AECOM Technology Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter and six months ended March 31, 2011, AECOM’s second fiscal quarter. AECOM provides professional technical and management support services through Professional Technical Services (PTS) and Management Support Services (MSS), with approximately 44,500 employees and field staff. Results are unaudited.
Key financial results
| Metric | Three months ended Mar. 31, 2011 | Three months ended Mar. 31, 2010 | Six months ended Mar. 31, 2011 | Six months ended Mar. 31, 2010 |
|---|---|---|---|---|
| Revenue | $1,936.4 million | $1,601.2 million | $3,872.6 million | $3,082.0 million |
| Gross profit | $99.7 million | $107.9 million | $205.1 million | $190.9 million |
| Operating income | $87.5 million | $83.4 million | $177.6 million | $148.9 million |
| Net income attributable to AECOM | $57.7 million | $58.5 million | $114.6 million | $104.3 million |
| Diluted EPS | $0.49 | $0.51 | $0.97 | $0.91 |
- Quarterly revenue rose 20.9%, but excluding businesses acquired in the prior 12 months fell 5.0%. Six-month revenue rose 25.7%; excluding acquisitions it was down 0.3%.
- Gross margin measured against revenue net of other direct costs, a company-defined non-GAAP measure, declined to 7.7% from 10.3% in the quarter and to 8.2% from 9.5% for six months. Operating income increased, while quarterly AECOM-attributable earnings declined.
- Net interest expense rose to $10.0 million for the quarter and $19.9 million for six months, from $2.4 million and $3.4 million, respectively, primarily reflecting acquisition-related borrowing.
- Six-month operating cash flow was negative $146.0 million, compared with negative $86.5 million a year earlier. Investing cash flow was negative $367.2 million, mainly due to acquisitions; financing cash flow was positive $294.0 million, principally from net borrowing.
- Cash and cash equivalents were $403.4 million at March 31, 2011, down from $612.9 million at September 30, 2010. Working capital was approximately $1.2 billion; DSO increased to 92 days from 89.
- Total debt was $1.169 billion, up from $931.1 million at September 30, 2010. The company reported $338.4 million available under its $600 million revolving facility. Its leverage ratio was 2.11 versus a maximum of 3.0, and it reported compliance with debt covenants.
Material changes and operating drivers
- AECOM completed five acquisitions during the six-month period, including four Davis Langdon businesses and Montreal-based RSW. Consideration was $303.1 million cash, net of cash acquired, plus $68.5 million in stock. Goodwill increased to $2.048 billion from $1.690 billion.
- Growth in reported revenue was substantially acquisition-driven. Organic revenue was pressured by completion of a U.S. government Combat Support project in the Middle East, reduced work in the United States, Europe and Libya, and stronger activity in Australia and Asia. Favorable currency movements also supported revenue.
- Joint-venture earnings rose to $11.3 million in the quarter and $19.4 million for six months, compared with $3.4 million and $7.8 million, respectively. Management cited acquired businesses and increased activity in a U.S. Navy joint venture.
- MSS revenue excluding acquisitions declined, mainly because the Combat Support project was completed in February 2011. PTS quarterly gross profit was affected by the Libya project disruption; both segments reported lower gross margin percentages on revenue net of other direct costs.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said expected operating cash flows, existing cash, revolving-credit capacity, and potential debt or equity issuance should cover projected cash requirements for at least the next 12 months.
- Management reported total backlog of $15.4 billion at March 31, 2011: $8.5 billion contracted and $6.9 billion awarded but not yet signed. Backlog may be delayed, reduced, cancelled, or fail to generate expected profits.
- Libya-related civil unrest caused AECOM to stop services in February 2011; continuation is uncertain. The disruption produced a $10.0 million net expense in the quarter, and $35.9 million of project-related liabilities remained on the balance sheet. The company also increased its doubtful-account allowance, primarily because of the project cessation.
- A U.S. Defense Contract Audit Agency questioned approximately $18 million of costs associated with a Kuwait joint venture; the amount was withheld from current billings. AECOM believes the costs were proper, but an adverse final determination and unsuccessful appeals could materially affect results.
- Other notable items include a $4.2 million U.K. and Ireland pension-plan curtailment gain and a $3.0 million tax benefit from retroactively extended research credits. Termination of the U.S. deferred compensation plan involved $223.0 million of distributions and contributed to reported cash-flow and tax-account movements.
- Key risks include government funding and contract termination, economic and public-spending cycles, fixed-price contract losses, joint-venture and subcontractor exposure, acquisition integration, international political and currency risks, pension funding, collection risk, and professional liability. Management stated ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether underlying revenue and margins stabilize after excluding acquisitions, foreign-exchange effects, and completed or disrupted projects.
- Cash conversion, receivables quality and collections, particularly the increase in DSO and the allowance for doubtful accounts.
- Integration and performance of the five acquisitions, including the final valuation of certain acquired assets and liabilities.
- Resolution of the Kuwait DCAA matter and the status of Libya operations, receivables, and remaining liabilities.
- Debt repayment and refinancing capacity, covenant headroom, and sensitivity to floating-rate increases.
- Conversion of contracted and awarded backlog into funded work, revenue, and profitable cash flows.