
completion of several major assignments. These projects experienced higher
levels of activity and generated significant revenues during our 2010 fiscal
year. Recently awarded emission control projects are in earlier design stages,
which are typically characterized by lower levels of activity and generate lower
revenues. We also experienced lower revenues from projects involving the
replacement of major components at existing nuclear power plants to extend their
efficiency and generating capacity, due largely to the completion of several
major assignments.
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Industrial
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages) 2011 2010 (Decrease) (Decrease)
Industrial Market Sector: (1)
Infrastructure & Environment (2) $ 763.8 $ 553.4 $ 210.4 38.0 %
Energy & Construction 461.5 403.6 57.9 14.3 %
Industrial total $ 1,225.3 $ 957.0 $ 268.3 28.0 %
(1) Historically, we have included revenues from the oil & gas market sector as
part of our presentation of revenues from the industrial & commercial market
sector. Effective at the beginning of our 2012 fiscal year, we revised our
presentation to show our revenues from the oil & gas market sector
separately. In addition, we changed the name of our "industrial and commercial" market sector to the "industrial" market sector. For comparative
purposes, we reclassified the prior period's data to conform them to the
current period's presentation.
(2) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
Consolidated revenues from our industrial and commercial market sector for the
year ended December 30, 2011 were $1.9 billion, an increase of $275.3 million,
or 16.8%, compared with the year ended December 31, 2010. During our 2011 fiscal
year, revenues increased from the engineering and environmental services we
provide under MSAs to multinational corporations to help them meet regulatory
requirements and support their existing operations. In the manufacturing
industry, we benefited from strong demand for facilities management services as
our clients continued to outsource these services to help save costs and
maximize the efficiency of their operations. Revenues also increased from
engineering, environmental and construction assignments for mining clients. By
contrast, we continued to experience a decline in revenues from major capital
expenditure projects, as well as from the completion of several large-scale
contracts that have not been replaced by comparable projects.
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CONSOLIDATED RESULTS BY DIVISION
The Year Ended December 30, 2011 Compared with the Year Ended December 31, 2010
Year Ended
Percentage
December 30, December 31, Increase Increase
(In millions, except percentages and per
share amounts) 2011 (1) 2010 (2) (Decrease) (Decrease)
Revenues $ 9,545.0 $ 9,177.1 $ 367.9 4.0 %
Cost of revenues (8,988.8 ) (8,609.5 ) 379.3 (4.4 %)
General and administrative expenses (79.5 ) (71.0 ) 8.5 (12.0 %)
Acquisition-related expenses (1.0 ) (11.9 ) (10.9 ) 91.6 %
Restructuring costs (5.5 ) (10.6 ) (5.1 ) 48.1 %
Goodwill impairment (825.8 ) - 825.8 N/M
Equity in income of unconsolidated
joint ventures 132.2 70.3 61.9 88.1 %
Operating income (loss) (223.4 ) 544.4 (767.8 ) (141.0 %)
Interest expense (22.1 ) (30.6 ) (8.5 ) 27.8 %
Income (loss) before income taxes (245.5 ) 513.8 (759.3 ) (147.8 %)
Income tax expense (91.8 ) (127.6 ) (35.8 ) (28.1 %)
Net income (loss) including
noncontrolling interests (337.3 ) 386.2 (723.5 ) (187.3 %)
Noncontrolling interests in income
of consolidated subsidiaries (128.5 ) (98.3 ) 30.2 30.7 %
Net income attributable to URS $ (465.8 ) $ 287.9 $ (753.7 ) (261.8 %)
$
Diluted earnings per share $ (6.03 ) $ 3.54 $ (9.57 ) (270.3 %)
(1) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
(2) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
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Revenues
Federal
Infrastructure & Services Energy &
(In millions, except percentages) Environment (1) (2) Construction Eliminations Total
Year ended
December 30, 2011 $ 3,760.9 $ 2,695.4 $ 3,251.1 $ (162.4 ) $ 9,545.0
December 31, 2010 3,248.5 2,582.8 3,420.6 (74.8 ) 9,177.1
Increase (decrease) 512.4 112.6 (169.5 ) 87.6 367.9
Percentage increase (decrease) 15.8 % 4.4 % (5.0 %) 117.1 % 4.0 %
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
The revenues reported are presented prior to the elimination of inter-segment
transactions. Our analysis of the changes in revenues by reporting segment is
discussed below.
The Infrastructure & Environment Division's Revenues
The Infrastructure & Environment Division's revenues increased for the year
ended December 30, 2011 compared to the year ended December 31, 2010.
For the 2011 fiscal year, Scott Wilson, which we acquired in September 2010,
generated $451.1 million in revenues. For the 2010 fiscal year, Scott Wilson
generated $150.4 million in revenues, beginning on the date of the acquisition
through December 31, 2010. During the 2011 year, we benefited from the growth of
our infrastructure business outside North America as a result of the acquisition
of Scott Wilson. Revenues increased from the services we provide to expand and
modernize surface and rail transportation infrastructure, and ports and
harbors. In addition, we continued to experience steady demand for the disaster
response services we provide to the Federal Emergency Management Agency,
particularly following tornado damage in Alabama and flooding caused by
Hurricane Irene. We also benefited from strong demand for the engineering and
environmental work we provide to multinational corporations under MSAs. The
sustained level of oil prices is causing many clients in the oil and gas
industry to move forward with the initial phases of projects that had previously
been deferred. Revenues also increased from our work supporting mining
clients. As a result of higher commodity prices for metals and mineral
resources, many of our mining clients are expanding their operations to meet
growing demand.
By contrast, revenues declined from the engineering and construction services we
provide to the DOD due to the completion of large task orders under existing
contracts to design and build military facilities at installations in the U.S.
and overseas. During the 2010 fiscal year, these task orders experienced great
levels of activities and generated higher revenues than similar design-build
assignments that were in progress during the 2011 fiscal year.
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The Federal Services Division's Revenues
The Federal Services Division's revenues increased for the year ended December
30, 2011 compared to the year ended December 31, 2010. The increase was
primarily due to the growth of our federal IT services business as a result of
the acquisition of Apptis, which generated $180.0 million in revenues during the
year ended December 30, 2011. Revenues also increased from our work managing
chemical demilitarization programs in the U.S., as well as from the global
threat reduction services we provide to secure and eliminate weapons of mass
destruction at locations worldwide. These increases were partially offset by a
decrease in revenues from the services we provide to modernize aging weapons
systems, develop new systems, and maintain and repair military vehicles and
aircraft. Revenues also declined from the operations and installations
management support we provide at military bases, test ranges and space flight
centers. The decline in revenues from these activities was primarily due to
delays in the award of new contracts and task orders under existing contracts,
as well as decreased U.S. military activity in the Middle East.
The Energy & Construction Division's Revenues
The Energy & Construction Division's revenues for the year ended December 30,
2011 decreased compared with the year ended December 31, 2010.
The decline in revenues was primarily due to the completion of new fossil power
generation projects, which accounted for a decrease of $124.7 million; a $53.2
million decrease at an ongoing air quality control services project; a decrease
in major component replacement projects and other related services performed at
nuclear power plants, which accounted for a decrease of $57.5 million; and a
$74.5 million decrease due to the completion of projects involving the retrofit
of coal-fired power plants with clean air technologies. We also experienced a
$119.8 million decrease on a levee construction project, which was nearing
completion in the 2011 fiscal year, and a $32.6 million decrease as a result of
lower activity at an ongoing dam construction project. In addition, revenues
declined $76.6 million due to the completion and wind down of oil and gas and
mining projects.
These declines were partially offset by revenue increases from both new and
ongoing projects for the DOE and for clients in the power and manufacturing
industries. We experienced higher revenues on a DOE contract to provide nuclear
management services for the treatment and disposal of high-level liquid waste,
which accounted for an increase of $97.7 million; a $40.2 million increase in
revenues due to increased activity on a DOE deactivation, demolition and removal
project; and a $30.0 million increase in revenues on a DOE nuclear cleanup
project. We also experienced a $217.8 million increase from new air quality
control and transmission and distribution projects; a $61.6 million increase due
to higher activity at a new nuclear power generation project; and a $23.5
million increase at an ongoing gas power generation plant. Revenues also
increased $35.3 million, as a result of higher activity on an engineering and
construction project at a manufacturing facility.
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Cost of Revenues
Infrastructure & Federal Energy &
(In millions, except percentages) Environment (1) Services (2) Construction Eliminations Total
Year ended
December 30, 2011 $ (3,537.2 ) $ (2,503.9 ) $ (3,110.1 ) $ 162.4 $ (8,988.8 )
December 31, 2010 (3,006.0 ) (2,423.1 ) (3,255.2 ) 74.8 (8,609.5 )
Increase (decrease) 531.2 80.8 (145.1 ) 87.6 379.3
Percentage increase (decrease) 17.7 % 3.3 % (4.5 %) 117.1 % 4.4 %
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
Our consolidated cost of revenues, which consists of labor, subcontractor costs,
and other expenses related to projects and the services we provided to our
clients, increased by 4.4% for the year ended December 30, 2011 compared with
the year ended December 31, 2010. Because our revenues are primarily
project-based, the factors that generally caused revenues to increase resulted
in a corresponding increase in our cost of revenues. Consolidated cost of
revenues as a percent of revenues increased from 93.8% for the year ended
December 31, 2010 to 94.2% for the year ended December 30, 2011. See "Operating
Income" for further discussion.
General and Administrative Expenses
Our consolidated G&A expenses for the year ended December 30, 2011 increased by
12.0% compared with the year ended December 31, 2010. Consolidated G&A expenses
as a percent of revenues remained the same at 0.8% for the years ended December
30, 2011 and December 31, 2010. The increase was primarily caused by a $6.6
million increase in expenses for employee benefits and the $2.8 million
reversal, in the second quarter of fiscal year 2010, of a foreign payroll tax
accrual related to a prior acquisition. These increases were partially offset by
$2.2 million of net foreign currency gains recorded in fiscal year 2011.
Acquisition-related Expenses
Our consolidated acquisition-related expenses for the years ended December 30,
2011 and December 31, 2010 were $1.0 million and $11.9 million, respectively. We
incurred these expenses in connection with our acquisitions of Apptis and Scott
Wilson, which were completed on June 1, 2011 and September 10, 2010,
respectively. These expenses included legal fees, bank fees, consultation fees,
travel expenses, and other miscellaneous direct and incremental administrative
expenses associated with the acquisitions.
Restructuring Costs
Restructuring costs for the year ended December 30, 2011 and December 31, 2010
were $5.5 million and $10.6 million, respectively, which consisted primarily of
costs for severance and associated benefits. The majority of the restructuring
costs resulted from the integration of Scott Wilson into our existing U.K. and
European business and necessary responses to reductions in market opportunities
in Europe.
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Goodwill Impairment
During the year ended December 30, 2011, we completed our goodwill impairment
review and recognized an impairment charge of $825.8 million affecting five of
our six reporting units. The decline in the fair value of our goodwill was due
to the effects of the adverse equity market conditions that caused a decrease in
market multiples and the decline in our stock price during the third quarter of
2011, which resulted in a decrease in our market capitalization. On a net,
after-tax basis, this resulted in decreases to net income and diluted EPS of
$732.2 million and $9.46, respectively, for the year ended December 30, 2011.
Equity in Income of Unconsolidated Joint Ventures
Infrastructure & Federal Energy &
(In millions, except percentages) Environment (1) Services (2) Construction Total
Year ended
December 30, 2011 $ 3.9 $ 6.2 $ 122.1 $ 132.2
December 31, 2010 2.9 5.9 61.5 70.3
Increase (decrease) 1.0 0.3 60.6 61.9
Percentage increase (decrease) 34.5 % 5.1 % 98.5 % 88.1 %
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
Our consolidated equity in income of unconsolidated joint ventures for the year
ended December 30, 2011 increased by $61.9 million or 88.1% compared with the
year ended December 31, 2010. The increase was primarily due to a $34.5 million
increase resulting from a $25.0 million charge taken in the comparable period in
fiscal 2010 as compared to a $9.5 million favorable settlement recovery on a
Southern California highway project recognized in fiscal year 2011, and a $21.6
million increase resulting from higher performance-based earnings on our nuclear
management, operations and cleanup projects in the U.K.
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Operating Income (Loss)
Federal
Infrastructure & Services Energy &
(In millions, except percentages) Environment (1) (2) Construction Corporate Total
Year ended
December 30, 2011 $ 222.0 $ (151.5 ) $ (214.4 ) $ (79.5 ) $ (223.4 )
December 31, 2010 222.9 165.6 226.9 $ (71.0 ) 544.4
Increase (decrease) (0.9 ) (317.1 ) (441.3 ) $ 8.5 (767.8 )
Percentage increase (decrease) (0.4 %) (191.5 %) (194.5 %) 12.0 % (141.0 %)
(1) The operating results of Scott Wilson have been included in our consolidated
results since the acquisition on September 10, 2010.
(2) The operating results of Apptis have been included in our consolidated
results since the acquisition on June 1, 2011.
Our consolidated operating loss for the year ended December 30, 2011 was $223.4
million, a decrease of $767.8 million or 141.0% compared with operating income
for the year ended December 31, 2010.
The operating loss for the year ended December 30, 2011 was the result of an
$825.8 million goodwill impairment charge. This charge was partially offset by
operating income resulting from the increases in revenues and equity in income
of unconsolidated joint ventures described above. See the detailed discussion in
operating income (loss) by segment below.
The Infrastructure & Environment Division's Operating Income
Operating income as a percentage of revenues was 5.9% for the year ended
December 30, 2011 compared to 6.9% for the year ended December 31, 2010. The
decrease in operating income was caused primarily by our European and Middle
Eastern operations, particularly in the U.K. Lower European revenues resulted in
decreases in the utilization of our staff and increases in systems
integration-related costs, which caused decreases in our operating income. These
decreases were partially offset by a reduction in restructuring costs of $5.1
million and a reduction in acquisition expenses of $11.8 million that we
incurred during the corresponding period last year related to our acquisition of
Scott Wilson. Overhead costs including acquisition-related expenses and
restructuring costs as a percentage of revenues decreased from 32.0% to 31.2%
for the years ended December 30, 2011 and December 31, 2010.
The Federal Services Division's Operating Income (Loss)
Operating income (loss) as a percentage of revenues was (5.6)% for the year
ended December 30, 2011, of which the goodwill impairment charge amounted to
(12.9)%, compared to 6.4% for the year ended December 31, 2010. The loss was the
result of a $348.3 million goodwill impairment charge taken during fiscal year
2011. In addition to this charge, delayed awards of new task orders under
existing contracts also contributed to the decrease in operating income. These
decreases were partially offset by increases in operating income resulting from
our acquisition of Apptis in June 2011 and the recognition of performance-based
incentive fees on various projects.
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The Energy & Construction Division's Operating Income (Loss)
Operating income (loss) as a percentage of revenues was (6.6)% for the year
ended December 30, 2011 compared to 6.6% for the year ended December 31, 2010.
The loss was the result of a $477.5 million goodwill impairment charge recorded
during fiscal year 2011. The following results partially offset the goodwill
impairment charge:
· a $34.5 million increase resulting from a $25.0 million charge taken in the
comparable period in fiscal 2010 as compared to a $9.5 million favorable
settlement recovery on a Southern California highway project recognized in
fiscal 2011;
· a $21.6 million increase resulting from higher performance-based earnings on
our nuclear management, operations and cleanup projects in the U.K.;
· a $17.4 million increase due to higher performance-based earnings on a nuclear
cleanup project;
· an $11.9 million increase resulting from higher activity on a nuclear
management services project;
· an $11.9 million increase resulting from close-out and settlement of suspended
mining projects in Jamaica; and
· a $10.7 million increase resulting from our share of cost savings on an air
quality control services project.
Other items reducing operating income were
· a $13.6 million decrease resulting from a higher loss recorded in the current
year compared to the prior year on a common sulfur project;
· a $30.6 million decrease associated with completed projects;
· a $10.0 million decrease resulting from a one-time schedule incentive earned
in the prior year on a clean air project;
· a $10.9 million decrease in major component replacement projects and other
related services performed at nuclear power plants; and
· a $10.9 million decrease resulting from a recovery in fiscal year 2010 related
to legacy workers' compensation and general liability insurance programs that
did not recur in fiscal year 2011.
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Interest Expense
Our consolidated interest expense for the year ended December 30, 2011 decreased
by $8.5 million or 27.8% compared with the year ended December 31, 2010. This
decrease was caused primarily by $7.8 million of interest expense we incurred in
fiscal year 2010 on a floating-for-fixed interest rate swap, which matured on
December 31, 2010. We did not have a similar interest rate instrument in
2011. The decrease was partially offset by a $2.9 million charge to write-off
prepaid financing fees and debt issuance costs in connection with the
extinguishment of our 2007 Credit Facility during fiscal year 2011.
Income Tax Expense
Our effective income tax rates for the years ended December 30, 2011
and December 31, 2010 were (37.4%) and 24.8%, respectively. See further
discussion in the "Income Tax Expense" in the Liquidity and Capital Resources
section below.
Noncontrolling Interests in Income of Consolidated Subsidiaries
Our noncontrolling interests in income of consolidated subsidiaries for the year
ended December 30, 2011 increased by $30.2 million or 30.7% compared with the
year ended December 31, 2010. The increase in noncontrolling interests in income
of consolidated subsidiaries was primarily due to a $12.2 million increase
resulting from higher earnings on the nuclear management, operations and cleanup
projects in the U.K., a $10.3 million increase in higher earnings on a DOE
nuclear cleanup project, a $6.2 million increase in higher earnings on a levee
construction project and a $5.7 million increase in earnings resulting from
higher activity on a DOE nuclear management project for the treatment of
high-level liquid waste. These increases were partially offset by a $5.7 million
decrease in major component replacement projects and other related services
performed at nuclear power plants.
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LIQUIDITY AND CAPITAL RESOURCES
Year Ended
December 28, December 30, December 31,
(In millions) 2012 2011 2010Cash flows from operating activities $ 430.2 $ 505.9 $ 526.4
Cash flows from investing activities (1,446.6 ) (348.1 )
(299.8 )
Cash flows from financing activities 892.3 (294.3 ) (375.1 )
Overview
Our primary sources of liquidity are collections of accounts receivable from our
clients, dividends from our unconsolidated joint ventures and borrowings related
to our Senior Notes and lines of credit. Our primary uses of cash are to fund
working capital, acquisitions, income tax payments, and capital expenditures; to
service our debt; to pay dividends; to repurchase our common stock; and to make
distributions to the noncontrolling interests in our consolidated joint
ventures.
Our cash flows from operations are primarily impacted by fluctuations in working
capital requirements, which are affected by numerous factors, including the
billing and payment terms of our contracts, the stage of completion of contracts
performed by us, the timing of payments to vendors, subcontractors, and joint
ventures, and the changes in income tax and interest payments, as well as
unforeseen events or issues that may have an impact on our working capital.
Liquidity
Cash and cash equivalents include all highly liquid investments with maturities
of 90 days or less at the date of purchase, including interest-bearing bank
deposits and money market funds. At December 28, 2012 and December 30, 2011,
restricted cash was $17.1 million and $21.0 million, respectively, which amounts
were included in "Other current assets" on our Consolidated Balance Sheets. At
December 28, 2012 and December 30, 2011, cash and cash equivalents included
$80.1 million and $91.4 million, respectively, of cash held by our consolidated
joint ventures, which is available only to fund activities and obligations
related to the joint ventures.
Accounts receivable and costs and accrued earnings in excess of billings on
contracts (also referred to as "Unbilled Accounts Receivable") represent our
primary sources of cash inflows from operations. Unbilled Accounts Receivable
represents amounts that will be billed to clients as soon as invoice support can
be assembled, reviewed and provided to our clients, or when specific contractual
billing milestones are achieved. In some cases, Unbilled Accounts Receivable may
not be billable for periods generally extending from two to six months and,
occasionally, beyond a year. As of December 28, 2012 and December 30, 2011,
$264.9 million and $185.0 million, respectively, of Unbilled Accounts Receivable
are not expected to become billable within twelve months of the balance sheet
date and, as a result, are included as a component of "Other long-term
assets." As of December 28, 2012 and December 30, 2011, significant unapproved
change orders and claims, which are included in Unbilled Accounts Receivable,
collectively represented approximately 3% and 2%, respectively, of our gross
accounts receivable and Unbilled Accounts Receivable.
Net Accounts Receivable, which is comprised of accounts receivable and the
current portion of Unbilled Accounts Receivable, net of receivable allowances,
at December 28, 2012 was $2.9 billion, an increase of $665.8 million, or 30.2%
over the balance at December 30, 2011. The increase was primarily the result of
$537.8 million from the Flint acquisition. The remaining difference relates to
normal flows within the billing cycle.
All accounts receivable and Unbilled Accounts Receivable are evaluated on a
regular basis to assess the risk of collectability and allowances are provided
as deemed appropriate. Based on the nature of our customer base, including U.S.
federal, state and local governments and large reputable companies, and
contracts, we have not historically experienced significant write-offs related
to receivables and Unbilled Accounts Receivable. The size of our allowance for
uncollectible receivables as a percentage of the combined totals of our accounts
receivable and Unbilled Accounts Receivable is indicative of our history of
successfully billing and collecting from our clients.
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As of December 28, 2012 and December 30, 2011, our receivable allowances
represented 2.37% and 1.92%, respectively, of the combined total accounts
receivable and the current portion of Unbilled Accounts Receivable. We believe
that our allowance for doubtful accounts receivable as of December 28, 2012 is
adequate. We have placed significant emphasis on collection efforts and
continually monitor our receivables allowance. However, future economic
conditions may adversely affect the ability of some of our clients to make
payments or the timeliness of their payments; consequently, it may also affect
our ability to consistently collect cash from our clients to meet our operating
needs. The other significant factors that typically affect our realization of
our accounts receivable include the billing and payment terms of our contracts,
as well as the stage of completion of our performance under the contracts. Our
operating cash flows may also be affected by changes in contract terms or the
timing of advance payments to our joint ventures, partnerships and
partially-owned limited liability companies relative to the contract collection
cycle. In addition, substantial advance payments or billings in excess of costs
also have an impact on our liquidity. Billings in excess of costs as of December
28, 2012 and December 30, 2011 were $289.1 million and $310.8 million,
respectively.
We use Days Sales Outstanding ("DSO") to monitor the average time, in days, that
it takes us to convert our accounts receivable into cash. DSO also is a useful
tool for investors to measure our liquidity and understand our average
collection period. We calculate DSO by dividing net accounts receivable, less
billings in excess of costs and accrued earnings on contracts as of the end of
the quarter by the amount of revenues recognized during the quarter, and
multiplying the result of that calculation by the number of days in that
quarter. We included the non-current amounts in our calculation of DSO and the
ratio of accounts receivable to revenues. Our DSO increased from 79 days as of
December 30, 2011 to 87 days as of December 28, 2012.
We also analyze the ratio of our accounts receivable to quarterly revenues (the
"Ratio"), which changed from 86.8% at December 30, 2011 to 95.7% at December 28,
2012. We calculate this ratio by dividing net accounts receivable less billings
in excess of costs and accrued earnings on contracts as of the end of the
quarter by the amount of revenues recognized during the quarter.
The factors that affect the Ratio also have the same effect on DSO. The
increases in the Ratio, and therefore the increases in DSO, occurred primarily
for the following reasons:
· Accruals of amounts from performance-based incentives under long-term U.S.
federal government contracts added 4.3% to our ratio of accounts receivable to
revenues for the quarter ended December 30, 2011 and 8.1% for the quarter
ended December 28, 2012. These amounts were included in Unbilled Accounts
Receivable and they become billable as provided under the terms of the
contracts to which they relate. We do not expect to bill for these incentives
until 2013 and beyond. Our Unbilled Accounts Receivable included amounts
earned under milestone payment clauses, which provided for payments to be
received beyond a year from the date service occurs. Based on our historical
experience, we generally consider the collection risk related to these amounts
to be low.
· Other, smaller increases in the ratio of accounts receivable to revenues were
caused by:
o Accruals related to reimbursement under U.S. federal government contracts for
employee "stay-and-perform" incentive payments;
o Receivables related to activity on a DOE deactivation, demolition, and removal
project; and
o Adjustments on some U.S. federal government contracts from bi-monthly to monthly billing cycles, U.S. federal government agency billing requirement
changes and invoice reviews by the DCAA, which have caused delays and
re-billings.
We believe that we have sufficient resources to fund our operating and capital
expenditure requirements, to pay income taxes, and to service our debt for at
least the next twelve months. In the ordinary course of our business, we may
experience various loss contingencies including, but not limited to, the pending
legal proceedings identified in Note 17, "Commitments and Contingencies," to
our "Consolidated Financial Statements and Supplementary Data" included under
Item 8 of this report, which may adversely affect our liquidity and capital
resources.
We have determined that the restricted net assets as defined by Rule 4-08(e)(3)
of Regulation S-X are less than 25% of our consolidated net assets.
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Acquisition
On May 14, 2012, we acquired the outstanding common shares of Flint for C$25.00
per share in cash, or C$1.24 billion (US$1.24 billion based on the exchange rate
on the date of acquisition) and paid $110.3 million of Flint's debt prior to the
closing of the transaction in exchange for a promissory note from Flint. On the
date of acquisition, Flint had outstanding Canadian notes with a face value of
C$175.0 million (US$175.0 million), in addition to $31.6 million of other
indebtedness.
On March 15, 2012, we issued two Senior Notes with an aggregate principal amount
of $1.0 billion. We used the net proceeds from the notes together with
borrowings from our 2011 Credit Facility to finance our acquisition of
Flint. See Note 10, "Indebtedness," to our "Consolidated Financial
Statements and Supplementary Data" included under Item 8 of this report, for
more information regarding the Senior Notes.
Dividend Program
On February 24, 2012, our Board of Directors approved the initiation of a
quarterly cash dividend program. Our Board of Directors has declared the
following dividends:
Total
Dividend Record Estimated Payment
Declaration Date Per Share Date Amount Date
(In millions, except per
share data)
March 16,
February 24, 2012 $ 0.20 2012 $ 15.2 April 6, 2012
June 15,
May 4, 2012 $ 0.20 2012 $ 15.4 July 6, 2012
September
August 3, 2012 $ 0.20 14, 2012 $ 15.4 October 5, 2012
December 14,
November 2, 2012 $ 0.20 2012 $ 15.4 January 4, 2013
On February 22, 2013, our Board of Directors approved the continuation of this
program and authorized a $0.21 per share quarterly dividend. Future dividends
are subject to approval by our Board of Directors or the Audit Committee of the
Board of Directors.
Operating Activities
The decrease in cash flows from operating activities for the year ended December
28, 2012, compared to the year ended December 30, 2011, was primarily due to the
timing of billings, collections and advance payments from clients on accounts
receivables, employer contribution payments to our 401(k) plan, project
incentive awards that were recognized but are not currently billable, and an
increase in interest payments and acquisition expenses, partially offset by a
decrease in income tax payments.
In 2011, we merged the Energy & Construction Division's 401(k) plan into the
company-wide 401(k) plan and the timing of employer contributions was shifted
from a bi-weekly basis to an annual basis. Prior to the merger of the plans, we
generally made the employer contributions for the Energy & Construction
Division's 401(k) plan within the same fiscal year in which the benefits were
earned. Under the merged plan, we expect to pay the contributions in the first
quarter following the end of the fiscal year. Due to the difference in timing of
contributions made, we paid $37.5 million more in contributions during the year
ended December 28, 2012 compared to the same period last year. If the plans were
not merged, the majority of these contributions would have been made in 2011.
The decrease in cash flows from operating activities for the year ended December
30, 2011, compared to the year ended December 31, 2010, was primarily due to the
timing of: dividend distributions from our unconsolidated joint ventures,
collections from clients on accounts receivable, advance project payments from
clients, project performance payments, and vendor and subcontractor payments. In
addition, we made larger income tax payments.
During the first quarter of 2013, we expect to make estimated payments of $135.2
million to pension, post-retirement, defined contribution and multiemployer
pension plans and incentive payments.
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Investing Activities
Cash flows used for investing activities of $1.4 billion during the year ended
December 28, 2012 consisted of the following significant activities:
· payments for business acquisition, net of cash acquired, of $1.3 billion; and
· capital expenditures, excluding purchases financed through capital leases and
equipment notes, of $125.4 million.
These cash flows were partially offset by:
· proceeds from disposal of property and equipment of $25.3 million, including
the residual payment received on the close out and settlement of mining
projects in Jamaica.
Cash flows used for investing activities of $348.1 million during the year ended
December 30, 2011 consisted of the following significant activities:
· payments for business acquisition, net of cash acquired, of $282.1 million;
· capital expenditures, excluding purchases financed through capital leases and
equipment notes, of $67.5 million; and
· disbursements related to advances to unconsolidated joint ventures of $19.6
million.
Cash flows used for investing activities of $299.8 million during the year ended
December 31, 2010 consisted of the following significant activities:
· payments for business acquisition, net of cash acquired, of $291.7 million;
· capital expenditures, excluding purchases financed through capital leases and
equipment notes, of $45.2 million; and
· $16.1 million in net change in restricted cash balance primarily due to
restrictions on cash balance of $28.0 million that collateralize the five-year
loan notes that we issued to shareholders of Scott Wilson as an alternative to
cash consideration, partially offset by the removal of restrictions on $11.9
million in cash held at a project.
These cash flows were partially offset by:
· maturity of short-term investments of $30.2 million; and
· consolidation of joint ventures, which resulted in a $20.7 million increase to
the cash balance at the beginning of our 2010 fiscal year.
For fiscal year 2013, we expect to incur approximately $193 million in capital
expenditures, a portion of which will be financed through capital leases or
equipment notes.
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Financing Activities
Cash flows generated from financing activities of $892.3 million during the year
ended December 28, 2012 consisted of the following significant activities:
· proceeds of our Senior Notes, net of debt discount and issuance costs, of
$990.1 million;
· net borrowings from our revolving line of credit of $78.0 million; and
· net change in overdrafts of $54.5 million.
These cash flows were partially offset by:
· distributions to noncontrolling interests of consolidated joint ventures of
$83.8 million;
· dividend payments of $44.7 million;
· repurchases of our common stock of $40.0 million; and
· payment of $30.0 million of the term loan under our 2011 Credit Facility.
Cash flows used for financing activities of $294.3 million during the year ended
December 30, 2011 consisted of the following significant activities:
· payment of all outstanding indebtedness under our 2007 Credit Facility, which
included outstanding term loans of $625.0 million and a drawn balance on our
revolving line of credit in the amount of $50.0 million;
· repurchases of our common stock of $242.8 million;
· distributions to noncontrolling interests of consolidated joint ventures of
$111.7 million; and
· net change in overdrafts of $18.0 million.
These cash flows were partially offset by:
· a term loan borrowing from our 2011 Credit Facility of $700.0 million; and
· net borrowings from our revolving line of credit of $72.9 million under our
2011 Credit Facility.
Cash flows used for financing activities of $375.1 million during the year ended
December 31, 2010 consisted of the following significant activities:
· payments of $150.0 million of the term loans under our 2007 Credit Facility;
· repurchases of our common stock of $128.3 million; and
· distributions to noncontrolling interests of $107.2 million.
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Contractual Obligations and Commitments
The following table contains information about our contractual obligations and
commercial commitments as of December 28, 2012:
Contractual
Obligations Payments and Commitments Due by Period
(Debt payments
include principal
only) Less Than After
(In millions) Total 1 Year 1-3 Years 4-5 Years 5 Years Other
As of December 28,
2012:
2011 Credit Facility
(1) $ 670.0 $ 18.1 $ 126.9 $ 525.0 $ - $ -
3.85% Senior Notes
(2) 400.0 - - 400.0 - -
5.00% Senior Notes
(2) 600.0 - - - 600.0 -
7.50% Canadian Notes
(2) 175.8 - - - 175.8 -
Revolving line of
credit 100.5 - - 100.5 - -
Capital lease
obligations (1) 59.2 28.5 20.0 10.7 - -
Notes payable,
foreign credit lines
and other
indebtedness 35.5 26.3 7.0 2.2 - -
Total debt 2,041.0 72.9 153.9 1,038.4 775.8 -
Operating lease
obligations (3) 801.0 224.9 267.7 145.5 162.9 -
Pension and other
retirement
plans funding
requirements (4) 631.5 218.8 97.4 85.7 229.6 -
Interest (5) 502.0 74.9 147.6 124.7 154.8 -
Dividends payable
(6) 16.7 15.6 0.9 0.2 - -
Purchase obligations
(7) 26.1 15.5 10.4 0.2 - -
Asset retirement
obligations (8) 13.8 1.9 2.6 3.9 5.4 -
Other contractual
obligations (9) 78.0 65.5 - - - 12.5
Total contractual
obligations $ 4,110.1 $ 690.0 $ 680.5 $ 1,398.6 $ 1,328.5 $ 12.5
(1) Amounts shown exclude unamortized debt issuance costs of $3.7 million for
our 2011 Credit Facility. For capital lease obligations, amounts shown
exclude interest of $3.1 million. For information regarding events that
could accelerate the due dates of these payments, see "2011 Credit
Facility" section below.
(2) Amounts shown exclude unamortized discount for the 3.85% and 5.00% Senior
Notes of $1.0 million, and unamortized premium for the 7.50% Canadian Notes
of $28.0 million. For information regarding events that could accelerate
these payments, see "Senior Notes and Canadian Notes" section below.
(3) Operating leases are predominantly real estate leases.
(4) Amounts consist of estimated pension and other retirement plan funding
requirements, to the extent that we were able to develop reasonable
estimates, for various defined benefit, post-retirement, defined
contribution, multiemployer, and other retirement plans. Estimates do not include potential multiemployer plan termination or withdrawal amounts since
we are unable to estimate the amount of contributions that could be
required.
(5) Interest for the next five years, which excludes non-cash interest, is determined based on the current outstanding balance of our debt and payment
schedule at the estimated interest rate.
(6) On February 24, 2012, our Board of Directors approved the initiation of a
regular quarterly cash dividend program. Dividends for unvested restricted
stock awards and units will be paid upon vesting. Future dividends are
subject to approval by our Board of Directors or, pursuant to delegated
authority, the Audit Committee of the Board.
(7) Purchase obligations consist primarily of software maintenance contracts.
(8) Asset retirement obligations represent the estimated costs of removing and
restoring our leased properties to the original condition pursuant to our
real estate lease agreements.
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(9) Other contractual obligations include accrued discretionary and
non-discretionary bonuses, net liabilities for anticipated settlements and
interest on our tax liabilities, accrued benefits for our executives pursuant to their employment agreements, and our contractual obligations to
joint ventures. Generally, it is not practicable to forecast or estimate the
payment dates for the above-mentioned tax liabilities. Therefore, we
included the estimated liabilities under "Other" above.
Off-balance Sheet Arrangements
In the ordinary course of business, we may use off-balance sheet arrangements if
we believe that such an arrangement would be an efficient way to lower our cost
of capital or help us manage the overall risks of our business operations. We do
not believe that such arrangements have had a material adverse effect on our
financial position or our results of operations.
The following are our off-balance sheet arrangements:
· Letters of credit and bank guarantees are used primarily to support project
performance, insurance programs, bonding arrangements and real estate
leases. We are required to reimburse the issuers of letters of credit and bank
guarantees for any payments they make under the outstanding letters of credit
or bank guarantees. Our credit facilities and banking arrangements cover the
issuance of our standby letters of credit and bank guarantees that are
critical for our normal operations. If we default on these credit facilities
and banking arrangements, we would be unable to issue or renew standby letters
of credit and bank guarantees, which would impair our ability to maintain
normal operations. As of December 28, 2012, we had $132.0 million in standby
letters of credit outstanding under our 2011 Credit Facility and $36.3 million
in bank guarantees outstanding under foreign credit facilities and other
banking arrangements with remaining availability of approximately $24 million.
· We have agreed to indemnify one of our joint venture partners up to $25.0
million for any potential losses, damages, and liabilities associated with
lawsuits in relation to general and administrative services we provide to the
joint venture. Currently, we have not been advised of any indemnified claims
under this guarantee.
· We have guaranteed a letter of credit issued on behalf of one of our
consolidated joint ventures. The total amount of the letter of credit was $0.9
million as of December 28, 2012.
· From time to time, we provide guarantees and indemnifications related to our
services or work. If our services under a guaranteed or indemnified project
are later determined to have resulted in a material defect or other material
deficiency, then we may be responsible for monetary damages or other legal
remedies. When sufficient information about claims on guaranteed or
indemnified projects is available and monetary damages or other costs or
losses are determined to be probable, we recognize such guarantee losses.
· In the ordinary course of business, we enter into various agreements providing
performance assurances and guarantees to clients on behalf of certain
unconsolidated subsidiaries, joint ventures, and other jointly executed
contracts. We enter into these agreements primarily to support the project
execution commitments of these entities. The potential payment amount of an
outstanding performance guarantee is typically the remaining cost of work to
be performed by or on behalf of third parties under engineering and
construction contracts. However, we are not able to estimate other amounts
that may be required to be paid in excess of estimated costs to complete
contracts and, accordingly, the total potential payment amount under our
outstanding performance guarantees cannot be estimated. For cost-plus
contracts, amounts that may become payable pursuant to guarantee provisions
are normally recoverable from the client for work performed under the
contract. For lump sum or fixed-price contracts, this amount is the cost to
complete the contracted work less amounts remaining to be billed to the client
under the contract. Remaining billable amounts could be greater or less than
the cost to complete. In those cases where costs exceed the remaining amounts
payable under the contract, we may have recourse to third parties, such as
owners, co-venturers, subcontractors or vendors, for claims.
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· In the ordinary course of business, our clients may request that we obtain
surety bonds in connection with contract performance obligations that are not
required to be recorded in our Consolidated Balance Sheets. We are obligated
to reimburse the issuer of our surety bonds for any payments made
thereunder. Each of our commitments under performance bonds generally ends
concurrently with the expiration of our related contractual obligation.
2011 Credit Facility
As of December 28, 2012 and December 30, 2011, the outstanding balance of the
term loan under our 2011 Credit Facility was $670.0 million and $700.0 million,
respectively. As of December 28, 2012 and December 30, 2011, the interest rates
applicable to the term loan were 1.71% and 1.80%, respectively. Loans
outstanding under our 2011 Credit Facility bear interest, at our option, at the
base rate or at the London Interbank Offered Rate ("LIBOR") plus, in each case,
an applicable per annum margin. The applicable margin is determined based on the
better of our debt ratings or our leverage ratio in accordance with a pricing
grid. The interest rate at which we normally borrow is LIBOR plus 150 basis
points.
Our 2011 Credit Facility will mature on October 19, 2016. We have an option to
prepay the term loans at any time without penalty.
Under our 2011 Credit Facility, we are subject to financial covenants and other
customary non-financial covenants. Our financial covenants include a maximum
consolidated leverage ratio, which is calculated by dividing total debt by
earnings before interest, taxes, depreciation and amortization ("EBITDA"), as
defined below, and a minimum interest coverage ratio, which is calculated by
dividing cash interest expense into EBITDA. Both calculations are based on the
financial data of our most recent four fiscal quarters.
For purposes of our 2011 Credit Facility, consolidated EBITDA is defined as
consolidated net income attributable to URS plus interest, depreciation and
amortization expense, income tax expense, and other non-cash items (including
impairments of goodwill or intangible assets). Consolidated EBITDA shall include
pro-forma components of EBITDA attributable to any permitted acquisition
consummated during the period of calculation.
Our 2011 Credit Facility contains restrictions, some of which apply only above
specific thresholds, regarding indebtedness, liens, investments and
acquisitions, contingent obligations, dividend payments, stock repurchases,
asset sales, fundamental business changes, transactions with affiliates, and
changes in fiscal year.
Our 2011 Credit Facility identifies various events of default and provides for
acceleration of the obligations and exercise of other enforcement remedies upon
default. Events of default include our failure to make payments under the credit
facility; cross-defaults; a breach of financial, affirmative and negative
covenants; a breach of representations and warranties; bankruptcy and other
insolvency events; the existence of unsatisfied judgments and attachments;
dissolution; other events relating to the Employee Retirement Income Security
Act; a change in control and invalidity of loan documents.
Our 2011 Credit Facility is guaranteed by all of our existing and future
domestic subsidiaries that, on an individual basis, represent more than 10% of
either our consolidated domestic assets or consolidated domestic revenues. If
necessary, additional domestic subsidiaries will be included so that assets and
revenues of subsidiary guarantors are equal at all times to at least 80% of our
consolidated domestic assets and consolidated domestic revenues of our available
domestic subsidiaries.
We may use any future borrowings from our 2011 Credit Facility along with
operating cash flows for general corporate purposes, including funding working
capital, making capital expenditures, funding acquisitions, paying dividends and
repurchasing our common stock.
We were in compliance with the covenants of our 2011 Credit Facility as of
December 28, 2012.
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Senior Notes and Canadian Notes
On March 15, 2012, we issued in a private placement $400.0 million aggregate
principal amount of 3.85% Senior Notes due on April 1, 2017 and $600.0 million
aggregate principal amount of 5.00% Senior Notes due on April 1, 2022. As of
December 28, 2012, the outstanding balance of the Senior Notes was $999.0
million, net of $1.0 million of discount.
Interest on the Senior Notes is payable semi-annually on April 1 and October 1
of each year beginning on October 1, 2012. The net proceeds of the Senior Notes
were used to fund the acquisition of Flint. We may redeem the Senior Notes, in
whole or in part, at any time and from time to time, at a price equal to 100% of
the principal amount, plus a "make-whole" premium and accrued and unpaid
interest as described in the indenture. In addition, we may redeem all or a
portion of the 5.00% Senior Notes at any time on or after the date that is three
months prior to the maturity date of those 5.00% Senior Notes, at a redemption
price equal to 100% of the principal amount of the 5.00% Senior Notes to be
redeemed. We may also, at our option, redeem the Senior Notes, in whole, at 100%
of the principal amount and accrued and unpaid interest upon the occurrence of
certain events that result in an obligation to pay additional amounts as a
result of certain specified changes in tax law described in the
indenture. Additionally, if a change of control triggering event occurs, as
defined by the terms of the indenture, we will be required to offer to purchase
the Senior Notes at a purchase price equal to 101% of the principal amount, plus
accrued and unpaid interest, if any, to the date of the purchase. We are
generally not limited under the indenture governing the Senior Notes in our
ability to incur additional indebtedness provided we are in compliance with
certain restrictive covenants, including restrictions on liens and restrictions
on sale and leaseback transactions, and merger or sale of substantially all of
our property and assets.
The Senior Notes are our general unsecured senior obligations and rank equally
with our other existing and future unsecured senior indebtedness. The Senior
Notes are fully and unconditionally guaranteed (the "Guarantees") by each of our
current and future domestic subsidiaries that are guarantors under our 2011
Credit Facility or that are wholly owned domestic obligors or wholly owned
domestic guarantors, individually or collectively, under any future indebtedness
of our subsidiaries in excess of $100.0 million (the "Guarantors"). The
Guarantees are the Guarantors' unsecured senior obligations and rank equally
with the Guarantors' other existing and future unsecured senior indebtedness.
In connection with the sale of the Senior Notes, we entered into a registration
rights agreement under which we agreed to file a registration statement with the
SEC offering to exchange any privately placed Senior Notes with substantially
similar notes, except that the newly exchanged notes will be unrestricted and
freely tradable securities. We have agreed to use commercially reasonable
efforts to cause the registration statement to be declared effective by the SEC
and complete the exchange offer no later than March 15, 2013. We do not expect
to complete our exchange offer until after March 15, 2013. After that date, we
will be required to pay additional interest up to a maximum of 50 basis points
to the holders of the Senior Notes until the exchange offer is completed.
On May 14, 2012, we guaranteed the Canadian Notes with an outstanding face value
of C$175.0 million (US$175.0 million). The Canadian Notes mature on June 15,
2019 and bear interest at 7.5% per year, payable in equal installments
semi-annually in arrears on June 15 and December 15 of each year. As of December
28, 2012, the outstanding balance of the Canadian Notes was $203.8 million,
including $28.0 million of premium.
The Canadian Notes are Flint's direct senior unsecured obligations and rank pari
passu, subject to statutory preferred exceptions, with URS' guarantee of that
debt. Prior to June 15, 2014, we may redeem up to 35.0% of the principal amount
of the outstanding Canadian Notes with the net cash proceeds of one or more
qualified equity offerings at a redemption price equal to 107.5% of the
principal amount of the Canadian Notes, provided that at least 65.0% of the
aggregate principal amount of the Canadian Notes remain outstanding. We may also
redeem the Canadian Notes prior to June 15, 2015 at a redemption price equal to
100.0% of the principal amount of the Canadian Notes plus an applicable
premium. We may also redeem the Canadian Notes on or after June 15, 2015 at a
redemption price equal to 103.8% of the principal amount if redeemed in the
twelve-month period beginning June 15, 2015; at a redemption price equal to
101.9% of the principal amount if redeemed in the twelve-month period beginning
June 15, 2016 and at a redemption price equal to 100.0% of the principal amount
if redeemed in the period beginning June 15, 2017 before maturity.
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Upon the occurrence of a change in control, Canadian Notes holders have a right
to require that their Notes be redeemed at a cash price equal to 101.0% of the
principal amount of the Canadian Notes. Our acquisition of Flint constituted a
change in control under the Canadian Note indenture and, as a result, the
holders of the Canadian Notes had the right to require that their Notes be
redeemed. The Canadian Notes also contain covenants limiting our and some of our
subsidiaries' ability to create liens and restricting them from amalgamating,
consolidating or merging with or into or winding up or dissolving into another
person or selling, leasing, transferring, conveying or otherwise disposing of or
assigning all or substantially all of their assets. The Canadian Notes also
contain covenants, which are suspended as long as the Canadian Notes have
investment grade ratings, that would restrict us and some of our subsidiaries
from making restricted payments, incurring indebtedness, selling assets and
entering into transactions with affiliates. As of December 28, 2012, the
Canadian Notes carried investment grade ratings.
We were in compliance with the covenants of our Senior Notes and Canadian Notes
as of December 28, 2012.
Revolving Line of Credit
Our revolving line of credit is used to fund daily operating cash needs and to
support our standby letters of credit. In the ordinary course of business, the
use of our revolving line of credit is a function of collection and disbursement
activities. Our daily cash needs generally follow a predictable pattern that
parallels our payroll cycles, which dictate, as necessary, our short-term
borrowing requirements.
As of December 28, 2012 and December 30, 2011, we had outstanding balances of
$100.5 million and $23.0 million, respectively, on our revolving line of
credit. As of December 28, 2012, we had issued $132.0 million of letters of
credit, leaving $767.5 million available under our revolving credit facility.
Year Ended
December 28, December 30, December 31,
(In millions, except percentages) 2012 2011 2010
Effective average interest rates paid on the
revolving line of credit 1.9 % 1.3 % 3.0 %
Average daily revolving line of credit balances $ 139.5 $
25.9 $ 0.3
Maximum amounts outstanding at any point
during the year $ 420.0 $ 104.6 $ 12.1
Other Indebtedness
Notes payable, five-year loan notes, and foreign credit lines. As of December
28, 2012 and December 30, 2011, we had outstanding amounts of $35.5 million and
$53.1 million, respectively, in notes payable, five-year loan notes, and foreign
lines of credit. The weighted-average interest rates of the notes were
approximately 4.68% and 4.04% as of December 28, 2012 and December 30, 2011,
respectively. Notes payable primarily include notes used to finance the purchase
of office equipment, computer equipment and furniture.
As of December 28, 2012 and December 30, 2011, we maintained several foreign
credit lines with aggregate borrowing capacity of $50.8 million and $33.7
million, respectively, and had remaining borrowing capacity of $47.7 million and
$23.2 million, respectively.
Capital Leases. As of December 28, 2012 and December 30, 2011, we had
obligations under our capital leases of approximately $59.2 million and $27.3
million, respectively, consisting primarily of leases for office equipment,
computer equipment, furniture, vehicles and automotive equipment, and
construction equipment.
Operating Leases. As of December 28, 2012 and December 30, 2011, we had
obligations under our operating leases of approximately $801.0 million and
$650.2 million, respectively, consisting primarily of real estate leases.
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Income Tax Expense
As of December 28, 2012, our federal net operating loss ("NOL") carryovers were
approximately $15.9 million. These federal NOL carryovers expire in years 2021
through 2025. In addition to the federal NOL carryovers, there are also state
income tax NOL carryovers in various taxing jurisdictions of approximately
$297.0 million. These state NOL carryovers expire in years 2013 through
2031. There are also foreign NOL carryovers in various jurisdictions of
approximately $544.4 million. The majority of the foreign NOL carryovers have no
expiration date. At December 28, 2012, the federal, state and foreign NOL
carryovers resulted in a deferred tax asset of $132.2 million with a valuation
allowance of $106.0 million established against this deferred tax asset. None of
the remaining net deferred tax assets related to NOL carryovers is individually
material and management believes that it is more likely than not they will be
realized. Full recovery of our NOL carryovers will require that the appropriate
legal entity generate taxable income in the future at least equal to the amount
of the NOL carryovers within the applicable taxing jurisdiction.
As of December 28, 2012 and December 30, 2011, we have remaining tax-deductible
goodwill of $223.2 million and $316.5 million, respectively, resulting from
acquisitions. The amortization of this goodwill is deductible over various
periods ranging up to 14 years. The tax deduction for goodwill for 2013 is
expected to be approximately $85.5 million and is expected to be substantially
lower beginning in 2015.
Valuation allowances for deferred tax assets are established when necessary to
reduce deferred income tax assets to the amount expected to be realized. Based
on expected future operating results, we believe that realization of deferred
tax assets in excess of our valuation allowances is more likely than not.
We have indefinitely reinvested $499.1 million of undistributed earnings of our
foreign operations outside of our U.S. tax jurisdiction as of December 28,
2012. No deferred tax liability has been recognized for the remittance of such
earnings to the U.S. since it is our intention to utilize these earnings in our
foreign operations. The determination of the amount of deferred taxes on these
earnings is not practicable since the computation would depend on a number of
factors that cannot be known unless a decision to repatriate the earnings is
made.
The effective income tax rates for the years ended December 28, 2012, December
30, 2011, and December 31, 2010 are as follows:
Year Ended Effective Income Tax Rates
December 28, 2012 30.8 %
December 30, 2011 (37.4) %
December 31, 2010 24.8 %
The 37.4% negative effective tax rate for the year ended December 30, 2011
differs from the statutory rate of 35% primarily due to the goodwill impairment
charge taken during the year, a substantial portion of which is not deductible
for tax purposes.
The effective income tax rate for the year ended December 31, 2010 is less than
the statutory rate of 35% primarily due to a change in our indefinite
reinvestment assertion during the year. During our fiscal year 2010, we
determined that our plans to expand our international presence would require
that we indefinitely reinvest the earnings of all of our foreign subsidiaries
offshore, which resulted in the reversal of the net U.S. deferred tax liability
on the undistributed earnings of all foreign subsidiaries. This benefit
increased net income attributable to URS by $42.1 million.
On January 2, 2013, the American Taxpayer Relief Act of 2012 ("Act") was
enacted. The Act provided tax relief for businesses by reinstating certain tax
benefits and credits retroactively to January 1, 2012. There are several
provisions of the Act that impact us, but not significantly. Income tax
accounting rules require tax law changes to be recognized in the period of
enactment; as such, the associated tax benefits of the Act will be recognized in
our provision for income taxes in the first quarter of 2013.
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No cash distributions were made from our foreign subsidiaries to their U.S.
shareholders in fiscal years 2010, 2011 or 2012.
As of December 28, 2012, December 30, 2011 and December 31, 2010, we had $15.4
million, $16.7 million and $21.5 million of unrecognized tax benefits,
respectively. Included in the balance of unrecognized tax benefits at the end of
fiscal year 2012 were $11.4 million of tax benefits, which, if recognized, would
affect our effective tax rate. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
Year Ended
December 28, December 30, December 31,
(In millions) 2012 2011 2010Unrecognized tax benefits beginning balance $ 16.7 $
21.5 $ 25.2
Gross increase - tax positions in prior years 1.2 2.7 1.1
Gross decrease - tax positions in prior years (1.2 ) (3.6 ) (1.5 )
Gross increase - current period tax positions 1.2 - 1.4
Settlements (0.2 ) (0.2 ) (0.2 )
Lapse of statute of limitations (2.4 ) (3.7 ) (5.3 )
Unrecognized tax benefits acquired in current year 0.1 - 0.8
Unrecognized tax benefits ending balance $ 15.4 $ 16.7 $ 21.5
We recognize accrued interest related to unrecognized tax benefits in interest
expense and penalties as a component of tax expense. During the years ended
December 28, 2012, December 30, 2011 and December 31, 2010, we recognized $(1.4)
million, $(1.4) million and $1.5 million, respectively, in interest and
penalties. We have accrued approximately $5.3 million, $6.7 million and $8.1
million in interest and penalties as of December 28, 2012, December 30, 2011 and
December 31, 2010, respectively. With a few exceptions, in jurisdictions where
our tax liability is immaterial, we are no longer subject to U.S. federal,
state, local or foreign examinations by tax authorities for years before 2008.
It is reasonably possible that unrecognized tax benefits will decrease up to
$2.7 million within the next twelve months as a result of the settlement of tax
audits. The timing and amounts of these audit settlements are uncertain, but we
do not expect any of these settlements to have a significant impact on our
financial position or results of operations.
Other Comprehensive Income (Loss)
Our other comprehensive income (loss), net of tax for the year ended December
28, 2012 was comprised of pension and post-retirement adjustments, and foreign
currency translation adjustments. The 2012 pension and post-retirement
adjustment of $26.6 million, net of tax, was caused primarily by a decrease in
the discount rate employed in the actuarial assumptions. The 2012 foreign
currency translation gain of $24.8 million resulted from the strengthening of
the U.S. dollar against foreign currencies. See Note 18, "Other Comprehensive
Income (Loss) and Accumulated Other Comprehensive Income (Loss)" to our
"Consolidated Financial Statements and Supplementary Data" included under Item
8 of this report for more disclosure about our other comprehensive loss.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions in the application of certain accounting policies that affect
amounts reported in our consolidated financial statements and related footnotes
included in Item 8 of this report. In preparing these financial statements, we
have made our best estimates and judgments of certain amounts, after considering
materiality. Application of these accounting policies, however, involves the
exercise of judgment and the use of assumptions as to future
uncertainties. Consequently, actual results could differ from our estimates, and
these differences could be material.
The following are the accounting policies that we believe are most critical to
an investor's understanding of our financial results and condition and that
require complex judgments by management. There were no material changes to these
critical accounting policies during the year ended December 28, 2012.
Consolidation of Variable Interest Entities
We participate in joint ventures, which include partnerships and partially-owned
limited liability companies to bid, negotiate and complete specific projects. We
are required to consolidate these joint ventures if we hold the majority voting
interest or if we meet the criteria under the variable interest model as
described below.
A variable interest entity ("VIE") is an entity with one or more of the
following characteristics (a) the total equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
financial support; (b) as a group, the holders of the equity investment at risk
lack the ability to make certain decisions, the obligation to absorb expected
losses or the right to receive expected residual returns; or (c) the equity
investors have voting rights that are not proportional to their economic
interests.
Our VIEs may be funded through contributions, loans and/or advances from the
joint venture partners or by advances and/or letters of credit provided by our
clients. Our VIEs may be directly governed, managed, operated and administered
by the joint venture partners. Others have no employees and, although these
entities own and hold the contracts with the clients, the services required by
the contracts are typically performed by the joint venture partners or by other
subcontractors.
If we are determined to be the primary beneficiary of the VIE, we are required
to consolidate it. We are considered to be the primary beneficiary if we have
the power to direct the activities that most significantly impact the VIE's
economic performance and the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the VIE. In
determining whether we are the primary beneficiary, we take into consideration
the following:
· Identifying the significant activities and the parties that would perform
them;
· Reviewing the governing board composition and participation ratio;
· Determining the equity, profit and loss ratio;
· Determining the management-sharing ratio;
· Reviewing employment terms, including which joint venture partner provides the
project manager; and
· Reviewing the funding and operating agreements.
Examples of our significant activities include the following:
· Engineering services;
· Procurement services;
· Construction;
· Construction management; and
· Operations and maintenance services.
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Based on the above, if we determine that the power to direct the significant
activities is shared by two or more joint venture parties, then there is no
primary beneficiary and no party consolidates the VIE. In making the
shared-power determination, we analyze the key contractual terms, governance,
related party and de facto agency as they are defined in the accounting
standard, and other arrangements to determine if the shared power exists.
We determined that we were the primary beneficiary of, and therefore, must
consolidate 11 joint ventures in which we did not have a majority voting
interest as of and for the year ended December 28, 2012.
Total revenues of these joint ventures for the year ended December 28, 2012 were
less than 10% of our total consolidated revenues. The net impact of these joint
ventures on segment revenues for the year ended December 28, 2012 was less than
15% of total segment revenues for each segment. There was no impact on our debt
as a result of consolidating these joint ventures.
We perform a quarterly re-assessment of our status as primary beneficiary. This
evaluation may result in a newly consolidated joint venture or in
deconsolidating a previously consolidated joint venture. See Note 6, "Joint
Ventures" to our "Consolidated Financial Statements and Supplementary Data"
included under Item 8 of this report for further information on our VIEs.
Revenue Recognition
We recognize revenues from engineering, construction and construction-related
contracts using the percentage-of-completion method as project progress
occurs. Service-related contracts, including operations and maintenance services
and a variety of technical assistance services, are accounted for using the
proportionate performance method as project progress occurs.
Percentage of Completion. Under the percentage-of-completion method, revenue is
recognized as contract performance progresses. We estimate the progress towards
completion to determine the amount of revenue and profit to recognize. We
generally utilize a cost-to-cost approach in applying the
percentage-of-completion method, where revenue is earned in proportion to total
costs incurred, divided by total costs expected to be incurred. Costs are
generally determined from actual hours of labor effort expended at per-hour
labor rates calculated using a labor dollar multiplier that includes direct
labor costs and allocable overhead costs. Direct non-labor costs are charged as
incurred plus any mark-up permitted under the contract.
Under the percentage-of-completion method, recognition of profit is dependent
upon the accuracy of a variety of estimates, including engineering progress,
materials quantities, and achievement of milestones, incentives, penalty
provisions, labor productivity, cost estimates and others. Such estimates are
based on various professional judgments we make with respect to those factors
and are subject to change as the project proceeds and new information becomes
available.
Proportional Performance. Our service contracts are accounted for using the
proportional performance method, under which revenue is recognized in proportion
to the number of service activities performed, in proportion to the direct costs
of performing the service activities, or evenly across the period of performance
depending upon the nature of the services provided.
Revenues from all contracts may vary based on the actual number of labor hours
worked and other actual contract costs incurred. If actual labor hours and other
contract costs exceed the original estimate agreed to by our client, we
generally obtain a change order, contract modification or successfully prevail
in a claim in order to receive and recognize additional revenues relating to the
additional costs (see "Change Orders and Claims" below).
If estimated total costs on any contract indicate a loss, we charge the entire
estimated loss to operations in the period the loss becomes known. The
cumulative effect of revisions to revenue, estimated costs to complete
contracts, including penalties, incentive awards, change orders, claims,
anticipated losses, and others are recorded in the accounting period in which
the events indicating a loss or change in estimates are known and the loss can
be reasonably estimated. Such revisions could occur at any time and the effects
may be material.
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We have a history of making reasonably dependable estimates of the extent of
progress towards completion, contract revenue and contract completion costs on
our long-term engineering and construction contracts. However, due to
uncertainties inherent in the estimation process, it is possible that actual
completion costs may vary from estimates.
Change Orders and Claims. Change orders and/or claims occur when changes are
experienced once contract performance is underway, and may arise under any of
the contract types described below.
Change orders are modifications of an original contract that effectively change
the existing provisions of the contract. Change orders may include changes in
specifications or designs, manner of performance, facilities, equipment,
materials, sites and period of completion of the work. Either we or our clients
may initiate change orders. Client agreement as to the terms of change orders
is, in many cases, reached prior to work commencing; however, sometimes
circumstances require that work progress without obtaining client
agreement. Costs related to change orders are recognized as incurred. Revenues
attributable to change orders that are unapproved as to price or scope are
recognized to the extent that costs have been incurred if the amounts can be
reliably estimated and their realization is probable. Revenues in excess of the
costs attributable to change orders that are unapproved as to price or scope are
recognized only when realization is assured beyond a reasonable doubt. Change
orders that are unapproved as to both price and scope are evaluated as claims.
Claims are amounts in excess of agreed contract prices that we seek to collect
from our clients or others for customer-caused delays, errors in specifications
and designs, contract terminations, change orders that are either in dispute or
are unapproved as to both scope and price, or other causes of unanticipated
additional contract costs. Claims are included in total estimated contract
revenues when the contract or other evidence provides a legal basis for the
claim, when the additional costs are caused by circumstances that were
unforeseen at the contract date and are not the result of the deficiencies in
the contract performance, when the costs associated with the claim are
identifiable, and when the evidence supporting the claim is objective and
verifiable. Revenue on claims is recognized only to the extent that contract
costs related to the claims have been incurred and when it is probable that the
claim will result in a bona fide addition to contract value which can be
reliably estimated. No profit is recognized on claims until final settlement
occurs. As a result, costs may be recognized in one period while revenues may be
recognized when client agreement is obtained or claims resolution occurs, which
can be in subsequent periods.
"At-risk" and "Agency" Contracts. The amount of revenues we recognize also
depends on whether the contract or project represents an at-risk or an agency
relationship between the client and us. Determination of the relationship is
based on characteristics of the contract or the relationship with the
client. For at-risk relationships where we act as the principal to the
transaction, the revenue and the costs of materials, services, payroll,
benefits, and other costs are recognized at gross amounts. For agency
relationships, where we act as an agent for our client, only the fee revenue is
recognized, meaning that direct project costs and the related reimbursement from
the client are netted. Revenues from agency contracts and collaborative
arrangements were not a material part of revenues for any period presented.
In classifying contracts or projects as either at-risk or agency, we consider
the following primary characteristics to be indicative of at-risk
relationships: (i) we acquire the related goods and services using our
procurement resources, (ii) we assume the risk of loss under the contract and
(iii) we are responsible for insurance coverage, employee-related liabilities
and the performance of subcontractors.
We consider the following primary characteristics to be indicative of agency
relationships: (i) our client owns the work facilities utilized under the
contract, (ii) we act as a procurement agent for goods and services acquired
with client funds, (iii) our client is invoiced for our fees, (iv) our client is
exposed to the risk of loss and maintains insurance coverage, and (v) our client
is responsible for employee-related benefit plan liabilities and any remaining
liabilities at the end of the contract.
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Contract Types
Our contract types include cost-plus, target-price, fixed-price, and
time-and-materials contracts. Revenue recognition is determined based on the
nature of the service provided, irrespective of the contract type, with
engineering, construction and construction-related contracts accounted for under
the percentage-of-completion method and service-related contracts accounted for
under the proportional performance method.
Cost-Plus Contracts. We enter into four major types of cost-plus
contracts. Revenue for the majority of our cost-plus contracts is recognized
using the percentage-of-completion method:
Cost-Plus Fixed Fee. Under cost-plus fixed fee contracts, we charge our clients
for our costs, including both direct and indirect costs, plus a fixed negotiated
fee.
Cost-Plus Fixed Rate. Under our cost-plus fixed rate contracts, we charge
clients for our direct costs plus negotiated rates based on our indirect costs.
Cost-Plus Award Fee. Some cost-plus contracts provide for award fees or
penalties based on performance criteria in lieu of a fixed fee or fixed
rate. Other contracts include a base fee component plus a performance-based
award fee. In addition, we may share award fees with subcontractors and/or our
employees. We accrue fee sharing on a monthly basis as related award fee revenue
is earned. We take into consideration the award fee or penalty on contracts when
estimating revenues and profit rates, and we record revenues related to the
award fees when there is sufficient information to assess anticipated contract
performance. On contracts that represent higher than normal risk or technical
difficulty, we defer all award fees until an award fee letter is received. Once
an award fee letter is received, the estimated or accrued fees are adjusted to
the actual award amount.
Cost-Plus Incentive Fee. Some of our cost-plus contracts provide for incentive
fees based on performance against contractual milestones. The amount of the
incentive fees vary, depending on whether we achieve above-, at- or below-target
results. We recognize incentive fees revenues as milestones are achieved,
assuming that we will achieve at-target results, unless our estimates indicate
our cost at completion to be significantly above or below target.
Target-Price Contracts. Under our target-price contracts, project costs are
reimbursable. Our fee is established against a target budget that is subject to
changes in project circumstances and scope. Should the project costs exceed the
target budget within the agreed-upon scope, we generally degrade a portion of
our fee or profit to mitigate the excess cost; however, the customer reimburses
us for the costs that we incur if costs continue to escalate beyond our expected
fee. If the project costs are less than the target budget, we generally recover
a portion of the project cost savings as additional fee or profit. We recognize
revenues on target-price contracts using the percentage-of-completion method.
Fixed-Price Contracts. We enter into two major types of fixed-price contracts:
Firm Fixed-Price ("FFP"). Under FFP contracts, our clients pay us an agreed
fixed-amount negotiated in advance for a specified scope of work. We generally
recognize revenues on FFP contracts using the percentage-of-completion
method. If the nature or circumstances of the contract prevent us from preparing
a reliable estimate at completion, we will delay profit recognition until
adequate information about the contract's progress becomes available. Prior to
completion, our recognized profit margins on any FFP contract depend on the
accuracy of our estimates and will increase to the extent that our current
estimates of aggregate actual costs are below amounts previously
estimated. Conversely, if our current estimated costs exceed prior estimates,
our profit margins will decrease and we may realize a loss on a project.
Fixed-Price Per Unit ("FPPU"). Under our FPPU contracts, clients pay us a set
fee for each service or production transaction that we complete. We recognize
revenues under FPPU contracts as we complete the related service or production
transactions for our clients generally using the proportional performance
method. Some of our FPPU contracts are subject to maximum contract values.
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Time-and-Materials Contracts. Under our time-and-materials contracts, we
negotiate hourly billing rates and charge our clients based on the actual time
that we spend on a project. In addition, clients reimburse us for our actual
out-of-pocket costs of materials and other direct incidental expenditures that
we incur in connection with our performance under the contract. The majority of
our time-and-material contracts are subject to maximum contract values and,
accordingly, revenues under these contracts are generally recognized under the
percentage-of-completion method. However, time and materials contracts that are
service-related contracts are accounted for utilizing the proportional
performance method. Revenues on contracts that are not subject to maximum
contract values are recognized based on the actual number of hours we spend on
the projects plus any actual out-of-pocket costs of materials and other direct
incidental expenditures that we incur on the projects. Our time-and-materials
contracts also generally include annual billing rate adjustment provisions.
Goodwill and Intangible Assets Impairment Review
Goodwill may be impaired if the estimated fair value of one or more of our
reporting units' goodwill is less than the carrying value of the unit's
goodwill. Because we have grown through acquisitions, goodwill and other net
intangible assets were $3.9 billion as of December 28, 2012. We perform an
analysis on our goodwill balances to test for impairment on an annual basis and
whenever events occur or circumstances change that indicate impairment could
exist. There are several instances that may cause us to further test our
goodwill for impairment between the annual testing periods including: (i)
continued deterioration of market and economic conditions that may adversely
impact our ability to meet our projected results; (ii) declines in our stock
price caused by continued volatility in the financial markets that may result in
increases in our weighted-average cost of capital or other inputs to our
goodwill assessment; and (iii) the occurrence of events that may reduce the fair
value of a reporting unit below its carrying amount, such as the sale of a
significant portion of one or more of our reporting units.
We perform our annual goodwill impairment review as of the end of the first
month following our September reporting period and also perform interim
impairment reviews if triggering events occur. Our 2012 annual review, performed
as of October 26, 2012, did not indicate any further adjustment to our
goodwill. No events or changes in circumstances have occurred that would
indicate any additional impairment adjustment of goodwill since our annual
testing date. We continue to monitor the recoverability of our goodwill.
During fiscal year 2011, our market capitalization was reduced due to stock
market volatility and declines in our stock price. For the year ended December
30, 2011, we recorded goodwill impairment charges in five of our reporting units
totaling $825.8 million ($732.2 million after tax). These non-cash charges
reduced goodwill recorded in connection with previous acquisitions and did not
impact our overall business operations. There was no goodwill impairment for any
of our reporting units during the years ended December 28, 2012 and December 31,
2010.
We believe the methodology that we use to review impairment of goodwill, which
includes a significant amount of judgment and estimates, provides us with a
reasonable basis to determine whether impairment has occurred. However, many of
the factors employed in determining whether our goodwill is impaired are outside
of our control, and it is reasonably likely that assumptions and estimates will
change in future periods. These changes could result in future impairments.
Goodwill impairment reviews involve a two-step process. The first step is a
comparison of each reporting unit's fair value to its carrying value. We
estimate fair value using discounted cash flow analyses, referred to as the
income approach. The income approach uses a reporting unit's projection of
estimated cash flows and discounts those back to the present using a
weighted-average cost of capital that reflects current market conditions. To
arrive at our cash flow projections, we consider estimates of economic and
market activity over a projection period of ten years, management's expectation
of growth rates in revenues, costs, and estimates of future expected changes in
operating margins and capital expenditures. Other significant estimates and
assumptions include long-term growth rates and changes in future working capital
requirements.
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We also consider indications obtained from the market approach. We applied
market multiples derived from market prices of stocks of companies that are
engaged in the same or similar lines of business as our reporting units and that
are actively traded on a free and open market, or applied market multiples
derived from transactions of significant interests in companies engaged in the
same or similar lines of business as our reporting units, to the corresponding
measure of financial performance for our reporting units that produces estimates
of value at the noncontrolling marketable level.
In reaching our final estimate of value, we considered the fair values derived
from using both the income and market approaches. We gave primary weight to the
income approach because it was deemed to be the most applicable.
When performing our impairment analysis, we also reconcile the sum of the fair
values of our reporting units with our market capitalization to determine if the
sum reasonably reconciles to the external market indicators. If our
reconciliation indicates a significant difference between our external market
capitalization and the fair values of our reporting units, we review and adjust,
if appropriate, our weighted-average cost of capital and examine whether the
implied control premium is reasonable in light of current market conditions.
If the carrying value of the reporting unit is higher than its fair value, there
is an indication that impairment may exist and the second step must be performed
to measure the amount of impairment. The amount of impairment is determined by
comparing the implied fair value of the reporting unit's goodwill to the
carrying value of the goodwill calculated in the same manner as if the reporting
unit were being acquired in a business combination. If the implied fair value of
goodwill is less than its carrying value, we would record an impairment charge
for the difference.
We also perform an analysis on our intangible assets to test for impairment
whenever events occur that indicate impairment could exist.
See Note 9, "Goodwill and Intangible Assets" to our "Consolidated
Financial Statements and Supplementary Data" included under Item 8 of this
report for more disclosure about our goodwill impairment reviews.
Receivable Allowances
We reduce our accounts receivable and costs and accrued earnings in excess of
billings on contracts by establishing an allowance for amounts that, in the
future, may become uncollectible or unrealizable, respectively. We determine our
estimated allowance for uncollectible amounts based on management's judgments
regarding our operating performance related to the adequacy of the services
performed or products delivered, the status of change orders and claims, our
experience settling change orders and claims and the financial condition of our
clients, which may be dependent on the type of client and current economic
conditions to which the client may be subject.
Deferred Income Taxes
We use the asset and liability approach for financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances based on
our judgments and estimates are established when necessary to reduce deferred
tax assets to the amount expected to be realized in future operating
results. Management believes that realization of deferred tax assets in excess
of the valuation allowance is more likely than not. Our estimates are based on
facts and circumstances in existence as well as interpretations of existing tax
regulations and laws applied to the facts and circumstances, with the help of
professional tax advisors. Therefore, we estimate and provide for amounts of
additional income taxes that may be assessed by the various taxing authorities.
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Self-insurance Reserves
Self-insurance reserves represent reserves established as a result of insurance
programs under which we have self-insured portions of our business risks. We
carry substantial premium-paid, traditional risk transfer insurance for our
various business risks; however, we self-insure and establish reserves for the
retentions on workers' compensation insurance, general liability, automobile
liability, and professional errors and omissions liability.
Defined Benefit and Post-retirement Benefit Plans
We account for our defined benefit pension plans and post-retirement benefits
using actuarial valuations that are based on assumptions, including discount
rates, long-term rates of return on plan assets, and rates of change in
participant compensation levels. We evaluate the funded status of each of our
defined benefit pension plans and post-retirement benefit plans using these
assumptions, consider applicable regulatory requirements, tax deductibility,
reporting considerations and other relevant factors, and thereby determine the
appropriate funding level for each period. The discount rate used to calculate
the present value of the pension benefit obligation is assessed at least
annually. The discount rate represents the rate inherent in the price at which
the plans' obligations are intended to be settled at the measurement date.
Holding all other assumptions constant, changes in the discount rate assumption
that we used in our annual analysis would have the following estimated effect on
the benefit obligations of our defined benefit and post-retirement benefit plans
as shown in the table below.
Domestic Foreign
Change in an Assumption Defined Defined Post-retirement
(In millions) Benefit Plans Benefit Plans Benefit Plans
25 basis point increase in discount rate $ (13.2 ) $ (22.2 ) $ (0.8 )
25 basis point decrease in discount rate $ 14.2 $ 23.6 $ 0.9
Hypothetical changes in all other key assumptions of 25 basis points have an
immaterial impact on the benefit obligations of our defined benefit and
post-retirement benefit plans. Hypothetical changes in key assumptions of 25
basis points also have an immaterial impact on net periodic pension costs of
these plans.
Business Combinations
We account for business combinations under the purchase accounting method. The
cost of an acquired company is assigned to the tangible and intangible assets
purchased and the liabilities assumed on the basis of their fair values at the
date of acquisition. The determination of fair values of assets and liabilities
acquired requires us to make estimates and use valuation techniques when market
value is not readily available. Any excess of purchase price over the fair value
of the tangible and intangible assets acquired is allocated to goodwill. The
transaction costs associated with business combinations are expensed as they are
incurred.
ADOPTED AND OTHER RECENTLY ISSUED ACCOUNTING STANDARDSSee Note 2, "Adopted and Other Recently Issued Statements of Financial
Accounting Standards," to our "Consolidated Financial Statements and
Supplementary Data" included under Item 8 of this report.
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