AECOM Technology Corporation — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended June 30, 2011; amounts below are U.S. dollars. The quarter is the company’s fiscal third quarter. Financial statements are unaudited.
Business context
AECOM provides professional technical and management support services worldwide through Professional Technical Services (PTS) and Management Support Services (MSS). Results reflect six acquisitions completed in the first nine months, including four Davis Langdon businesses. Acquisitions contributed substantially to reported growth.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,046.7 million | $1,635.2 million | $5,919.3 million | $4,717.1 million |
| Gross profit | $121.2 million | $115.1 million | $326.3 million | $305.9 million |
| Operating income | $109.9 million | $92.7 million | $287.6 million | $241.6 million |
| Net income attributable to AECOM | $73.8 million | $64.8 million | $188.4 million | $169.1 million |
| Diluted EPS | $0.62 | $0.56 | $1.59 | $1.47 |
| Gross margin on revenue net of other direct costs | 9.2% | 10.8% | 8.5% | 9.9% |
Q3 revenue rose 25.2%, but excluding companies acquired in the prior 12 months it fell 7.4%. Nine-month revenue rose 25.5%, while excluding acquired companies it declined 2.4%. Acquisition contributions were $533.4 million for Q3 and $1.3 billion for the nine-month period. Net income attributable to AECOM increased 13.9% in Q3 and 11.4% year to date.
Gross margin compression reflected weaker underlying gross profit, project mix and lower activity, including the Libya suspension and completion of the Middle East Combat Support contract. Higher joint-venture earnings and lower general and administrative costs supported operating income. Net interest expense rose to $10.4 million in Q3 and $30.3 million year to date, mainly due to acquisition-related borrowings.
Cash flow, liquidity and debt
- Nine-month operating cash flow was negative $130.1 million, versus positive $43.7 million a year earlier. The filing attributes the current-period outflow in part to the $89.7 million deferred-compensation liability settlement and related tax effects.
- Investing cash outflow was $381.6 million, including $365.9 million net cash paid for acquisitions; financing cash inflow was $267.0 million, mainly reflecting net borrowing.
- Cash and cash equivalents were $381.5 million at June 30, down from $612.9 million at September 30, 2010. This includes $26.7 million held in consolidated joint ventures and restricted to those ventures’ use.
- Working capital was approximately $1.3 billion. Net accounts receivable was $2.47 billion; adjusted days sales outstanding increased to 93 days from 89 days at September 30, 2010.
- Total debt was $1.196 billion, up from $931.1 million; long-term debt was $1.165 billion. The company reported a 2.2 leverage ratio against a maximum of 3.0 and compliance with debt covenants at quarter-end.
- In July 2011, AECOM amended and restated its revolving credit facility, increasing capacity from $600 million to $1.05 billion and extending expiry to July 2016. Management said anticipated liquidity sources should meet projected needs for at least 12 months.
Changes, outlook and material matters
- PTS revenue for the nine months increased 29.4%, with acquired companies accounting for most of the increase; excluding acquisitions, revenue increased 1.7%. PTS gross margin on revenue net of other direct costs fell to 8.5% from 9.7%.
- MSS nine-month revenue increased 7.8%, but declined 21.3% excluding acquisitions, primarily because the U.S. government Combat Support project ended in February 2011. MSS gross margin on revenue net of other direct costs fell to 9.2% from 12.6%.
- Management cited continuing challenges in Western Europe, particularly the U.K., and was evaluating restructuring actions. Such actions could reduce Q4 diluted EPS by approximately $0.05. No broader numerical earnings guidance is provided in the supplied filing text.
- The Libya civil unrest halted AECOM’s work on the Libya Housing and Infrastructure Board program. The disruption caused a $10.0 million net expense in the March 2011 quarter; $30.7 million of related liabilities remained on the June 30 balance sheet. The company could not determine whether or when work would resume.
- A U.S. Defense Contract Audit Agency challenge to approximately $18 million of costs for a Kuwait joint venture remained unresolved; the government withheld that amount from current billings. AECOM believed its position was supportable, but an adverse final outcome could materially affect results.
- Backlog at June 30 was approximately $16.0 billion: $9.0 billion contracted and $7.0 billion awarded but not yet signed. The company cautioned that backlog may be delayed, reduced or cancelled and is not assurance of future revenue or profit.
Key risks identified include government budget and contract changes, economic and public-sector spending weakness, acquisition integration, international political instability and currency movements, fixed-price project losses, joint-venture and subcontractor exposure, receivable collection, pension funding, and debt covenant or refinancing risks. Standby letters of credit and other guarantees create contingent exposure; approximately $220.4 million was reported outstanding under standby letters of credit for insurance and performance obligations.
Important facts for investors to verify
- How much of future growth and profitability is organic versus attributable to acquisitions, and whether acquired businesses deliver expected integration benefits.
- Whether underlying gross margins stabilize, particularly in PTS and MSS, and the effect of the announced potential Western Europe restructuring.
- Cash conversion, receivable collection and DSO trends, given negative operating cash flow and rising unbilled receivables.
- Debt levels, borrowing costs, covenant headroom and the terms and availability of the July 2011 expanded revolving facility.
- Developments in the Libya project and the Kuwait DCAA cost challenge, including any additional losses, collections or liabilities.
- Backlog conversion and funding, especially the distinction between contracted and awarded backlog, and exposure to government spending and contract cancellations.