AECOM Technology Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014 (53 weeks). The filing is an annual report, not a standalone fourth-quarter filing. FY2014 results exclude URS Corporation, acquired October 17, 2014, except where the filing identifies subsequent events or pro forma figures.
Business context and results
AECOM provided engineering, design, consulting, construction management and government support services through Professional Technical Services (PTS) and Management Support Services (MSS). It had approximately 43,300 employees. PTS generated 91% of FY2014 revenue and MSS 9%; government clients represented 56% of revenue.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $8.357 billion | $8.153 billion | +2.5% |
| Revenue, net of other direct costs (non-GAAP) | $4.856 billion | $4.977 billion | -2.4% |
| Gross profit | $403.2 million | $450.0 million | -10.4% |
| Gross margin on net revenue | 8.3% | 9.0% | -0.7 percentage points |
| Operating income | $352.9 million | $377.0 million | -6.4% |
| Net income attributable to AECOM | $229.9 million | $239.2 million | -3.9% |
| Diluted EPS | $2.33 | $2.35 | -0.9% |
| Cash from operating activities | $360.6 million | $408.6 million | -11.7% |
FY2014 fourth-quarter revenue was $2.563 billion and net income attributable to AECOM was $64.1 million, or $0.65 diluted EPS; the comparable FY2013 quarter reported revenue of $2.079 billion and net income attributable to AECOM of $76.5 million.
Financial position and material changes
- PTS revenue increased 5.1% to $7.610 billion, but its gross profit fell 12.4% to $365.2 million and margin on net revenue declined to 8.2% from 9.4%. MSS revenue declined 18.0% to $746.9 million, while gross profit rose to $38.0 million and margin improved to 9.7% from 5.9%.
- Backlog increased 52% to $25.1 billion: $11.4 billion contracted and $13.7 billion awarded. Awarded backlog is not yet fully contracted; the filing cautions that backlog may be reduced, delayed or cancelled.
- Cash and cash equivalents were $574.2 million; working capital was $978.3 million, down 9.3%. Net accounts receivable increased 12.7% to $2.275 billion, while days sales outstanding improved to 85 from 88.
- Year-end debt was $1.004 billion, down from $1.173 billion; long-term debt excluding current maturities was $939.6 million. The existing revolving facility had $1.038 billion available. The company reported covenant compliance and a most restrictive leverage ratio of 2.55 against a 3.0 maximum.
- Capital expenditures were $62.9 million. Cash used in investing activities was $142.8 million and cash used in financing activities was $233.8 million. Cash from operations less capital expenditures was approximately $297.8 million.
- Goodwill and acquired intangible assets totaled approximately $2.0 billion. The company recorded a $37.4 million pretax gain from obtaining control of an unconsolidated Middle East joint venture; equity in joint-venture earnings rose to $57.9 million from $24.3 million.
Outlook, acquisition, risks and unusual items
- The filing provides no specific FY2015 revenue or earnings guidance. Management said expected liquidity sources were sufficient for projected needs over at least the next 12 months. It expected approximately $250 million of intangible-asset amortization and $290 million of acquisition and integration expense over the next 12 months, primarily related to URS.
- URS closed after year-end for approximately $2.3 billion cash and $1.6 billion in AECOM shares. AECOM assumed $1.0 billion of URS senior notes and repaid URS term-loan and revolving borrowings. Acquisition financing included $1.925 billion term loan A, $760 million term loan B, a $1.05 billion revolver and a $500 million performance letter-of-credit facility. The filing estimated approximately $5.2 billion of pro forma indebtedness as of September 30, 2014, giving effect to the acquisition and related financing.
- Key risks include government budget and procurement uncertainty, contract termination or non-appropriation, fixed-price contract losses, project and subcontractor execution, international and foreign-exchange exposure, and integration and retention risks following URS. AECOM also highlighted variable-rate debt and restrictive financing covenants.
- AECOM Australia faced lawsuits related to a traffic forecast for an insolvent motorway project. Claims included approximately A$1.68 billion by receivers, approximately A$76 million by a lender (which AECOM considered potentially duplicative), and a class action involving investors who acquired approximately A$155 million of securities. AECOM disputed the claims; outcome and exposure were not reasonably determinable and an adverse resolution could materially affect results.
- The U.S. Attorney’s Office was investigating potential improper overtime payments on projects managed by Tishman Construction; no action had been filed as of the report. The filing also notes that claims and proceedings could have material effects despite management’s view that other matters were not expected to be material.
- Management cited a $37.4 million joint-venture remeasurement gain and collection of previously reserved receivables as items affecting comparisons. FY2014 also included $27.3 million of URS-related acquisition and integration costs. There was no goodwill impairment in FY2014; a $336 million impairment had been recorded in FY2012.
Important facts for investors to verify
- How much of the $25.1 billion backlog is converted into signed, funded contracts and recognized revenue.
- Whether core profitability and PTS margins recover, given the FY2014 decline in net-of-pass-through revenue and gross margin.
- Post-acquisition debt, refinancing costs, covenant headroom, integration spending and whether expected URS synergies are realized.
- Working-capital and receivable collection trends, including the growth in unbilled receivables and the use of receivable sales.
- Developments in the Australian litigation, the Tishman inquiry, pension funding and other guarantees or contingencies.
- FY2014 financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of September 30, 2014.