AECOM Technology Corporation — Form 10-Q Summary
Business context and reporting period
Reports the unaudited first quarter of fiscal 2012, the three months ended December 31, 2011, compared with the three months ended December 31, 2010. AECOM provides professional technical services (PTS) and management support services (MSS) to commercial and government clients. Its first fiscal quarter is typically its weakest due to weather and holiday-related seasonality.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $2.029 billion | $1.936 billion |
| Gross profit | $90.3 million | $105.3 million |
| Operating income | $76.7 million | $90.2 million |
| Net income attributable to AECOM | $47.9 million | $56.9 million |
| Diluted EPS | $0.42 | $0.48 |
| Net cash used in operating activities | $6.4 million | $179.3 million |
Revenue rose 4.8%, but gross profit fell 14.2%, operating income fell 15.0%, and AECOM-attributable net income fell 15.8%. Gross margin on revenue net of other direct costs, a company-defined non-GAAP measure, declined to 7.3% from 8.7%; operating income was 6.2% of that measure versus 7.4%.
Cash and cash equivalents were $507.5 million at December 31, including $86.6 million held in consolidated joint ventures and restricted to their use. Working capital was $1.305 billion. Total debt was $1.242 billion, up from $1.163 billion at September 30, 2011; cash exceeded debt by approximately $734 million, before considering restrictions on joint-venture cash. AECOM reported $841.6 million available under its $1.05 billion revolving facility. Its leverage ratio was 2.4 against a maximum of 3.0, and it reported compliance with debt covenants.
Operating cash use improved substantially year over year, in part because the prior-year quarter included an $89.7 million deferred-compensation settlement and unusually large share-based payment tax benefits. Receivables rose to $2.514 billion from $2.380 billion; days sales outstanding increased to 95 from 88 days at September 30.
Material changes and operating drivers
- PTS revenue increased 14.7% to $1.807 billion, led by construction management demand in the Americas and infrastructure work in Australia, Asia and North America. Its gross profit declined 5.3% to $84.8 million, with Libya-related service reductions cited as a factor.
- MSS revenue fell 38.5% to $221.8 million, largely because a Middle East combat-support project ended in February 2011. MSS gross profit declined 65.2% to $5.5 million; AECOM cited a $6 million reserve for a cost-recovery matter and project cost write-off, as well as the project completion.
- Revenue net of other direct costs increased only 1.4% to $1.231 billion; acquired companies contributed most of the increase. AECOM completed its acquisition of Taiwan-based Capital Engineering Corporation, paying $7.3 million for a majority interest and agreeing to pay $5.9 million for the remaining shares.
- Quarterly repurchases were approximately 360,000 shares for $7.3 million under the company’s $200 million authorization. The company also had an accelerated share repurchase agreement expected to settle in the first half of fiscal 2012, no later than March 7, 2012.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management stated that cash, operating cash flows, borrowing capacity and potential access to capital should be sufficient for projected requirements for at least the next 12 months. AECOM noted that results are seasonal and not necessarily indicative of the full fiscal year. It reported backlog of $15.8 billion at December 31: $8.5 billion contracted and $7.3 billion awarded but not yet signed; backlog may be delayed, reduced or cancelled and does not assure future revenue or profit.
Key risks include dependence on government contracts and appropriations, possible contract termination or reduced public spending, economic cyclicality, fixed-price project losses, acquisition integration, international political and currency risks, and collection and project-execution risks. AECOM had ceased work on its Libyan infrastructure program amid civil unrest and could not say when or whether it would resume; related balance-sheet liabilities were $25.6 million.
Two government audit disputes could adversely affect results if unresolved: the DCAA questioned costs at Combat Support Associates, with approximately $17 million withheld by the U.S. government, and questioned costs at Global Linguists Solutions, with approximately $14 million withheld. AECOM and the joint ventures disputed the questioned costs; outcomes were uncertain. The company also reported $228.2 million of contingent exposure under standby letters of credit, primarily for insurance and performance guarantees, while stating it did not expect guarantees to have a material adverse effect.
Important facts for investors to verify
- Whether the deterioration in gross margin and earnings, particularly in MSS, persists after the project-related reserve and write-off and the completion of the combat-support contract.
- Receivables collection and DSO trends, given the increase to 95 days and the quarter’s negative operating cash flow.
- Resolution and financial impact of the CSA and GLS DCAA disputes and related government payment withholdings.
- Developments in Libya, including the status of the program and remaining project liabilities.
- Debt, covenant headroom, use of revolving-credit capacity, and final settlement of the accelerated share repurchase agreement.
- Conversion of awarded backlog into signed, funded contracts and whether backlog translates into profitable work.