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Engineering a Growth Plan: Continuing to Diversify Services

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This month, Congress successfully passed a $1.1 trillion omnibus spending bill, which funds government operations through September 30, 2014.  The bill was signed by President Obama shortly after arriving with significant momentum, having passed with a 359 – 67 bipartisan congressional majority.  The omnibus legislation provides budget clarity to a number of Federal contractors; however, Federal Engineering and Construction (“E&C”) firms may continue to face funding challenges despite the President’s vocal emphasis on infrastructure investment.  While the bill realigns spending to fund more critical functions such as maintaining roadways and bridges as well as staffing the nation’s airports, decreased funding for engineering projects continues to encourage Federal E&C firms to branch into other well-funded industries such as energy exploration and even cybersecurity.

The new omnibus bill provides $50.8 billion in discretionary transportation and development funding in 2014, a decrease of $961 million compared to the government fiscal year 2013 enacted level.  The bill also excludes funding for any new programs proposed by the Senate or President.  Compounding the impact of competition for contracting dollars, increasing labor and material costs are causing profitability constraints on construction companies serving the Federal agencies.  As such, large E&C’s have continued to diversify away from transportation and into other well-funded areas.  For example, the Energy and Water Subcommittee portion of the omnibus is ~$34 billion in 2014, an increase of $777 million above the enacted 2013 level.  Notably, programs within the Department of Energy would be funded at $10.2 billion in 2014, a $620 million increase over 2013 enacted levels.

URS Corporation is a prime example of these diversification efforts, especially within high-security level IT, sophisticated training, and programs with communications systems.  Over the last few years, the company has made acquisitions to broaden its aperture in order to address these horizontal markets for their 20 to 25 government agency customers.  Specifically, the company continues to state confidence in its acquisitions of CATI Training Systems and Apptis Holdings in 2011, which have allowed URS to address high-priority initiatives in cybersecurity and training.

Despite a continued dialogue of diversification away from traditional Federal E&C, the company has stated that it would not pursue large M&A targets as a use of free cash flow, but rather expand into adjacent markets with existing capabilities.  However, management mentioned it may augment organic growth through smaller acquisitions that help to enhance market position and capabilities (up to $200 million in total outlays through the end of 2015).  Furthermore, the company noted that it remains confident in the long-term prospects of its traditional Federal business and believes its ability to deliver full-service engineering, construction, and technical services.

As such, 2014 may witness traditional Federal E&C’s acquiring or partnering with companies in well-funded markets such as cybersecurity, intelligence, or energy, especially if they are less successful in further expanding into commercial or international markets.

 

Source: Committee on Appropriations; URS Corporation Investor Relations