Table of Contents

 

 

 

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 December 31, 2012

 

OR

 

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

 

For the transition period from            to           

 

Commission File Number 0-52423

 


 

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 period 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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 January 25, 2013, 104,746,739 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

AECOM TECHNOLOGY CORPORATION

 

INDEX

 

PART I.

 

FINANCIAL INFORMATION

1

 

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2012 (unaudited) and September 30, 2012

1

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended December 31, 2012 (unaudited) and December 31, 2011 (unaudited)

2

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 (unaudited) and December 31, 2011 (unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 (unaudited) and December 31, 2011 (unaudited)

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

5

 

 

 

 

 

Item 2.

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

19

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

PART II.

 

OTHER INFORMATION

31

 

 

 

 

 

Item 1.

Legal Proceedings

31

 

Item 1A.

Risk Factors

31

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

39

 

Item 6.

Exhibits

40

 

 

 

 

SIGNATURES

 

 

41

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

AECOM Technology Corporation

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

 459,276

 

$

 456,983

 

Cash in consolidated joint ventures

 

132,020

 

136,793

 

Total cash and cash equivalents

 

591,296

 

593,776

 

Accounts receivable—net

 

2,481,834

 

2,395,881

 

Prepaid expenses and other current assets

 

156,613

 

140,764

 

Income taxes receivable

 

11,916

 

 

Deferred tax assets—net

 

16,873

 

16,872

 

TOTAL CURRENT ASSETS

 

3,258,532

 

3,147,293

 

PROPERTY AND EQUIPMENT—NET

 

322,714

 

325,917

 

DEFERRED TAX ASSETS—NET

 

117,263

 

126,948

 

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

86,323

 

91,049

 

GOODWILL

 

1,816,965

 

1,775,352

 

INTANGIBLE ASSETS—NET

 

100,659

 

96,973

 

OTHER NON-CURRENT ASSETS

 

105,569

 

101,036

 

TOTAL ASSETS

 

$

 5,808,025

 

$

 5,664,568

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term debt

 

$

 18,403

 

$

 1,641

 

Accounts payable

 

698,765

 

761,211

 

Accrued expenses and other current liabilities

 

927,061

 

821,663

 

Income taxes payable

 

 

12,641

 

Billings in excess of costs on uncompleted contracts

 

395,832

 

320,296

 

Current portion of long-term debt

 

193,063

 

160,950

 

TOTAL CURRENT LIABILITIES

 

2,233,124

 

2,078,402

 

OTHER LONG-TERM LIABILITIES

 

443,003

 

454,537

 

LONG-TERM DEBT

 

1,021,772

 

907,141

 

TOTAL LIABILITIES

 

3,697,899

 

3,440,080

 

COMMITMENTS AND CONTINGENCIES (Note 15)

 

 

 

 

 

 

 

 

 

 

 

AECOM STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, Class E—authorized, 20 shares; issued and outstanding, 3 shares as of December 31 and September 30, 2012; no par value, $1.00 liquidation preference value

 

 

 

Common stock—authorized, 300,000,000 shares of $0.01 par value as of  December 31 and September 30, 2012; issued and outstanding, 100,935,219 and 107,041,003 as of December 31 and September 30, 2012, respectively

 

1,009

 

1,070

 

Additional paid-in capital

 

1,759,881

 

1,741,478

 

Accumulated other comprehensive loss

 

(182,621

)

(179,173

)

Retained earnings

 

471,199

 

606,089

 

TOTAL AECOM STOCKHOLDERS’ EQUITY

 

2,049,468

 

2,169,464

 

Noncontrolling interests

 

60,658

 

55,024

 

TOTAL STOCKHOLDERS’ EQUITY

 

2,110,126

 

2,224,488

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

 5,808,025

 

$

 5,664,568

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM Technology Corporation

Consolidated Statements of Income

(unaudited - in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Revenue

 

$

2,017,272

 

$

2,029,180

 

 

 

 

 

 

 

Cost of revenue

 

1,939,154

 

1,938,834

 

Gross profit

 

78,118

 

90,346

 

 

 

 

 

 

 

Equity in earnings of joint ventures

 

5,915

 

8,962

 

General and administrative expenses

 

(22,102

)

(22,611

)

Income from operations

 

61,931

 

76,697

 

 

 

 

 

 

 

Other income

 

301

 

1,919

 

Interest expense, net

 

(10,551

)

(10,614

)

Income before income tax expense

 

51,681

 

68,002

 

 

 

 

 

 

 

Income tax expense

 

12,703

 

19,578

 

Net income

 

38,978

 

48,424

 

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

(869

)

(493

)

Net income attributable to AECOM

 

$

38,109

 

$

47,931

 

 

 

 

 

 

 

Net income attributable to AECOM per share:

 

 

 

 

 

Basic and diluted

 

$

0.36

 

$

0.42

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

104,759

 

113,965

 

Diluted

 

105,538

 

114,591

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM Technology Corporation

Consolidated Statements of Comprehensive Income

(unaudited—in thousands)

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

 

 

 

 

 

 

Net income

 

$

38,978

 

$

48,424

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

(5,978

)

19,476

 

Unrealized gain (loss) on derivatives:

 

 

 

 

 

Unrealized holding gain (loss) on derivatives

 

(11

)

(776

)

Reclassification adjustments for losses included in net income

 

438

 

371

 

Net unrealized gain (loss) on derivatives, net of tax

 

427

 

(405

)

Pension adjustments, net of tax

 

2,103

 

(391

)

Comprehensive income, net of tax

 

35,530

 

67,104

 

Noncontrolling interests in comprehensive income of consolidated subsidiaries, net of tax

 

(869

)

(493

)

Comprehensive income attributable to AECOM, net of tax

 

$

34,661

 

$

66,611

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM Technology Corporation

Consolidated Statements of Cash Flows

(unaudited - in thousands)

 

 

 

Three Months Ended December 31,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

38,978

 

$

48,424

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

23,902

 

25,548

 

Equity in earnings of unconsolidated joint ventures

 

(5,915

)

(8,962

)

Distribution of earnings from unconsolidated joint ventures

 

11,332

 

7,837

 

Non-cash stock compensation

 

6,834

 

8,634

 

Excess tax benefit from share-based payment

 

(685

)

(687

)

Foreign currency translation

 

(1,452

)

3,740

 

Other

 

837

 

(702

)

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

 

 

 

 

 

Accounts receivable

 

(48,392

)

(128,612

)

Prepaid expenses and other assets

 

(19,415

)

(5,837

)

Accounts payable

 

(73,427

)

57,569

 

Accrued expenses and other current liabilities

 

75,084

 

(56,141

)

Billings in excess of costs on uncompleted contracts

 

69,018

 

57,260

 

Other long-term liabilities

 

(9,610

)

(14,497

)

Net cash provided by (used in) operating activities

 

67,089

 

(6,426

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Payments for business acquisitions, net of cash acquired

 

(41,713

)

(8,972

)

Net investment in unconsolidated joint ventures

 

 

363

 

Proceeds from sale of investments

 

2,470

 

5,272

 

Payments for capital expenditures

 

(12,925

)

(18,284

)

Net cash used in investing activities

 

(52,168

)

(21,621

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowings under credit agreements

 

590,547

 

380,354

 

Repayments of borrowings under credit agreements

 

(428,877

)

(301,384

)

Proceeds from issuance of common stock

 

1,840

 

4,634

 

Proceeds from exercise of stock options

 

2,851

 

2,320

 

Payments to repurchase common stock under the Repurchase Program

 

(167,055

)

(7,271

)

Payments for other repurchases of common stock

 

(7,875

)

(6,398

)

Excess tax benefit from share-based payment

 

685

 

687

 

Net distributions to noncontrolling interests

 

(9,002

)

(244

)

Net cash (used in) provided by financing activities

 

(16,886

)

72,698

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(515

)

5,895

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(2,480

)

50,546

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

593,776

 

456,940

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

591,296

 

$

507,486

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY

 

 

 

 

 

Common stock issued in acquisitions

 

$

14,322

 

$

857

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM Technology Corporation

Notes to Consolidated Financial Statements

(unaudited)

 

1.              Basis of Presentation

 

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

 

The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2012. The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

The results of operations for the three months ended December 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2013.

 

The Company reports its annual results of operations based on 52 or 53-week periods ending on the Friday nearest September 30. The Company reports its quarterly results of operations based on periods ending on the Friday nearest December 31, March 31, and June 30. For clarity of presentation, all periods are presented as if the periods ended on September 30, December 31, March 31, and June 30.

 

2.              New Accounting Pronouncements and Changes in Accounting

 

In June 2011, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of comprehensive income. The standard requires companies to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate consecutive statements. This guidance was effective for the Company in its fiscal year beginning October 1, 2012 and it did not have a material impact on its financial condition or results of operations.

 

In September 2011, the FASB issued guidance intended to simplify goodwill impairment testing. Entities are allowed to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance was effective for goodwill impairment tests performed in interim and annual periods for the Company in its fiscal year beginning October 1, 2012. This guidance did not have a material impact on its consolidated financial statements.

 

3.              Stock Repurchase Program

 

In August 2011, the Company’s Board of Directors authorized a stock repurchase program (Repurchase Program), pursuant to which the Company could initially purchase up to $200 million of its common stock. The Company completed the initial authorization to purchase $200 million of its common stock during the quarter ended June 30, 2012. In August 2012, the Company’s Board of Directors authorized an additional $300 million to repurchase its common stock under the Repurchase Program. Share repurchases under the Repurchase Program can be made through open market purchases, unsolicited or solicited privately negotiated transactions or other methods, including pursuant to a Rule 10b5-1 plan. As of December 31, 2012, $64.6 million of shares was available for repurchase of the Company’s common stock pursuant to the Repurchase Program. Repurchased shares are retired, but remain authorized for registration and issuance in the future.

 

Accelerated Share Repurchase

 

In connection with the Repurchase Program, the Company entered into an accelerated share repurchase (ASR) agreement with Bank of America, N.A. (Bank of America) on August 16, 2011. Under the agreement for the ASR, the Company agreed to repurchase $100 million of its common stock from Bank of America. During the quarter ended September 30, 2011, Bank of America delivered 4.3 million shares to the Company, at which point the Company’s shares outstanding were reduced and accounted for as a reduction to retained earnings. The number of shares delivered was the minimum amount of shares Bank of America was contractually obligated to provide under the ASR agreement.

 

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Table of Contents

 

The number of shares that ultimately were repurchased by the Company under the ASR agreement was based upon the volume-weighted average share price of the Company’s common stock during the term of the ASR agreement, less an agreed discount, subject to collar provisions which established a maximum and minimum price and other customary conditions under the ASR agreement. The ASR agreement was settled in full on March 7, 2012 and the total number of shares repurchased was 4.8 million at an average price of $20.97 per share.

 

Rule 10b5-1 Repurchase Plan and Open Market Purchases

 

In connection with the Repurchase Program, the Company entered into Rule 10b5-1 repurchase plans. The timing, nature and amount of purchases depended on a variety of factors, including market conditions and the volume limit defined by Rule 10b-18.

 

As of June 30, 2012, the Company had repurchased under the initial authorization approximately 4.4 million shares under the Rule 10b5-1 plans and through open market purchases, at an average price of $22.59 per share, for a total cost of approximately $100.0 million, thereby completing its initial authorization under the Repurchase Program.

 

As of December 31, 2012, the Company had repurchased, under the second authorization, through open market purchases and purchases made under a Rule 10b5-1 plan, 10.8 million shares at an average price of $21.77 per share, for a total cost of $235.4 million, which included 0.3 million shares repurchased in transactions that were settled in the second quarter of fiscal 2013.

 

$500 million share repurchase authorization

 

In January 2013, the Company’s Board of Directors authorized an additional $500 million to repurchase its common stock under the Repurchase Program.

 

4.              Business Acquisitions, Goodwill and Intangible Assets

 

Consideration for business acquisitions during the quarter ended December 31, 2012 totaled $54.3 million in cash and $14.3 million in stock. Business acquisitions included South Africa-based BKS Group and Asia-based KPK Quantity Surveyors. These business acquisitions did not meet the quantitative thresholds, either individually or in the aggregate, to require pro forma disclosures of operating results based on the Company’s consolidated assets and income.

 

At the time of acquisition, the Company preliminarily estimates the amount of the identifiable intangible assets acquired based upon historical valuations of similar acquisitions and the facts and circumstances available at the time. The Company determines the final value of the identifiable intangible assets as soon as information is available, but not more than 12 months from the date of acquisition. Post-acquisition adjustments primarily relate to project related liabilities.

 

The changes in the carrying value of goodwill by reportable segment for the three months ended December 31, 2012 and 2011 were as follows:

 

 

 

September 30,
2012

 

Post-
Acquisition
Adjustments

 

Foreign
Exchange
Impact

 

Acquired

 

December 31,
2012

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Professional Technical Services

 

$

1,608.6

 

$

 

$

(2.9

)

$

44.5

 

$

1,650.2

 

Management Support Services

 

166.8

 

 

 

 

166.8

 

Total

 

$

1,775.4

 

$

 

$

(2.9

)

$

44.5

 

$

1,817.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,
2011

 

Post-
Acquisition
Adjustments

 

Foreign
Exchange
Impact

 

Acquired

 

December 31,
2011

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Professional Technical Services

 

$

1,733.9

 

$

0.5

 

$

4.2

 

$

8.9

 

$

1,747.5

 

Management Support Services

 

352.4

 

(2.0

)

 

 

350.4

 

Total

 

$

2,086.3

 

$

(1.5

)

$

4.2

 

$

8.9

 

$

2,097.9

 

 

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Table of Contents

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of December 31, 2012 and September 30, 2012, included in intangible assets—net, in the accompanying consolidated balance sheets, were as follows:

 

 

 

December 31, 2012

 

September 30, 2012

 

 

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Intangible
Assets, Net

 

Gross
Amount

 

Accumulated
Amortization

 

Intangible
Assets, Net

 

Amortization
Period

 

 

 

(in millions)

 

(years)

 

Backlog

 

$

95.2

 

$

(85.4

)

$

9.8

 

$

91.1

 

$

(83.8

)

$

7.3

 

1 – 5

 

Customer relationships

 

148.5

 

(57.8

)

90.7

 

143.6

 

(54.1

)

89.5

 

10

 

Trademark / tradename

 

7.8

 

(7.6

)

0.2

 

7.8

 

(7.6

)

0.2

 

2

 

Total

 

$

251.5

 

$

(150.8

)

$

100.7

 

$

242.5

 

$

(145.5

)

$

97.0

 

 

 

 

Amortization expense of acquired intangible assets included within cost of revenue was $5.3 million and $5.9 million for the three months ended December 31, 2012 and 2011, respectively. The following table presents estimated amortization expense of intangible assets for the remainder of fiscal 2013 and for the succeeding years:

 

Fiscal Year

 

(in millions)

 

2013 (nine months remaining)

 

$

15.9

 

2014

 

19.0

 

2015

 

16.0

 

2016

 

13.3

 

2017

 

12.1

 

Thereafter

 

24.4

 

Total

 

$

100.7

 

 

5.              Accounts Receivable—Net

 

Net accounts receivable consisted of the following as of December 31, 2012 and September 30, 2012:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Billed

 

$

1,277.6

 

$

1,207.0

 

Unbilled

 

1,152.7

 

1,145.1

 

Contract retentions

 

157.9

 

156.6

 

Total accounts receivable—gross

 

2,588.2

 

2,508.7

 

Allowance for doubtful accounts

 

(106.4

)

(112.8

)

Total accounts receivable—net

 

$

2,481.8

 

$

2,395.9

 

 

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 accounts billed after the period end. Substantially all unbilled receivables as of December 31, 2012 and September 30, 2012 are expected to be billed and collected within twelve months. Contract retentions represent amounts invoiced to clients where payments have been withheld pending the completion of certain milestones, or other contractual conditions or upon the completion of a project. These retention agreements vary from project to project and could be outstanding for 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 December 31, 2012 or September 30, 2012.

 

The Company sold trade receivables to financial institutions, of which $89.6 million was outstanding as of December 31, 2012. The Company does not retain financial or legal interest in these receivables.

 

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6.              Joint Ventures and Variable Interest Entities

 

The Company’s joint ventures provide architecture, engineering, program management, construction management and operations and maintenance services. Joint ventures, the combination of two or more partners, are generally formed for a specific project. Management of the joint venture is typically controlled by a joint venture executive committee, comprised of representatives from the joint venture partners. The joint venture executive committee normally provides management oversight and controls decisions which could have significant impact on the joint venture.

 

Some of the Company’s joint ventures have no employees and minimal operating expenses. For these joint ventures, the Company’s employees perform work for the joint venture, which is then billed to a third-party customer by the joint venture. These joint ventures function as pass through entities to bill the third-party customer. For consolidated entities, the Company records the entire amount of the services performed and the costs associated with these services, including the services provided by the other joint venture partners, in the Company’s results of operations. For certain of these joint ventures where a fee is added by an unconsolidated joint venture to client billings, the Company’s portion of that fee is recorded in equity in earnings of joint ventures.

 

The Company also has joint ventures that have their own employees and operating expenses, and to which the Company generally makes a capital contribution. The Company accounts for these joint ventures either as consolidated entities or equity method investments based on the criteria further discussed below.

 

The Company follows guidance issued by the FASB on the consolidation of variable interest entities (VIEs) that requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE. The process for identifying the primary beneficiary of a VIE requires consideration of the factors that indicate a party has the power to direct the activities that most significantly impact the joint venture’s economic performance, including powers granted to the joint venture’s program manager, powers contained in the joint venture governing board and, to a certain extent, a company’s economic interest in the joint venture. The Company analyzes its joint ventures and classifies them as either:

 

·                  a VIE that must be consolidated because the Company is the primary beneficiary or the joint venture is not a VIE and the Company holds the majority voting interest with no significant participative rights available to the other partners; or

 

·                  a VIE that does not require consolidation because the Company is not the primary beneficiary or the joint venture is not a VIE and the Company does not hold the majority voting interest.

 

If it is determined that the Company has the power to direct the activities that most significantly impact the joint venture’s economic performance, the Company considers whether or not it has the obligation to absorb losses or rights to receive benefits of the VIE that could potentially be significant to the VIE.

 

The Company has not provided financial or other support during the periods presented to any of its VIEs that it was not previously contractually required to provide. Contractually required support provided to the Company’s joint ventures is further discussed in Note 15.

 

Summary of unaudited financial information of the consolidated joint ventures is as follows:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Current assets

 

$

208.4

 

$

243.2

 

Non-current assets

 

 

 

Total assets

 

$

208.4

 

$

243.2

 

 

 

 

 

 

 

Current liabilities

 

$

39.8

 

$

43.1

 

Non-current liabilities

 

 

 

Total liabilities

 

39.8

 

43.1

 

 

 

 

 

 

 

Total AECOM equity

 

121.7

 

145.1

 

Noncontrolling interests

 

46.9

 

55.0

 

Total owners’ equity

 

168.6

 

200.1

 

Total liabilities and owners’ equity

 

$

208.4

 

$

243.2

 

 

Total revenue of the consolidated joint ventures was $130.7 million and $100.2 million for the three months ended December 31, 2012 and 2011, respectively. The assets of the Company’s consolidated joint ventures are restricted for use only by the particular joint venture and are not available for the general operations of the Company.

 

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Summary of unaudited financial information of the unconsolidated joint ventures is as follows:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Current assets

 

$

587.7

 

$

598.8

 

Non-current assets

 

16.1

 

15.2

 

Total assets

 

$

603.8

 

$

614.0

 

 

 

 

 

 

 

Current liabilities

 

$

416.4

 

$

411.2

 

Non-current liabilities

 

3.2

 

2.7

 

Total liabilities

 

419.6

 

413.9

 

 

 

 

 

 

 

Joint ventures’ equity

 

184.2

 

200.1

 

Total liabilities and joint ventures’ equity

 

$

603.8

 

$

614.0

 

 

 

 

 

 

 

AECOM’s investment in joint ventures

 

$

86.3

 

$

91.0

 

 

Total revenue of the unconsolidated joint ventures was $527.5 million and $523.7 million for the three months ended December 31, 2012 and 2011, respectively.

 

Summary of AECOM’s equity in earnings of unconsolidated joint ventures is as follows:

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

 

 

(in millions)

 

 

 

 

 

 

 

Pass through joint ventures

 

$

1.5

 

$

0.9

 

Other joint ventures

 

4.4

 

8.1

 

Total

 

$

5.9

 

$

9.0

 

 

7.              Pension Benefit Obligations

 

The following table details the components of net periodic cost for the Company’s pension plans for the three months ended December 31, 2012 and 2011:

 

 

 

Three Months Ended

 

 

 

December 31, 2012

 

December 31, 2011

 

 

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

 

 

(in millions)

 

Components of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

Service costs

 

$

 

$

0.3

 

$

 

$

0.3

 

Interest cost on projected benefit obligation

 

1.6

 

6.1

 

1.9

 

6.4

 

Expected return on plan assets

 

(2.1

)

(5.9

)

(2.1

)

(6.3

)

Amortization of net loss

 

1.1

 

1.0

 

0.8

 

0.5

 

Settlement loss recognized

 

 

0.8

 

 

0.5

 

Net periodic cost

 

$

0.6

 

$

2.3

 

$

0.6

 

$

1.4

 

 

The total amounts of employer contributions paid for the three months ended December 31, 2012 were $1.8 million for U.S. plans and $4.4 million for non-U.S. plans. The expected remaining scheduled annual employer contributions for the fiscal year ending September 30, 2013 are $7.1 million for U.S. plans and $12.9 million for non-U.S. plans. Included in other long-term liabilities are net pension liabilities of $185.9 million and $192.2 million as of December 31, 2012 and September 30, 2012, respectively.

 

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8.              Debt

 

Debt consisted of the following:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Unsecured term credit agreement

 

$

750.0

 

$

750.0

 

Unsecured senior notes

 

257.6

 

256.8

 

Unsecured revolving credit facility

 

159.6

 

24.0

 

Notes secured by real properties

 

24.0

 

24.2

 

Other debt

 

42.0

 

14.7

 

Total debt

 

1,233.2

 

1,069.7

 

Less: Current portion of debt and short-term borrowings

 

(211.4

)

(162.6

)

Long-term debt, less current portion

 

$

1,021.8

 

$

907.1

 

 

The following table presents, in millions, scheduled maturities of our debt as of December 31, 2012:

 

Fiscal Year

 

 

 

2013 (nine months remaining)

 

$

173.9

 

2014

 

167.9

 

2015

 

151.7

 

2016

 

461.3

 

2017

 

1.6

 

Thereafter

 

276.8

 

Total

 

$

1,233.2

 

 

Unsecured Term Credit Agreement

 

In September 2011, the Company entered into an Amended and Restated Credit Agreement (Term Credit Agreement) with Bank of America, N.A., as administrative agent and a lender, and the other lenders party thereto. Pursuant to the Term Credit Agreement, the Company borrowed $750 million in term loans on the closing date and may borrow up to an additional $100 million in term loans upon request by the Company subject to certain conditions, including Company and lender approval. The Company used approximately $600 million of the proceeds from the loans to repay indebtedness under its prior term loan facility, approximately $147 million of the proceeds to pay down indebtedness under its revolving credit facility and a portion of the proceeds to pay fees and expenses related to the Term Credit Agreement. The loans under the Term Credit Agreement bear interest, at the Company’s option, at either the Base Rate (as defined in the Term Credit Agreement) plus an applicable margin or the Eurodollar Rate (as defined in the Term Credit Agreement) plus an applicable margin. The applicable margin for the Base Rate loans is a range of 0.375% to 1.500% and the applicable margin for Eurodollar Rate loans is a range of 1.375% to 2.500%, both based on the debt-to-earnings leverage ratio of the Company at the end of each fiscal quarter. For the three months ended December 31, 2012 and 2011, the average interest rate of the Company’s term loan facility was 2.02% and 2.12%, respectively. Payments of the initial principal amount outstanding under the Term Credit Agreement are required on a quarterly basis beginning on December 31, 2012, while interest payments are required on a quarterly basis beginning December 31, 2011. Any remaining principal of the loans under the Term Credit Agreement is due no later than July 20, 2016. Accrued interest is payable in arrears on a quarterly basis for Base Rate loans, and at the end of the applicable interest period (but at least every three months) for Eurodollar Rate loans. The Company may, at its option, prepay the loans at any time, without penalty.

 

Unsecured Senior Notes

 

In July 2010, the Company issued $300 million of notes to private institutional investors. The notes consisted of $175.0 million of 5.43% Senior Notes, Series A, due July 2020 and $125.0 million of 1.00% Senior Discount Notes, Series B, due July 2022 for net proceeds of $249.8 million. The outstanding accreted balance of Series B Notes, which have an effective interest rate of 5.62%, was $82.6 million and $81.8 million at December 31, 2012 and September 30, 2012, respectively. The fair value of the Company’s unsecured senior notes was approximately $276.0 million at December 31, 2012 and $277.8 million at September 30, 2012. The Company calculated the fair values based on model-derived valuations using market observable inputs, which are Level 2 inputs under the accounting guidance. The Company’s obligations under the notes are guaranteed by certain subsidiaries of the Company pursuant to one or more subsidiary guarantees.

 

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Unsecured Revolving Credit Facility

 

In July 2011, the Company entered into a Third Amended and Restated Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A., as an administrative agent and a lender and the other lenders party thereto, which amended and restated its unsecured revolving credit facility and increased its available borrowing capacity to $1.05 billion in order to support its working capital and acquisition needs. The Revolving Credit Agreement has an expiration date of July 20, 2016 and prior to this expiration date, principal amounts outstanding under the Revolving Credit Agreement may be repaid and reborrowed at the option of the Company without prepayment or penalty, subject to certain conditions. The Company may also, at its option, request an increase in the commitments under the facility up to a total of $1.15 billion, subject to certain conditions, including Company and lender approval. The loans under the Revolving Credit Agreement may be borrowed in dollars or in certain foreign currencies and bear interest, at the Company’s option, at either the Base Rate (as defined in the Revolving Credit Agreement) plus an applicable margin or the Eurocurrency Rate (as defined in the Revolving Credit Agreement) plus an applicable margin. The applicable margin for the Base Rate loans is a range of 0.00% to 1.50% and the applicable margin for the Eurocurrency Rate loans is a range of 1.00% to 2.50%, both based on the Company’s debt-to-earnings leverage ratio at the end of each fiscal quarter. In addition to these borrowing rates, there is a commitment fee which ranges from 0.150% to 0.375% on any unused commitment. Accrued interest is payable in arrears on a quarterly basis for Base Rate loans, and at the end of the applicable interest period (but at least every three months) for Eurocurrency Loans. At December 31, 2012 and September 30, 2012, $159.6 million and $24.0 million, respectively, were outstanding under the revolving credit facility. At both December 31, 2012 and September 30, 2012, outstanding standby letters of credit totaled $35.1 million under the revolving credit facility. As of December 31, 2012, the Company had $855.3 million available under its Revolving Credit Agreement.

 

Covenants and Restrictions

 

Under the Company’s debt agreements relating to its unsecured revolving credit facility and unsecured term credit agreements, the Company is subject to a maximum consolidated leverage ratio at the end of each fiscal quarter. This ratio is calculated by dividing consolidated funded debt (including financial letters of credit) by consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA). For the Company’s debt agreements, EBITDA is defined as consolidated net income attributable to AECOM plus interest, depreciation and amortization expense, amounts set aside for taxes and other non-cash items (including a calculated annualized EBITDA from the Company’s acquisitions). As of December 31, 2012, the consolidated leverage ratio was 2.56, which did not exceed the Company’s most restrictive maximum consolidated leverage ratio of 3.0.

 

The Company’s Revolving Credit Agreement and Term Credit Agreement also contain certain covenants that limit the Company’s ability to, among other things, (i) merge with other entities, (ii) enter into a transaction resulting in a change of control, (iii) create new liens, (iv) sell assets outside of the ordinary course of business, (v) enter into transactions with affiliates, (vi) substantially change the general nature of the Company and its subsidiaries taken as a whole, and (vii) incur indebtedness and contingent obligations.

 

Additionally, the Company’s unsecured senior notes contain covenants that limit (i) certain types of indebtedness, which include indebtedness incurred by subsidiaries and indebtedness secured by a lien, (ii) merging with other entities, (iii) entering into a transaction resulting in a change of control, (iv) creating new liens, (v) selling assets outside of the ordinary course of business, (vi) entering into transactions with affiliates, and (vii) substantially changing the general nature of the Company and its subsidiaries taken as a whole. The unsecured senior notes also contain a financial covenant that requires the Company to maintain a net worth above a calculated threshold. The threshold is calculated as $1.2 billion plus 40% of the consolidated net income for each fiscal quarter commencing with the fiscal quarter ending June 30, 2010. In the calculation of this threshold, the Company cannot include a consolidated net loss that may occur in any fiscal quarter. The Company’s net worth for this financial covenant is defined as total AECOM stockholders’ equity, which is consolidated stockholders’ equity, including any redeemable common stock and stock units and the liquidation preference of any preferred stock. As of December 31, 2012, this amount was $2.0 billion, which exceeds the calculated threshold of $1.5 billion.

 

Should the Company fail to comply with these covenants, all or a portion of its borrowings under the unsecured senior notes and unsecured term credit agreements could become immediately payable and its unsecured revolving credit facility could be terminated. At December 31, 2012 and September 30, 2012, the Company was in compliance with all such covenants.

 

The Company’s average effective interest rate on total borrowings, including the effects of the interest rate swap agreements, during the three months ended December 31, 2012 and 2011 was 3.0% and 3.1%, respectively.

 

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Notes Secured by Real Properties

 

Notes secured by real properties, payable to a bank, were assumed in connection with a business acquired during the year ended September 30, 2008. These notes payable bear interest at 6.04% per annum and mature in December 2028.

 

Other Debt

 

Other debt consists primarily of bank overdrafts and obligations under capital leases and unsecured credit facilities. In addition to the unsecured revolving credit facility discussed above, the Company also has unsecured credit facilities. The unsecured credit facilities are primarily used for standby letters of credit issued primarily for payment and performance guarantees, see Note 15 herein. At December 31, 2012 and September 30, 2012, outstanding standby letters of credit totaled $202.0 million and $209.8 million, respectively.

 

The Company also had obligations under these unsecured credit facilities of $4.6 million as of December 31, 2012 and $4.8 million as of September 30, 2012, which were included in other debt. As of December 31, 2012, the Company had $254 million available under its unsecured credit facilities.

 

9.              Derivative Financial Instruments

 

The Company uses certain interest rate derivative contracts to hedge interest rate exposures on the Company’s variable rate debt. The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company’s hedging program is not designated for trading or speculative purposes.

 

The Company recognizes derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. The Company records changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as accounting hedges in the accompanying consolidated statements of income as cost of revenue, interest expense, net, or to accumulated other comprehensive loss in the accompanying consolidated balance sheets.

 

Cash Flow Hedges

 

The Company uses interest rate swap agreements designated as cash flow hedges to fix the variable interest rates on portions of the Company’s debt. The Company also uses foreign currency options designated as cash flow hedges to hedge forecasted revenue transactions denominated in currencies other than the U.S. dollar. The Company initially reports any gain on the effective portion of a cash flow hedge as a component of accumulated other comprehensive loss. Depending on the type of cash flow hedge, the gain is subsequently reclassified to either interest expense, net when the interest expense on the variable rate debt is recognized, or to cost of sales when the hedged revenues are recorded. If the hedged transaction becomes probable of not occurring, any gain or loss related to interest rate swap agreements or foreign currency options would be recognized in other income (expense). Further, the Company excludes the change in the time value of the foreign currency options from the assessment of hedge effectiveness. The Company records the premium paid or time value of an option on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of sales.

 

At December 31, 2012, the effective portion of the Company’s interest rate swap agreements designated as cash flow hedges before tax effect was $5.4 million, of which $2.9 million is expected to be reclassified from accumulated other comprehensive loss to interest expense, net within the next 12 months. At December 31, 2012, the effective portion of the Company’s foreign currency options designated as cash flow hedges before tax effect, were immaterial.

 

As of December 31, 2012 and September 30, 2012, the notional principal, fixed rates and related expiration dates of the Company’s outstanding interest rate swap agreements were as follows:

 

Notional Amount
(in millions)

 

Fixed
Rate

 

Expiration
Date

 

$

250.0

 

0.95

%

September 2015

 

200.0

 

0.68

%

December 2014

 

150.0

 

0.55

%

December 2013

 

 

The notional principal of foreign currency options to purchase British Pounds (GBP) with Brazilian Reais (BRL) was BRL 4.5 million and BRL 16.4 million (or approximately $2.2 million and $8.1 million) at December 31, 2012 and September 30, 2012, respectively. These foreign exchange contracts have maturities of 24 months or less.

 

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Table of Contents

 

Foreign Currency Forward Contracts

 

The Company uses foreign currency forward contracts, which are not designated as accounting hedges, to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts are recognized in cost of sales for those instruments related to the provision of our services or general and administrative expenses, along with the offsetting losses and gains of the related hedged items. The notional principal of foreign currency forward contracts to purchase U.S. dollars with foreign currencies was $126.3 million and $60.1 million at December 31, 2012 and September 30, 2012, respectively. The notional principal of foreign currency forward contracts to sell U.S. dollars for foreign currencies was $58.2 million and $110.2 million at December 31, 2012 and September 30, 2012, respectively. The notional principal of foreign currency forward contracts to purchase GBP with BRL was BRL 21.3 million and BRL 9.7 million (or approximately $10.4 million and $4.9 million) at December 31, 2012 and September 30, 2012, respectively.

 

Other Derivatives

 

Other derivatives that are not designated as hedging instruments consist of option contracts that the Company uses to hedge anticipated transactions in currencies other than the functional currency of a subsidiary. The Company recognizes gains and losses on these contracts as well as the offsetting losses and gains of the related hedged item costs in cost of sales. The Company records the premium paid or time value of an option on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of sales. The notional principal of option contracts to sell U.S. dollars for foreign currencies was $17.3 million at September 30, 2012 and no such option contracts were outstanding at December 31, 2012.

 

The fair values of our outstanding derivative instruments were as follows (in millions):

 

 

 

 

 

Fair Value of Derivative
Instruments as of

 

 

 

Balance Sheet Location

 

Dec 31,
2012

 

Sep 30,
2012

 

Derivative assets

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Foreign currency options

 

Prepaid expenses and other current assets

 

$

0.1

 

$

0.1

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

Option contracts

 

Prepaid expenses and other current assets

 

 

0.1

 

Foreign currency forward contracts

 

Prepaid expenses and other current assets

 

0.2

 

0.4

 

Total

 

 

 

$

0.3

 

$

0.6

 

Derivative liabilities

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate swap agreements

 

Accrued expenses and other current liabilities

 

$

2.9

 

$

2.9

 

Interest rate swap agreements

 

Other long-term liabilities

 

2.5

 

3.2

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Accrued expenses and other current liabilities

 

1.5

 

0.6

 

Total

 

 

 

$

6.9

 

$

6.7

 

 

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income is summarized below (in millions):

 

 

 

Increase in Losses
Recognized in Accumulated
Other Comprehensive Loss
on Derivatives Before Tax
Effect (Effective Portion)
Three Months Ended Dec 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Derivatives in cash flow hedging relationship:

 

 

 

 

 

Interest rate swap agreements

 

$

 

$

(0.8

)

 

 

 

 

 

Losses Reclassified from
Accumulated Other
Comprehensive Loss into
Income (Effective Portion)
Three Months Ended Dec 31,

 

 

 

Location

 

2012

 

2011

 

Derivatives in cash flow hedging relationship:

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense, net

 

$

(0.7

)

$

(0.4

)

 

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Losses Recognized in
Income on Derivatives
(Amount Excluded from
Effectiveness Testing and
Ineffective Portion)(1)
Three Months Ended Dec 31,

 

 

 

Location

 

2012

 

2011

 

Derivatives in cash flow hedging relationship:

 

 

 

 

 

 

 

Foreign currency options

 

Cost of revenue

 

$

(0.1

)

$

 

 


(1)   Losses related to the ineffective portion of the hedges were not material in all periods presented.

 

The gain recognized in accumulated other comprehensive loss from the Company’s foreign currency options was immaterial for the three months ended December 31, 2012 and the Company had no foreign currency options outstanding for the three months ended December 31, 2011. There were no losses reclassified from accumulated other comprehensive loss into income from the foreign currency options in any of the years presented. Additionally, there were no losses recognized in income due to amounts excluded from effectiveness testing from the Company’s interest rate swap agreements.

 

The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):

 

 

 

 

 

Gains / (Losses) Recognized
in Income on Derivatives
(Amount Excluded from
Effectiveness Testing and
Ineffective Portion) (1)
Three Months Ended Dec 31,

 

 

 

Location

 

2012

 

2011

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

Foreign currency forward contracts

 

General and administrative expenses

 

$

(1.0

)

$

1.5

 

Option contracts

 

Cost of revenue

 

(0.1

)

 

 

 

 

 

$

(1.1

)

$

1.5

 

 


(1)   Losses related to the ineffective portion of the hedges were not material in all periods presented.

 

10.       Fair Value Measurements

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it would transact, and the Company considers assumptions that market participants would use when pricing the asset or liability. It measures certain financial and nonfinancial assets and liabilities at fair value on a recurring and nonrecurring basis.

 

Nonfinancial assets and liabilities include items such as goodwill and long lived assets that are measured at fair value resulting from impairment, if deemed necessary. During the three months ended December 31, 2012 and 2011, the Company did not record any fair value adjustments to those financial and nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.

 

Fair Value Hierarchy

 

The three levels of inputs that may be used to measure fair value are as follows:

 

·                  Level 1  Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·                  Level 2  Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.

 

·                 Level 3  Unobservable inputs that are significant to the measurement of the fair value of assets or liabilities.

 

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Table of Contents

 

The following table summarizes the Company’s non-pension financial assets and liabilities measured at fair value on a recurring basis (at least annually) in millions:

 

 

 

December 31,
2012

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 2)

 

 

 

 

 

 

 

Foreign currency options

 

$

0.1

 

$

0.1

 

Foreign currency forward contracts

 

0.2

 

0.2

 

Total assets

 

$

0.3

 

$

0.3

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

5.4

 

$

5.4

 

Foreign currency forward contracts

 

1.5

 

1.5

 

Total liabilities

 

$

6.9

 

$

6.9

 

 

 

 

September 30,
2012

 

Quoted Prices in
Active Markets for
Similar Assets
(Level 2)

 

 

 

 

 

 

 

Foreign currency options

 

$

0.1

 

$

0.1

 

Option contracts

 

0.1

 

0.1

 

Foreign currency forward contracts

 

0.4

 

0.4

 

Total assets

 

$

0.6

 

$

0.6

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

6.1

 

$

6.1

 

Foreign currency forward contracts

 

0.6

 

0.6

 

Total liabilities

 

$

6.7

 

$

6.7

 

 

For additional information about the Company’s derivatives, refer to Note 9 herein.

 

11.       Share-based Payments

 

The fair value of the Company’s employee 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. The risk-free interest rate is based on U.S. Treasury bond rates with maturities equal to the expected term of the option on the grant date. The Company uses historical data as a basis to estimate the probability of forfeitures. The Company did not grant any employee stock options during the three months ended December 31, 2012 and 2011.

 

Stock option activity for the three months ended December 31 was as follows:

 

 

 

2012

 

2011

 

 

 

Shares of stock
under options

 

Weighted average
exercise price

 

Shares of stock
under options

 

Weighted average
exercise price

 

 

 

(in millions)

 

 

 

 

(in millions)

 

 

 

 

Outstanding at September 30

 

2.5

 

$

22.81

 

2.9

 

$

21.38

 

Options granted

 

 

 

 

 

Options exercised

 

(0.3

)

12.71

 

(0.2

)

10.61

 

Options forfeited or expired

 

(0.1

)

27.18

 

 

25.22

 

Outstanding at December 31

 

2.1

 

23.67

 

2.7

 

22.22

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest in the future as of December 31

 

2.1

 

$

23.65

 

2.7

 

$

22.16

 

 

The Company grants stock units to employees under its Performance Earnings Program (PEP), whereby units are earned and issued dependent upon meeting established cumulative performance objectives over a two or three year period. Additionally, the Company issues restricted stock units to employees which are earned based on service conditions. Total compensation expense related to share-based payments was $6.8 million and $8.6 million during the three months ended December 31, 2012 and 2011, respectively. Unrecognized compensation expense related to total share-based payments outstanding was $87.3 million and $39.0 million as of December 31, 2012 and September 30, 2012, respectively, to be recognized on a straight-line basis over the awards’ respective vesting periods which are generally three years.

 

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Table of Contents

 

Cash flows attributable to tax benefits resulting from tax deductions in excess of compensation cost recognized for those stock options (excess tax benefits) is classified as financing cash flows. Excess tax benefits of $0.7 million for the three months ended December 31, 2012 and 2011 have been classified as financing cash inflows in the consolidated statements of cash flows.

 

12.       Income Taxes

 

The Company’s effective tax rate was 24.6% and 28.8% for the three months ended December 31, 2012 and 2011, respectively. The Company’s effective tax rate is lower than the federal statutory rate of 35.0% primarily due to the tax rate differential on foreign earnings where the statutory rates are generally lower than the federal statutory rate. Our effective tax rate fluctuates from quarter to quarter due to several factors including the change in the mix of foreign and domestic earnings, tax law changes, outcomes of administrative audits, changes in our assessment of valuation allowances and other tax contingencies.

 

13.       Earnings Per Share

 

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income available for 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 potential common stock equivalent shares for the period. The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options and restricted stock units using the treasury stock method.

 

The following table sets forth a reconciliation of the denominators for basic and diluted earnings per share:

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

 

 

(in millions)

 

Denominator for basic earnings per share

 

104.8

 

114.0

 

Potential common shares:

 

 

 

 

 

Stock options

 

0.1

 

0.2

 

Other

 

0.6

 

0.4

 

Denominator for diluted earnings per share

 

105.5

 

114.6

 

 

EPS includes the effect of repurchased shares, which are discussed in Note 3 herein. For the three months ended December 31, 2012 and 2011, options excluded from the calculation of potential common shares were not significant.

 

14.       Other Financial Information

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Accrued salaries and benefits

 

$

402.0

 

$

415.2

 

Accrued contract costs

 

437.0

 

333.4

 

Other accrued expenses

 

88.1

 

73.1

 

 

 

$

927.1

 

$

821.7

 

 

Accrued contract costs above include balances related to professional liability accruals of $119.2 million and $117.8 million as of December 31, 2012 and September 30, 2012, respectively. The remaining accrued contract costs primarily relate to costs for services provided by subcontractors and other non-employees.

 

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Table of Contents

 

Other long-term liabilities consist of the following:

 

 

 

December 31,
2012

 

September 30,
 2012

 

 

 

(in millions)

 

Pension liabilities (Note 7)

 

$

185.9

 

$

192.2

 

Reserve for uncertain tax positions

 

53.8

 

56.3

 

Other

 

203.3

 

206.0

 

 

 

$

443.0

 

$

454.5

 

 

The components of accumulated other comprehensive loss are as follows:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Loss on cash flow hedge valuations, net of tax

 

$

(3.3

)

$

(3.7

)

Foreign currency translation adjustment

 

(3.2

)

2.7

 

Defined benefit minimum pension liability adjustment, net of tax

 

(176.1

)

(178.2

)

 

 

$

(182.6

)

$

(179.2

)

 

15.       Commitments and Contingencies

 

The Company records amounts representing its probable estimated liabilities relating to claims, guarantees, litigation, audits and investigations. The Company relies in part on qualified actuaries to assist it in determining the level of reserves to establish for insurance-related claims that are known and have been asserted against it, and for insurance-related claims that are believed to have been incurred based on actuarial analysis, but have not yet been reported to the Company’s claims administrators as of the respective balance sheet dates. The Company includes any adjustments to such insurance reserves in its consolidated results of operations.

 

The Company is a defendant in various lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on its consolidated balance sheet or statements of income or cash flows.

 

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 additional costs or be held responsible for the costs incurred by the client to achieve the required performance standards. At December 31, 2012, the Company was contingently liable in the amount of approximately $237.1 million under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for payment and performance guarantees.

 

In the ordinary course of business, the Company enters into various agreements providing financial or performance assurances to clients on behalf of certain unconsolidated partnerships, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. The guarantees have various expiration dates. For the majority of these projects, the maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties. On projects where the Company has additional exposure including for delay or consequential damages, the policy is to cap those damages in order to limit this exposure and, in any case, to cap the performance guarantees themselves. Generally, under joint venture arrangements, if a partner is financially unable to complete its share of the contract, the other partner(s) will 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 does not expect that these guarantees will have a material adverse effect on its consolidated balance sheet or statements of income or cash flows.

 

Global Linguists Solutions Joint Venture

 

On October 5, 2011 and February 8, 2012, the DCAA issued DCAA Forms 1 questioning costs incurred by Global Linguists Solutions (GLS), an equity method joint venture, of which McNeil Technologies, Inc., acquired by the Company in August 2010, is an owner. The questioned costs were incurred by GLS during fiscal 2009, a period prior to the acquisition. Specifically, the DCAA questioned direct labor, associated burdens, and fees billed to the U.S. Government under a contract for the the U.S. Army for linguists that allegedly did not meet specific contract requirements. As a result of the issuance of the DCAA Forms 1, the U.S. Government has withheld approximately $19 million from payments on current year billings pending final resolution.

 

GLS is performing a review of the issues raised in the Forms 1 in order to respond fully to the questioned costs. Based on a preliminary review, GLS believes that it met the applicable contract requirements in all material respects.

 

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Table of Contents

 

Additionally, on April 20, 2012, GLS received a subpoena from the Office of the Inspector General of the U.S. Department of Defense requesting documentation related to the same contract with the United States Army. GLS has responded to the government’s request and is cooperating in the government’s investigation. If the DCAA Forms 1 are not overruled and subsequent appeals are unsuccessful or there are unfavorable consequences from the Inspector General’s investigation, these events could have a material adverse effect on the Company’s results of operations.

 

AECOM Australia

 

In 2005 and 2006, the Company’s main Australian subsidiary, AECOM Australia Pty Ltd (AECOM Australia), performed a traffic forecast assignment for a client consortium as part of their project to design, build, finance and operate a tolled motorway tunnel in Australia. To fund the motorway’s design and construction, the client formed a special purpose vehicle (SPV) that raised approximately $700 million Australian dollars through an initial public offering (IPO) of equity units in 2006 and another approximately $1.4 billion Australian dollars in long term bank loans. The SPV (and certain affiliated SPVs) went into insolvency administrations in February 2011.

 

A class action lawsuit, which has been amended to include approximately 770 of the IPO investors, was filed against AECOM Australia in the Federal Court of Australia on May 31, 2012. Separately, KordaMentha, the receivers for the SPVs, filed a lawsuit in the Federal Court of Australia on May 14, 2012 claiming damages that purportedly resulted from AECOM Australia’s role in connection with the above described traffic forecast. WestLB, one of the lending banks to the SPVs, filed a lawsuit in the Federal Court of Australia on May 18, 2012. Centerbridge Credit Partners (and a number of related entities) and Midtown Acquisitions (and a number of related entities), both claiming to be assignees of certain other lending banks, previously filed their own proceedings in the Federal Court of Australia and then subsequently withdrew the lawsuits. None of the lawsuits specify the amount of damages sought and the damages sought by WestLB are duplicative of damages already included in the receivers’ claim.

 

AECOM Australia intends to vigorously defend the claims brought against it.

 

Hawaii Project

 

The U.S. Attorney’s Office (USAO) informed the Company in May 2011 that the USAO and the U.S. Environmental Protection Agency are investigating potential criminal charges in connection with services the Company’s subsidiary provided to the operator of the Waimanalo Gulch Sanitary Landfill in Hawaii. The Company has cooperated fully with the investigation and, as of this date, no actions have been filed. The Company believes that the investigation will show that there has been no criminal wrongdoing on the Company’s part or any of its subsidiaries and, if any actions are brought, the Company intends to vigorously defend against such actions.

 

The services performed by the subsidiary included the preparation of a pollution control plan, which the operator used to obtain permits necessary for the operation of the landfill. The USAO is investigating whether flooding at the landfill that resulted in the discharge of waste materials and storm water into the Pacific Ocean in December 2010 and January 2011 was due in part to reliance on information contained in the plan prepared by a subsidiary of the Company.

 

16.       Reportable Segments

 

The Company’s operations are organized into two reportable segments: Professional Technical Services (PTS) and Management Support Services (MSS). The Company’s PTS reportable segment delivers planning, consulting, architectural and engineering design, and program and construction management services to commercial and government clients worldwide. The Company’s MSS reportable segment provides program and facilities management and maintenance, training, logistics, consulting, and technical assistance and systems integration services, primarily for agencies of the U.S. Government. These reportable segments are organized by the types of services provided, the differing specialized needs of the respective clients, and how the Company manages its business. The Company has aggregated various operating segments into its PTS reportable segment based on their similar characteristics, including similar long term financial performance, the nature of services provided, internal processes for delivering those services, and types of customers.

 

Management internally analyzes the results of its operations using several non-GAAP measures. A significant portion of the Company’s revenues relates to services provided by subcontractors and other non-employees that it categorizes as other direct costs. Other direct costs are segregated from cost of revenues resulting in revenue, net of other direct costs, which is a measure of work performed by Company employees. The Company has included information on revenue, net of other direct costs, as it believes that it is useful to view its revenue exclusive of costs associated with external service providers.

 

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Table of Contents

 

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

 

Reportable Segments:

 

Professional
Technical
Services

 

Management
Support
Services

 

Corporate

 

Total

 

 

 

 

 

(in millions)

 

 

 

Three Months Ended December 31, 2012:

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,771.2

 

$

246.1

 

$

 

$

2,017.3

 

Revenue, net of other direct costs(1)

 

1,093.8

 

151.2

 

 

1,245.0

 

Gross profit

 

69.3

 

8.8

 

 

78.1

 

Equity in earnings of joint ventures

 

5.1

 

0.8

 

 

5.9

 

General and administrative expenses

 

 

 

(22.1

)

(22.1

)

Operating income

 

74.4

 

9.6

 

(22.1

)

61.9

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

3.9

%

3.6

%

 

3.9

%

Gross profit as a % of revenue, net of other direct costs(1)

 

6.3

%

5.8

%

 

6.3

%

 

Reportable Segments:

 

Professional
Technical
Services

 

Management
Support
Services

 

Corporate

 

Total

 

 

 

 

 

(in millions)

 

 

 

Three Months Ended December 31, 2011:

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,807.4

 

$

221.8

 

$

 

$

2,029.2

 

Revenue, net of other direct costs(1)

 

1,100.9

 

129.9

 

 

1,230.8

 

Gross profit

 

84.8

 

5.5

 

 

90.3

 

Equity in earnings of joint ventures

 

2.5

 

6.5

 

 

9.0

 

General and administrative expenses

 

 

 

(22.6

)

(22.6

)

Operating income

 

87.3

 

12.0

 

(22.6

)

76.7

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

4.7

%

2.5

%

 

4.5

%

Gross profit as a % of revenue, net of other direct costs(1)

 

7.7

%

4.2

%

 

7.3

%

 


(1)         Non-GAAP measure

 

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, the risk of employee misconduct or our failure to comply with laws and regulations, and our ability to successfully execute our mergers and acquisitions strategy, including the integration of new companies into our business. Accordingly, actual results could differ materially from those contemplated by any forward-looking statement. 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 public and private clients around the world. We provide our services in a broad range of end markets through a network of approximately 46,900 employees.

 

Our business focuses primarily on providing fee-based professional technical and support services and therefore our business is 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 spent on client projects and our ability to manage our costs. We report our business through two segments: Professional Technical Services (PTS) and Management Support Services (MSS).

 

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Table of Contents

 

Our PTS segment delivers planning, consulting, architectural and engineering design, and program and construction management services to commercial and government clients worldwide in major end markets such as transportation, facilities, environmental, energy, water and government 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.

 

Our MSS segment provides program and 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 subcontractors and other direct costs.

 

Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, integrate and maximize the value of our recent acquisitions, allocate our labor resources to profitable and high growth markets, secure new contracts and renew existing client agreements. Demand for our services is cyclical and may be vulnerable to sudden economic downturns and reductions in government and private industry spending, which may result in clients delaying, curtailing or canceling proposed and existing projects. Moreover, as a professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation and profitability.

 

Our costs consist primarily of the compensation we pay to our employees, including salaries, fringe benefits, the costs of hiring subcontractors and other project-related expenses, and sales, general and administrative costs.

 

We define revenue provided by acquired companies as revenue included in the current period up to twelve months subsequent to their acquisition date. Throughout this section, we refer to companies we acquired in the last twelve months as “acquired companies.”

 

Components of Income and Expense

 

Our management analyzes the results of our operations using several financial measures not in accordance with generally accepted accounting principles (GAAP). A significant portion of our revenue relates to services provided by subcontractors and other non-employees that we categorize as “other direct costs.” Those costs are typically paid to service providers upon our receipt of payment from the client. We segregate other direct costs from revenue resulting in a measurement that we refer to as “revenue, net of other direct costs,” which is a measure of work performed by AECOM employees. A large portion of our fees are derived through work performed by AECOM employees rather than other parties. We have included information on revenue, net of other direct costs, as we believe that it is useful to view our revenue exclusive of costs associated with external service providers, and the related gross margins, as discussed in Results of Operations below. Because of the importance of maintaining the high quality of work generated by our employees, gross margin is an important metric that we review in evaluating our operating performance.

 

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Table of Contents

 

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

 

 

 

Three Months
Ended December 31,

 

 

 

2012

 

2011

 

 

 

(in millions)

 

Other Financial Data:

 

 

 

 

 

Revenue

 

$

2,017.3

 

$

2,029.2

 

Other direct costs(1)

 

772.3

 

798.4

 

Revenue, net of other direct costs(1)

 

1,245.0

 

1,230.8

 

Cost of revenue, net of other direct costs(1)

 

1,166.9

 

1,140.5

 

Gross profit

 

78.1

 

90.3

 

Equity in earnings of joint ventures

 

5.9

 

9.0

 

General and administrative expenses

 

(22.1

)

(22.6

)

Income from operations

 

$

61.9

 

$

76.7

 

 

 

 

 

 

 

Reconciliation of Cost of Revenue:

 

 

 

 

 

Other direct costs

 

$

772.3

 

$

798.4

 

Cost of revenue, net of other direct costs

 

1,166.9

 

1,140.5

 

Cost of revenue

 

$

1,939.2

 

$

1,938.9

 

 


(1)         Non-GAAP measure

 

Results of Operations

 

Three months ended December 31, 2012 compared to the three months ended December 31, 2011

 

Consolidated Results

 

 

 

Three Months Ended

 

 

 

December 31,

 

December 31,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

 

 

(in millions)

 

 

 

Revenue

 

$

2,017.3

 

$

2,029.2

 

$

(11.9

)

(0.6

)%

Other direct costs

 

772.3

 

798.4

 

(26.1

)

(3.3

)

Revenue, net of other direct costs

 

1,245.0

 

1,230.8

 

14.2

 

1.2

 

Cost of revenue, net of other direct costs

 

1,166.9

 

1,140.5

 

26.4

 

2.3

 

Gross profit

 

78.1

 

90.3

 

(12.2

)

(13.5

)

Equity in earnings of joint ventures

 

5.9

 

9.0

 

(3.1

)

(34.4

)

General and administrative expenses

 

(22.1

)

(22.6

)

0.5

 

(2.2

)

Income from operations

 

61.9

 

76.7

 

(14.8

)

(19.3

)

Other income

 

0.3

 

1.9

 

(1.6

)

(84.2

)

Interest expense, net

 

(10.5

)

(10.6

)

0.1

 

(0.9

)

Income before income tax expense

 

51.7

 

68.0

 

(16.3

)

(24.0

)

Income tax expense

 

12.7

 

19.6

 

(6.9

)

(35.2

)

Net income

 

39.0

 

48.4

 

(9.4

)

(19.4

)

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

(0.9

)

(0.5

)

(0.4

)

80.0

 

Net income attributable to AECOM

 

$

38.1

 

$

47.9

 

$

(9.8

)

(20.5

)%

 

21



Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

93.7

 

92.7

 

Gross margin

 

6.3

 

7.3

 

Equity in earnings of joint ventures

 

0.5

 

0.7

 

General and administrative expense

 

(1.8

)

(1.8

)

Income from operations

 

5.0

 

6.2

 

Other income

 

 

0.2

 

Interest expense, net

 

(0.8

)

(0.9

)

Income before income tax expense

 

4.2

 

5.5

 

Income tax expense

 

1.1

 

1.6

 

Net income

 

3.1

 

3.9

 

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

 

 

Net income attributable to AECOM

 

3.1

%

3.9

%

 

Revenue

 

Our revenue for the three months ended December 31, 2012 decreased $11.9 million, or 0.6%, to $2,017.3 million as compared to $2,029.2 million for the corresponding period last year. Revenue provided by acquired companies was $29.1 million for the three months ended December 31, 2012. Excluding the revenue provided by acquired companies, revenue decreased $41.0 million, or 2.0%, from the three months ended December 31, 2011.

 

The decrease in revenue, excluding acquired companies, for the three months ended December 31, 2012 was primarily attributable to a reduction in engineering, program management, and construction management services provided in the Americas of $75 million and a decrease in mining related services in Australia of approximately $15 million. These decreases were partially offset by a $24 million increase in our MSS segment and increased engineering and program management services on infrastructure projects in Asia of approximately $20 million.

 

Revenue, Net of Other Direct Costs

 

Our revenue, net of other direct costs, for the three months ended December 31, 2012 increased $14.2 million, or 1.2%, to $1,245.0 million as compared to $1,230.8 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $21.3 million for the three months ended December 31, 2012. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $7.1 million, or 0.6%, from the three months ended December 31, 2011.

 

The decrease in revenue, net of other direct costs, excluding revenue, net of other direct costs provided by acquired companies, for the three months ended December 31, 2012 was primarily due to a reduction in engineering and program management services in the Americas of $20 million and a decrease in mining related services in Australia of approximately $15 million, partially offset by an increase in our MSS segment of $21 million.

 

Gross Profit

 

Our gross profit for the three months ended December 31, 2012 decreased $12.2 million, or 13.5%, to $78.1 million as compared to $90.3 million for the corresponding period last year. Gross profit provided by acquired companies was $0.8 million for the three months ended December 31, 2012. Excluding gross profit provided by acquired companies, gross profit decreased $13.0 million, or 14.4%, from the three months ended December 31, 2011. For the three months ended December 31, 2012, gross profit, as a percentage of revenue, net of other direct costs, decreased to 6.3% from 7.3% in the three months ended December 31, 2011.

 

The decreases in gross profit and gross profit, as a percentage of revenue, net of other direct costs for the three months ended December 31, 2012, as compared to the corresponding period last year were primarily attributable to a decline in our Australian mining related services noted above, which led us to incur severance costs of approximately $8 million during the quarter ended December 31, 2012.

 

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Table of Contents

 

Equity in Earnings of Joint Ventures

 

Our equity in earnings of joint ventures for the three months ended December 31, 2012 decreased $3.1 million, or 34.4%, to $5.9 million as compared to $9.0 million in the corresponding period last year primarily due to reduced earnings on a joint venture that supports United States government activities in the Middle East.

 

General and Administrative Expenses

 

Our general and administrative expenses for the three months ended December 31, 2012 decreased $0.5 million, or 2.2%, to $22.1 million as compared to $22.6 million for the corresponding period last year. As a percentage of revenue, net of other direct costs, general and administrative expenses was 1.8% for each of the three months ended December 31, 2012 and December 31, 2011.

 

Other Income

 

Our other income for the three months ended December 31, 2012 decreased $1.6 million to $0.3 million as compared to $1.9 million for the three months ended December 31, 2011.

 

Other income is primarily related to investment earnings.

 

Interest Expense, Net

 

Our net interest expense for the three months ended December 31, 2012 decreased $0.1 million to $10.5 million as compared to $10.6 million for the three months ended December 31, 2011.

 

Income Tax Expense

 

Our income tax expense for the three months ended December 31, 2012 decreased $6.9 million, or 35.2%, to $12.7 million as compared to $19.6 million for the three months ended December 31, 2011.

 

The reduction in the tax expense is primarily due to a reduction in the earnings from the quarter ended December 31, 2012, as compared to the earnings from the quarter ended December 31, 2011.

 

Net Income Attributable to AECOM

 

The factors described above resulted in net income attributable to AECOM of $38.1 million for the three months ended December 31, 2012 as compared to net income attributable to AECOM of $47.9 million for the three months ended December 31, 2011.

 

Results of Operations by Reportable Segment:

 

Professional Technical Services

 

 

 

Three Months Ended

 

 

 

December 31,

 

December 31,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

 

 

(in millions)

 

 

 

Revenue

 

$

1,771.2

 

$

1,807.4

 

$

(36.2

)

(2.0

)%

Other direct costs

 

677.4

 

706.5

 

(29.1

)

(4.1

)

Revenue, net of other direct costs

 

1,093.8

 

1,100.9

 

(7.1

)

(0.6

)

Cost of revenue, net of other direct costs

 

1,024.5

 

1,016.1

 

8.4

 

0.8

 

Gross profit

 

$

69.3

 

$

84.8

 

$

(15.5

)

(18.3

)%

 

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

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

93.7

 

92.3

 

Gross margin

 

6.3

%

7.7

%

 

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Table of Contents

 

Revenue

 

Revenue for our PTS segment for the three months ended December 31, 2012 decreased $36.2 million, or 2.0%, to $1,771.2 million as compared to $1,807.4 million for the corresponding period last year. Revenue provided by acquired companies was $29.1 million for the three months ended December 31, 2012. Excluding revenue provided by acquired companies, revenue decreased $65.3 million, or 3.6%, from the three months ended December 31, 2011.

 

The decrease in revenue, excluding acquired companies, for the three months ended December 31, 2012 was primarily attributable to a reduction in engineering, program management, and construction management services provided in the Americas of $75 million and a decrease in mining related services in Australia of approximately $15 million. These decreases were partially offset by increased engineering and program management services on infrastructure projects in Asia of approximately $20 million.

 

Revenue, Net of Other Direct Costs

 

Revenue, net of other direct costs, for our PTS segment for the three months ended December 31, 2012 decreased $7.1 million, or 0.6%, to $1,093.8 million as compared to $1,100.9 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $21.3 million for the three months ended December 31, 2012. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $28.4 million, or 2.6%, from the three months ended December 31, 2011.

 

The decrease in revenue, net of other direct costs, excluding revenue, net of other direct costs provided by acquired companies, for the three months ended December 31, 2012 was primarily due to decreased engineering and program management services in the Americas and Australia of $20 million and $15 million, respectively.

 

Gross Profit

 

Gross profit for our PTS segment for the three months ended December 31, 2012 decreased $15.5 million, or 18.3%, to $69.3 million as compared to $84.8 million for the corresponding period last year. Gross profit provided by acquired companies was $0.8 million for the three months ended December 31, 2012. Excluding gross profit provided by acquired companies, gross profit decreased $16.3 million, or 19.2%, from the three months ended December 31, 2011. As a percentage of revenue, net of other direct costs, gross profit decreased to 6.3% of revenue, net of other direct costs, for the three months ended December 31, 2012 from 7.7% in the corresponding period last year.

 

The decrease in gross profit and gross profit as a percentage of revenue, net of other direct costs, was primarily attributable to a decline in our Australian mining related services noted above, which led us to incur severance costs of approximately $8 million during the quarter ended December 31, 2012.

 

Management Support Services

 

 

 

Three Months Ended

 

 

 

December 31,

 

December 31,

 

Change

 

 

 

2012

 

2011

 

$

 

%

 

 

 

 

 

(in millions)

 

 

 

Revenue

 

$

246.1

 

$

221.8

 

$

24.3

 

11.0

%

Other direct costs

 

94.9

 

91.9

 

3.0

 

3.3

 

Revenue, net of other direct costs

 

151.2

 

129.9

 

21.3

 

16.4

 

Cost of revenue, net of other direct costs

 

142.4

 

124.4

 

18.0

 

14.5

 

Gross profit

 

$

8.8

 

$

5.5

 

$

3.3

 

60.0

%

 

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

 

 

 

Three Months Ended

 

 

 

December 31,
2012

 

December 31,
2011

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

94.2

 

95.8

 

Gross margin

 

5.8

%

4.2

%

 

24



Table of Contents

 

Revenue

 

Revenue for our MSS segment for the three months ended December 31, 2012 increased $24.3 million, or 11.0%, to $246.1 million as compared to $221.8 million for the corresponding period last year. No revenue, net of other direct costs, was provided by acquired companies.

 

The increase in revenue for the three months ended December 31, 2012 was primarily attributable to increased services provided to the U.S. Army in the Middle East.

 

Revenue, Net of Other Direct Costs

 

Revenue, net of other direct costs, for our MSS segment for the three months ended December 31, 2012 increased $21.3 million, or 16.4%, to $151.2 million as compared to $129.9 million for the corresponding period last year. No revenue, net of other direct costs, was provided by acquired companies.

 

The increase in revenue, net of other direct costs, for the three months ended December 31, 2012 was primarily attributable to increased services provided to the U.S. Army in the Middle East.

 

Gross Profit

 

Gross profit for our MSS segment for the three months ended December 31, 2012 increased $3.3 million, or 60.0%, to $8.8 million as compared to $5.5 million for the corresponding period last year. As a percentage of revenue, net of other direct costs, gross profit increased to 5.8% of revenue, net of other direct costs, for the three months ended December 31, 2012 from 4.2% in the corresponding period last year. No gross profit was provided by acquired companies.

 

Seasonality

 

We experience seasonal trends in our business. The first quarter of our fiscal year (October 1 to December 31) is typically our weakest quarter. The harsher weather conditions impact our ability to complete work in parts of North America and the holiday season schedule affects our productivity during this period. Our revenue is typically higher in the last half of the fiscal year. Many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during their first quarter, when new funding becomes available. In addition, we find that the U.S. federal government tends to authorize more work during the period preceding the end of our fiscal year, September 30. Further, our construction management revenue typically increases during the high construction season of the summer months. Within the United States, as well as other parts of the world, our business generally benefits from milder weather conditions in our fiscal fourth quarter, which allows for more productivity from our on-site civil services. For these reasons, coupled with the number and significance of client contracts commenced and completed during a period, as well as the time of expenses incurred for corporate initiatives, it is not unusual for us to experience seasonal changes or fluctuations in our quarterly operating results.

 

Liquidity and Capital Resources

 

Cash Flows

 

Our principal sources of liquidity are cash flows from operations, borrowings under our credit facilities, and access to financial markets. Our principal uses of cash are operating expenses, capital expenditures, working capital requirements, acquisitions, repurchases of stock under our stock repurchase program and repayment of debt. We believe our anticipated sources of liquidity including operating cash flows, existing cash and cash equivalents, borrowing capacity under our revolving credit facility and our ability to issue debt or equity, if required, will be sufficient to meet our projected cash requirements for at least the next 12 months.

 

At December 31, 2012, cash and cash equivalents were $591.3 million, a decrease of $2.5 million, or 0.4%, from $593.8 million at September 30, 2012. The decrease in cash and cash equivalents was primarily attributable to cash payments for business acquisitions and stock repurchases offset by cash provided by operating activities and net borrowings under credit agreements.

 

Net cash provided by operating activities was $67.1 million for the three months ended December 31, 2012, compared with net cash used in operating activities of $6.4 million for the three months ended December 31, 2011. The increase was primarily attributable to the timing of receipts and payments of working capital, which include accounts receivable, accounts payable, accrued expenses, and billings in excess of costs on uncompleted contracts. The increase in cash provided by operating activities provided by our accounts receivable was partially due to the sale of trade receivables to financial institutions, which provided a net benefit of $51.0 million. We expect to continue to sell trade receivables in the future as long as the terms continue to remain favorable to AECOM.

 

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Table of Contents

 

Net cash used in investing activities was $52.2 million for the three months ended December 31, 2012, compared with $21.6 million for the three months ended December 31, 2011. This increase was primarily attributable to a $32.7 million increase in payments for business acquisitions.

 

Net cash used in financing activities was $16.9 million for the three months ended December 31, 2012, compared with net cash provided by financing activities of $72.7 million for the three months ended December 31, 2011. The change was primarily attributable to a $159.8 million increase in payments to repurchase common stock under the Repurchase Program, partially offset by an increase in net borrowings under credit agreements of $82.7 million.

 

Working Capital

 

Working capital, or current assets less current liabilities, decreased $43.5 million, or 4.1%, to $1,025.4 million at December 31, 2012 from $1,068.9 million at September 30, 2012. Net accounts receivable, which includes billed and unbilled costs and fees, net of billings in excess of costs on uncompleted contracts, increased $10.4 million, or 0.5%, to $2,086.0 million at December 31, 2012.

 

Accounts receivable increased 3.6%, or $86.0 million, to $2,481.8 million at December 31, 2012 from $2,395.9 million at September 30, 2012.

 

Days Sales Outstanding (DSO), including accounts receivable, net of billings in excess of costs on uncompleted contracts, excluding the effects of recent acquisitions, at December 31, 2012, was 94 days compared to the 91 days at September 30, 2012.

 

In Note 5, Accounts Receivable—Net, in the notes to our consolidated financial statements, a comparative analysis of the various components of accounts receivable is provided. Substantially all unbilled receivables as of December 31, 2012 and September 30, 2012 are expected to be billed and collected within twelve months.

 

Unbilled receivables related to claims are recorded only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, revenue is recorded only to the extent that contract costs relating to the claim have been incurred. Other than as disclosed, there are no significant net receivables related to contract claims as of December 31, 2012 and September 30, 2012. Award fees in unbilled receivables are accrued only when there is sufficient information to assess contract performance. On contracts that represent higher than normal risk or technical difficulty, award fees are generally deferred until an award fee letter is received.

 

Because our revenue depends to a great extent on billable labor hours, most of our charges are invoiced following the end of the month in which the hours were worked, the majority usually within 15 days. Other direct costs are normally billed along with labor hours. However, as opposed to salary costs, which are generally paid on either a bi-weekly or monthly basis, other direct costs are generally not paid until payment is received (in some cases in the form of advances) from the customers.

 

Debt

 

Debt consisted of the following:

 

 

 

December 31,
2012

 

September 30,
2012

 

 

 

(in millions)

 

Unsecured term credit agreement

 

$

750.0

 

$

750.0

 

Unsecured senior notes

 

257.6

 

256.8

 

Unsecured revolving credit facility

 

159.6

 

24.0

 

Notes secured by real properties

 

24.0

 

24.2

 

Other debt

 

42.0

 

14.7

 

Total debt

 

1,233.2

 

1,069.7

 

Less: Current portion of debt and short-term borrowings

 

(211.4

)

(162.6

)

Long-term debt, less current portion

 

$

1,021.8

 

$

907.1

 

 

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Table of Contents

 

The following table presents, in millions, scheduled maturities of our debt as of December 31, 2012:

 

Fiscal Year

 

 

 

2013 (nine months remaining)

 

$

173.9

 

2014

 

167.9

 

2015

 

151.7

 

2016

 

461.3

 

2017

 

1.6

 

Thereafter

 

276.8

 

Total

 

$

1,233.2

 

 </