AECOM Technology Corporation — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2013. Amounts are in U.S. dollars; financial statements are unaudited. AECOM provides professional technical and management support services through Professional Technical Services (PTS) and Management Support Services (MSS).
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $2.067 billion | $2.095 billion | $6.074 billion | $6.135 billion |
| Gross profit | $131.8 million | $111.2 million | $309.8 million | $277.7 million |
| Operating income | $111.9 million | $102.8 million | $254.3 million | $252.7 million |
| Net income attributable to AECOM | $70.8 million | $69.4 million | $162.7 million | $166.3 million |
| Diluted EPS | $0.70 | $0.63 | $1.58 | $1.47 |
| Cash from operations | Not presented separately for the quarter | Not presented separately for the quarter | $248.5 million | $207.0 million |
- Revenue declined 1.3% in Q3 and 1.0% for the nine-month period. Excluding acquired-company revenue, declines were 3.5% and 2.9%, respectively.
- Gross margin measured against revenue net of other direct costs improved to 10.7% from 8.4% in Q3 and to 8.3% from 7.2% year to date. Management attributed the improvement primarily to better project performance. GAAP gross profit as a percentage of total revenue was 6.4% in Q3 and 5.1% year to date.
- Year-to-date net income attributable to AECOM fell 2.2% despite higher gross profit, reflecting substantially lower joint-venture earnings and higher G&A costs. Joint-venture earnings declined to $17.9 million from $38.1 million; G&A increased to $73.4 million from $63.2 million.
Cash, liquidity and debt
- Cash and cash equivalents were $507.6 million at June 30, 2013, down from $593.8 million at September 30, 2012. This total includes $155.9 million held in consolidated joint ventures, whose assets are restricted to those ventures; cash outside the joint ventures was $351.7 million.
- Working capital was $1.108 billion, compared with $1.069 billion at September 30, 2012. Year-to-date operating cash flow included a $67.0 million benefit from trade-receivable sales; the increase in that benefit versus the prior-year period was $38.8 million.
- Total debt was $1.149 billion, up from $1.070 billion. A June 2013 term-credit refinancing included $750 million of borrowings, approximately $675 million of which repaid the prior term loan. The company reported $906.5 million available under its $1.05 billion revolving facility.
- The consolidated leverage ratio was 2.40 against a maximum of 3.0; AECOM reported compliance with debt covenants. The average effective borrowing rate was 3.0% for the nine months.
- Operating, investing and financing cash flows for the nine months were respectively $248.5 million provided, $109.7 million used and $212.3 million used. Financing outflows included $314.1 million of program repurchases of common stock.
Changes, outlook and notable matters
- Lower Australian mining-related work was a major source of revenue pressure. Management cited approximately $100 million of lower Australian revenue in Q3 and approximately $200 million for the nine-month period, compared with prior-year periods. Reduced U.S. military-facility field-service activity also weighed on MSS Q3 revenue.
- PTS nine-month gross profit was down 1.4%; management cited approximately $14 million of severance costs associated with the decline in Australian mining work, partly offset by improved cost controls. MSS returned to positive gross profit, which management attributed to improved project performance.
- In Q3, AECOM moved $147.9 million of cash previously held outside the U.S. to make it available for U.S. general corporate purposes; the transaction generated $4.9 million of U.S. income tax expense.
- The board had authorized up to $1.0 billion in repurchases. As of June 30, $426.3 million remained available; 2.4 million shares were repurchased in Q3 at an average $30.72 per share. AECOM also acquired BKS Group and KPK Quantity Surveyors; acquisition consideration for the nine months totaled $55.0 million in cash and $14.3 million in stock.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management said expected liquidity sources should cover projected requirements for at least the next 12 months. It also noted that revenue is typically higher in the second half of the fiscal year, especially Q4.
- Material matters to monitor include the DCAA’s questioned costs involving the Global Linguists Solutions joint venture, with approximately $19 million withheld by the U.S. Government pending resolution; Australian litigation relating to a toll-road traffic forecast, for which claimed damages were not specified; and a U.S. investigation concerning a Hawaii landfill project, with no action filed as of the report. Management said these matters could have adverse effects in specified circumstances, while stating that it did not expect ordinary-course legal matters overall to materially affect the company.
- Other key risks include government-budget reductions and contract termination, fixed-price project losses, project guarantees and performance obligations, international and foreign-exchange exposure, acquisition integration, pension funding, and potential goodwill impairment. AECOM reported $16.8 billion of total backlog, comprising $8.6 billion contracted and $8.2 billion awarded; backlog may be delayed, reduced or canceled and does not assure future revenue or profit.
Most important facts for investors to verify
- Whether project-margin gains can persist while underlying revenue remains pressured, particularly in Australia and U.S. government-related work.
- The sustainability of operating cash flow, given the material cash-flow benefit from receivable sales and working-capital timing.
- Debt levels, refinancing terms, covenant headroom and the effect of continued share repurchases on liquidity.
- Developments and potential financial exposure in the GLS, Australian toll-road and Hawaii matters; the filing does not provide a clear estimate of total potential losses for these matters.
- Backlog conversion and funding, especially the less-certain awarded backlog, alongside risks from government spending and contract cancellations.