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ACM > SEC Filings for ACM > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for AECOM TECHNOLOGY CORP


7-Aug-2013

Quarterly Report


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," "will," "would," "could," "should," 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 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 46,000 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).


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.

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

                                       Three Months                  Nine Months
                                      Ended June 30,                Ended June 30,
                                   2013           2012           2013           2012
                                                     (in millions)
Other Financial Data:
Revenue                         $   2,067.5    $   2,095.2    $   6,074.4    $   6,135.3
Other direct costs (1)                831.5          771.7        2,341.5        2,291.5
Revenue, net of other direct
costs (1)                           1,236.0        1,323.5        3,732.9        3,843.8
Cost of revenue, net of
other direct costs (1)              1,104.2        1,212.3        3,423.1        3,566.1
Gross profit                          131.8          111.2          309.8          277.7
Equity in earnings of joint
ventures                                4.1           12.3           17.9           38.2
General and administrative
expenses                              (24.0 )        (20.7 )        (73.4 )        (63.2 )
Income from operations          $     111.9    $     102.8    $     254.3    $     252.7

Reconciliation of Cost of
Revenue:
Other direct costs              $     831.5    $     771.7    $   2,341.5    $   2,291.5
Cost of revenue, net of
other direct costs                  1,104.2        1,212.3        3,423.1        3,566.1
Cost of revenue                 $   1,935.7    $   1,984.0    $   5,764.6    $   5,857.6



(1) Non-GAAP measure.


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Results of Operations

Three and nine months ended June 30, 2013 compared to the three and nine months ended June 30, 2012

Consolidated Results



                               Three Months Ended                          Nine Months Ended
                     June 30,    June 30,        Change         June 30,    June 30,        Change
                       2013        2012         $        %        2013        2012         $        %
                                                       (in millions)
Revenue              $ 2,067.5   $ 2,095.2   $ (27.7 )  (1.3 )% $ 6,074.4   $ 6,135.3   $ (60.9 )  (1.0 )%
Other direct costs       831.5       771.7      59.8     7.7      2,341.5     2,291.5      50.0     2.2
Revenue, net of
other direct costs     1,236.0     1,323.5     (87.5 )  (6.6 )    3,732.9     3,843.8    (110.9 )  (2.9 )
Cost of revenue,
net of other
direct costs           1,104.2     1,212.3    (108.1 )  (8.9 )    3,423.1     3,566.1    (143.0 )  (4.0 )
Gross profit             131.8       111.2      20.6    18.5        309.8       277.7      32.1    11.6
Equity in earnings
of joint ventures          4.1        12.3      (8.2 ) (66.7 )       17.9        38.2     (20.3 ) (53.1 )
General and
administrative
expenses                 (24.0 )     (20.7 )    (3.3 )  15.9        (73.4 )     (63.2 )   (10.2 )  16.1
Income from
operations               111.9       102.8       9.1     8.9        254.3       252.7       1.6     0.6
Other income               1.2         1.5      (0.3 ) (20.0 )        2.0         8.6      (6.6 ) (76.7 )
Interest expense         (11.7 )     (13.1 )     1.4   (10.7 )      (34.5 )     (35.7 )     1.2    (3.4 )
Income before
income tax expense       101.4        91.2      10.2    11.2        221.8       225.6      (3.8 )  (1.7 )
Income tax expense        30.1        21.4       8.7    40.7         56.8        57.7      (0.9 )  (1.6 )
Net income                71.3        69.8       1.5     2.1        165.0       167.9      (2.9 )  (1.7 )
Noncontrolling
interests in
income
of consolidated
subsidiaries, net
of tax                    (0.5 )      (0.4 )    (0.1 )  25.0         (2.3 )      (1.6 )    (0.7 )  43.8
Net income
attributable to
AECOM                $    70.8   $    69.4   $   1.4     2.0 %  $   162.7   $   166.3   $  (3.6 )  (2.2 )%

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

                                      Three Months Ended        Nine Months Ended
                                    June 30,     June 30,     June 30,     June 30,
                                      2013         2012         2013         2012
Revenue, net of other direct
costs                                   100.0 %      100.0 %      100.0 %      100.0 %
Cost of revenue, net of other
direct costs                             89.3         91.6         91.7         92.8
Gross margin                             10.7          8.4          8.3          7.2
Equity in earnings of joint
ventures                                  0.3          0.9          0.5          1.0
General and administrative
expense                                  (1.9 )       (1.5 )       (2.0 )       (1.6 )
Income from operations                    9.1          7.8          6.8          6.6
Other income                              0.1          0.1          0.1          0.2
Interest expense                         (1.0 )       (1.0 )       (1.0 )       (0.9 )
Income before income tax expense          8.2          6.9          5.9          5.9
Income tax expense                        2.4          1.6          1.5          1.5
Net income                                5.8          5.3          4.4          4.4
Noncontrolling interests in
income of consolidated
subsidiaries, net of tax                 (0.1 )       (0.1 )        0.0         (0.1 )
Net income attributable to AECOM          5.7 %        5.2 %        4.4 %        4.3 %

Revenue

Our revenue for the three months ended June 30, 2013 decreased $27.7 million, or 1.3%, to $2,067.5 million as compared to $2,095.2 million for the corresponding period last year. Revenue provided by acquired companies was $46.5 million for the three months ended June 30, 2013. Excluding the revenue provided by acquired companies, revenue decreased $74.2 million, or 3.5%, from the three months ended June 30, 2012.


Table of Contents

Our revenue for the nine months ended June 30, 2013 decreased $60.9 million, or 1.0%, to $6,074.4 million as compared to $6,135.3 million for the corresponding period last year. Revenue provided by acquired companies was $119.9 million for the nine months ended June 30, 2013. Excluding the revenue provided by acquired companies, revenue decreased $180.8 million, or 2.9%, from the nine months ended June 30, 2012.

The decrease in revenue, excluding acquired companies, for the three months ended June 30, 2013 was primarily attributable to a decrease in Australia of approximately $100 million substantially from decreased mining related services, partially offset by an increase in the Americas of approximately $40 million due to increased other direct costs from construction management services.

The decrease in revenue, excluding acquired companies, for the nine months ended June 30, 2013 was primarily attributable to a decrease in Australia of approximately $200 million substantially from decreased mining related services and a reduction in engineering and program management services provided in the Americas of $30 million. These decreases were partially offset by increased engineering and program management services on infrastructure projects in Asia of approximately $40 million.

Revenue, Net of Other Direct Costs

Our revenue, net of other direct costs, for the three months ended June 30, 2013 decreased $87.5 million, or 6.6%, to $1,236.0 million as compared to $1,323.5 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $36.6 million for the three months ended June 30, 2013. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $124.1 million, or 9.4%, from the three months ended June 30, 2012.

Our revenue, net of other direct costs, for the nine months ended June 30, 2013 decreased $110.9 million, or 2.9%, to $3,732.9 million as compared to $3,843.8 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $90.3 million for the nine months ended June 30, 2013. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $201.2 million, or 5.2%, from the nine months ended June 30, 2012.

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 June 30, 2013 was primarily due to a decrease in Australia of approximately $60 million substantially from decreased mining related services and a reduction in engineering and program management services in the Americas of approximately $50 million.

The decrease in revenue, net of other direct costs, excluding revenue, net of other direct costs provided by acquired companies, for the nine months ended June 30, 2013 was primarily due to a decrease in Australia of approximately $120 million substantially from decreased mining related services and a reduction in engineering and program management services in the Americas of approximately $130 million, partially offset by increased engineering and program management services on infrastructure projects in Asia of approximately $50 million.

Gross Profit

Our gross profit for the three months ended June 30, 2013 increased $20.6 million, or 18.5%, to $131.8 million as compared to $111.2 million for the corresponding period last year. Gross profit provided by acquired companies was $3.3 million for the three months ended June 30, 2013. Excluding gross profit provided by acquired companies, gross profit increased $17.3 million, or 15.6%, from the three months ended June 30, 2012. For the three months ended June 30, 2013, gross profit, as a percentage of revenue, net of other direct costs, increased to 10.7% from 8.4% for the three months ended June 30, 2012.

Our gross profit for the nine months ended June 30, 2013 increased $32.1 million, or 11.6%, to $309.8 million as compared to $277.7 million for the corresponding period last year. Gross profit provided by acquired companies was $7.4 million for the nine months ended June 30, 2013. Excluding gross profit provided by acquired companies, gross profit increased $24.7 million, or 8.9%, from the nine months ended June 30, 2012. For the nine months ended June 30, 2013, gross profit, as a percentage of revenue, net of other direct costs, increased to 8.3% from 7.2% for the nine months ended June 30, 2012.

The increases in gross profit and gross profit as a percentage of revenue, net of other direct costs, for the three and nine months ended June 30, 2013 were primarily due to improved project performance.


Table of Contents

Equity in Earnings of Joint Ventures

Our equity in earnings of joint ventures for the three months ended June 30, 2013 decreased $8.2 million, or 66.7%, to $4.1 million as compared to $12.3 million in the corresponding period last year.

Our equity in earnings of joint ventures for the nine months ended June 30, 2013 decreased $20.3 million, or 53.1%, to $17.9 million as compared to $38.2 million in the corresponding period last year.

The decrease in equity in earnings of joint ventures for the three months ended June 30, 2013 was primarily due to reduced earnings on a PTS joint venture that provides engineering and design services in the Middle East.

The decrease in equity in earnings of joint ventures for the nine months ended June 30, 2013 was primarily due to reduced earnings on MSS joint ventures that support the United States Army in the Middle East.

General and Administrative Expenses

Our general and administrative expenses for the three months ended June 30, 2013 increased $3.3 million, or 15.9%, to $24.0 million as compared to $20.7 million for the corresponding period last year. As a percentage of revenue, net of other direct costs, general and administrative expenses increased to 1.9% for the three months ended June 30, 2013 from 1.5% for the three months ended June 30, 2012.

Our general and administrative expenses for the nine months ended June 30, 2013 increased $10.2 million, or 16.1%, to $73.4 million as compared to $63.2 million for the corresponding period last year. As a percentage of revenue, net of other direct costs, general and administrative expenses increased to 2.0% for the nine months ended June 30, 2013 from 1.6 for the nine months ended June 30, 2012.

The increases in general administrative expenses are primarily due to increased performance-based compensation.

Other Income

Our other income for the three months ended June 30, 2013 decreased $0.3 million to $1.2 million as compared to $1.5 million for the three months ended June 30, 2012.

Our other income for the nine months ended June 30, 2013 decreased $6.6 million to $2.0 million as compared to $8.6 million for the nine months ended June 30, 2012.

The decrease in other income for the nine months ended June 30, 2013 is primarily due to decreased earnings from investments.

Interest Expense

Our interest expense for the three months ended June 30, 2013 decreased $1.4 million to $11.7 million as compared to $13.1 million for the three months ended June 30, 2012.

Our interest expense for the nine months ended June 30, 2013 decreased $1.2 million to $34.5 million as compared to $35.7 million for the nine months ended June 30, 2012.

Income Tax Expense

Our income tax expense for the three months ended June 30, 2013 increased $8.7 million, or 40.7%, to $30.1 million as compared to $21.4 million for the three months ended June 30, 2012.

Our income tax expense for the nine months ended June 30, 2013 decreased $0.9 million, or 1.6%, to $56.8 million as compared to $57.7 million for the nine months ended June 30, 2012.

The increase in income tax expense for the three months ended June 30, 2013 was primarily due to entering into a restructuring transaction to make $147.9 million of cash available in the U.S. for general corporate purposes, which resulted in $4.9 million of U.S. income tax expense.

Net Income Attributable to AECOM

The factors described above resulted in net income attributable to AECOM of $70.8 million and $162.7 million for the three and nine months ended June 30, 2013, respectively, as compared to net income attributable to AECOM of $69.4 million and $166.3 million for the three and nine months ended June 30, 2012, respectively.


Table of Contents

Results of Operations by Reportable Segment:



Professional Technical Services



                             Three Months Ended                         Nine Months Ended
                   June 30,    June 30,        Change         June 30,    June 30,        Change
                     2013        2012         $        %        2013        2012         $       %
                                                     (in millions)
Revenue            $ 1,847.1   $ 1,846.5   $    0.6    0.0 %  $ 5,384.2   $ 5,455.0   $ (70.8 ) (1.3 )%
Other direct
costs                  745.1       681.9       63.2    9.3      2,078.1     2,026.4      51.7    2.6
Revenue, net of
other direct
costs                1,102.0     1,164.6      (62.6 ) (5.4 )    3,306.1     3,428.6    (122.5 ) (3.6 )
Cost of revenue,
net of other
direct costs           982.2     1,050.4      (68.2 ) (6.5 )    3,024.8     3,143.2    (118.4 ) (3.8 )
Gross profit       $   119.8   $   114.2   $    5.6    4.9 %  $   281.3   $   285.4   $  (4.1 ) (1.4 )%

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

                                    Three Months Ended          Nine Months Ended
                                  June 30,      June 30,      June 30,      June 30,
                                    2013          2012          2013          2012
Revenue, net of other direct
costs                                 100.0 %       100.0 %       100.0 %       100.0 %
Cost of revenue, net of other
direct costs                           89.1          90.2          91.5          91.7
Gross profit                           10.9 %         9.8 %         8.5 %         8.3 %

Revenue

Revenue for our PTS segment for the three months ended June 30, 2013 increased $0.6 million, or 0.0%, to $1,847.1 million as compared to $1,846.5 million for the corresponding period last year. Revenue provided by acquired companies was $46.5 million for the three months ended June 30, 2013. Excluding revenue provided by acquired companies, revenue decreased $45.9 million, or 2.5%, from the three months ended June 30, 2012.

Revenue for our PTS segment for the nine months ended June 30, 2013 decreased $70.8 million, or 1.3%, to $5,384.2 million as compared to $5,455.0 million for the corresponding period last year. Revenue provided by acquired companies was $119.9 million for the nine months ended June 30, 2013. Excluding revenue provided by acquired companies, revenue decreased $190.7 million, or 3.5%, from the nine months ended June 30, 2012.

The decrease in revenue, excluding acquired companies, for the three months ended June 30, 2013 was primarily attributable to a decrease in Australia of approximately $100 million substantially from decreased mining related services, partially offset by an increase in the Americas of approximately $40 million due to increased other direct costs from construction management services.

The decrease in revenue, excluding acquired companies, for the nine months ended June 30, 2013 was primarily attributable to a decrease in Australia of approximately $200 million substantially from decreased mining related services and a reduction in engineering and program management services provided in the Americas of $30 million. These decreases were partially offset by increased engineering and program management services on infrastructure projects in Asia of approximately $40 million.

Revenue, Net of Other Direct Costs

Revenue, net of other direct costs, for our PTS segment for the three months ended June 30, 2013 decreased $62.6 million, or 5.4%, to $1,102.0 million as compared to $1,164.6 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $36.6 million for the three months ended June 30, 2013. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $99.2 million, or 8.5%, from the three months ended June 30, 2012.


Table of Contents

Revenue, net of other direct costs, for our PTS segment for the nine months ended June 30, 2013 decreased $122.5 million, or 3.6%, to $3,306.1 million as compared to $3,428.6 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $90.3 million for the nine months ended June 30, 2013. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $212.8 million, or 6.2%, from the nine months ended June 30, 2012.

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 June 30, 2013 was primarily due to a decrease in Australia of approximately $60 million substantially from decreased mining related services and a reduction in engineering and program management services in the Americas of approximately $50 million.

The decrease in revenue, net of other direct costs, excluding revenue, net of other direct costs provided by acquired companies, for the nine months ended June 30, 2013 was primarily due to a decrease in Australia of approximately $120 million substantially from decreased mining related services, and a reduction in engineering and program management services in the Americas of approximately $130 million, partially offset by increased engineering and program management services on infrastructure projects in Asia of approximately $50 million.

Gross Profit

Gross profit for our PTS segment for the three months ended June 30, 2013 increased $5.6 million, or 4.9%, to $119.8 million as compared to $114.2 million for the corresponding period last year. Gross profit provided by acquired companies was $3.3 million for the three months ended June 30, 2013. Excluding gross profit provided by acquired companies, gross profit increased $2.3 million, or 2.0%, from the three months ended June 30, 2012. As a percentage of revenue, net of other direct costs, gross profit increased to 10.9% of revenue, net of other direct costs, for the three months ended June 30, 2013 from 9.8% in the corresponding period last year.

Gross profit for our PTS segment for the nine months ended June 30, 2013 decreased $4.1 million, or 1.4%, to $281.3 million as compared to $285.4 million for the corresponding period last year. Gross profit provided by acquired companies was $7.4 million for the nine months ended June 30, 2013. Excluding gross profit provided by acquired companies, gross profit decreased $11.5 million, or 4.0%, from the nine months ended June 30, 2012. As a . . .

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