URS posts improved Q4 profit, sharply cut debt during fiscal 2004

By Paul Deckelman

New York, Jan. 14 - URS Corp. reported a 34% increase in net earnings for the fiscal fourth quarter on Friday - and said that it had repaid $271 million of debt during the 2004 fiscal year ended Oct. 31, bringing the company's ratio of debt to total capital way down to 34% from 52% a year earlier.

And on a conference call with analysts after the release of the figures, the San Francisco-based systems engineering company and defense contractor's chairman and chief executive officer, Martin M. Koffel, said that URS intends to continue on that path in the new fiscal year as well, anticipating cutting debt by another $80 million by the end of the year, depending on the company's working capital needs, and bringing the debt/capital ratio below 30%.

"Over the past decade, we've used debt to finance a series of strategic acquisitions," Koffel said, particularly the 2002 purchase of EG&G Technical Services, which handles the bulk of URS' important defense and homeland security business with the federal government, and Lear Siegler Services, Inc. from The Carlyle Group for $500 million.

He added that URS has "integrated those [acquisitions] successfully and has built a very well balanced company that is competitive across our key markets, and as a result from the increased scale that came from that, and the cash-generating capacity that came from it, we've been able to significantly reduce debt and improve our debt-to-total capitalization ratio."

He noted the fact that the ratio stood at 58% two years ago, when EG&G was acquired. Since that time, he pointed out, URS has paid down total of $410 million of debt, for a "significant de-leveraging" of the company's balance sheet.

In the 2004 fiscal year, cash flow was "very strong throughout the year," as the company generated $109 million in cash from operations and used much of it to pay down $86 million of debt, exceeding its originally outlined goal of $70 million, as well as the revised debt-paydown goal of $80 million that URS outlined on a conference call last September. On top of that, it repaid another $185 million in debt from the proceeds of its April stock offering, for a total of $271 million in debt repayments in fiscal 2004.

"The benefits of our cash management and de-leveraging over the past year are quite clear," Koffel declared.

Interest expense drops 28%

Company chief financial officer Kent P. Ainsworth pointed out during the call that URS' interest expense fell to $59.8 million in fiscal 2004 from $83.6 million in the previous year, a 28% reduction chiefly attributable to the company's having retired so much of its debt.

That, in turn helped to boost net income for the fiscal year to $61.7 million from $58.1 million, although per-share earnings were lower, partly due to the increase of shares from the April stock offering of 7.5 million shares. The 2004 results include a previously announced pre-tax charge of $28.2 million, or 36 cents per share, taken in the third and fourth quarters of the fiscal year in connection with the company's $260 million of note redemptions.

The bulk of that - the redemption of $70 million of 11½% senior notes due 2009 and of $160 million of 12¼% senior subordinated notes due 2009 - took place during the company's fiscal third quarter, which ended on July 31, and the remainder occurred in the fiscal fourth quarter, ended Oct. 31.

"If you look at just the third and fourth quarters of fiscal 2004, which included the benefit of the new redemptions, interest expense was, respectively, 42% and 49% lower than the comparable periods in 2003," Koffel said. "As a result of this progress in debt reduction, S&P and Moody's both upgraded us this year, and as a consequence, the interest rate on our senior secured debt decreased by 25 bps."

Koffel promised "that's an improvement that we intend to maintain going forward."

Growth, repaying debt "main focus"

Asked on the conference call whether URS intends to put its cash flow to uses other than debt retirement, such as share repurchases, stock dividends or acquisitions, Ainsworth answered that "our main focus will be on funding the growth in the business and paying off debt.

"We stated at the end of '03 that de-leveraging would be a strategic goal, and that we'd want to finance the growth in our markets when they eventually returned," Koffel added, "and I think that we're quite on track with that."

In the fiscal fourth quarter, URS had net earnings of $26.1 million (59 cents per share), on revenues of $907.4 million, up from $19.5 million (57 cents a share) on revenues of $838.1 million.

Looking ahead to 2005, URS will change its fiscal year, so that it closely coincides with the calendar year. It will issue a "transition period" report on its financial results for November and December 2004, and the 2005 fiscal year will be deemed to have begun on Jan. 1 and will end on the Friday closest to Dec. 31.

Revenue forecasts

The company anticipates revenues for the year of $3.6 billion, versus $3.382 billion for the 2004 fiscal year ended Oct. 31, and $3.187 billion for the fiscal year ended in October 2003.

Koffel predicted that revenues for the company unit that does business with federal agencies - notably the Pentagon and the Department of Homeland Security - will see revenue increases of 5% to 10%. The unit that does business with state and municipal governments, largely on transportation projects, will see 3% to 7% revenue growth, mostly in the second half of the year. Its private sector operations - which had a difficult year in 2004, as revenues declined by 10% - may see revenue growth of up to 5%, particularly aided by strength in its business of helping large power producers, like the Tennessee Valley Authority and Southern Co., to meet environmental emission standards. And its international business is expected to have 5% to 10% revenue growth.

Assuming it meets its revenue projections, URS expects to have net earnings of $94 million ($2.10 per share). It did not issue cash flow guidance, citing the difficulty of making such projections in the face of uncertainties, including appropriate working capital levels.

Ainsworth said that most of the anticipated $80 million of debt reduction for fiscal 2005 would come during the second half of the year. He also said that the company's projections take into account expected continued rate increases by the Federal Reserve Board as the year goes on - about $350 million of the company's total long-term debt of $544 million is senior secured variable-rate debt.

In 2004, Koffel said, "we met our overall expectations for the business, and we met the earnings guidance that we had given you for the year. In addition, we made significant de-leveraging on the balance sheet, and we positioned the company to capture additional growth as the economy recovers."

URS, he said, "ended the year with $32 million in cash on hand, more than double the amount we had at the start of fiscal 2004, and this give us additional financial flexibility as we enter 2005."

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