URS 10-K 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2010
For the transition period from _____ to _____
Commission file number 1-7567
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: >None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-Accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the common stock of the registrant held by non-affiliates on February 21, 2011 and July 2, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $3,758.6 million and $3,105.0 million, respectively, based upon the closing sales price of the registrant’s common stock on such dates as reported in the consolidated transaction reporting system. On February 21, 2011, and July 2, 2010, there were 80,629,705 shares and 83,785,472 shares of the registrant’s common stock outstanding, respectively.
Documents Incorporated by Reference
Part III incorporates information by reference from the registrant’s definitive proxy statement for its 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.
URS CORPORATION AND SUBSIDIARIES
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “potential,” “intend,” “may,” “plan,” “predict,” “project,” “will,” and similar terms used in reference to our future revenues, services, project awards and other business trends; future accounting and actuarial estimates; future contract losses; future backlog and book of business conversion; future income tax payments; future stock-based compensation expenses; future bonus, pension and post-retirement expenses; future compliance with regulations; future legal proceedings and accruals; future bonding and insurance coverage; future interest debt payments; future integration costs; future capital expenditures, contractual obligations and commitments; future effectiveness of our disclosure and internal controls over financial reporting and future economic and industry conditions. We believe that our expectations are reasonable and are based on reasonable assumptions, however, we caution against relying on any of our forward-looking statements as such forward-looking statements by their nature involve risks and uncertainties. A variety of factors, including but not limited to the following, could cause our business and financial results, as well as the timing of events, to differ materially from those expressed or implied in our forward-looking statements: declines in client spending; changes in our book of business; our compliance with government contract procurement regulations; integration of acquisitions; employee, agent or partner misconduct; our ability to procure government contracts; liabilities for pending and future litigation; environmental liabilities; availability of bonding and insurance; our reliance on government appropriations; unilateral termination provisions in government contracts; our ability to make accurate estimates and assumptions; our accounting policies; workforce utilization; our and our partners’ ability to bid on, win, perform and renew contracts and projects; liquidated damages; our dependence on partners, subcontractors and suppliers; customer payment defaults; our ability to recover on claims; impact of target and fixed-priced contracts on earnings; the inherent dangers at our project sites; impairment of our goodwill; the impact of changes in laws and regulations; nuclear indemnifications and insurance; expert reports; a decline in defense spending; industry competition; our ability to attract and retain key individuals; retirement plan obligations; our leveraged position and the ability to service our debt; restrictive covenants in our credit agreement; risks associated with international operations; business activities in high security risk countries; third-party software risks; natural and man-made disaster risks; our relationships with labor unions; our ability to protect our intellectual property rights; anti-takeover risks and other factors discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 39, Risk Factors beginning on page 17, as well as in other reports subsequently filed from time to time with the United States Securities and Exchange Commission. We assume no obligation to revise or update any forward-looking statements.
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 major United States (“U.S.”) federal government contractor in the areas of systems engineering and technical assistance, and operations and maintenance. We have approximately 47,000 employees in a global network of offices and contract-specific job sites in more than 40 countries.
We provide our services through three reporting segments, which we refer to as our Infrastructure & Environment, Federal Services and Energy & Construction businesses. Our Infrastructure & Environment business provides a wide range of program management, planning, design, engineering, construction and construction management, and operations and maintenance services to a variety of U.S. and international government agencies and departments, as well as to private sector clients. Our Federal Services business provides program management, planning, systems engineering and technical assistance, construction and construction management, operations and maintenance, and decommissioning and closure services to U.S. federal government agencies, primarily the Departments of Defense (“DOD”), the National Aeronautics and Space Administration (“NASA”), and the Department of Homeland Security (“DHS”). Our Energy & Construction business provides program management, planning, design, engineering, construction and construction management, operations and maintenance, and decommissioning and closure services to U.S. and international government agencies and departments, as well as to private sector clients.
On September 10, 2010, we completed the acquisition of Scott Wilson Group plc. (“Scott Wilson”), a United Kingdom (“U.K.”)-based infrastructure engineering and design firm with approximately 5,500 employees in a network of 80 offices worldwide. The acquisition has expanded our capabilities in the U.K. infrastructure market and in other key markets and regions around the world. At the close of the transaction, Scott Wilson’s operations became part of our Infrastructure & Environment business.
For information on our business by segment and geographic region, please refer to Note 15, “Segment and Related Information” to our “Consolidated Financial Statements and Supplementary Data,” which is included under Item 8 of this report and incorporated into this Item by reference. For information on risks related to our business, segments and geographic regions, including risks related to foreign operations, please refer to Item 1A, “Risk Factors” of this report.
Clients, Market Sectors and Services
We serve public agencies and private sector companies worldwide through our global network of offices including locations in the Americas, the U.K., continental Europe, the Middle East, India, China, Australia and New Zealand. Our clients include U.S. federal government agencies, national governments of other countries, state and local government agencies both in the U.S. and in other countries, and private sector clients representing a broad range of industries. See Note 15, “Segment and Related Information,” to our “Consolidated Financial Statements and Supplementary Data” included under Item 8 for financial information regarding geographic areas.
Our expertise is focused in four market sectors: power, infrastructure, federal, and industrial and commercial. Within these markets, we offer a broad range of services, including program management; planning, design and engineering; systems engineering and technical assistance; construction and construction management; operations and maintenance; and decommissioning and closure.
The following chart and table illustrate the percentage of our revenues by market sector for the year ended December 31, 2010, and representative services we provide in each of these markets.
The following table summarizes the primary market sectors served by our three businesses for the year ended December 31, 2010.
We plan, design, engineer, construct, retrofit and maintain a wide range of power-generating facilities, as well as the systems that transmit and distribute electricity. Our services include planning, siting and licensing, permitting, engineering, procurement, construction and construction management, facility start-up, operations and maintenance, upgrades and modifications, and decommissioning and closure. We provide these services to utilities, industrial co-generators, independent power producers, original equipment manufacturers and government utilities. We also specialize in the development and installation of clean air technologies that reduce emissions at both new and existing fossil fuel power plants. These technologies help power-generating facilities comply with air quality regulations.
Our project expertise in our power market sector encompasses services related to the following:
We provide a broad range of the services required to build, expand and modernize infrastructure, including surface, air and rail transportation networks; ports and harbors; water supply, treatment and conveyance systems; and many types of facilities. We serve as the program manager, planner, architect, engineer, general contractor, constructor and/or construction manager for a wide variety of infrastructure projects, and we also provide operations and maintenance services when a project has been completed.
Our clients in our infrastructure market sector include local municipalities, community planning boards, state and municipal departments of transportation and public works, transit authorities, water and wastewater authorities, environmental protection agencies, school boards and authorities, colleges and universities, judiciary agencies, hospitals, ports and harbors authorities and owners, airport authorities and owners, and airline carriers.
Our project expertise in our infrastructure market sector encompasses services related to the following:
As a major contractor to the U.S. federal government and national governments of other countries, we serve a wide variety of government departments and agencies, including the DOD, DHS, Department of Energy (“DOE”), as well as the General Services Administration, the Environmental Protection Agency, the National Aeronautics and Space Administration and other federal agencies. We also serve departments and agencies of other national governments, such as the U.K. Nuclear Decommissioning Authority (“NDA”). Our services range from program management; planning, design and engineering; and systems engineering and technical assistance to construction and construction management; operations and maintenance; and decommissioning and closure.
We modernize weapons systems, refurbish military vehicles and aircraft, train pilots and manage military and other government installations. We provide logistics support for military operations and help decommission former military bases for redevelopment. In the area of global threat reduction, we support programs to eliminate nuclear, chemical and biological weapons, and we assist the DOE and other nuclear regulatory agencies outside the U.S. in the management of complex programs and facilities.
Our project expertise in our federal market sector encompasses the following:
Industrial & Commercial
We provide a wide range of engineering, procurement and construction services for new industrial and commercial infrastructure and process facilities and the expansion, modification and upgrade of existing facilities. These services include front-end studies, engineering and process design, procurement, construction and construction management, facility management, and operations and maintenance. Our expertise also includes due diligence, permitting, compliance, environmental management, pollution control, health and safety, waste management and hazardous waste remediation. For facilities that are no longer in use, we provide site decommissioning and closure services.
Our industrial and commercial clients represent a broad range of industries, including automotive, chemical, consumer products, pharmaceutical, manufacturing, mining, power, oil and gas, and pipelines. Over the past several years, many of these companies have reduced the number of service providers they use, selecting larger, global multi-service contractors, like URS, in order to control overhead costs.
Our project expertise in our industrial and commercial market sector encompasses services related to the following:
We provide program management; planning, design and engineering; systems engineering and technical assistance; construction and construction management; operations and maintenance; and decommissioning and closure services to U.S. federal government agencies, national governments of other countries, state and local government agencies both in the U.S. and overseas, and private sector clients representing a broad range of industries. Although we are typically the prime contractor, in some cases, we provide services as a subcontractor or through joint ventures or partnership agreements with other service providers.
The following table summarizes the services provided by our businesses for the year ended December 31, 2010.
Program Management. We provide the technical and administrative services required to manage, coordinate and integrate the multiple and concurrent assignments that comprise a large program – from conception through completion. For large military programs, which typically involve naval, ground, vessel and airborne platforms, our program management services include logistics planning, acquisition management, risk management of weapons systems, safety management and subcontractor management. We also provide program management services for large capital improvement programs, which typically involve the oversight of a wide variety of activities ranging from planning, coordination, scheduling and cost control to design, construction and commissioning.
Planning, Design and Engineering. The planning process is typically used to develop a blueprint or overall scheme for a project. Based on the project requirements identified during the planning process, detailed engineering drawings and calculations are developed, which may include material specifications, construction cost estimates and schedules. Our planning, design and engineering services include the following:
We provide planning, design and engineering services for the construction of new transportation projects and for the renovation and expansion of existing transportation infrastructure, including bridges, highways, roads, airports, mass transit systems and railroads, and ports and harbors. We also plan and design many types of facilities, such as schools, courthouses and hospitals; power generation, industrial and commercial facilities; waste treatment and disposal facilities; water supply and conveyance systems and wastewater treatment plants; and corporate offices and retail outlets. Our planning, design and engineering capabilities also support homeland security and global threat reduction programs; hazardous and radioactive waste clean-up activities at government sites and facilities; and environmental assessment, due diligence and permitting at government, commercial and industrial facilities. We also provide planning, design and engineering support to U.S. federal government clients for major research and development projects, as well as for technology development and deployment.
Systems Engineering and Technical Assistance. We provide a broad range of systems engineering and technical assistance to all branches of the U.S. military for the design and development of new weapons systems and the modernization of aging weapons systems. We have the expertise to support a wide range of platforms including aircraft and helicopters, tracked and wheeled vehicles, ships and submarines, shelters and ground support equipment. Representative systems engineering and technical assistance services include the following:
We support a number of activities including technology insertion, system modification, installation of new systems/equipment, design of critical data packages, and configuration management.
Construction and Construction Management Services. We provide construction contracting and construction management services for projects involving transportation, environmental and waste management, power generation and transmission, industrial and manufacturing facilities, water resources and wastewater treatment, government buildings and facilities, and mining projects. As a contractor, we are responsible for the construction and completion of a project in accordance with its specifications and contracting terms. In this capacity, we often manage the procurement of materials, equipment and supplies; directly supervise craft labor; and manage and coordinate subcontractors. Our services typically include the following:
As a construction manager, we serve as the client’s representative to ensure compliance with design specifications and contract terms. In performing these services, we may purchase equipment and materials on behalf of the client; monitor the progress, cost and quality of construction projects in process and oversee and coordinate the activities of construction contractors. Our services typically include the following:
Operations and Maintenance. We provide operations and maintenance services in support of large military installations and operations, and hazardous facilities, as well as for transportation systems, industrial and manufacturing facilities, and mining operations. Our services include the following:
Decommissioning and Closure. We provide decommissioning and closure services for nuclear power plants, nuclear research and test facilities, production sites and laboratories. Many of these facilities have been highly contaminated and contain significant inventories of chemical and nuclear materials. We also provide decommissioning and closure services for the DOD at chemical weapons depots and for military installations under the DOD’s Base Realignment and Closure program, as well as for industrial facilities and mining operations. Our services include the following:
Our largest clients are from our federal market sector. Within this sector, we have multiple contracts with our two major customers: the U.S. Army and DOE. For the purpose of analyzing revenues from major customers, we do not consider the combination of all federal departments and agencies as one customer. The different federal agencies manage separate budgets. As such, reductions in spending by one federal agency do not affect the revenues we could earn from another federal agency. In addition, the procurement processes for federal agencies are not centralized, and procurement decisions are made separately by each federal agency. The loss of the federal government, the U.S. Army, or DOE as clients, would have a material adverse effect on our business; however, we are not dependent on any single contract on an ongoing basis. We believe that the loss of any single contract would not have a material adverse effect on our business.
Our revenues from the U.S. Army and DOE by business for the years ended December 31, 2010, January 1, 2010, and January 2, 2009 are presented below:
Our industry is highly fragmented and intensely competitive. Our competitors are numerous, ranging from small private firms to multi-billion dollar companies. The technical and professional aspects of our services generally do not require large upfront capital expenditures and, therefore, provide limited barriers against new competitors. Some of our competitors have achieved greater market penetration in some of the markets in which we compete and have substantially more financial resources and/or financial flexibility than we do. To our knowledge, no individual company currently dominates any significant portion of our markets.
We believe that we are well positioned to compete in our markets because of our reputation, our cost effectiveness, long-term client relationships, extensive network of offices, employee expertise, and broad range of services. In addition, as a result of our national and international network of offices and contract-specific job sites in more than 40 countries, we can offer our government and private sector clients localized knowledge and expertise that is backed by the support of our worldwide professional staff.
Our Infrastructure & Environment, Federal Services, and Energy & Construction businesses operate in similar competitive environments. All three businesses compete based on performance, reputation, expertise, price, technology, customer relationships and a range of service offerings. In addition, our Infrastructure & Environment and Energy & Construction businesses compete through domestic and international office networks. The competitors for each of our businesses are numerous, ranging from small private firms to multi-billion dollar companies. The primary competitors of our Infrastructure & Environment business include AECOM Technology Corporation, CH2M HILL Companies, Ltd., Fluor Corporation, Jacobs Engineering Group Inc., Tetra Tech, Inc., and The Shaw Group Inc. The primary competitors of our Federal Services business include Bechtel Corporation, Computer Sciences Corporation, DynCorp International LLC, ITT Corporation, KBR, Inc., L-3 Communications Corporation, Northrop Grumman Corporation, Parsons and Science Applications International Corporation. The primary competitors of our Energy & Construction business include AMEC, Bechtel Corporation, Black & Veatch Corporation, CH2M HILL Companies, Ltd., EnergySolutions, Inc., Foster-Wheeler Corporation, Fluor Corporation, Granite Construction Company, Jacobs Engineering Group Inc., KBR, Inc., Kiewit Corporation, Skanska, The Babcock & Wilcox Company, The Shaw Group Inc and Worley Parsons, Ltd.
Book of Business
For the purpose of calculating our book of business, we determine the amounts of all contract awards that may potentially be recognized as revenues or equity in income of unconsolidated joint ventures over the life of the contracts. We categorize our book of business into backlog, option years and indefinite delivery contracts (“IDCs”), based on the nature of the award and its current status.
Backlog. Our contract backlog represents the monetary value of signed contracts, including task orders that have been issued and funded under IDCs and, where applicable, a notice to proceed has been received from the client that is expected to be recognized as revenues or equity in income of unconsolidated joint ventures when future services are performed.
The performance periods of our contracts vary widely from a few months to many years. In addition, contract durations differ significantly among our businesses, although some overlap exists. As a result, the amount of revenues that will be realized beyond one year also varies from business to business. As of December 31, 2010, we estimated that approximately 63% of our total backlog would not be realized within one year based upon the timing of awards and the long-term nature of many of our contracts; however, no assurance can be given that backlog will be realized at this rate.
Option Years. Our option years represent the monetary value of option periods under existing contracts in backlog, which are exercisable at the option of our clients without requiring us to go through an additional competitive bidding process and would be canceled only if a client decides to end the project (a termination for convenience) or through a termination for default. Option years are in addition to the “base periods” of these contracts. The base periods of these contracts can vary from one to five years.
Indefinite Delivery Contracts. Indefinite delivery contracts represent the expected monetary value to us of signed contracts under which we perform work only when the client awards specific task orders or projects to us. When agreements for such task orders or projects are signed and funded, we transfer their value into backlog. Generally, the terms of these contracts exceed one year and often include a maximum term and potential value. IDCs generally range from one to twenty years in length.
While the value of our book of business is a predictor of future revenues and equity in income of unconsolidated joint ventures, we have no assurance, nor can we provide assurance, that we will ultimately realize the maximum potential values for backlog, option years or IDCs. Based on our historical experience, our backlog has the highest likelihood of being converted into revenues or equity in income of unconsolidated joint ventures because it is based upon signed and executable contracts with our clients. Option years are not as certain as backlog because our clients may decide not to exercise one or more option years. Because we do not perform work under IDCs until specific task orders are issued, the value of our IDCs are not as likely to convert into revenues or equity in income of unconsolidated joint ventures as other categories of our book of business.
As of December 31, 2010, our total book of business was $29.1 billion, a net decrease of $0.3 billion, compared to $29.4 billion as of January 1, 2010. The following table summarizes our book of business:
Our backlog decreased from $17.3 billion as of January 1, 2010 to $16.6 billion as of December 31, 2010 mainly due to a decrease in our federal market sector backlog. This decrease was partially offset by an additional $0.4 billion of backlog resulting from our acquisition of Scott Wilson.
We were originally incorporated in California on May 1, 1957, under the former name of Broadview Research Corporation. On May 18, 1976, we re-incorporated in Delaware under the name URS Corporation. After several additional name changes, we re-adopted the name “URS Corporation” on February 21, 1990.
We provide services for projects that are subject to government oversight, including environmental laws and regulations, general government procurement laws and regulations, and other government regulations and requirements. Below is a summary of some of the regulations that impact our business. For more information on risks associated with our government regulations, please refer to Item 1A, “Risk Factors,” of this report.
Environmental Regulations. A portion of our business involves the planning, design, construction management, and operation and maintenance of pollution control facilities, as well as the assessment, design and management of remediation activities at hazardous waste or Superfund sites and military bases. In addition, we have contracts with U.S. federal governmental entities to destroy hazardous and radioactive materials, including chemical agents and weapons stockpiles. These activities may require us to manage, handle, remove, treat, transport and dispose of toxic or hazardous substances.
Some environmental laws including the Resource Conservation and Recovery Act of 1976, as amended, and the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, (“CERCLA”), as well as other governmental laws can impose liability for the entire cost of the clean-up of contaminated facilities or sites upon present and former owners and operators as well as generators, transporters and persons arranging for the treatment or disposal of such substances. While we strive to handle hazardous and toxic substances with care and in accordance with safe methods, the possibility of accidents, leaks, spills and the events of force majeure always exist. Humans exposed to these materials, including employees or subcontractors engaged in the transportation and disposal of hazardous materials, and persons in affected areas may be injured or become ill, resulting in lawsuits that expose us to liability and may result in substantial damage awards against us. Liabilities for contamination or human exposure to hazardous or toxic materials or a failure to comply with applicable regulations could result in substantial costs to us, including clean-up costs, fines and civil or criminal sanctions, third-party claims for property damage or personal injury, or cessation of remediation activities.
Some of our business operations are covered by Public Law 85-804, which provides for indemnification by the U.S federal government against claims and damages arising out of unusually hazardous or nuclear activities performed at the request of the U.S. federal government. Should public policies and laws be changed, however, U.S. federal government indemnification may not be available in the case of any future claims or liabilities relating to hazardous activities that we undertake to perform.
Government Procurement. The services we provide to the U.S. federal government are subject to the Federal Acquisition Regulation (“FAR”), the Truth in Negotiations Act, the Cost Accounting Standards (“CAS”), the American Recovery and Reinvestment Act (“ARRA”), the Service Contract Act, DOD security regulations, and other rules and regulations applicable to government contracts, each as amended. These laws and regulations affect how we transact business with our government clients and in some instances, impose added costs to our business operations. A violation of specific laws and regulations could lead to fines, contract termination or suspension of future contracts. Our government clients can also terminate, renegotiate, or modify any of their contracts with us at their convenience, and many of our government contracts are subject to renewal or extension annually.
Other regulations and requirements. We provide services to the DOD and other defense-related entities that often require specialized professional qualifications and security clearances. Our international business is also subject to the Foreign Corrupt Practices Act, as well as various export control, anti-boycott, and embargo laws. In addition, as engineering design services professionals, we are subject to a variety of local, state, federal and foreign licensing and permit requirements and ethics rules.
Our Infrastructure & Environment business performs business development, sales and marketing activities primarily through our network of local offices around the world. For large, market-specific projects requiring diverse technical capabilities, we utilize the company-wide resources of specific disciplines. This often involves coordinating marketing efforts on a regional, national or global level. Our Federal Services business performs business development, sales and marketing activities primarily through its management groups, which address specific markets, such as homeland security and defense systems. In addition, our Federal Services business coordinates national marketing efforts on large projects, which often involve a multi-segment or multi-market scope. Our Energy & Construction business conducts business development, sales and marketing activities at a market sector level. For large complex projects, markets or clients that require broad-based capabilities, business development efforts are coordinated across our businesses. Over the past year, our businesses have been successful in marketing their combined capabilities to win new work with clients in the various markets we serve.
We experience seasonal trends in our business in connection with federal holidays, such as Memorial Day, Independence Day, Thanksgiving, Christmas and New Year’s Day. Our revenues are typically 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 worked on projects and thus lesser 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 temporarily reduce activities.
We purchase most of the raw materials and components necessary to operate our business from numerous sources. However, the price and availability of raw materials and components may vary from year to year due to customer demand, production capacity, market conditions and material shortages. While we do not currently foresee the lack of availability of any particular raw materials in the near term, prolonged unavailability of raw materials necessary to our projects and services or significant price increases for those raw materials could have a material adverse effect on our business in the near term.
Generally, our government contracts are subject to renegotiation or termination of contracts or subcontracts at the discretion of the U.S. federal, state or local governments, and national governments of other countries.
Trade Secrets and Other Intellectual Property
We rely principally on trade secrets, confidentiality policies and other contractual arrangements to protect much of our intellectual property where we do not believe that patent or copyright protection is appropriate or obtainable.
Research and Development
We have not incurred material costs for company-sponsored research and development activities.
Generally, our insurance program covers workers’ compensation and employer’s liability, general liability, automobile liability, professional errors and omissions liability, property, marine property and liability, and contractor’s pollution liability (in addition to other policies for specific projects). Our insurance program includes deductibles or self-insured retentions for each covered claim. In addition, our insurance policies contain exclusions and sublimits that insurance providers may use to deny or restrict coverage. Excess liability, contractor’s pollution liability, and professional liability insurance policies provide for coverages on a “claims-made” basis, covering only claims actually made and reported during the policy period currently in effect. Thus, if we do not continue to maintain these policies, we will have no coverage for claims made after the termination date even for claims based on events that occurred during the term of coverage. While we intend to maintain these policies, we may be unable to maintain existing coverage levels.
The number of our employees varies with the volume, type and scope of our operations at any given time. As of January 28, 2011, we had approximately 47,000 employees, including temporary or part-time workers. The Infrastructure & Environment, Federal Services, and Energy & Construction businesses employed approximately 21,000, 13,000, and 13,000 persons (including temporary and part-time workers), respectively. At various times, we have employed up to several thousand workers on a temporary or part-time basis to meet our contractual obligations. Approximately 13% of our employees are covered by collective bargaining agreements or by specific labor agreements, which expire upon completion of the relevant project.
Executive Officers of the Registrant
Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our web site at www.urs.com. These reports, and any amendments to these reports, are made available on our web site as soon as reasonably practicable after we electronically file or furnish the reports with the Securities and Exchange Commission (“SEC”). In addition, our Corporate Governance Guidelines, the charters for our Audit, Board Affairs and Compensation Committees, and our Code of Business Conduct and Ethics are available on our web site at www.urs.com under the “Corporate Governance” section. Any waivers or amendments to our Code of Business Conduct and Ethics will be posted on our web site. A printed copy of this information is also available without charge by sending a written request to: Corporate Secretary, URS Corporation, 600 Montgomery Street, 26th Floor, San Francisco, CA 94111-2728.
In addition to the other information included or incorporated by reference in this Annual Report on Form 10-K, the following factors also could affect our financial condition and results of operations:
Demand for our services is cyclical and vulnerable to economic downturns and reductions in government and private industry spending. If the economy remains weak or client spending declines further, then our revenues, profits and our financial condition may deteriorate.
Demand for our services is cyclical and vulnerable to economic downturns and reductions in government and private industry spending, which has resulted and may continue to result in clients delaying, curtailing or canceling proposed and existing projects. In fiscal years 2009 and 2010, our clients were affected by the weak economic conditions caused by the declines in the overall economy and constraints in the credit market. As a result, some clients delayed, curtailed or cancelled proposed and existing projects and may continue to do so. For example, for the year ended December 31, 2010, we did not experience growth in revenues or our book of business compared to fiscal year 2009. In addition, our clients may find it more difficult to raise capital in the future due to limitations on the availability of credit and other uncertainties in the federal, municipal and corporate credit markets. We expect our government clients will continue to be constrained by budget shortages. Also, our clients may demand more favorable pricing terms and find it increasingly difficult to timely pay invoices for our services, which would impact our future cash flows and liquidity. In addition, any rapid changes in the prices of commodities make it difficult for our clients and us to forecast future capital expenditures. Inflation or significant changes in interest rates could reduce the demand for our services. Any inability to timely collect our invoices may lead to an increase in our accounts receivables and potentially to increased write-offs of uncollectible invoices. If the economy remains weak or uncertain, or client spending declines further, then our revenues, book of business, net income and overall financial condition could deteriorate.
We may not realize the full amount of revenues reflected in our book of business, particularly in light of the current economic conditions, which could harm our operations and could significantly reduce our expected profits and revenues.
We account for all contract awards that may eventually be recognized as revenues or equity in income of unconsolidated joint ventures as our “book of business,” which includes backlog, option years and IDCs. As of December 31, 2010, our book of business was estimated at approximately $29.1 billion, which included $16.6 billion of our backlog. Our book of business estimates may not result in realized profits and revenues in any particular period because clients may delay, modify terms or terminate projects and contracts and may decide not to exercise contract options or issue task orders. This uncertainty is particularly acute in light of current economic conditions as the risk of contracts in backlog being delayed or cancelled is more likely to increase during periods of economic volatility. In addition, our government contracts or subcontracts are subject to renegotiation or termination at the convenience of the applicable U.S. federal, state or local governments, as well as national governments of other countries. Accordingly, if we do not realize a substantial amount of our book of business, our operations could be harmed and our expected profits and revenues could be significantly reduced.
As a government contractor, we must comply with various procurement laws and regulations and are subject to regular government audits; failure to comply with these laws and regulations could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor. Any interruption or termination of our government contractor status could reduce our profits and revenues significantly.
As a government contractor, we enter into many contracts with federal, state and local government clients. For example, revenues from our federal market sector represented 49% of our total revenues for the year ended December 31, 2010. We are affected by and must comply with federal, state, local and foreign laws and regulations relating to the formation, administration and performance of government contracts. For example, we must comply with FAR, the Truth in Negotiations Act, CAS, ARRA, the Services Contract Act, export controls rules and DOD security regulations, as well as many other laws and regulations. In addition, we must also comply with other government regulations related to employment practices, environmental protection, health and safety, tax, accounting and anti-fraud, as well as many others in order to maintain our government contractor status. These laws and regulations affect how we transact business with our clients and in some instances, impose additional costs on our business operations. Even though we take precautions to prevent and deter fraud, misconduct and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud or other improper activities.
Government agencies, such as the U.S. Defense Contract Audit Agency (“DCAA”), routinely audit and investigate government contractors. These government agencies review and audit a government contractor’s performance under its contracts, a government contractor’s direct and indirect cost structure, and a government contractor’s compliance with applicable laws, regulations and standards. For example, during the course of its audits, the DCAA may question our incurred project costs and, if the DCAA believes we have accounted for these costs in a manner inconsistent with the requirements for the FAR or CAS, the DCAA auditor may recommend to our U.S. government corporate administrative contracting officer to disallow such costs. We can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. In addition, government contracts are subject to a variety of other socioeconomic requirements relating to the formation, administration, performance and accounting for these contracts. We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could reduce our profits and revenues significantly.
Employee, agent or partner misconduct or failure to comply with anti-bribery and other government laws and regulations could harm our reputation, reduce our revenues and profits, and subject us to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable government laws and regulations, or other improper activities by one of our employees, agents or partners could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with government procurement regulations, regulations regarding the protection of classified information, regulations prohibiting bribery and other foreign corrupt practices, regulations regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws and any other applicable laws or regulations. For example, the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. In addition, we regularly provide services that may be highly sensitive or that relate to critical national security matters; if a security breach were to occur, our ability to procure future government contracts could be severely limited.
Our policies mandate compliance with these regulation and laws, and we take precautions intended to prevent and detect misconduct. However, since our internal controls are subject to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed by our employees and agents. Failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, loss of security clearances, and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenues and profits and subject us to criminal and civil enforcement actions.
Legal proceedings, investigations and disputes could result in substantial monetary penalties and damages, which could affect us adversely, especially if such penalties and damages exceed or are excluded from existing insurance coverage.
We engage in engineering, construction and technical services that can result in substantial injury or damages that may expose us to legal proceedings, investigations and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes regarding personal injury and wrongful death claims, employee or labor disputes, professional liability claims, and general commercial disputes involving project cost overruns and liquidated damages as well as other claims. See Note 16, “Commitments and Contingencies,” to our “Consolidated Financial Statements and Supplementary Data” included under Item 8 for a discussion of some of our legal proceedings. In addition, in the ordinary course of our business, we frequently make professional judgments and recommendations about environmental and engineering conditions of project sites for our clients. We may be deemed to be responsible for these judgments and recommendations if they are later determined to be inaccurate. Any unfavorable legal ruling against us could result in substantial monetary damages or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities. Generally, our insurance program covers workers’ compensation and employer’s liability, general liability, automobile liability, professional errors and omissions liability, property, marine property and liability, and contractor’s pollution liability (in addition to other policies for specific projects). Our insurance program includes deductibles or self-insured retentions for each covered claim. In addition, our insurance policies contain exclusions and sublimits that insurance providers may use to deny us insurance coverage. Excess liability, contractor’s pollution liability, and professional liability insurance policies provide for coverages on a “claims-made” basis, covering only claims actually made and reported during the policy period currently in effect. If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations and financial condition, including our profits and revenues.
Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt the management of our business operations.
We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. If any of our third-party insurers fail, suddenly cancel our coverage or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted. In addition, there can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at the required limits.
We may be subject to substantial liabilities under environmental laws and regulations.
A portion of our environmental business involves the planning, design, program management, construction and construction management, and operation and maintenance of pollution control and nuclear facilities, hazardous waste or Superfund sites and military bases. In addition, we have contracts with U.S. federal government entities to destroy hazardous materials, including chemical agents and weapons stockpiles, as well as to decontaminate and decommission nuclear facilities. These activities may require us to manage, handle, remove, treat, transport and dispose of toxic or hazardous substances. We must comply with a number of governmental laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances. Under CERCLA and comparable state laws, we may be required to investigate and remediate regulated hazardous materials. CERCLA and comparable state laws typically impose strict, joint and several liabilities without regard to whether a company knew of or caused the release of hazardous substances. The liability for the entire cost of cleanup could be imposed upon any responsible party. Other principal federal environmental, health and safety laws affecting us include, but are not limited to, the Resource Conservation and Recovery Act, the National Environmental Policy Act, the Clean Air Act, the Clean Air Mercury Rule, the Occupational Safety and Health Act, the Toxic Substances Control Act and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar state and international laws relating to environmental protection. Our past waste management practices and contract mining activities, as well as our current and prior ownership of various properties, may also expose us to such liabilities. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations could result in substantial costs to us, including clean-up costs, fines and civil or criminal sanctions, third-party claims for property damage or personal injury or cessation of remediation activities. Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability.
Our failure to conduct due diligence effectively or our inability to integrate acquisitions successfully could impede us from realizing all of the benefits of the acquisition, which could severely weaken our results of operations.
Historically, we have used acquisitions as one way to expand our business. If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could seriously harm our results of operations. In addition, the overall integration of two combining companies may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and diversion of management’s attention, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:
In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings, or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.
Our inability to win or renew government contracts during regulated procurement processes could harm our operations and reduce our profits and revenues.
Revenues from our federal market sector represented approximately 49% of our total revenues for the year ended December 31, 2010. Government contracts are awarded through a regulated procurement process. The federal government has increasingly relied upon multi-year contracts with pre-established terms and conditions, such as IDCs, that generally require those contractors that have previously been awarded the IDC to engage in an additional competitive bidding process before a task order is issued. The increased competition, in turn, may require us to make sustained efforts to reduce costs in order to realize revenues and profits under government contracts. If we are not successful in reducing the amount of costs we incur, our profitability on government contracts will be negatively impacted. In addition, the U.S. government has announced its intention to scale back outsourcing of services in favor of “insourcing” jobs to its employees, which could reduce our revenues. Moreover, even if we are qualified to work on a government contract, we may not be awarded the contract because of existing government policies designed to protect small businesses and under-represented minority contractors. Our inability to win or renew government contracts during regulated procurement processes could harm our operations and reduce our profits and revenues.
Each year, client funding for some of our government contracts may rely on government appropriations or public-supported financing. If adequate public funding is delayed or is not available, then our profits and revenues could decline.
Each year client funding for some of our government contracts may directly or indirectly rely on government appropriations or public-supported financing such as the ARRA, which provides funding for various clients’ state transportation projects. Legislatures may appropriate funds for a given project on a year-by-year basis, even though the project may take more than one year to perform. In addition, public-supported financing such as state and local municipal bonds, may be only partially raised to support existing infrastructure projects. As a result, a project we are currently working on may only be partially funded and thus additional public funding may be required in order to complete our contract. Public funds and the timing of payment of these funds may be influenced by, among other things, the state of the economy, competing political priorities, curtailments in the use of government contractors, a rise in the cost of raw materials, delays associated with a lack of a sufficient number of government staff to oversee contracts, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures. If adequate public funding is not available or is delayed, then our profits and revenues could decline.
Our government contracts may give government agencies the right to modify, delay, curtail, renegotiate or terminate existing contracts at their convenience at any time prior to their completion, which may result in a decline in our profits and revenues.
Government projects in which we participate as a contractor or subcontractor may extend for several years. Generally, government contracts include the right for government agencies to modify, delay, curtail, renegotiate or terminate contracts and subcontracts at their convenience any time prior to their completion. Any decision by a government client to modify, delay, curtail, renegotiate or terminate our contracts at their convenience may result in a decline in our profits and revenues.
If we are unable to accurately estimate and control our contract costs, then we may incur losses on our contracts, which could decrease our operating margins and reduce our profits.
It is important for us to accurately estimate and control our contract costs so that we can maintain positive operating margins and profitability. We generally enter into four principal types of contracts with our clients: cost-plus, fixed-price, target-price and time-and-materials.
Under cost-plus contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all of the costs we incur. Under fixed-price contracts, we receive a fixed price regardless of what our actual costs will be. Consequently, we realize a profit on fixed-price contracts only if we can control our costs and prevent cost over-runs on our contracts. Under target-price contracts, project costs are reimbursable and our fee is established against a target budget that is subject to changes in project circumstances and scope. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for other expenses.
If we are unable to accurately estimate and manage our costs, we may incur losses on our contracts, which could decrease our operating margins and significantly reduce or eliminate our profits. Many of our contracts require us to satisfy specified design, engineering, procurement or construction milestones in order to receive payment for the work completed or equipment or supplies procured prior to achieving the applicable milestone. As a result, under these types of arrangements, we may incur significant costs or perform significant amounts of work prior to receipt of payment. If the customer determines not to proceed with the completion of the project or if the customer defaults on its payment obligations, we may encounter difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended to purchase equipment or supplies.
Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our financial statements, which may reduce our profits.
To prepare financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. For example, we may recognize revenue over the life of a contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Areas requiring significant estimates by our management include:
Our actual business and financial results could differ from those estimates, which may reduce our profits.
Our profitability could suffer if we are not able to maintain adequate utilization of our workforce.
The cost of providing our services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:
If we overutilize our workforce, our employees may become disengaged, which will impact employee attrition. If we underutilize our workforce, our profit margin and profitability could suffer.
Our use of the percentage-of-completion method of revenue recognition could result in a reduction or reversal of previously recorded revenues and profits.
A substantial portion of our revenues and profits are measured and recognized using the percentage-of-completion method of revenue recognition. Our use of this accounting method results in recognition of revenues and profits ratably over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenues and estimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term engineering, program management, construction management or construction contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenues and profits.
Our failure to successfully bid on new contracts and renew existing contracts could reduce our profits.
Our business depends on our ability to successfully bid on new contracts and renew existing contracts with private and public sector clients. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which are affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a surety bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions arise, or if we fail to secure adequate financial arrangements or the required governmental approval, we may not be able to pursue particular projects, which could adversely reduce or eliminate our profitability.
If we fail to timely complete, miss a required performance standard or otherwise fail to adequately perform on a project, then we may incur a loss on that project, which may reduce or eliminate our overall profitability.
We may commit to a client that we will complete a project by a scheduled date. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or fails to meet required performance standards, we may either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from governmental inaction, public opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, labor disruptions and other factors. In some cases, should we fail to meet required performance standards, we may also be subject to agreed-upon financial damages, which are determined by the contract. To the extent that these events occur, the total costs of the project could exceed our estimates and we could experience reduced profits or, in some cases, incur a loss on a project, which may reduce or eliminate our overall profitability.
We may be required to pay liquidated damages if we fail to meet milestone requirements in our contracts.
We may be required to pay liquidated damages if we fail to meet milestone requirements in our contracts. Failure to meet any of the milestone requirements could result in additional costs, and the amount of such additional costs could exceed the projected profits on the project. These additional costs include liquidated damages paid under contractual penalty provisions, which can be substantial and can accrue on a regular basis.
If our partners fail to perform their contractual obligations on a project, we could be exposed to joint and several liability and financial penalties that could reduce our profits and revenues.
We often partner with unaffiliated third parties, individually or via a joint venture, to jointly bid on and perform a particular project. For example, for the year ended December 31, 2010, our equity in income of unconsolidated joint ventures amounted to $70.3 million. The success of our partnerships and joint ventures depends, in large part, on the satisfactory performance of contractual obligations by each member. In addition, when we operate through a joint venture in which we are a minority holder, we have limited control over many project decisions, including decisions related to the joint venture’s internal controls, which may not be subject to the same internal control procedures that we employ. If these unaffiliated third parties do not fulfill their contract obligations, the partnerships or joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be obligated to pay financial penalties, provide additional services to ensure the adequate performance and delivery of the contracted services and may be jointly and severally liable for the other’s actions or contract performance. These additional obligations could result in reduced profits and revenues or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.
Our dependence on third-party subcontractors and equipment and material providers could reduce our profits or result in project losses.
We rely on third-party subcontractors and equipment and material providers. For example, we procure heavy equipment and construction materials as needed when performing large construction and contract mining projects. To the extent that we cannot engage subcontractors or acquire equipment and materials at reasonable costs or if the amount we are required to pay exceeds our estimates, our ability to complete a project in a timely fashion or at a profit may be impaired. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials are needed.
If we experience delays and/or defaults in client payments, we could suffer liquidity problems or we may be unable to recover all working capital or equity investments.
Because of the nature of our contracts, at times we may commit resources to a client’s projects before receiving payments to cover our expenditures. Sometimes, we incur and record expenditures for a client project before receiving any payment to cover our expenses. In addition, we may make equity investments in majority or minority controlled large-scale client projects and other long-term capital projects before the project completes operational status or completes its project financing. If a client is unable to make its payments on a project, we could incur losses including our working capital or equity investments.
The past tightening of credit could increase this risk, as more clients may be unable to secure sufficient liquidity to pay their obligations. If a client delays or defaults in making its payments on a project to which we have devoted significant resources, it could have an adverse effect on our financial position and cash flows.
Our failure to adequately recover on claims brought by us against project owners for additional contract costs could have a negative impact on our liquidity and profitability.
We have brought claims against project owners for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope, both of which may result in additional cost. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we have used working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a negative impact on our liquidity and profitability.
Target-price and fixed-price contracts have increased the unpredictability and volatility of our earnings.
The federal government and some clients have increased the use of target-price and fixed-price contracts. Fixed-price contracts require cost and scheduling estimates that are based on a number of assumptions, including those about future economic conditions, costs and availability of labor, equipment and materials, and other exigencies. We could experience cost overruns if these estimates are originally inaccurate as a result of errors or ambiguities in the contract specifications, or become inaccurate as a result of a change in circumstances following the submission of the estimate due to, among other things, unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of raw materials, or inability of our vendors or subcontractors to perform. If cost overruns occur, we could experience reduced profits or, in some cases, a loss for that project. For example, one of our construction projects has experienced cost increases and schedule delays and we have recorded cumulative project losses of approximately $87.8 million as of December 31, 2010. If a project is significant, or if there are one or more common issues that impact multiple projects, costs overruns could increase the unpredictability and volatility of our earnings as well as have a material adverse impact on our business and earnings.
Maintaining adequate bonding capacity is necessary for us to successfully bid on and win fixed-price contracts.
In line with industry practice, we are often required to provide performance or payment bonds to clients under fixed-price contracts. These bonds indemnify the client should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. We have bonding capacity but, as is typically the case, the issuance of a bond is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significantly higher costs. There can be no assurance that our bonding capacity will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new fixed-price contracts could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Construction and project sites are inherently dangerous workplaces. Failure to maintain safe work sites could result in employee deaths or injuries, reduced profitability, the loss of projects or clients and possible exposure to litigation.
Construction and maintenance sites often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials. On many sites, we are responsible for safety and, accordingly, must implement safety procedures. If we fail to implement these procedures or if the procedures we implement are ineffective, we may suffer the loss of or injury to our employees, as well as expose ourselves to possible litigation. As a result, our failure to maintain adequate safety standards could result in reduced profitability or the loss of projects or clients, and could have a material adverse impact on our business, financial condition, and results of operations.
If our goodwill or intangible assets become impaired, then our profits will be reduced.
A decline in our stock price and market capitalization could result in an impairment of a material amount of our goodwill, which would reduce our earnings. 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 in part through acquisitions, goodwill and other intangible assets represent a substantial portion of our assets. Goodwill and other net intangible assets were $3.9 billion as of December 31, 2010. We perform an analysis on our goodwill balances to test for impairment on an annual basis and whenever events occur 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; (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 also perform an analysis of our intangible assets to test for impairment whenever events occur that indicate impairment could exist. Examples of such events are i) significant adverse changes in the intangible asset’s market value, useful life, or in the business climate that could affect its value; ii) a current-period operating or cash flow loss or a projection or forecast that demonstrates continuing losses associated with the use of the intangible asset; and iii) a current expectation that, more likely than not, the intangible asset will be sold or otherwise disposed of before the end of its previously estimated useful life.
Changes in environmental, defense, or infrastructure industry laws could directly or indirectly reduce the demand for our services, which could in turn negatively impact our revenues.
Some of our services are directly or indirectly impacted by changes in federal, state, local or foreign laws and regulations pertaining to the environmental, defense or infrastructure industries. For example, passage of the Clean Air Mercury environmental rules increased demand for our emissions control services, and any repeal of these rules would have a negative impact on our revenues. Proposed climate change and greenhouse gas regulations, if adopted, could impact the services we provide to our clients, including services related to fossil fuel and industrial projects. Relaxation or repeal of laws and regulations, or changes in governmental policies regarding the environmental, defense or infrastructure industries could result in a decline in demand for our services, which could in turn negatively impact our revenues.
If we do not have adequate indemnification for our services related to nuclear materials, it could adversely affect our business and financial condition.
We provide services to the DOE relating to its nuclear weapons facilities and the nuclear energy industry in the ongoing maintenance and modification, as well as the decontamination and decommissioning, of its nuclear energy plants. Indemnification provisions under the Price-Anderson Act (“PAA”) available to nuclear energy plant operators and DOE contractors do not apply to all liabilities that we might incur while performing services as a radioactive materials cleanup contractor for the DOE and the nuclear energy industry. If the PAA’s indemnification protection does not apply to our services or our exposure occurs outside the U.S., our business and financial condition could be adversely affected either by our client’s refusal to retain us or by our inability to obtain commercially adequate insurance and indemnification.
We are subject to professional standards, duties and statutory obligations on professional reports and opinions we issue, which could subject us to monetary damages.
We issue reports and opinions to clients based on our professional engineering expertise, as well as our other professional credentials, that subject us to professional standards, duties and statutory obligations regulating the performance of our services. If our report or opinion is made public, we could also be liable to a third party even if we are not contractually obligated to the third party for the report. For example, we could deliver a public report to a government client or in a securities offering that may be relied upon by a third party, which could subject us to liability for significant monetary damages.
A decline in defense or other federal government spending or a change in budgetary priorities could reduce our profits and revenues.>
Revenues from our federal market sector represented 49% of our total revenues and contracts, of which the DOD and other defense-related clients represented approximately 33% of our total revenues for the year ended December 31, 2010. Past increases in spending authorization for defense-related or other federal government programs and in outsourcing of federal government jobs to the private sector are not expected to be sustained on a long-term basis. For example, the DOD budget declined in the late 1980s and the early 1990s, resulting in DOD program delays and cancellations. Future levels of expenditures and authorizations for defense-related or other federal programs, including foreign military commitments, may decrease, remain constant or shift to programs in areas where we do not currently provide services. As a result, a general decline in defense or other federal spending or a change in budgetary priorities could reduce our profits and revenues.
Our overall market share and profits will decline if we are unable to compete successfully in our industry.
Our industry is highly fragmented and intensely competitive. For example, according to the publication Engineering News-Record, based on voluntarily reported information, the top ten U.S. engineering design firms accounted only for approximately 40% of the total top 500 U.S. design firm revenues in 2009. The top 25 U.S. contractors accounted for approximately 50% of the total top 400 U.S. contractors’ revenues in 2009, as reported by the Engineering News Record. Our competitors are numerous, ranging from small private firms to multi-billion dollar companies. In addition, the technical and professional aspects of some of our services generally do not require large upfront capital expenditures and provide limited barriers against new competitors.
Some of our competitors have achieved greater market penetration in some of the markets in which we compete and have substantially more financial resources and/or financial flexibility than we do. As a result of the number of competitors in the industry, our clients may select one of our competitors on a project due to competitive pricing or a specific skill set. If we are unable to maintain our competitiveness, our market share, revenues and profits will decline. If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits.
Our failure to attract and retain key employees could impair our ability to provide services to our clients and otherwise conduct our business effectively.
As a professional and technical services company, we are labor intensive, and, therefore, our ability to attract, retain and expand our senior management and our professional and technical staff is an important factor in determining our future success. From time to time, it may be difficult to attract and retain qualified individuals with the expertise and in the timeframe demanded by our clients. For example, some of our government contracts may require us to employ only individuals who have particular government security clearance levels. We may occasionally enter into contracts before we have hired or retained appropriate staffing for that project. In addition, we rely heavily upon the expertise and leadership of our senior management. If we are unable to retain executives and other key personnel, the roles and responsibilities of those employees will need to be filled, which may require that we devote time and resources to identify, hire and integrate new employees. In addition, the failure to attract and retain key individuals could impair our ability to provide services to our clients and conduct our business effectively.
We may be required to contribute additional cash to meet any underfunded benefit obligations associated with multiemployer pension plans we participate in or retirement and post-retirement benefit plans we manage.
We have various employee retirement plan obligations that require us to make contributions to satisfy, over time, our underfunded benefit obligations, which are determined by calculating the projected benefit obligations minus the fair value of plan assets. For example, as of December 31, 2010, our defined benefit pension and post-retirement benefit plans were projected to be underfunded by $254.1 million. See Note 13, “Employee Retirement and Post-Retirement Benefit Plans,” to our “Consolidated Financial Statements and Supplementary Data” included under Item 8 of this annual report for additional disclosure. In the future, our retirement plan obligations may increase or decrease depending on changes in the levels of interest rates, pension plan asset performance and other factors. If we are required to contribute a significant amount of the deficit for underfunded benefit plans, our cash flows could be materially and adversely affected.
A multiemployer pension plan is typically established under a collective bargaining agreement with a union to cover the union-represented workers of various unrelated companies. Our collective bargaining agreements with unions typically require us to contribute to many multiemployer pension plans. For the year ended December 31, 2010, we contributed approximately $46.5 million to participate in multiemployer pension plans. Under the Employee Retirement Income Security Act, an employer who contributes to a multiemployer pension plan, absent an applicable exemption, may also be liable, upon termination or withdrawal from the plan, for its proportionate share of the multiemployer pension plan’s unfunded vested benefit. If we terminate or withdraw from a multiemployer plan, absent an applicable exemption (such as for some plans in the building and construction industry), we could be required to contribute a significant amount of cash to fund a multiemployer pension plan’s unfunded vested benefit, which could materially and adversely affect our financial results.
Our outstanding indebtedness could adversely affect our liquidity, cash flows and financial condition.>
As of December 31, 2010, our outstanding balance under the Senior Secured Credit Facility (“2007 Credit Facility”) was $625.0 million. Our next scheduled payment of $105.0 million is due in March 2012. This level of debt might:
Our access to credit markets may be limited.
We expect to refinance our 2007 Credit Facility prior to its earliest maturity date. We may not be able to refinance our 2007 Credit Facility at rates and on terms that are favorable to us. Currently, the debt markets remain volatile, and our successful refinancing may depend on variables that impact the overall credit markets, regardless of our inherent qualifications to secure financing.
We may not be able to generate or borrow enough cash to service our indebtedness, which could result in bankruptcy or otherwise impair our ability to maintain sufficient liquidity to continue our operations.
We rely primarily on our ability to generate cash from operations to service our indebtedness in the future. If we do not generate sufficient cash flows to meet our debt service and working capital requirements, we may need to seek additional financing. If we are unable to obtain financing on terms that are acceptable to us, we could be forced to sell our assets or those of our subsidiaries to make up for any shortfall in our payment obligations under unfavorable circumstances. Our 2007 Credit Facility limits our ability to sell assets and also restricts our use of the proceeds from any such sale. If we default on our debt obligations, our lenders could require immediate repayment of our entire outstanding debt. If our lenders require immediate repayment on the entire principal amount, we will not be able to repay them in full, and our inability to meet our debt obligations could result in bankruptcy or otherwise impair our ability to maintain sufficient liquidity to continue our operations.
Because we are a holding company, we may not be able to service our debt if our subsidiaries do not make sufficient distributions to us.
We have no direct operations and no significant assets other than investments in the stock of our subsidiaries. Because we conduct our business operations through our operating subsidiaries, we depend on those entities for payments and dividends to generate the funds necessary to meet our financial obligations. Legal restrictions, including state and local tax regulations and other contractual obligations could restrict or impair our subsidiaries’ ability to pay dividends or make loans or other distributions to us. The earnings from, or other available assets of, these operating subsidiaries may not be sufficient to make distributions to enable us to pay interest on our debt obligations when due or to pay the principal of such debt at maturity.
Restrictive covenants in our 2007 Credit Facility may restrict our ability to pursue business strategies.
Our 2007 Credit Facility and our other outstanding indebtedness include covenants limiting our ability to, among other things:
Our 2007 Credit Facility also requires that we maintain various financial ratios, which we may not be able to achieve. The covenants may impair our ability to finance future operations or capital needs or to engage in other favorable business activities.
Our international operations are subject to a number of risks that could significantly reduce our profits and revenues or subject us to criminal and civil enforcement actions.
As a multinational company, we have operations in more than 40 countries and we derived 9% of our revenues from international operations for the year ended December 31, 2010. International business is subject to a variety of risks, including:
International risks and violations of international regulations may significantly reduce our profits and revenues and subject us to criminal or civil enforcement actions, including fines, suspensions or disqualification from future U.S. federal procurement contracting. Although we have policies and procedures to monitor legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. As a result, our international risk exposure may be more or less than the percentage of revenues attributed to our international operations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and similar worldwide anti-bribery laws.
The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws, such as the U.K. Bribery Act of 2010, generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Practices in the local business community of many countries outside the U.S. have a level of government corruption that is greater than that found in the developed world. Our policies mandate compliance with these anti-bribery laws and we have established policies and procedures designed to monitor compliance with these anti-bribery law requirements; however we cannot assure that our policies and procedures will protect us from potential reckless or criminal acts committed by individual employees or agents. If we are found to be liable for anti-bribery law violations we could suffer from criminal or civil penalties or other sanctions that could have a material adverse effect on our business.
We could be adversely impacted if we fail to comply with domestic and international export laws.
To the extent we export technical services, data and products outside of the United States, we are subject to U.S. and international laws and regulations governing international trade and exports, including but not limited to the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control of the Department of Treasury. A failure to comply with these laws and regulations could result in civil or criminal sanctions, including the imposition of fines, the denial of export privileges and suspension or debarment from participation in U.S. government contracts, which could have a material adverse effect on our business.
Our international operations may require our employees to travel to and work in high security risk countries, which may result in employee death or injury, repatriation costs or other unforeseen costs.
As a multinational company, some of our employees often travel to and work in high security risk countries around the world that are undergoing political, social and economic upheavals resulting in war, civil unrest, criminal activity, acts of terrorism, or public health crises. For example, we have employees working in high security risk countries located in the Middle East and Southwest Asia. As a result, we risk loss of or injury to our employees and may be subject to costs related to employee death or injury, repatriation or other unforeseen circumstances.
We rely on information technology to run our business, including third-party internal and outsourced software to run our critical accounting, project management and financial information systems. Any sudden loss, breach of security, disruption or unexpected data or vendor loss could significantly increase our operational expense and disrupt our business operations.
We rely on information technology to run our business. If we are unable to maintain and upgrade our systems and network infrastructure, our business operation could be interrupted or delayed. We also rely on third-party internal and outsourced software to run our critical accounting, project management and financial information systems. For example, we rely on one software vendor’s products to process a majority of our total revenues. We also depend on our software vendors to provide long-term software maintenance support for our information systems. Software vendors may decide to discontinue further development, integration or long-term software maintenance support for our information systems, in which case, we may need to abandon one or more of our current information systems and migrate some or all of our accounting, project management and financial information to other systems, thus increasing our operational expense as well as disrupting the management of our business operations. Any system interruption, delay, breach of security, loss of data or loss of a vendor could also adversely affect our operating results.
Force majeure events, including natural disasters and terrorists’ actions have negatively impacted and could further negatively impact our business, which may affect our financial condition, results of operations or cash flows.
Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, as well as terrorist actions, could negatively impact the economies in which we operate. For example, in August 2005, Hurricane Katrina caused several of our Gulf Coast offices to close, interrupted a number of active client projects and forced the relocation of our employees in that region from their homes. In addition, during the September 11, 2001 terrorist attacks, many client records were destroyed when our office at the World Trade Center was destroyed.
We typically remain obligated to perform our services after such extraordinary events unless the contract contains a force majeure clause relieving us of our contractual obligations in such an extraordinary event. If we are not able to react quickly to force majeure events, our operations may be affected significantly, which would have a negative impact on our financial condition, results of operations and/or cash flows.
Negotiations with labor unions and possible work actions could divert management attention and disrupt operations. In addition, new collective bargaining agreements or amendments to agreements could increase our labor costs and operating expenses.
As of January 28, 2011, approximately 13% of our employees were covered by collective bargaining agreements. The outcome of any future negotiations relating to union representation or collective bargaining agreements may not be favorable to us. We may reach agreements in collective bargaining that increase our operating expenses and lower our net income as a result of higher wages or benefit expenses. In addition, negotiations with unions could divert management attention and disrupt operations, which may adversely affect our results of operations. If we are unable to negotiate acceptable collective bargaining agreements, we may have to address the threat of union-initiated work actions, including strikes. Depending on the nature of the threat or the type and duration of any work action, these actions could disrupt our operations and adversely affect our operating results.
We have a limited ability to protect our intellectual property rights, which are important to our success. Our failure to protect our intellectual property rights could adversely affect our competitive position.
Our success depends, in part, upon our ability to protect our proprietary information and other intellectual property. We rely principally on a combination of trade secrets, confidentiality policies and other contractual arrangements to protect much of our intellectual property. Trade secrets are generally difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information. In addition, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain our intellectual property rights would adversely affect our competitive business position. In addition, if we are unable to prevent third parties from infringing or misappropriating our intellectual property, our competitive position could be adversely affected.
Delaware law and our charter documents may impede or discourage a merger, takeover or other business combination even if the business combination would have been in the best interests of our stockholders.
We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our stockholders. In addition, our Board of Directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock, which could be used defensively if a takeover is threatened. Our incorporation under Delaware law, the ability of our Board of Directors to create and issue a new series of preferred stock and provisions in our certificate of incorporation and bylaws, such as those relating to advance notice of certain stockholder proposals and nominations, could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, even if the business combination would have been in the best interests of our current stockholders.
Our stock price could become more volatile and stockholders’ investments could lose value.
In addition to the macroeconomic factors that have recently affected the prices of many securities generally, all of the factors discussed in this section could affect our stock price. The timing of announcements in the public markets regarding new services or potential problems with the performance of services by us or our competitors or any other material announcements could affect our stock price. Speculation in the media and analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated to our stock can cause the price of our stock to change. Continued volatility in the financial markets could also cause further declines in our stock price, which could trigger an impairment of the goodwill of our individual reporting units that could be material to our consolidated financial statements. A significant drop in the price of our stock could also expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert managements’ attention and resources, which could adversely affect our business.
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) by the federal Mine Safety and Health Administration (“MSHA”). We do not act as the owner of any mines, but we may act as a mining operator as defined under the Mine Act where we may be a lessee of a mine, a person who operates, controls or supervises such mine, or as an independent contractor performing services or construction of such mine.
The following tables provide information for the three months and year ended December 31, 2010.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of December 31, 2010, we owned four properties and had approximately 707 facility leases in locations throughout the world. The lease terms range from a minimum of month-to-month to a maximum of 25 years with options for renewal, expansions, contraction and termination, sublease rights and allowances for improvements. Our significant lease agreements expire at various dates through the year 2023. We believe that our current facilities are sufficient for the operation of our business and that suitable additional space in various local markets is available to accommodate any reasonable foreseeable needs that may arise. The following table summarizes our ten most significant leased properties by location based on annual rental expenses:
Various legal proceedings are pending against us and our affiliates. The resolution of outstanding claims and litigation is subject to inherent uncertainty, and it is reasonably possible that resolution of any of the outstanding claims or litigation matters could have a material adverse effect on us. See Note 16, “Commitments and Contingencies,” to our “Consolidated Financial Statements and Supplementary Data” included under Item 8 of this report for a discussion of our legal proceedings, the discussion of which is incorporated into this item by reference.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol “URS.” As of February 21, 2011, we had approximately 3,086 stockholders of record. The following table sets forth the high and low sale prices of our common stock for the periods indicated.
We have not paid cash dividends since 1986, and at the present time, we do not anticipate paying dividends on our outstanding common stock in the near future. In addition, we are precluded by provisions in our 2007 Credit Facility from paying cash dividends on our outstanding common stock until our Consolidated Leverage Ratio is equal to or less than 1.00:1.00. Please refer to Note 9, “Indebtedness” and Note 14, “Stockholders’ Equity” to our “Consolidated Financial Statements and Supplementary Data” included under Item 8 of this report.
The following table sets forth all purchases made by us or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, as amended, of our common stock during the fourth quarter of 2010.
The following selected financial data was derived from our consolidated financial statements. You should read the selected financial data presented below in conjunction with the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes thereto contained in Item 8, “Consolidated Financial Statements and Supplementary Data,” of this report.
The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described herein. You should read this section in conjunction with Item 1A, “Risk Factors,” of this report beginning on page 17 and the consolidated financial statements and notes thereto contained in Item 8, “Consolidated Financial Statements and Supplementary Data,” of this report.
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 major U.S. federal government contractor in the areas of systems engineering and technical assistance, and operations and maintenance. We have more than 47,000 employees in a global network of offices and contract-specific job sites in more than 40 countries. We provide services through three businesses: Infrastructure & Environment, Federal Services and Energy & Construction.
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; as well as segment administrative, marketing, sales, bid and proposal, rental and other overhead costs.
We report our financial results on a consolidated basis and for our three reporting segments: the Infrastructure & Environment business, the Federal Services business and the Energy & Construction business.
OVERVIEW AND BUSINESS TRENDS
Fiscal Year 2010 Results
Consolidated revenues for the year ended December 31, 2010 were $9.2 billion, a decrease of $72.0 million or 0.8% compared to revenues for fiscal year 2009. During the 2010 fiscal year, revenues grew in our federal and infrastructure market sectors, while we experienced a decline in revenues in our power and industrial and commercial market sectors, compared to our 2009 fiscal year. Net income attributable to URS increased 7.0% from $269.1 million for the year ended January 1, 2010 to $287.9 million for the year ended December 31, 2010.
Income tax expense
Our effective income tax rate for the year ended December 31, 2010 decreased to 30.1% from 37.9% for the year ended January 1, 2010. This reduction in the effective income tax rate increased net income attributable to URS by $42.1 million. See Note 12, “Income Taxes,” to our “Consolidated Financial Statements and Supplementary Data” included under Item 8 of this annual report for additional disclosure.
Cash Flows and Debt
During the year ended December 31, 2010, we generated $527.5 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 $124.1 million for fiscal year 2010 compared with fiscal year 2009. This decrease was primarily due to the timing of payments from clients on accounts receivable; the use of advance payments from clients as projects moved towards completion; the timing of project performance payments and an increase in income tax payments. The decrease was partially offset by the timing of joint venture, vendor and subcontractor payments and lower interest payments in fiscal year 2010.
We also had the following cash outflows related to investing and financing activities:
Our ratio of debt to total capitalization (total debt divided by the sum of debt and total stockholders’ equity) decreased from 17% at January 1, 2010 to 14% at December 31, 2010. This financial ratio provides information that we believe to be useful regarding our leverage and financial solvency risk exposure.
On September 10, 2010, we completed the acquisition of Scott Wilson for total purchase consideration of $343 million. The operating results of Scott Wilson from the acquisition date through December 31, 2010 are included in our consolidated financial statements under the Infrastructure & Environment business. The operating results generated from this newly acquired business during this period were not material to our consolidated results for the year ended December 31, 2010. During the year ended December 31, 2010, we incurred acquisition-related expenses of $11.9 million. In addition, we accrued $10.6 million of restructuring costs for the year ended December 31, 2010. The majority of the restructuring costs, which consisted primarily of costs for severance and associated benefits, resulted from the integration of Scott Wilson into our existing U.K. and European business. The integration is expected to be completed in fiscal year 2011. We expect to incur additional restructuring costs related to the closure of excess facilities during fiscal year 2011.
Book of Business
As of December 31, 2010 and January 1, 2010, our total book of business was $29.1 billion and $29.4 billion, respectively. Please see Book of Business on page 13 for more information.
Given the current economic uncertainty, it is difficult to predict the impact of continuing global economic weakness on our business. In fiscal 2010, we experienced a modest decline in revenues compared to our 2009 fiscal year as many of our private sector clients continued to restrict capital spending. We are continuing to monitor the situation carefully to determine the potential impact on our business during our 2011 fiscal year. However, the continuing global uncertainty and challenging economic conditions may impair our ability to forecast the following business trends accurately.
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 Item 1A, “Risk Factors,” of this report, which begins on page 17.
Although revenues in our power market sector declined during the 2010 fiscal year, we expect revenues in this sector to grow during our 2011 fiscal year, based on increased procurement activity and recent contract awards in a number of markets. For example, we are seeing increased procurement activity and contract awards for our air quality and emissions control services as utilities make preparations to comply with consent decrees and federal emissions reduction deadlines.
In the nuclear power market, we expect continued demand for the types of services we provide to retrofit and upgrade nuclear power plants to increase the generating capacity and efficiency of these facilities. In addition, the Administration’s proposed 2012 budget request includes an additional $36 billion for loan guarantees for the development of new nuclear power plants. This would triple the current size of the DOE’s loan guarantee program. We also expect to continue to benefit from investments in transmission and distribution systems, as utilities invest in these systems to improve reliability and accommodate the delivery of renewable energy sources.
Revenues in our infrastructure market grew during the 2010 fiscal year, and, given the diversity of funding sources for infrastructure programs, we expect revenues to grow in fiscal year 2011. Because of the economic downturn and lower tax revenues, many state and local governments have reduced spending for key infrastructure programs. As a result, an increasing proportion of our infrastructure work is being funded through sources other than tax revenues, such as bond measures, federal matching grants and dedicated tax measures. For example, many state and local governments have continued to raise capital for infrastructure programs by issuing bonds to fund a variety of transportation, education and public facilities projects. In addition, federal support for high-speed rail and other infrastructure projects remains strong. At the end of 2010, the Department of Transportation redirected $1.2 billion in ARRA funding to support high-speed rail projects in 13 states. Also, the Administration recently submitted a $556 billion budget request that would reauthorize the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (“SAFETEA-LU”) for the next six years. SAFETEA-LU provides federal matching funds to state governments for highway and transit projects. At the same time, the outcome of ongoing political debate in Congress over government spending could result in reductions in the funding proposed by the Administration for infrastructure projects.
In addition, the acquisition of Scott Wilson has enhanced our infrastructure capabilities outside the U.S., which we anticipate will create new opportunities to increase our revenues from the infrastructure market sector. For example, in the U.K., where Scott Wilson has a major presence, the U.K. Coalition Government has introduced a five-year National Infrastructure Plan. The plan includes investments of more than $320 billion for infrastructure projects from 2011 through 2015.
Revenues from our federal government clients increased during 2010, and we expect revenues in this market sector to continue to grow in the 2011 fiscal year based on the diversification of our federal business, steady demand for outsourced services from the DOD and DOE, and relatively stable funding for the type of work we perform. Although the Administration has announced plans to reduce defense spending, the DOD’s fiscal 2012 budget request includes relatively stable funding for many of the budget line items that support our DOD work. This includes $204.4 billion for the operations and maintenance line item, a 10% increase over the 2011 continuing resolution amount and $75.3 billion for the research, development, test and evaluation line item, 6% lower than the 2011 continuing resolution amount. These proposed funding levels are consistent with the DOD’s practice of outsourcing the types of specialized engineering and technical services we provide.
In addition, we anticipate sustained funding for the environmental and nuclear management services we provide to the DOE and U.K NDA. The DOE’s fiscal 2012 budget request includes $6.1 billion for environmental management programs, a $132 million increase from the fiscal 2011 continuing resolution funding level and an increase of $124 million from fiscal 2010. In the U.K., we also expect to continue to benefit from stable funding for the work we perform for the NDA. Despite budget cuts for many agencies, the U.K. Coalition Government has provided $4.6 billion in annual funding for the NDA over the next four years.
Industrial and Commercial
Although revenues from our industrial and commercial sector declined in fiscal year 2010, we expect revenues from this sector to grow in fiscal 2011, as a result of increased procurement activity and potential contract awards, particularly in the oil and gas and mining markets. With the stabilization of oil prices, several of our clients are moving forward with projects in the Canadian oil sands region and on the Trans-Alaska Pipeline project. As a result, we are beginning to provide preliminary engineering and design services for projects that had previously been postponed. We believe our ability to support the initial phases of these projects positions us well to capture larger assignments as they move into the engineering and construction phases.
In the mining market, rising commodity prices for base and precious metals, largely driven by demand from India and China, is accelerating our work on mining projects in Australia. In addition, we expect revenues will continue to grow from the environmental and engineering work we perform under our long-term Master Service Agreements (“MSAs”) with multinational clients, and the acquisition of Scott Wilson provides us with additional resources to support our MSA clients outside the United States.
Other Business Trends
The diversification of our business and changes in the mix and timing of our fixed-price, target-price and other contracts can cause earnings and profit margins to vary between periods. For example, we continue to experience an increase in the number of fixed-price contracts, particularly among clients in the federal sector. This increase in fixed-price contracting creates additional risks of incurring losses and opportunities for achieving higher margins on these contracts. 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. 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. This trend changes the relationship between backlog and revenues, although revenues from IDC task orders can equal those from traditional contracts. Increases in IDCs will typically lower our reported backlog and increase our reported IDC in our book of business.
We cannot determine if proposed climate change and greenhouse gas regulations would materially impact our business or our clients’ businesses at this time; however, any new regulations could impact the 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 environmental, infrastructure and nuclear and alternative energy related services.
The Year Ended December 31, 2010 Compared with the Year Ended January 1, 2010
N/M = Not meaningful
The following table presents our consolidated revenues by market sector and business for the years ended December 31, 2010 and January 1, 2010.