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The Top 200 Environmental Firms – Companies Face Recession Now But Still Plan for Recovery

By Debra Rubin, Pam Hunter, Bruce Buckley and Tony Illia
Copyright © 2006-2008 The McGraw-Hill Companies – All Rights Reserved.

The Top 200 Environmental Firms coasted to yet another record year for revenue growth in 2008, but that windfall will now have to sustain them through tough times ahead. Even firms in traditionally steady market niches cannot escape the recession as projects get delayed or derailed amid the current money crunch and budget paranoia. But with new national priorities that are seemingly beneficial to the industry, many are optimistic that a rebound, even if it will be slow moving, is coming soon,and it pays to plan for it now.

“The economic environment faced today certainly imposes plenty of pressures on engineering and construction firms, but it also offers some opportunity for those creative, aggressive players to make some real strategic advances vis-à-vis their more faint-of-heart competitors, particularly if it can be done prudently,” says Paul Zofnass, president of EFCG Inc., a New York City-based industry financial consultant. “Protecting your downside is appropriate; looking for upside opportunities may well offer more potential…than in stronger economic times.”

The cushion of higher revenue and increased backlog that many Top 200 firms amassed last year before the downturn is helping to carry them through today’s difficulties. Company executives are trying to be optimistic. “Overall, environmental markets are keeping steady,” says Bill Siegel, who took over this year as CEO of The Kleinfelder Group Inc. “It’s not up, but it’s not down significantly.”

The Top 200 report revenue increased more than 52% in 2008, a 13.6% hike over the previous year. Strong merger and acquisition activity in the environmental sector added bulk to firms as a quicker alternative to organic growth

AECOM Technology Corp. continued to feed its M&A appetite last year, rising to No. 8 on the Top 200 list, up from No. 16. Next year’s list will see an enlarged ARCADIS, a result of last month’s completed acquisition of Malcolm Pirnie Inc. Tetra Tech also managed to nudge further up the list, with help from its purchases of smaller companies.

Siegel says the economy has injected new realism into acquisition pricing. “We think that multipliers are coming down, and it will be a good opportunity to pick up quality firms at fair prices, as opposed to some unsustainable price levels we’ve seen over the past few years,” he says. In tough times, prospective sellers “will see the value of joining up with established, yet still employee-owned” companies like Kleinfelder, he adds.

In looking at Top 200 markets, it is already apparent that new energy-efficiency efforts and a focus on climate change, now a priority of the Obama Administration, propelled a 56% spike in clean-air revenue to more than $5.1 billion. That countered a slowdown in what had been two years of explosive growth in international work.

Top 200 non-U.S. revenue jumped less than 12% in 2008, compared to four times that rate from 2007. The hazardous waste cleanup and management market is still the list’s largest in terms of dollar volume, but it continues to mature and flatten.

Work for private-sector clients, which represents 42% of Top 200 revenue, still managed to grow 15% in 2008 before owners starting pulling back on commitments. The impact is taking some adjustment. “We are not seeing a reduction in regulatory pressure, but clients are watching their costs closely, putting consultants in a difficult situation where we are trying to meet requirements [while] on a limited budget,” says Siegel. Chris Vincze, CEO of The TRC Cos Inc., agrees there are “pricing pressures.”

Cash-strapped owners are stretching out required cleanups to meet environmental-liability requirements on their balance sheets, but corporate reputation is still a motivating factor for clients, according to ERM executives.

Fighting the economic tumult, CH2M Hill managed to hold onto its Top 200 lead spot for the third straight year. Environmental work on a stable of overseas megaprojects boosted its non-U.S. revenue to 28%, and even its hazardous-waste market share grew.

“We see opportunities in remediation as well as a higher level of compliance,” says John Mogge, senior vice president of CH2M Hill’s environmental-services business group. “We see a much stronger demand than 18 months ago for sustainable remediation. Rather than pump systems, clients are asking for renewable sources. It’s got to have a clear business case. If we can do it a better way at reasonable life-cycle costs, then the clients are there.” Others are changing their market focus and marketing approaches to secure work. LVI Services Inc. has experienced up to an 80% drop in U.S. commercial asbestos-abatement and related environmental work. But the firm has balanced that falloff by growing its demolition capabilities through acquisition and seeking new clients in the energy sector, says CEO Bob McNamara. The firm recently formalized a relationship with utility NRG Energy Inc., Princeton, N.J., to provide remediation and dismantlement services to all the utility’s U.S. powerplants.

Firms also point to the federal government’s increased role as an environmental-services owner through the American Recovery and Reinvestment Act (ARRA). Superfund projects on the U.S. Environmental Protection Agency’s list became eligible for stimulus funding this year because many were “shovel-ready,” says Michael Elia, CEO of Sevenson Environmental Services Inc., a longtime program contractor. He says five East Coast sites at which the firm is working are getting a $70-million stimulus boost.

Sevenson also is in line for river dredging work from the Tennessee Valley Authority linked to the December 2008 collapse of coal-ash containment ponds at its Kingston, Tenn., powerplant. Site cleanup is being managed by Jacobs Engineering Group Inc. and is estimated to cost $1 billion.

Earlier this year, Shaw Group Inc. was awarded a $125-million task order with the Army Corps of Engineers to extend to 2013 an existing contract for environmental remediation services on the Maywood, N.J., Superfund site. Shaw has worked there since 1999.

Paul Shea, president of CDM Constructors Inc., a Denver-based unit, says the government is often “a counter-cyclical market usually when everybody’s down, they’re up.”

George Bevan, president of Shaw’s environmental and infrastructure group, has won the firm’s fifth consecutive contract with EPA to support research to evaluate drinking-water and hazardous-waste treatment technologies, address water-security issues and study the environmental impact of nanotechnology.

Malcom Pirnie CEO William Dee says the market for cleaning up unexploded ordinance (UXO) and military defense ranges remains strong. In January, his firm began work as a subcontractor to clean up UXOs and nonexplosive munitions debris at a former Army site in New Mexico.CH2M Hill’s Mogge says ARRA funding has expedited the firm’s existing multi-year cleanup program at the Iron Mountain mine site in Redding, Calif., one of the country’s most polluted. “We’ve been able to enlarge that operation and add more people and jobs to the task to move faster,” he says, adding that the time period of the effort has been lengthened.

Nuclear Boost

Work in the nuclear-waste market also continues to support Top 200 bottom lines. Market-sector revenue for listed firms grew nearly 20% last year, and that was before the stimulus provided more than $6 billion to expedite cleanup of U.S. Dept of Energy nuclear-waste sites.

“2009 looks to be a little better for us than 2008,” says Curtis G. Hull, senior vice president of S.M. Stoller Corp. The firm has a variety of DOE contracts for research and operational support at nuclear sites.

Stoller operates huge low-level radioactive-waste disposal facilities at the Hanford site in Washington state and the Idaho National Laboratory complex in Idaho Falls. At DOE’s Pantex site in Texas, Stoller has recently completed construction of a groundwater dewatering and treatment project that includes a 250-gallon-per-day treatment plant and monitoring well installation. Hull says work this year will benefit from stimulus-related “incremental increases.”

DOE in July also announced it will build by late 2011 an $80-million groundwater decontamination system at Hanford. It will treaty up to 85 million gallons per month, twice the volume of other facilities already there. The agency says as much as 450 billion gallons of contaminated liquid seeped into the ground in one area of the 586-sq-mile site during years of unmonitored plutonium-disc production. A site-based unit of CH2M Hill will build the new treatment facility.

North Wind Inc., an Idaho Falls program management firm that debuted on the Top 200 list this year at No. 172, generated 40% of its environmental revenue from nuclear-waste work. Business seemed robust enough to have generated a 30% backlog increase and a 10% rise in professional staff last year, according to the firm.

Rate of Flow

The Top 200 wastewater-treatment and water-supply design, construction and management markets appear to be fairly resilient to economic forces. While revenue in the former rose just 3.7% for firms last year, the latter was up more than 17%.

For Brown & Caldwell, the market “is down, but it has been steady, meaning that needs are so high, many projects and programs must continue,” says Craig Goehring, the firms’s chairman and CEO. Brown & Caldwell last year won a multi-year, $300-million contract to serve as program manager for the Washington, D.C., Water and Sewer Authority’s biosolids program. That contract, which will encompass multiple projects, is continuing despite the recession, he says.

Richard Fox, CEO of CDM, still sees significant engineering activity in water markets, “which bodes well for an uptick in construction by late this year and early next.” CDM Constructors’ Shea says a diverse portfolio and client base has steadied the firm. Sales of professional services rose more than 10% last year, adds Fox. “The market is very local, and there is a lot of pent-up demand,” he adds. “Unfortunately, there is no focused water advocacy group.”

“Water projects are a continual growth market in the U.S.” says Michael Crawford, president and CEO of Sukut Construction. “Drought issues in western states make water supply a huge issue.”

The firm broke ground on a new $36-million reservoir to create an emergency backup water supply in Orange County, Calif. The project, expected to be complete in December 2010, will hold 800 acre-ft of water and require excavation of 1.4 million cu yd of material from the floor of Chiquita Canyon. The excavated material will be reused as a part of a 167-foot-high earthen dam. Malcom Pirnie recently won a $950,000 contract for Phase I and a $6-million contract for Phase 2 to do pilot work, site selection and preliminary design for a coastal desalination plant and supporting transmission infrastructure in central Florida, says Dee. The 30-million-gallon-a-day plant, which could be scaled up to 70 mgd, will attempt to provide an alternate supply of potable water to lessen both groundwater and surface water withdrawals and meet future growth needs.

Although municipal bond financing problems are adversely affecting the progress of wet infrastructure projects, pumped-up state revolving funds could fill a greater portion of the funding gap, according to Robert Uhler, CEO of MWH Global. But he also says that some utilities are becoming more “frugal” on spending until they can build sufficient reserve funds.

Uhler also points to municipalities that are considering options to build now rather than face higher costs later should the economy suffer more inflation. “I’m seeing more clients become advanced thinkers,” he says.

Uhler also says more utilities are “looking to pull water infrastructure into energy-consumption thinking,” so they can be better positioned for possible new regulation. “Our clients are preparing to have to tell their boards what cap-and-trade means to the firms,” he says.

Top 200 company executives see insufficient stimulus money moving into water and wastewater projects. “The good news is that the stimulus has helped states meet their budgets, and that kept some projects going,” says Kleinfelder’s Siegel. “The bad news is that it was a one-time fix, and generally states did not repair their budgetary imbalances.”

Others say private investors are starting to show up with cash. “We are seeing a higher level of interest from private infrastructure funds looking for ways to invest in the water market,” says Dan McCarthy, president and CEO of Black & Veatch’s global water business. “They see it as a safer haven than other markets and there is a lot of interest in investing in green infrastructure.”

But McCarthy cautions that privatizing water or wastewater infrastructure is a more community-sensitive subject for publicsector owners than selling transportation assets. “There’s still that issue of ‘Do we want to sell our utilities because they are fundamental to our personal health and economic health?,’” he says. “It’s easier to say that someone else could own the expressway.”

McCarthy predicts environmental regulations may expand before the economy fully recovers. “From what you hear from EPA and the new administration, they are not indicating they will rest on their laurels,” he says. “I suspect there will be some tightening of water-quality standards going forward. The renewable-energy discussion also will get more elevated so you will see more water and wastewater authorities interested in how they can improve their carbon footprint. That will provide additional opportunities.”

Some municipalities coping with limited federal stimulus funding for environmental projects are opting for more self-sufficiency. “We are all sitting on our own miniature stimulus packages,” Baltimore Public Works Director David E. Scott last month told the Construction Management Association of America Water Summit in Las Vegas. “It’s up to local governments to take a more comprehensive approach. It’s not just about building mains. It’s about, ‘How do we invest our dollars today to ensure a stream of revenue in the future?’ We do have a crisis in America, and it really is our crumbling infrastructure.”

Frequent Flyers

Foreign expansion by Top 200 firms appears to have leveled off in 2008, although list participants that make a living globally see new opportunities for their skills. Revenue from work in Asia grew to almost 32% in 2008, while firms working in Canada saw environmental revenue increase more than 21%. “We see water resources and environmental, safety and health impact assessments [ESHIA] as significant growth areas,” says Gordon J. Johnson, environment practice leader for WorleyParsons. About 56% of its Top 200 revenue came from work in non-U.S. markets. “ESHIA is a specifically targeted area for us, and we are able to do more of it through our access to large energy and resource projects being completed around the world,” he says.

Johnson points to large projects in Australia and Canada. He says WorleyParsons is completing a hydrogeologic and hydrologic study of a proposed coal-seam-methane liquified-natural-gas project in Queensland, Australia, that produces significant groundwater in the methane-recovery process. “WorleyParsons is assessing the potential impacts associated with this groundwater production, with emphasis on beneficial reuse options, impacts to receiving water bodies if discharged and potential mitigating measures,” he says. The firm also is developing a water-use strategy for the state of South Australia to relieve stress on the Murray-Darling river system, according to Johnson.

In Canada’s oil-sands region, WorleyParsons is assisting petroleum producers in reducing environmental impacts of the complex extraction and refining processes in the wake of greater government scrutiny. Johnson says freshwater use per barrel of oil produced by steam-assisted extraction projects has been cut by about 90% through water recycling and use of other sources of non-potable water.

Smaller Staffs

Top 200 firms report that constrained staffing is a fact of life in the recession’s new world order. But many firms are trying hard to avoid layoffs to ensure they have adequate human resources to tackle work when the downturn eases. Still, in a recent query of industry CFOs by EFCG, cutting staff is the most common step firms take to contain costs.

Top 200 firms point to developing the right kind of staff as one of the biggest challenges ahead. Earth Consulting, a $36-million firm, notes the need to find enough “seller-doers.” GAI Consultants Inc. reported a 30% staff increase last year but still noted the need to find more “qualified” personnel. Others cited challenges of developing project management expertise and grooming new leaders.

Gerald Salontai, former Kleinfelder CEO and now an industry consultant, says, “The more you get the right people doing the right things for the right reasons and letting the entire organization know, the better your results will be.” Although profitability now seems to be holding for Top 200 firms, the prospect of declining revenue this year and next could change the bottom line. “If growth rates come in lower than previously forecast, margins will likely suffer,” says EFCG’s Zofnass.

But, he adds slower growth will also reduce pressure on cash flow because less money will be tied up in accounts receivable that are tough to collect. “We’re not suggesting that this is necessarily good from a long-term strategy perspective,” he says. “But we are suggesting that recessionary times may make capital availability less of a problem. This would be even more so if the poor conditions translated to lower stock prices, thereby reducing the costs of paying out retiring shareholders.”

Firms also are exploring new ways to diversify from their core business to offset lost revenue in coming months. “One hope for our business is in peripherals,” says MWH Global’s Uhler. “Design engineering has pressure on it, so you have to diversify to something else.” He notes formation of the firm’s management-consulting business, which provides clients with facility expertise they may have lost to retirements or staff cuts within their own ranks.

Salontai counsels Top 200 firms that “weathering the storm” is not a new phenomenon. Perception is often reality. To survive and succeed, he says company leaders must execute a strategy “in a manner that is decisive, relays a sense of calmness, is not so rapid as to create instability, ensures alignment or buy-in and does not forgo the future.” Data management by Fran Sweeney and Theola King, with Gary L. Tulacz

Copyright © 2006-2008 The McGraw-Hill Companies – All Rights Reserved.