AECOM Technology Corporation — Q3 FY2010 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2010; fiscal year ends September 30. Figures are unaudited. AECOM provides professional technical services (PTS) and management support services (MSS) to commercial and government clients worldwide.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $1,635.2 million, up 6.1% | $4,717.1 million, up 5.0% |
| Gross profit | $115.1 million, up 31.5% | $305.9 million, up 19.5% |
| Income from operations | $92.7 million, up 25.9% | $241.6 million, up 14.2% |
| Net income attributable to AECOM | $64.8 million, up 26.8% | $169.1 million, up 24.9% |
| Diluted EPS attributable to AECOM | $0.56, versus $0.46 | $1.47, versus $1.25 |
| Gross margin on revenue, net of other direct costs (non-GAAP) | 10.8%, versus 9.0% | 9.9%, versus 9.1% |
Revenue growth included acquisition contributions of $65.8 million in the quarter and $174.5 million year to date. Excluding acquired companies, revenue rose 1.8% and 1.1%, respectively. Favorable currency translation and infrastructure/program-management demand supported growth; weakness in privately financed facilities and U.S. infrastructure offset some gains. PTS margin improvement reflected cost initiatives, Earth Tech integration and improved project performance. MSS gross margin fell to 9.4% for the quarter and 12.6% year to date, from 14.0% and 17.0%, respectively, partly because of lower-margin project mix and, in the quarter, staffing costs and an award-fee reserve.
Cash flow, balance sheet and liquidity
- Operating cash flow: $43.7 million for the nine months, down from $107.9 million; management attributed the decline mainly to timing of receivable collections and payments. Investing cash flow was an outflow of $73.4 million; financing cash flow was an inflow of $37.5 million.
- Cash and cash equivalents: $293.9 million at June 30, 2010, including $52.0 million held in consolidated joint ventures.
- Working capital: $811.5 million, versus $657.8 million at September 30, 2009. Accounts receivable was $1,902.6 million; DSO increased to 87 days from 78 days.
- Debt: $188.8 million total at June 30, including $129.1 million outstanding on the $600 million revolving facility. AECOM reported $439.1 million available under that facility and compliance with debt covenants.
- Liquidity outlook: Management said anticipated operating cash flows, cash, borrowing capacity and potential debt or equity issuance should cover projected needs for at least 12 months. This assessment preceded the significant subsequent acquisitions described below.
Material changes, outlook and notable items
- In July, AECOM issued $300 million principal amount of senior notes for net proceeds of $249.8 million: $175 million of 5.43% notes due 2020 and $125 million of 1.00% senior discount notes due 2022. Proceeds were intended for debt repayment and general corporate purposes, including acquisitions.
- AECOM completed its approximately $245 million Tishman Construction acquisition in July, paid with cash and stock. It agreed to acquire McNeil Technologies for $355 million cash, expected to close in Q4 FY2010 or Q1 FY2011, and agreed in August to acquire specified Davis Langdon operations for $324 million in cash and stock, expected to close in Q1 FY2011. The filing says the McNeil and Davis Langdon transactions were planned to be financed with bank term and revolving debt.
- Backlog at June 30 was $9.7 billion: $5.5 billion contracted and $4.2 billion awarded but not yet signed. Management cautions that backlog may be delayed, reduced or cancelled and does not assure future revenue or profit.
- The nine-month effective tax rate declined to 25.0% from 28.5%, primarily due to discrete tax benefits, including IRS audit-related settlements and benefits associated with Australian restructuring and Canadian tax positions. Further tax examinations and settlements could produce differences from accrued amounts.
- Restructuring reserves were $19.5 million at June 30, principally facility costs, and are expected to be paid over five years. A U.S. Defense Contract Audit Agency challenge to employee termination-indemnity costs at a Kuwait joint venture could materially affect results if AECOM’s position and appeals are unsuccessful; management believes the costs comply with Kuwait law.
- AECOM identified seasonal and quarterly variability, dependence on government appropriations and contracts, economic and private-sector spending weakness, fixed-price project execution, joint-venture and subcontractor exposure, international and currency risks, acquisition integration, personnel retention, pension funding and professional-liability risks. It also cited potential government contract audits, termination or insourcing. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether higher DSO and weaker year-to-date operating cash flow reverse as receivables are collected.
- Acquisition closing, financing, integration and purchase-price details for Tishman, McNeil and Davis Langdon, and resulting leverage and margins.
- Backlog conversion, funding status and cancellation exposure, particularly for government and awarded-but-unsigned work.
- Progress and potential financial exposure in the Kuwait DCAA matter, along with outcomes of tax examinations and other contingencies.
- Whether MSS margin pressure persists and whether PTS margin improvement continues excluding currency and acquisitions.