UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q

(Mark One)

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2007

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                       

 

AECOM TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

61-1088522

(State or other jurisdiction of

 

(I.R.S. Employer

 incorporation or organization)

 

Identification Number)

 

555 South Flower Street, Suite 3700

Los Angeles, California  90071

(Address of principal executive office and zip code)

 

(213) 593-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o      Accelerated filer o      Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of August 1, 2007, 98,335,369 shares of the registrant’s common stock were outstanding.

 

 




 

AECOM TECHNOLOGY CORPORATION
INDEX

PART I.

 

 

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2006 and June 30, 2007 (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2006 and 2007 (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2006 and 2007 (unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2006 and 2007 (unaudited)

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

 

 

 

 

PART II.

 

 

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

2




PART I. FINANCIAL INFORMATION

Item 1.                          Financial Statements

AECOM Technology Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share data)

 

 

September 30,
2006

 

June 30,
2007

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

118,477

 

$

303,601

 

Cash in consolidated joint ventures

 

9,393

 

39,472

 

Total cash and cash equivalents

 

127,870

 

343,073

 

 

 

 

 

 

 

Accounts receivable—net

 

913,178

 

1,051,414

 

Prepaid expenses and other current assets

 

52,827

 

80,016

 

TOTAL CURRENT ASSETS

 

1,093,875

 

1,474,503

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Equipment, furniture and fixtures

 

85,201

 

122,439

 

Leasehold improvements

 

31,539

 

40,928

 

Total

 

116,740

 

163,367

 

Accumulated depreciation and amortization

 

(26,417

)

(49,268

)

PROPERTY AND EQUIPMENT—NET

 

90,323

 

114,099

 

 

 

 

 

 

 

DEFERRED INCOME TAXES—NET

 

98,449

 

103,524

 

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

 

19,943

 

22,493

 

GOODWILL

 

466,508

 

548,243

 

INTANGIBLE AND OTHER ASSETS—NET

 

18,168

 

33,916

 

OTHER NON-CURRENT ASSETS

 

38,508

 

140,411

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,825,774

 

$

2,437,189

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) / EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term debt

 

$

2,716

 

$

2,316

 

Accounts payable

 

265,192

 

235,867

 

Accrued expenses and other current liabilities

 

365,548

 

430,723

 

Billings in excess of costs on uncompleted contracts

 

143,283

 

171,114

 

Income taxes payable

 

35,646

 

36,593

 

Deferred tax liability—net

 

12,824

 

11,784

 

Share purchase liability

 

55,394

 

 

Current portion of long-term debt

 

11,949

 

4,543

 

TOTAL CURRENT LIABILITIES

 

892,552

 

892,940

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

112,970

 

185,903

 

LONG-TERM DEBT

 

122,790

 

56,623

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST

 

18,701

 

17,818

 

REDEEMABLE COMMON AND PREFERRED STOCK AND STOCK UNITS

 

771,207

 

 

NOTES RECEIVABLE FROM STOCKHOLDERS

 

(36,552

)

 

REDEEMABLE PREFERRED STOCK, Class F—47,000 and 0 authorized, issued and outstanding as of September 30, 2006 and June 30, 2007, respectively, $2,500 liquidation preference value

 

117,500

 

 

REDEEMABLE PREFERRED STOCK, Class G—47,000 and 0 authorized, issued and outstanding as of September 30, 2006 and June 30, 2007, respectively, $2,500 liquidation preference value

 

117,500

 

 

 

 

 

 

 

 

STOCKHOLDERS’ (DEFICIT) / EQUITY:

 

 

 

 

 

Convertible preferred stock—authorized, 7,799,780 shares; issued and outstanding 56,203 shares and 46,741 shares as of September 30, 2006 and June 30, 2007, respectively, $100 liquidation preference value

 

 

4,674

 

Preferred stock, Class C—authorized, 200 shares; issued and outstanding, 56.297 and 71.368 as of September 30, 2006 and June 30, 2007, respectively, no par value, $1.00 liquidation preference value

 

 

 

Preferred stock, Class E—authorized, 20 shares; issued and outstanding, 5.427 and 5.736 as of September 30, 2006 and June 30, 2007, respectively, no par value, $1.00 liquidation preference value

 

 

 

Common stock—authorized, 150,000,000 shares of $0.01 par value; issued and outstanding, 34,183,074 and 98,204,106 shares as of September 30, 2006 and June 30, 2007, respectively

 

 

982

 

Additional paid-in capital

 

(254,225

)

1,253,321

 

Accumulated other comprehensive loss

 

(36,669

)

(20,373

)

Retained earnings

 

 

45,301

 

TOTAL STOCKHOLDERS’ (DEFICIT) / EQUITY

 

(290,894

)

1,283,905

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) / EQUITY

 

$

1,825,774

 

$

2,437,189

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

3




AECOM Technology Corporation
Condensed Consolidated Statements of Income
(unaudited—in thousands, except per share data)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

June 30,
2007

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

911,486

 

$

1,100,656

 

$

2,517,213

 

$

3,122,914

 

Cost of revenue

 

678,581

 

788,565

 

1,855,246

 

2,278,531

 

Gross profit

 

232,905

 

312,091

 

661,967

 

844,383

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures

 

1,554

 

3,992

 

4,117

 

7,628

 

General and administrative expenses

 

209,340

 

270,401

 

591,161

 

738,376

 

Income from operations

 

25,119

 

45,682

 

74,923

 

113,635

 

 

 

 

 

 

 

 

 

 

 

Minority interest in share of earnings

 

3,022

 

3,824

 

8,503

 

9,058

 

Gain on the sale of equity investment

 

 

 

 

11,286

 

Interest expense — net

 

2,528

 

6,312

 

10,318

 

9,615

 

Income before income tax expense

 

19,569

 

35,546

 

56,102

 

106,248

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

6,262

 

11,360

 

17,953

 

35,343

 

Net income

 

$

13,307

 

$

24,186

 

$

38,149

 

$

70,905

 

 

 

 

 

 

 

 

 

 

 

Net income allocation:

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

$

78

 

$

68

 

$

2,125

 

$

184

 

Net income available for common stockholders

 

13,229

 

24,118

 

36,024

 

70,721

 

Net income

 

$

13,307

 

$

24,186

 

$

38,149

 

$

70,905

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.30

 

$

0.66

 

$

1.09

 

Diluted

 

$

0.18

 

$

0.26

 

$

0.55

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

55,762

 

80,915

 

54,242

 

64,948

 

Diluted

 

73,882

 

92,037

 

69,804

 

83,013

 

 

Condensed Consolidated Statements of Comprehensive Income
(unaudited—in thousands)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

June 30,
 2007

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,307

 

$

24,186

 

$

38,149

 

$

70,905

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(372

)

9,122

 

414

 

16,296

 

Comprehensive income

 

$

12,935

 

$

33,308

 

$

38,563

 

$

87,201

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

4




 

AECOM Technology Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited—in thousands)

 

 

Nine Months Ended
June 30,

 

 

 

2006

 

2007

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

38,149

 

$

70,905

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

28,536

 

30,980

 

Equity in earnings of unconsolidated joint ventures

 

(4,117

)

(7,628

)

Distribution of earnings from unconsolidated joint ventures

 

6,904

 

6,284

 

Stock match and other non-cash stock compensation

 

10,076

 

19,648

 

Write-off of deferred financing costs and make-whole premium

 

2,100

 

3,166

 

Interest income on notes from stockholders

 

(1,576

)

(754

)

Foreign currency translation

 

(1,391

)

5,110

 

Gain on sale of equity investment

 

 

(11,286

)

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

(121,651

)

(78,880

)

Prepaid expenses and other assets

 

2,441

 

(46,285

)

Accounts payable

 

47,973

 

(31,140

)

Accrued expenses and other current liabilities

 

21,841

 

44,476

 

Billings in excess of costs on uncompleted contracts

 

20,153

 

22,126

 

Income taxes payable

 

5,471

 

(213

)

Other long-term obligations

 

(716

)

(6,170

)

Net cash provided by operating activities

 

54,193

 

20,339

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Payments for business acquisitions, net of cash acquired

 

(34,089

)

(137,460

)

Proceeds from the sale of equity investment

 

 

14,683

 

Net investments in unconsolidated joint ventures

 

2,310

 

(237

)

Payments for capital expenditures

 

(21,542

)

(32,941

)

Proceeds on sale of property and equipment

 

20,959

 

 

Net cash used in investing activities

 

(32,362

)

(155,955

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowings under credit agreements

 

253,284

 

55,726

 

Repayments of borrowings under long-term obligations

 

(297,989

)

(133,611

)

Proceeds from issuance of common stock and preferred stock

 

41,013

 

54,561

 

Proceeds from issuance of stock upon exercise of stock options

 

5,050

 

4,102

 

Net proceeds from the issuance of Class F and Class G preferred stock

 

232,120

 

 

Net proceeds from the issuance of common stock in initial public offering

 

 

469,378

 

Funding of stock purchase plan rabbi trust

 

 

(75,413

)

Repurchase of Class D preferred stock

 

(116,486

)

 

Repayment of notes receivable from stockholders

 

1,306

 

22,663

 

Payments to repurchase common stock and common stock units

 

(49,905

)

(48,581

)

Payments of dividends on convertible preferred stock

 

(1,900

)

 

Net cash provided by financing activities

 

66,493

 

348,825

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(26

)

1,994

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

88,298

 

215,203

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

54,302

 

127,870

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

142,600

 

$

343,073

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5




AECOM Technology Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.   Basis of Presentation

The accompanying condensed consolidated financial statements of AECOM Technology Corporation, or the Company, are unaudited, and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented.  All inter-company balances and transactions are eliminated in consolidation.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10 as filed with the Securities and Exchange Commission on July 3, 2007 for the fiscal year ended September 30, 2006.

The results of operations for the three and nine months ended June 30, 2007 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2007.

All share and per share amounts reflect, on a retroactive basis, the 2-for-1 stock split effected in the form of a 100% stock dividend wherein one additional share of stock was issued effective May 4, 2007 for each share outstanding as of the record date of May 4, 2007.

2.    Initial Public Offering

In May 2007, the Company completed the initial public offering of 40,422,500 shares of common stock, which included the exercise of the underwriters’ over-allotment option to purchase 5,272,500 shares, at $20.00 per share, before underwriting discounts and commissions.  Of the total shares sold in the offering, 15,261,203 were sold by stockholders of the Company.  Proceeds to AECOM, net of underwriting discounts, commissions, and other offering related costs were approximately $469,400,000, of which $75,400,000 was used to fund elections by employees to diversify their holdings in the Company’s stock purchase plan.  Proceeds to the selling stockholders, net of underwriting discounts and commissions, were approximately $286,500,000.  The Company’s common stock commenced trading on the New York Stock Exchange under the ticker symbol “ACM” on May 10, 2007.

Additionally, effective with the closing of the initial public offering, all of the Company’s redeemable common and preferred stock and stock units were converted into common stock and stock units.  The Company funded a rabbi trust for the deferred compensation obligations of the diversified stock purchase plan balances, and has recorded the assets within other non-current assets and the related liability within other long-term liabilities.  Prior to the initial public offering, redeemable common and preferred stock and stock units were classified outside permanent equity because redemption was not solely within the control of the Company.

3.   Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  Total cash and cash equivalents includes cash in consolidated joint ventures.

4.   Accounts Receivable—Net

Net accounts receivable consisted of the following as of September 30, 2006 and June 30, 2007:

 

September 30,
2006

 

June 30,
2007

 

 

 

(in thousands)

 

Billed

 

$

543,606

 

$

609,467

 

Unbilled

 

372,034

 

445,818

 

Contract retentions

 

38,921

 

45,839

 

Total accounts receivable—gross

 

954,561

 

1,101,124

 

Allowance for doubtful accounts

 

(41,383

)

(49,710

)

Total accounts receivable—net

 

$

913,178

 

$

1,051,414

 

 

 

 

 

 

 

Billings in excess of costs on uncompleted contracts

 

$

143,283

 

$

171,114

 

 

6




 

Billed accounts receivable represent amounts billed to clients that have yet to be collected.  Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end.  Substantially all unbilled receivables as of September 30, 2006 and June 30, 2007 are expected to be billed and collected within twelve months of such date.  Contract retentions represent amounts invoiced to clients where payments have been withheld pending the completion of certain milestones, other contractual conditions or upon the completion of the project.  These retention agreements vary from project to project and could be outstanding several months or years.

Allowances for doubtful accounts have been determined through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience.

Other than the U.S. government, no single client accounted for more than 10% of the Company’s accounts receivable as of September 30, 2006 or June 30, 2007.

5.   Goodwill and Acquired Intangible Assets

The changes in the carrying value of goodwill by reporting unit for the nine months ended June 30, 2007 were as follows:

 

September 30,
2006

 

Post
Acquisition
Adjustments

 

Acquired

 

June 30,
2007

 

 

 

(in thousands)

 

Professional Technical Services

 

$

457,575

 

$

464

 

$

81,771

 

$

539,810

 

Management Support Services

 

8,933

 

(500

)

 

8,433

 

Total

 

$

466,508

 

$

(36

)

$

81,771

 

$

548,243

 

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of September 30, 2006 and June 30, 2007 included in intangible and other assets—net in the accompanying condensed consolidated balance sheets, were as follows:

 

September 30, 2006

 

June 30, 2007

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Gross
Amount

 

Accumulated
Amortization

 

 

 

(in thousands)

 

Backlog

 

$

16,687

 

$

15,254

 

$

28,776

 

$

21,098

 

Customer Relationships

 

18,179

 

2,180

 

28,773

 

3,928

 

Trade-Names

 

899

 

163

 

1,773

 

380

 

Total

 

$

35,765

 

$

17,597

 

$

59,322

 

$

25,406

 

 

At the time of acquisition, the Company estimates the amount of the identifiable intangible assets acquired based upon historical valuations and the facts and circumstances available at the time.  The Company concludes the value of the identifiable intangible assets during the purchase allocation period, which does not extend beyond 12 months from the date of acquisition.  However, based upon the date of acquisition, the purchase allocation period may cross into subsequent fiscal periods.

The following table presents estimated amortization expense for the remainder of fiscal 2007 and for the succeeding years:

Fiscal Year

 

 

 

(in thousands)

 

2007

 

$

4,094

 

2008

 

7,354

 

2009

 

3,232

 

2010

 

3,222

 

2011

 

3,079

 

Thereafter

 

12,935

 

Total

 

$

33,916

 

 

7




 

6.   Disclosures About Pension Benefit Obligations

The Company’s pension cost for the three and nine months ended June 30, 2006 and 2007 includes the following components:

 

Three Months Ended 
June 30,

 

Nine Months Ended
June 30,

 

U.S. Plans

 

 

 

2006

 

2007

 

2006

 

2007

 

 

 

(in thousands)

 

Service costs

 

$

765

 

$

651

 

$

2,295

 

$

1,953

 

Interest cost on projected benefit obligation

 

1,678

 

1,876

 

5,034

 

5,629

 

Expected return on plan assets

 

(1,621

)

(1,719

)

(4,863

)

(5,157

)

Amortization of prior service costs

 

(290

)

(289

)

(870

)

(867

)

Amortization of net loss

 

1,433

 

982

 

4,299

 

2,946

 

Net periodic benefit cost

 

$

1,965

 

$

1,501

 

$

5,895

 

$

4,504

 

 

 

Three Months Ended 
June 30,

 

Nine Months Ended
June 30,

 

Non-U.S. Plans

 

 

 

2006

 

2007

 

2006

 

2007

 

 

 

(in thousands)

 

Service costs

 

$   1,316

 

$   1,170

 

$   3,948

 

$   3,633

 

Interest cost on projected benefit obligation

 

3,812

 

4,499

 

11,436

 

13,160

 

Expected return on plan assets

 

(3,427

)

(4,267

)

(10,281

)

(12,275

)

Amortization of prior service costs

 

(220

)

(101

)

(660

)

(624

)

Amortization of net gain

 

1,459

 

979

 

4,377

 

2,897

 

Curtailment gain recognized

 

 

 

 

(2,646

)

Net periodic benefit cost

 

$   2,940

 

$   2,280

 

$   8,820

 

$   4,145

 

 

The total amounts of employer contributions paid for the three and nine months ended June 30, 2007 were $2.5 and $2.6 million, respectively, for U.S. plans and $20.4 and $28.1 million, respectively for non-U.S. plans.  The expected remaining scheduled annual employer contributions for fiscal year September 30, 2007 are $0.6 million for U.S. plans and $4.0 million for non-U.S. plans.

7.   Reportable Segments

The Company’s operations are organized by two reportable segments: Professional Technical Services and Management Support Services.  This segmentation corresponds to how the Company manages its business as well as the underlying characteristics of its markets.

Management internally analyzes the results of the Company’s segments and operations using the non-GAAP measure of revenue, net of other direct costs which is a measure of work performed by the Company obtained by subtracting subcontractor fees and related costs from revenue.

8




 

The following tables set forth summarized financial information concerning the Company’s reportable segments:

Reportable Segments:

 

 

 

Professional
Technical
Services

 

Management
Support
Services

 

Total

 

 

 

(in thousands)

 

Three Months Ended June 30, 2006:

 

 

 

 

 

 

 

Revenue

 

$

720,347

 

$

190,695

 

$

911,042

 

Revenue, net of other direct costs

 

465,143

 

26,417

 

491,560

 

Gross profit

 

225,293

 

10,323

 

235,616

 

Gross profit as a % of revenue

 

31.3

%

5.4

%

25.9

%

Gross profit as a % of revenue, net of other direct costs

 

48.4

%

39.1

%

47.9

%

Equity in earnings of joint ventures

 

560

 

994

 

1,554

 

General and administrative expenses

 

191,251

 

4,865

 

196,116

 

Segment income from operations

 

34,602

 

6,452

 

41,054

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2007:

 

 

 

 

 

 

 

Revenue

 

$

903,386

 

$

196,307

 

$

1,099,693

 

Revenue, net of other direct costs

 

611,800

 

31,140

 

642,940

 

Gross profit

 

302,434

 

11,738

 

314,172

 

Gross profit as a % of revenue

 

33.5

%

6.0

%

28.6

%

Gross profit as a % of revenue, net of other direct costs

 

49.4

%

37.7

%

48.9

%

Equity in earnings of joint ventures

 

830

 

2,928

 

3,758

 

General and administrative expenses

 

252,598

 

5,394

 

257,992

 

Segment income from operations

 

50,666

 

9,272

 

59,938

 

Segment assets

 

1,775,242

 

177,561

 

1,952,803

 

 

Reportable Segments:

 

 

 

Professional
Technical
Services

 

Management
Support
Services

 

Total

 

 

 

(in thousands)

 

Nine Months Ended June 30, 2006:

 

 

 

 

 

 

 

Revenue

 

$

2,039,968

 

$

476,342

 

$

2,516,310

 

Revenue, net of other direct costs

 

1,320,166

 

72,674

 

1,392,840

 

Gross profit

 

637,185

 

27,684

 

664,869

 

Gross profit as a % of revenue

 

31.2

%

5.8

%

26.4

%

Gross profit as a % of revenue, net of other direct costs

 

48.3

%

38.1

%

47.7

%

Equity in earnings of joint ventures

 

1,965

 

2,151

 

4,116

 

General and administrative expenses

 

550,796

 

13,175

 

563,971

 

Segment income from operations

 

88,354

 

16,660

 

105,014

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2007:

 

 

 

 

 

 

 

Revenue

 

$

2,497,950

 

$

621,478

 

$

3,119,428

 

Revenue, net of other direct costs

 

1,653,559

 

79,850

 

1,733,409

 

Gross profit

 

815,663

 

32,697

 

848,360

 

Gross profit as a % of revenue

 

32.7

%

5.3

%

27.2

%

Gross profit as a % of revenue, net of other direct costs

 

49.3

%

40.9

%

48.9

%

Equity in earnings of joint ventures

 

1,845

 

6,668

 

8,513

 

General and administrative expenses

 

688,541

 

17,200

 

705,741

 

Segment income from operations

 

128,967

 

22,165

 

151,132

 

Segment assets

 

1,775,242

 

177,561

 

1,952,803

 

 

9




 

 

Three Months Ended 

 

Nine Months Ended

 


Reconciliations:

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

June 30,
2007

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

Revenue from reportable segments

 

$

911,042

 

$

1,099,693

 

$

2,516,310

 

$

3,119,428

 

Other revenue

 

444

 

963

 

903

 

3,486

 

Total consolidated revenue

 

$

911,486

 

$

1,100,656

 

$

2,517,213

 

$

3,122,914

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

Gross profit from reportable segments

 

$

235,616

 

$

314,172

 

$

664,869

 

$

848,360

 

Other

 

(2,711

)

(2,081

)

(2,902

)

(3,977

)

Total consolidated gross profit

 

$

232,905

 

$

312,091

 

$

661,967

 

$

844,383

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures:

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures from reportable segments

 

$

1,554

 

$

3,758

 

$

4,116

 

$

8,513

 

Other equity in earnings of joint ventures

 

 

234

 

1

 

(885

)

Total consolidated equity in earnings of joint ventures

 

$

1,554

 

$

3,992

 

$

4,117

 

$

7,628

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

General and administrative expenses of reportable segments

 

$

196,116

 

$

257,992

 

$

563,971

 

$

705,741

 

Unallocated corporate general and administrative expense

 

13,224

 

12,409

 

27,190

 

32,635

 

Total general and administrative expense

 

$

209,340

 

$

270,401

 

$

591,161

 

$

738,376

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

Segment income from operations

 

$

41,054

 

$

59,938

 

$

105,014

 

$

151,132

 

Loss from operations not allocated to reportable segments

 

(15,935

)

(14,256

)

(30,091

)

(37,497

)

Total consolidated income from operations

 

$

25,119

 

$

45,682

 

$

74,923

 

$

113,635

 

 

 

 

 

 

 

 

 

 

 

Segment assets:

 

 

 

 

 

 

 

 

 

Total assets of reportable segments

 

 

 

 

 

 

 

$

1,952,803

 

Other assets not allocated to reportable segments and eliminations

 

 

 

 

 

 

 

484,386

 

Total assets

 

 

 

 

 

 

 

$

2,437,189

 

 

8.   Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (SFAS 159).  SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  SFAS No. 159 will be effective for the Company’s fiscal year ending September 30, 2009.  The Company is currently evaluating the potential impact of the provisions of SFAS 159 on its results of operations and financial position.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158).  SFAS 158 requires employers to fully recognize the obligations associated with defined benefit pension plans in their financial statements.  The Company will be required to initially recognize such obligations and apply the disclosure requirements as of the end of current fiscal year ending September 30, 2007.  Additionally, the Company will be required to measure such obligations as of the end of its fiscal year, rather than up to three months earlier as had been previously permitted, effective in its fiscal year ending September 30, 2009.  The Company is currently evaluating the impact of the provisions of SFAS 158 on its results of operations and financial position.

10




 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles (GAAP), and expands disclosures about fair value measurements.  The provisions of SFAS 157 will be effective for the Company’s fiscal year ending September 30, 2009.  The Company is currently evaluating the potential impact of the provisions of SFAS 157 on its results of operations and financial position.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements.  FIN 48 prescribes that a company should use a “more-likely-than-not” recognition threshold for such income taxes based on the technical merits of the tax position taken.  Additionally, FIN 48 provides guidance on recognition or de-recognition of interest and penalties, changes in judgment in interim periods, and disclosures of uncertain tax positions.  FIN 48 becomes effective for the Company in the period beginning October 1, 2007.  The Company is in the process of determining the effect of the adoption of FIN 48 on its results of operations and financial position.

9.   Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment” (SFAS 123R) that requires the Company to expense the value of employee stock options and similar awards.  Under SFAS 123R, share-based payment (SBP) awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest.

SFAS 123R became effective for the Company on October 1, 2006.  Upon adoption of SFAS 123R, the Company implemented the prospective transition method.  Under this method, prior periods were not restated to reflect the impact of SFAS 123R.  SFAS 123R requires that the Company recognize as compensation expense the fair value of all stock-based awards, including stock options, granted to employees and directors in exchange for services over the requisite service period, which is typically the vesting period.  SFAS 123R also requires that cash flows resulting from tax benefits realized from stock option exercises or stock vesting events in excess of tax benefits recognized from stock-based compensation expenses be classified as cash flows from financing activities instead of cash flows from operating activities for awards subject to SFAS 123R.

Prior to October 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  Under the intrinsic value method, no compensation expense was reflected in the statement of income for stock options granted to employees, as all stock options had an exercise price equal to the fair value of the underlying common stock on the date of grant.

Under the prospective transition method, the Company continues to account for options granted prior to October 1, 2006 under the provisions of APB Opinion No. 25 to the extent vested.  Since stock options had an exercise price equal to the fair value of the underlying common stock on the date of grant, no compensation expense will be recognized for options granted prior to October 1, 2006 unless modifications are made to those options.  Prior to the adoption of SFAS 123R, the fair value of stock options used to disclose pro forma net income and earnings per share disclosures was the estimated value using the minimum value method as allowed for non-public companies.  The adoption of SFAS 123R did not have a material effect on the Company’s results of operations, financial position, or cash flows.

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model.  The expected term of awards granted represents the period of time the awards are expected to be outstanding.  As the Company’s common stock was not publicly-traded when options were granted, expected volatility was based on a historical volatility, for a period consistent with the expected option term, of publicly-traded peer companies.  The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the option on the grant date.  The Company uses historical data as a basis to estimate forfeitures.

The fair value of options granted during the three and nine months ended June 30, 2007 was determined using the following weighted average assumptions:

 

Three
Months Ended
June 30, 2007

 

Nine
Months Ended
June 30, 2007

 

Dividend yield

 

 

 

Expected volatility

 

25

%

25

%

Risk-free interest rate

 

4.6

%

4.6

%

Term (in years)

 

7

 

7

 

 

11




 

Under SFAS 123R, the Company’s net income for the three and nine months ended June 30, 2007 was $0.2 million and $0.5 million, respectively, lower than under the Company’s previous accounting method, as a result of recognizing as expense the fair value of stock options.

Stock option activity for the nine months ended June 30, 2007 was as follows:

 

Shares of
stock under
options

 

Weighted
average
exercise price

 

Aggregate
intrinsic value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2006

 

8,928,640

 

$

8.42

 

$

75,213

 

Options granted

 

675,565

 

14.79

 

9,994

 

Options forfeited or expired

 

(27,466

)

13.68

 

(376

)

Options exercised

 

(1,367,303

)

7.81

 

(10,683

)

Outstanding at June 30, 2007

 

8,209,436

 

9.03

 

$

74,148

 

 

 

 

 

 

 

 

 

Vested and expected to vest in the future as of June 30, 2007

 

8,196,405

 

$

9.02

 

$

73,953

 

 

The weighted average grant-date fair value of stock options granted during the nine months ended June 30, 2007 was $5.76.

10.   Earnings Per Share

Basic earnings per share, or EPS, excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding and dilutive potential common shares for the period.  The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options using the treasury stock method.

The following table sets forth the computation of basic and diluted EPS:

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

June 30,
2007

 

 

 

(in thousands, except per share data)

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

13,307

 

$

24,186

 

$

38,149

 

$

70,905

 

Preferred stock dividends

 

78

 

68

 

2,125

 

184

 

Net income available for common stockholders

 

$

13,229

 

$

24,118

 

$

36,024

 

$

70,721

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

55,762

 

80,915

 

54,242

 

64,948

 

Potential common shares:

 

 

 

 

 

 

 

 

 

Preferred stock, Class D

 

 

 

4,221

 

 

Preferred stock, Class F and G

 

15,562

 

7,829

 

8,591

 

15,108

 

Stock options

 

2,126

 

2,988

 

2,159

 

2,562

 

Preferred stock, other

 

432

 

305

 

434

 

395

 

Stock warrants

 

 

 

157

 

 

Denominator for diluted earnings per share

 

73,882

 

92,037

 

69,804

 

83,013

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.30

 

$

0.66

 

$

1.09

 

Diluted

 

$

0.18

 

$

0.26

 

$

0.55

 

$

0.85

 

 

For the three and nine months ended June 30, 2006 and 2007, no stock options were excluded from the calculation or were considered anti-dilutive.

12




 

11.   Stock Plans

Prior to our initial public offering of common stock, shares held by previous employees were repurchased by the Company.  During the nine months ended June 30, 2007, the Company’s Global Stock Program, or GSP, sold to the Company 1.5 million shares for $21.5 million as compared to 1.6 million for $20.0 million during the nine months ended June 30, 2006.  During the nine months ended June 30, 2007, the Company’s Stock Purchase Plan, or SPP, sold to the Company 0.7 million shares for $10.1 million as compared to 0.6 million shares for $8.3 million during the nine months ended June 30, 2006.  During the nine months ended June 30, 2007, direct shareholders sold to the Company 1.1 million shares for $16.2 million as compared to 1.3 million shares for $17.6 million during the nine months ended June 30, 2006.

12.   Commitments and Contingencies

The Company is subject to certain claims and lawsuits typically filed against the engineering and consulting profession, alleging primarily professional errors or omissions.  The Company carries professional liability insurance against such claims, subject to certain deductibles and policy limits.  From time to time the Company establishes reserves for litigation that is considered a probable loss.  In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the financial position of the Company.

At June 30, 2007, the Company was contingently liable in the amount of approximately $49.1 million under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for payment and performance guarantees relating to domestic and overseas contracts.  In addition, in some instances the Company guarantees that a project, when complete, will achieve specified performance standards.  If the project subsequently fails to meet guaranteed performance standards, the Company may either incur significant additional costs or be held responsible for the costs incurred by the client to achieve the required performance standards.

Under joint venture arrangements, if a partner is financially unable to complete its share of the contract, the other partner(s) will generally be required to complete those activities.  The Company generally only enters into joint venture arrangements with partners who are reputable, financially sound and who carry appropriate levels of surety bonds for the project in order to adequately assure completion of their assignments.  The Company is a partner in certain joint ventures where the joint venture has contracted with subconsultants for certain specialized professional services.  The joint venture, or the Company to the extent that the joint venture partner(s) are unable to fulfill their responsibilities, is liable to the third-party customer for performance of the sub-consultant and would be liable to the sub-consultant if the third-party customer fails to make payments due the joint venture for sub-consultant services.

 

13




 

Item 2.  Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Forward-Looking Statements

This Quarterly Report contains certain forward-looking statements, including the plans and objectives of management for our business, operations and economic performance.  These forward-looking statements generally can be identified by the context of the statement or the use of forward-looking terminology, such as “believes,” “estimates,” “anticipates,” “intends,” “expects,” “plans,” “is confident that” or words of similar meaning, with reference to us or our management.  Similarly, statements that describe our future operating performance, financial results, financial position, plans, objectives, strategies or goals are forward-looking statements.  Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward-looking statements are subject to various factors, risks and uncertainties, many of which are beyond our control, including, but not limited to, our dependence on long-term government contracts, which are subject to uncertainties concerning the government’s budgetary approval process, the possibility that our government contracts may be terminated by the government, our ability to successfully manage our joint ventures, the risk of employee misconduct or our failure to comply with laws and regulations, our ability to successfully execute our mergers and acquisitions strategy, including the integration of new companies into our business, our ability to attract and retain key technical and management personnel, our ability to complete our backlog of uncompleted projects as currently projected, our liquidity and capital resources and changes in regulations or legislation that could affect us.  Accordingly, actual results could differ materially from those contemplated by any forward-looking statement.  In addition to the other risks and uncertainties mentioned in connection with certain forward-looking statements throughout this Quarterly Report, please review “Part II, Item 1A — Risk Factors” in this Quarterly Report for a discussion of the factors, risks and uncertainties that could affect our future results.

Overview

We are a leading global provider of professional technical and management support services for commercial and government clients around the world.  We provide our services in a broad range of end markets and strategic geographic markets through a global network of operating offices and more than 31,000 employees and staff employed in the field on a project-by-project basis.

Our business focuses primarily on providing fee-based professional technical and support services and, as such, we are labor and not capital intensive.  We derive income from our ability to generate revenue and collect cash from our clients through the billing of our employees’ time and our ability to manage our costs.  We operate our business through two segments:  Professional Technical Services (PTS) and Management Support Services (MSS).

Our PTS segment delivers planning, consulting, architecture and engineering design, and program and construction management services to institutional, commercial and government clients worldwide in major end markets such as transportation, facilities and environmental markets.  PTS revenue is primarily derived from fees from services that we provide, as opposed to pass-through fees from subcontractors and other direct costs.  As a percentage of PTS revenue, our other direct costs, including subcontractor and consultant costs, typically range from 30% to 38%.  Our gross margin as a percentage of PTS revenue typically ranges from 30% to 35%, depending on the nature and scope of the underlying projects.

Our MSS segment provides facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government.  MSS revenue typically includes a significant amount of pass-through fees from subcontractor and other direct costs.  As a percentage of MSS revenue, other direct costs, including subcontractor, consultants and material costs typically range from 85% to 87%.  Our gross margin as a percentage of MSS revenue typically ranges from 3% to 5%, depending on the level of other direct costs required, which can vary significantly from period to period.

In summary, our revenue is dependent on our ability to attract qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts, renew existing client agreements and provide outstanding services.  Moreover, as a professional services company, the quality of the work generated by our employees is integral to our generation of revenue and profits.

Our costs are driven primarily by the compensation we pay to our employees, including fringe benefits, the cost of hiring subcontractors and other project-related expenses, and sales and general and administrative overhead costs.

14




 

Components of Income and Expense

Our management analyzes the results of our operations using two financial measures that are not in accordance with generally accepted accounting principles in the United States (GAAP):  revenue, net of other direct costs and cost of revenue, net of other direct costs.

The following table presents, for the periods indicated, a presentation of the non-GAAP financial measures reconciled to the closest GAAP measures:

 

 

Year Ended September 30,

 

Nine Months Ended
June 30,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2006

 

2007

 

 

 

(in millions)

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,747

 

$

1,915

 

$

2,012

 

$

2,395

 

$

3,421

 

$

2,517

 

$

3,123

 

Other direct costs

 

671

 

725

 

776

 

933

 

1,521

 

1,123

 

1,387

 

Revenue, net of other direct costs

 

1,076

 

1,190

 

1,236

 

1,462

 

1,900

 

1,394

 

1,736

 

Cost of revenue, net of other direct costs

 

598

 

656

 

667

 

785

 

994

 

732

 

892

 

Gross profit

 

478

 

534

 

569

 

677

 

906

 

662

 

844

 

Equity in earnings of joint ventures

 

1

 

2

 

3

 

2

 

7

 

4

 

8

 

Amortization expense of acquired intangible assets

 

 

 

 

3

 

15

 

11

 

8

 

Other general and administrative expenses

 

430

 

467

 

485

 

578

 

795

 

580

 

730

 

General and administrative expenses

 

430

 

467

 

485

 

581

 

810

 

591

 

738

 

Income from operations

 

$

49

 

$

69

 

$

87

 

$

98

 

$

103

 

$

75

 

$

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other direct costs

 

$

671

 

$

725

 

$

776

 

$

933

 

$

1,521

 

$

1,123

 

$

1,387

 

Cost of revenue, net of other direct costs

 

598

 

656

 

667

 

785

 

994

 

732

 

892

 

Cost of revenue

 

$

1,269

 

$

1,381

 

$

1,443

 

$

1,718

 

$

2,515

 

$

1,855

 

$

2,279

 

 

Results of Operations

Consolidated Results

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30

 

June 30

 

Change

 

June 30

 

June 30

 

Change

 

 

 

2006

 

2007

 

$

 

%

 

2006

 

2007

 

$

 

%

 

 

 

(in thousands)

 

Revenue

 

$

911,486

 

$

1,100,656

 

$

189,170

 

20.8

%

$

2,517,213

 

$

3,122,914

 

$

605,701

 

24.1

%

Other direct costs

 

419,482

 

456,965

 

37,483

 

8.9

 

1,123,470

 

1,386,608

 

263,138

 

23.4

 

Revenue, net of other direct costs

 

492,004

 

643,691

 

151,687

 

30.8

 

1,393,743

 

1,736,306

 

342,563

 

24.6

 

Cost of revenue, net of other direct costs

 

259,099

 

331,600

 

72,501

 

28.0

 

731,776

 

891,923

 

160,147

 

21.9

 

Gross profit

 

232,905

 

312,091

 

79,186

 

34.0

 

661,967

 

844,383

 

182,416

 

27.6

 

Equity in earnings of joint ventures

 

1,554

 

3,992

 

2,438

 

156.9

 

4,117

 

7,628

 

3,511

 

85.3

 

General and administrative expenses

 

209,340

 

270,401

 

61,061

 

29.2

 

591,161

 

738,376

 

147,215

 

24.9

 

Income from operations

 

25,119

 

45,682

 

20,563

 

81.9

 

74,923

 

113,635

 

38,712

 

51.7

 

Minority interest in share of earnings

 

3,022

 

3,824

 

802

 

26.5

 

8,503

 

9,058

 

555

 

6.5

 

Gain on sale of equity investment

 

 

 

 

0.0

 

 

11,286

 

11,286

 

 

Interest expense, net

 

2,528

 

6,312

 

3,784

 

149.7

 

10,318

 

9,615

 

(703

)

(6.8

)

Income before income tax expense

 

19,569

 

35,546

 

15,977

 

81.6

 

56,102

 

106,248

 

50,146

 

89.4

 

Income tax expense

 

6,262

 

11,360

 

5,098

 

81.4

 

17,953

 

35,343

 

17,390

 

96.9

 

Net income

 

$

13,307

 

$

24,186

 

$

10,879

 

81.8

%

$

38,149

 

$

70,905

 

$

32,756

 

85.9

%

 

15




 

The following table presents the percentage relationship of certain items to revenue, net of other direct costs:

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

June 30,
2007

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

52.7

%

51.5

%

52.5

%

51.4

%

Gross profit

 

47.3

%

48.5

%

47.5

%

48.6

%

Equity in earnings of joint ventures

 

0.3

%

0.6

%

0.3

%

0.4

%

General and administrative expense

 

42.5

%

42.0

%

42.4

%

42.5

%

Income from operations

 

5.1

%

7.1

%

5.4

%

6.5

%

Minority interest in share of earnings

 

0.6

%

0.6

%

0.6

%

0.5

%

Gain on sale of equity investment

 

 

 

 

0.7

%

Interest expense — net

 

0.5

%

1.0

%

0.7

%

0.6

%

Income before income tax expense

 

4.0

%

5.5

%

4.1

%

6.1

%

Income tax expense

 

1.3

%

1.8

%

1.3

%

2.0

%

Net income

 

2.7

%

3.7

%

2.8

%

4.1

%

 

Revenue

Our revenue for the three months ended June 30, 2007 increased $189.2 million, or 20.8%, to $1.1 billion as compared to $911.5 million for the corresponding period last year.  Of this increase, $91.7 million, or 48.5%, was provided by companies acquired in the past twelve months.  Excluding the revenue provided by acquired companies, revenue increased $97.5 million, or 10.7%.  This increase was primarily attributable to increased spending for infrastructure development in Australia, Canada, and the United Arab Emirates as a result of continued economic growth in these regions, higher volume of work performed for clients in the building and transportation sectors of our operations in the United Kingdom, and an increase in design/build services performed in the United States.  Increased demand in these markets was partially offset by a decline in revenue from contracts we hold with the Federal Emergency Management Agency (“FEMA”) as a result of a decrease in hurricane recovery activities in the Gulf Coast region.

Our revenue for the nine months ended June 30, 2007 increased $605.7 million, or 24.1%, to $3.1 billion as compared to $2.5 billion for the corresponding period last year.  Of this increase, $202.3 million, or 33.4%, was provided by companies acquired in the past twelve months.  Excluding the revenue provided by acquired companies, revenue increased $403.4 million, or 16.0%.  In addition to the growth factors mentioned above, this increase was also attributable to a higher volume of task orders received associated with U.S. government activity in Kuwait, partially offset by the reduction in emergency / disaster events that trigger task orders under our FEMA emergency response program in the first two fiscal quarters.

Revenue, Net of Other Direct Costs

Our revenue, net of other direct costs for the three months ended June 30, 2007 increased $151.7 million, or 30.8%, to $643.7 million as compared to $492.0 million in the corresponding period last year.  Of this increase, $73.5 million, or 48.5%, was provided by companies acquired in the past twelve months.  Excluding the revenue, net of other direct costs provided by acquired companies, revenue, net of other direct costs increased $78.2 million, or 15.9%.  This increase was primarily attributable to the revenue growth factors noted above.

Our revenue, net of other direct costs for the nine months ended June 30, 2007, increased $342.6 million, or 24.6%, to $1.7 billion as compared to $1.4 billion in the corresponding period last year.  Of this increase, $160.3 million, or 46.8%, was provided by companies acquired in the past twelve months.  Excluding the revenue, net of other direct costs provided by acquired companies, revenue, net of other direct costs increased $182.3 million, or 13.1%.  This increase was primarily attributable to the revenue growth factors mentioned above.

Cost of Revenue, Net of Other Direct Costs

For the three months ended June 30, 2007, our cost of revenue, net of other direct costs increased $72.5 million, or 28.0%, to $331.6 million as compared to $259.1 million in the corresponding period last year.  Of this increase, $33.4 million, or 46.0%, was incurred by acquired companies.  Excluding cost of revenue, net of other direct costs associated with acquired companies, cost of revenue, net of other direct costs increased $39.1 million, or 15.1%.  Included in cost of revenue, net of other direct costs is stock match expense of $3.6 million and $2.8 million for the three months ended June 30, 2007 and 2006, respectively.  Most of our cost of revenue, net of other direct costs is attributable to employee related costs.

16




For the three months ended June 30, 2007, cost of revenue, net of other direct costs, as a percentage of revenue, net of other direct costs, was 51.5% as compared to 52.7% in the corresponding period last year.

For the nine months ended June 30, 2007, our cost of revenue, net of other direct costs increased $160.1 million, or 21.9%, to $891.9 million as compared to $731.8 million in the corresponding period last year.  Of this increase, $74.7 million, or 46.6% was incurred by companies acquired in the past twelve months.  Excluding cost of revenue, net of other direct costs associated with acquired companies, cost of revenue, net of other direct costs increased $85.5 million, or 11.7%.  Included in cost of revenue, net of other direct costs is stock match expense of $8.9 million and $7.5 million for the nine months ended June 30, 2007 and June 30, 2006, respectively.  For the nine months ended June 30, 2007, cost of revenue, net of other direct costs, as a percentage of revenue, net of other direct costs, was 51.4% as compared to 52.5% in the corresponding period last year.

Gross Profit

Our gross profit for the three months ended June 30, 2007 increased $79.2 million, or 34.0%, to $312.1 million as compared to $232.9 million in the corresponding period last year.  Of this increase, gross profit provided by companies acquired in the past 12 months was $40.2 million, or 50.7%.  Excluding gross profit provided by acquired companies, gross profit increased $39.0 million, or 16.8%.  The increase was primarily attributable to improved project performance.  For the three months ended June 30, 2007, gross profit, as a percentage of revenue, net of other direct costs, was 48.5% as compared to 47.3% in the corresponding period last year.

Our gross profit for the nine months ended June 30, 2007, increased $182.4 million, or 27.6%, to $844.4 million as compared to $662.0 million in the corresponding period last year.  Of this increase, gross profit provided by companies acquired in the past 12 months was $85.6 million, or 46.9%.  Excluding gross profit provided by acquired companies, gross profit increased $96.8 million, or 14.6%.  This increase was primarily attributable to the factors mentioned above.  For the nine months ended June 30, 2007, gross profit, as a percentage of revenue, net of other direct costs, was 48.6% as compared to 47.5% in the corresponding period last year.

Equity in Earnings of Joint Ventures

Our equity in earnings of joint ventures for the three months ended June 30, 2007 increased $2.4 million, or 157%, to $4.0 million as compared to $1.6 million in the corresponding period last year.  The increase was primarily attributable to our participation in a joint venture at the Department of Energy’s Nevada Test Site that commenced in the fourth quarter of fiscal 2006.

Our equity in earnings of joint ventures for the nine months ended June 30, 2007 increased $3.5 million, or 85.3%, to $7.6 million as compared to $4.1 million in the corresponding period last year.  The increase was primarily attributable to the factor mentioned above.

General and Administrative Expenses

Our general and administrative expenses for the three months ended June 30, 2007 increased $61.1 million, or 29.2%, to $270.4 million as compared to $209.3 million in the corresponding period last year. Of this increase, $34.4 million, or 56.4%, was incurred by acquired companies.  Excluding general and administrative expenses associated with acquired companies, general and administrative expenses increased $26.6  million, or 12.7%.  The increase was primarily attributable to growth in revenue noted above, increased headcount associated with acquired companies, continued investments throughout the organization to support strategic initiatives and expenses incurred related to our becoming a public reporting company, including compliance efforts related to the requirements of the Sarbanes-Oxley Act of 2002.  For the three months ended June 30, 2007, general and administrative expenses, as a percentage of revenue, net of other direct costs was 42.0% as compared to 42.5% in the corresponding period last year.  Included in general and administrative expenses is amortization expense of acquired intangible assets of $1.6 million and $3.7 million for the three months ended June 30, 2007 and 2006, respectively.  Included in general and administrative expenses is stock match expense of $1.2 million and $1.0 million for the three months ended June 30, 2007 and 2006, respectively.

Our general and administrative expenses for the nine months ended June 30, 2007 increased $147.2 million, or 24.9%, to $738.4 million as compared to $591.2 million in the corresponding period last year. Of this increase, $77.1 million, or 52.4%, was incurred by acquired companies.  Excluding general and administrative expenses associated with acquired companies, general and administrative expenses increased $70.1  million, or 11.9%.  The increase was primarily attributable to the factors mentioned above.  For the nine months ended June 30, 2007, general and administrative expenses, as a percentage of revenue, net of other direct costs was 42.5% as compared to 42.4% in the corresponding period last year.  Included in general and

17




administrative expenses is amortization expense of acquired intangible assets of $7.9 million and $10.7 million for the nine months ended June 30, 2007 and 2006, respectively.  Also included in general and administrative expenses is stock match expense of $3.0 million and $2.6 million for the nine months ended June 30, 2007 and 2006, respectively.

Gain on Sale of Equity Investment

During the nine months ended June 30, 2007, we sold our minority interest in an equity investment in the U.K. for 7.5 million GBP, or approximately $14.7 million.  Related to this sale, we recorded a gain on the sale of $11.3 million.

Interest Expense — Net

Our net interest expense for the three months ended June 30, 2007 increased $3.8 million, or 150%, to $6.3 million as compared to $2.5 million in the corresponding period last year.  This increase was primarily attributable to make-whole premiums incurred upon the early repayment of $60.5 million in fixed rate senior notes with proceeds from our initial public offering completed in May 2007.

Our net interest expense for the nine months ended June 30, 2007 decreased $0.7 million, or 6.8%, to $9.6 million as compared to $10.3 million in the corresponding period last year.  This decrease was primarily attributable to lower borrowings in the nine months ending June 30, 2007 as compared to the corresponding period in the prior year, partially offset by the make-whole premiums mentioned above.

Income Tax Expense

The effective tax rate for the three and nine months ending June 30, 2007 was 32.0% and 33.3% as compared to 32.0% and 32.0% for the three and nine months ended June 30, 2006.

Net Income

The factors described above resulted in our net income of $24.2 million for the three months ended June 30, 2007 an increase of 81.8% from $13.3 million in the corresponding period last year, and net income of $70.9 million for the nine months ended June 30, 2007 an increase of 85.9% from $38.1 million in the corresponding period last year.

Results of Operations by Reportable Segment:

Professional Technical Services

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

Change

 

June 30,

 

June 30,

 

Change

 

 

 

2006

 

2007

 

$

 

%

 

2006

 

2007

 

$

 

%

 

 

 

($ in thousands)

 

Revenue

 

$

720,347

 

$

903,386

 

$

183,039

 

25.4

%

$

2,039,968

 

$

2,497,950

 

$

457,982

 

22.5

%

Other direct costs

 

255,204

 

291,586

 

36,382

 

14.3

 

719,802

 

844,391

 

124,589

 

17.3

 

Revenue, net of other direct costs

 

465,143

 

611,800

 

146,657

 

31.5

 

1,320,166

 

1,653,559

 

333,393

 

25.3

 

Cost of revenue, net of other direct costs

 

239,850

 

309,366

 

69,516

 

29.0

 

682,981

 

837,896

 

154,915

 

22.7

 

Gross profit

 

$

225,293

 

$

302,434

 

$

77,141

 

34.2

 

$

637,185

 

$

815,663

 

$

178,478

 

28.0

 

 

The following table presents the percentage relationship of certain items to revenue, net of other direct costs:

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

June 30,
2007

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

51.6

 

50.6

 

51.7

 

50.7

 

Gross profit

 

48.4

%

49.4

%

48.3

%

49.3

%

 

18




 

Revenue

PTS’ revenue for the three months ended June 30, 2007 increased $183.1 million, or 25.4%, to $903.4 million as compared to $720.3 million in the corresponding period last year.  Of this increase, $91.7 million, or 50.1%, was provided by companies acquired in the past twelve months.  Excluding revenue provided by acquired companies, PTS’ revenue increased $91.3 million, or 12.7%.  This increase was primarily attributable to increased government and private sector spending for infrastructure development in Australia, Canada, and the United Arab Emirates as a result of continued economic growth, an increase in our building and transportation business in the U.K., and higher volumes of design/build services in the United States.  These increases were partially offset by a decline in task orders received from FEMA as result of decreased hurricane recovery activities in the Gulf Coast region.

PTS’ revenue for the nine months ended June 30, 2007 increased $458.0 million, or 22.5%, to $2.5 billion as compared to $2.0 billion in the corresponding period last year.  Of this increase, $202.3 million, or 44.2%, was provided by companies acquired in the past twelve months.  Excluding revenue provided by acquired companies, PTS’ revenue increased $255.7 million, or 12.5%.  This increase was primarily attributable to the factors mentioned above.

Revenue, Net of Other Direct Costs

PTS’ revenue, net of other direct costs for the three months ended June 30, 2007 increased $146.7 million, or 31.5%, to $611.8 million as compared to $465.1 million in the corresponding period last year.  Of this increase, $73.5 million, or 50.1%, was provided by companies acquired in the past twelve months.  Excluding revenue, net of other direct costs provided by acquired companies, PTS’ revenue, net of other direct costs increased $73.1 million, or 15.7%.  This increase was primarily attributable to the factors mentioned above.

PTS’ revenue, net of other direct costs for the nine months ended June 30, 2007 increased $333.4 million, or 25.3%, to $1.7 billion as compared to $1.3 billion in the corresponding period last year.  Of this increase, $160.3 million, or 48.1%, was provided by companies acquired in the past twelve months.  Excluding revenue, net of other direct costs provided by acquired companies, PTS’ revenue, net of other direct costs increased $173.1 million, or 13.1%.  This increase was primarily attributable to the factors mentioned above.

Cost of Revenue, Net of Other Direct Costs

For the three months ended June 30, 2007, PTS’ cost of revenue, net of other direct costs increased $69.5 million, or 29.0%, to $309.4 million as compared to $239.9 million in the corresponding period last year.  Of this increase, $33.4 million, or 48.0%, was incurred by companies acquired in the past twelve months.  Excluding cost of revenue, net of other direct costs associated with acquired companies, cost of revenue, net of other direct costs increased by $36.2 million, or 15.1%.  For the three months ended June 30, 2007, cost of revenue, net of other direct costs, as a percentage of revenue, net of other direct costs, was 50.6% as compared to 51.6% in the corresponding period last year.

For the nine months ended June 30, 2007, PTS’ cost of revenue, net of other direct costs increased $154.9 million, or 22.7%, to $837.9 million as compared to $683.0 million in the corresponding period last year.  Of this increase, $74.7 million, or 48.2%, was incurred by companies acquired in the past twelve months.  Excluding cost of revenue, net of other direct costs associated with acquired companies, cost of revenue, net of other direct costs increased by $80.2 million, or 11.7%.  For the nine months ended June 30, 2007, cost of revenue, net of other direct costs, as a percentage of revenue, net of other direct costs, was 50.7% as compared to 51.7% in the corresponding period last year.

Gross Profit

PTS’ gross profit for the three months ended June 30, 2007 increased $77.1 million, or 34.2%, to $302.4 million as compared to $225.3 million in the corresponding period last year.  Of this increase, $40.2 million, or 52.1%, was provided by companies acquired in the past 12 months.  Excluding gross profit provided by acquired compa