AECOM Technology Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2012; fiscal second quarter of fiscal 2012. Comparative periods are the quarter and six months ended March 31, 2011. Amounts are in U.S. dollars.
Business context
AECOM provides professional technical and management support services to public- and private-sector clients in more than 130 countries. Its two reportable segments are Professional Technical Services (PTS) and Management Support Services (MSS). Government contracts are a significant source of revenue; the company reported approximately 46,000 employees.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $2.011 billion, up 3.8% | $4.040 billion, up 4.3% |
| Revenue, net of other direct costs (non-GAAP) | $1.290 billion, down 0.3% | $2.520 billion, up 0.5% |
| Gross profit | $76.2 million, down 23.6% | $166.5 million, down 18.8% |
| Gross margin on revenue net of other direct costs | 5.9%, versus 7.7% | 6.6%, versus 8.2% |
| Operating income | $73.2 million, down 16.2% | $149.9 million, down 15.6% |
| Net income attributable to AECOM | $49.0 million; diluted EPS $0.43 | $96.9 million; diluted EPS $0.85 |
For the six months, equity earnings from joint ventures rose 33.5% to $25.9 million and general and administrative expenses fell 9.4% to $42.5 million. Net interest expense increased 9.5% to $21.8 million, primarily due to increased acquisition-related borrowings. The six-month effective tax rate was 27.0%, compared with 24.6%.
Segment trend: PTS revenue increased 12.0% to $3.609 billion for the six months, but segment gross profit declined 3.4% to $171.2 million and margin fell to 7.6% from 8.0%. MSS revenue fell 33.7% to $431.6 million; its gross loss was $4.7 million, versus gross profit of $27.8 million. Management attributed MSS weakness to reduced U.S. government work in the Middle East, including project completion and the Iraq drawdown, and weaker performance on several projects.
Cash flow: Operating activities provided $5.0 million for the six months, compared with $146.0 million used in the prior-year period. Investing activities used $38.9 million versus $367.2 million, largely reflecting lower acquisition spending. Financing activities provided $32.7 million versus $294.0 million. Cash and cash equivalents were $465.7 million at March 31, including $87.2 million held in consolidated joint ventures and restricted to those ventures’ use.
Balance sheet and liquidity: Total debt was $1.261 billion, up from $1.163 billion at September 30, 2011; $88.7 million was current. Working capital was $1.231 billion, up 4.7%. Accounts receivable rose to $2.554 billion, and DSO increased to 98 days from 88 days. The $1.05 billion revolving credit facility had $807.2 million available. The company reported a leverage ratio of 2.5 against a maximum of 3.0 and compliance with debt covenants. Management stated that anticipated liquidity sources should meet projected requirements for at least 12 months.
Material changes and notable items
- Revenue growth was led by PTS construction management in the Americas and infrastructure work in Australia and Asia; lower MSS activity and reduced Libya work partly offset gains.
- Revenue growth did not translate into higher profit: gross profit and margins declined, with the largest deterioration in MSS. PTS also reported lower six-month gross profit, primarily from reduced profitability on U.S. engineering and program management work.
- During the six months, AECOM acquired Taiwan-based Capital Engineering Corporation. Acquisition payments were $13.8 million, compared with $303.1 million in the prior-year period.
- The company repurchased approximately 2.9 million shares in the quarter for about $65.3 million. As of March 31, approximately $25.3 million remained under its $200 million authorization. The accelerated share repurchase was settled on March 7; total shares repurchased under that agreement were 4.8 million at an average price of $20.97.
- Backlog at March 31 was $16.0 billion: $8.4 billion contracted and $7.6 billion awarded but not yet signed. Backlog may be delayed, reduced or cancelled and is not a guarantee of future revenue or profit.
Outlook, risks and contingencies
The filing gives no quantitative earnings or revenue guidance. Management noted the business is seasonal, with revenue typically higher in the second half of the fiscal year, and cautioned that six-month results are not necessarily indicative of full-year results. AECOM expected SAFETEA-LU, scheduled to expire in June 2012, to be extended; failure to extend it could adversely affect results.
- Government and market exposure: Government budgets, contract funding, termination or insourcing, economic weakness, and reduced public or private spending could affect demand and profitability.
- Government contract reviews: DCAA questioned approximately $17 million of costs at the CSA joint venture; the government withheld that amount pending resolution. DCAA also questioned costs at GLS, an equity-method joint venture, with approximately $19 million withheld. GLS received a Department of Defense Inspector General subpoena on April 20, 2012. AECOM said adverse outcomes could materially affect results.
- Other legal matters: Australian receivers stated they may seek damages exceeding A$1.4 billion related to a traffic forecast assignment; no action had been filed. U.S. authorities were investigating the Hawaii landfill matter; no action had been filed. Management said it intended to defend claims and believed the company had not committed criminal wrongdoing in the Hawaii matter.
- Libya: Services had ceased in February 2011 amid civil unrest; resumption remained uncertain. Related liabilities were $25.2 million at March 31, 2012. The disruption generated a $10.0 million net expense in the 2011 comparison quarter.
- Other exposures: Performance guarantees and standby letters of credit totaled approximately $228.7 million. Pension liabilities were $151.7 million. Risks also include fixed-price contract losses, joint-venture exposure, professional liability, foreign exchange and floating-rate debt. A 1% rate change would have changed six-month interest expense by approximately $2.6 million; $600 million of variable-rate debt was fixed through swaps.
Important facts for investors to verify
- Whether MSS project performance and margins recover, and how continuing reductions in Middle East government work affect the segment.
- Whether rising receivables and DSO convert to cash; review collection trends and the composition of unbilled receivables and retentions.
- Developments and potential financial exposure from the CSA and GLS DCAA matters, including the GLS subpoena and withheld payments.
- Updates on the threatened Australian claim, Hawaii investigation, and Libya-related liabilities and operations.
- Backlog conversion, funding and contract status—especially awarded backlog not yet signed—and the effect of government appropriations and transportation funding.
- Debt maturities, leverage and covenant headroom, alongside share repurchases and acquisition spending.