AECOM Technology Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal third quarter and nine months ended June 30, 2012; the comparable periods are the three and nine months ended June 30, 2011. AECOM provides professional technical and management support services in more than 130 countries through its Professional Technical Services (PTS) and Management Support Services (MSS) segments. Financial amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $2,095.1; up 2.4% | $6,135.3; up 3.6% |
| Gross profit | $111.2; down 8.3% | $277.7; down 14.9% |
| Income from operations | $102.8; down 6.5% | $252.7; down 12.1% |
| Net income attributable to AECOM | $69.4; down 6.0% | $166.3; down 11.7% |
| Diluted EPS | $0.63 vs. $0.62 | $1.47 vs. $1.59 |
| Operating cash flow | Not reported quarterly in the filing text | $207.0 provided, versus $130.1 used |
Gross margin as a percentage of revenue was 5.3% for the quarter, compared with 5.9%, and 4.5% for the nine-month period, compared with 5.5%. On management’s non-GAAP basis of revenue less other direct costs, gross margin was 8.4% and 7.2%, respectively, down from 9.2% and 8.5% in the comparable periods.
Segment performance. PTS revenue increased 4.2% for the quarter and 9.2% for the nine months. Its gross profit was $114.2 for the quarter and $285.4 for the nine months. MSS revenue fell 9.2% for the quarter and 26.5% for the nine months; MSS reported gross losses of $3.0 and $7.7, respectively, versus gross profits in the prior-year periods. Management attributed MSS pressure to reduced project activity and weaker performance on certain projects.
Balance sheet, liquidity and capital
- At June 30, 2012, cash and cash equivalents were $398.4, including $112.1 held in consolidated joint ventures and restricted to their use; cash was $456.9 at September 30, 2011.
- Total debt was $1,070.3, down from $1,162.5 at September 30, 2011. Long-term debt was $950.6; current debt and short-term borrowings were $119.7. The current portion rose from $17.8.
- Working capital was $1,041.8, down from $1,175.6. Receivables increased to $2,483.3; DSO, excluding recent acquisitions and net of billings in excess of costs, rose to 92 days from 88 days.
- AECOM had $984.9 available under its $1.05 billion revolving facility. Its reported leverage ratio was 2.16 against a maximum of 3.0; it was in compliance with debt covenants.
- Operating cash flow improved to $207.0 from cash used of $130.1 in the prior-year nine-month period. Investing activities used $88.9, including $47.8 of capital expenditures; financing activities used $184.7, including $107.2 of share repurchases.
Material changes, outlook and commentary
- Revenue growth was supported by infrastructure and construction-management demand in Australia, Asia and the Americas. Foreign-currency effects and reduced MSS activity partly offset growth. Excluding acquired companies, nine-month revenue increased 3.1%, while revenue net of other direct costs was approximately flat.
- Lower gross profit was primarily attributable to MSS. Nine-month equity earnings from joint ventures increased 20.5% to $38.1, while net interest expense increased to $34.5 from $30.3, which management linked mainly to acquisition-related borrowings.
- Management stated that existing cash, operating cash flows and borrowing capacity were expected to meet projected cash requirements for at least 12 months. The filing provides no specific earnings or revenue guidance.
- Total backlog was reported at $15.8 billion: $8.4 billion contracted and $7.4 billion awarded but not yet signed. The company cautioned that backlog may be delayed, reduced or canceled and is not a guarantee of revenue or profit.
- The $200 million stock repurchase authorization was completed. For the nine months, AECOM repurchased approximately 4.4 million shares under open-market and Rule 10b5-1 purchases, in addition to the separately described accelerated repurchase.
- Key exposures include potential U.S. government spending reductions and sequestration scheduled for January 2013 absent remedial action; government contract audits and termination rights; international political and currency risks; fixed-price project execution; and collection and working-capital risks. Libya operations remained suspended, with $25.1 of related liabilities on the balance sheet.
Contingencies and unusual items
- Government contract audits questioned costs associated with the Combat Support Associates and Global Linguist Solutions joint ventures. The government had withheld approximately $17 and $19, respectively, pending resolution; the company said adverse outcomes could materially affect results.
- AECOM Australia faced multiple lawsuits related to a failed motorway project; claimed damages were not specified in the filing. A U.S. investigation concerning a landfill project in Hawaii was ongoing, with no action filed as of the report date.
- The company reported approximately $225.3 of contingent exposure under standby letters of credit, primarily for insurance and project guarantees. Management did not expect guarantees or ordinary-course litigation to have a material adverse effect, while acknowledging certain matters could be material if resolved adversely.
- A $2.9 tax benefit was recorded in the quarter following settlement of part of IRS examinations of fiscal 2008 and 2009 returns. The nine-month effective tax rate was 25.6%, versus 24.6%.
Important facts for investors to verify
- Whether MSS project performance and gross losses improve, and whether the decline in government-related activity persists.
- Receivables collection, the increase in DSO, and the extent to which cash flow benefited from receivable sales and working-capital timing.
- Developments in the CSA and GLS questioned-cost matters, the Hawaii investigation and Australian litigation, including potential financial exposure.
- Government funding and sequestration outcomes, and the conversion of awarded backlog into signed, funded work.
- The filing reports a leverage ratio of 2.16 in its debt discussion and 2.15 elsewhere; investors may wish to confirm the applicable calculation.