AECOM Technology Corporation — Form 10-Q
Business context and period: Global provider of professional technical and management support services, reported through Professional Technical Services (PTS) and Management Support Services (MSS). This unaudited filing covers the first quarter of fiscal 2011, the three months ended December 31, 2010; comparisons are with the three months ended December 31, 2009. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $1,936.2 million | $1,480.8 million | +30.8% |
| Gross profit | $105.3 million | $83.0 million | +26.9% |
| Operating income | $90.2 million | $65.5 million | +37.7% |
| Net income attributable to AECOM | $56.9 million | $45.8 million | +24.2% |
| Diluted EPS | $0.48 | $0.40 | +$0.08 |
| Net cash used in operating activities | $179.3 million | $34.6 million | Cash use increased |
- Revenue growth included $385.4 million from companies acquired in the prior 12 months. Excluding acquired-company revenue, revenue increased 4.7% year over year; stronger Australian and Canadian currencies also contributed.
- Gross margin was 5.4% of reported revenue, compared with 5.6%. On management’s non-GAAP measure of revenue net of other direct costs, gross margin improved to 8.7% from 8.6%; operating income was 7.4% of that measure versus 6.8%.
- PTS revenue rose 30.8%; its gross margin on revenue net of other direct costs improved to 8.3% from 8.1%. MSS revenue rose 30.4%, but its corresponding gross margin declined to 12.2% from 14.4%, primarily due to lower activity on a U.S. Army depot maintenance project.
- Net interest expense increased to $9.9 million from $1.0 million, primarily reflecting borrowings used to fund acquisitions. The effective tax rate was 24.8%, broadly unchanged from 24.9%.
Cash, debt and liquidity
- Cash and cash equivalents were $421.2 million at December 31, 2010, down from $612.9 million at September 30, 2010. Working capital was approximately $1.2 billion.
- Operating cash outflow was $179.3 million; investing cash outflow was $350.2 million, including $298.7 million of net cash consideration for acquisitions. Financing provided $334.1 million, mainly from net borrowing. Management attributed much of the year-over-year increase in operating cash use to settlement of the U.S. deferred compensation plan and related share-based payment tax effects.
- Total debt increased to $1,206.5 million from $931.1 million at September 30, 2010. The revolving credit facility had $299.0 million drawn and $269.2 million available; total standby letters of credit outstanding were approximately $189.9 million. AECOM reported compliance with debt covenants.
- Management said anticipated operating cash flows, existing cash, revolving-credit capacity and potential debt or equity issuance were expected to cover projected cash needs for at least the next 12 months.
Material developments, outlook and risks
- AECOM completed five acquisitions during the quarter, including four Davis Langdon businesses and Montreal-based RSW, Inc. Consideration was $298.7 million net cash and $58.9 million in AECOM stock; goodwill increased to $2,007.7 million from $1,690.4 million.
- Backlog at December 31 was approximately $15.5 billion: $7.9 billion contracted and $7.6 billion awarded but not yet signed. The filing cautions that backlog may be delayed, reduced or cancelled and is not a guarantee of future revenue or profit.
- The first fiscal quarter is typically AECOM’s weakest because of weather and holiday effects; management said revenue is typically higher in the second half. The filing provides no specific earnings or revenue guidance. Management characterized liquidity as sufficient for at least 12 months.
- Key exposures include government budget and contract changes, economic and client spending cycles, fixed-price project losses, joint-venture execution, acquisition integration, pension funding, foreign exchange and floating-rate debt. A 1% change in short-term floating rates was estimated to change annual interest expense by about $7.6 million.
- A U.S. Defense Contract Audit Agency challenge concerning about $18 million of withheld payments to a consolidated Kuwait joint venture remained unresolved. Management believed the costs were allowable, but an adverse final outcome and unsuccessful appeals could materially affect results.
- AECOM disclosed various ordinary-course claims and lawsuits that management did not expect to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- How much subsequent growth and profitability are organic versus acquisition-driven, and whether acquired operations are being integrated as planned.
- Whether operating cash flow normalizes after the deferred compensation plan settlement, and how receivables, collections and DSO develop; adjusted DSO was 90 days versus 89 days at fiscal year-end.
- Debt repayment and refinancing capacity, covenant headroom, and sensitivity to higher interest rates.
- Progress and ultimate resolution of the CSA Kuwait labor-law cost dispute and the related payment withholding.
- Backlog conversion and funding, particularly given government budget uncertainty and the expected March 2011 expiration of the SAFETEA-LU transportation funding program.
- Pension funding needs, project and guarantee exposures, and the quality of the significant goodwill balance following acquisitions.