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ACM > SEC Filings for ACM > Form 10-Q on 5-Feb-2014All Recent SEC Filings

Show all filings for AECOM TECHNOLOGY CORP

Form 10-Q for AECOM TECHNOLOGY CORP


5-Feb-2014

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 44,400 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).

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.


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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 Ended December 31,
                                                      2013                2012
                                                           (in millions)
Other Financial Data:
Revenue                                         $        1,953.9    $        2,017.3
Other direct costs(1)                                      802.4               772.3
Revenue, net of other direct costs(1)                    1,151.5             1,245.0
Cost of revenue, net of other direct costs(1)            1,073.3             1,166.9
Gross profit                                                78.2                78.1
Equity in earnings of joint ventures                        36.1                 5.9
General and administrative expenses                        (23.9 )             (22.1 )
Income from operations                          $           90.4    $           61.9

Reconciliation of Cost of Revenue:
Other direct costs                              $          802.4    $          772.3
Cost of revenue, net of other direct costs               1,073.3             1,166.9
Cost of revenue                                 $        1,875.7    $        1,939.2



(1) Non-GAAP measure


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Results of Operations

Three months ended December 31, 2013 compared to the three months ended December 31, 2012

Consolidated Results



                                                       Three Months Ended
                                    December 31,      December 31,             Change
                                        2013              2012             $             %
                                                            (in millions)
Revenue                            $      1,953.9    $      2,017.3    $    (63.4 )       (3.1 )%
Other direct costs                          802.4             772.3          30.1          3.9
Revenue, net of other direct
costs                                     1,151.5           1,245.0         (93.5 )       (7.5 )
Cost of revenue, net of other
direct costs                              1,073.3           1,166.9         (93.6 )       (8.0 )
Gross profit                                 78.2              78.1           0.1          0.1
Equity in earnings of joint
ventures                                     36.1               5.9          30.2        511.9
General and administrative
expenses                                    (23.9 )           (22.1 )        (1.8 )        8.1
Income from operations                       90.4              61.9          28.5         46.0
Other income                                    -               0.7          (0.7 )     (100.0 )
Interest expense, net                       (10.4 )           (10.9 )         0.5         (4.6 )
Income before income tax
expense                                      80.0              51.7          28.3         54.7
Income tax expense                           23.5              12.7          10.8         85.0
Net income                                   56.5              39.0          17.5         44.9
Noncontrolling interests in
income of consolidated
subsidiaries, net of tax                     (0.1 )            (0.9 )         0.8        (88.9 )
Net income attributable to
AECOM                              $         56.4    $         38.1    $     18.3         48.0 %

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

                                                         Three Months Ended
                                                   December 31,     December 31,
                                                       2013             2012
Revenue, net of other direct costs                         100.0 %          100.0 %
Cost of revenue, net of other direct costs                  93.2             93.7
Gross margin                                                 6.8              6.3
Equity in earnings of joint ventures                         3.1              0.5
General and administrative expense                          (2.0 )           (1.8 )
Income from operations                                       7.9              5.0
Other income                                                   -              0.1
Interest expense, net                                       (1.0 )           (0.9 )
Income before income tax expense                             6.9              4.2
Income tax expense                                           2.0              1.1
Net income                                                   4.9              3.1
Noncontrolling interests in income of
consolidated subsidiaries, net of tax                          -                -
Net income attributable to AECOM                             4.9 %            3.1 %

Revenue

Our revenue for the three months ended December 31, 2013 decreased $63.4 million, or 3.1%, to $1,953.9 million as compared to $2,017.3 million for the corresponding period last year. Revenue provided by acquired companies was $18.6 million for the three months ended December 31, 2013. Excluding the revenue provided by acquired companies, revenue decreased $82.0 million, or 4.1%, from the three months ended December 31, 2012.

The decrease in revenue, excluding acquired companies, for the three months ended December 31, 2013 was primarily attributable to decreases in our MSS segment of $62 million noted below and in Australia of approximately $70 million substantially from decreased mining related services. These decreases were partially offset by increases in the Americas and the Middle East of approximately $20 million each. The increase in the Americas was primarily due to an increase in construction services, partially offset by a reduction in engineering and program management services.


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Revenue, Net of Other Direct Costs

Our revenue, net of other direct costs, for the three months ended December 31, 2013 decreased $93.5 million, or 7.5%, to $1,151.5 million as compared to $1,245.0 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $15.9 million for the three months ended December 31, 2013. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $109.4 million, or 8.8%, from the three months ended December 31, 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 December 31, 2013 was primarily due to decreases in our MSS segment of $41 million noted below and in Australia of approximately $40 million substantially from decreased mining related services, and a reduction in engineering and program management services in the Americas of approximately $40 million. These decreases were partially offset by increases in the Europe, Middle East and Africa region of $10 million and Asia of $10 million.

Gross Profit

Our gross profit for the three months ended December 31, 2013 increased $0.1 million, or 0.1%, to $78.2 million as compared to $78.1 million for the corresponding period last year. Gross profit provided by acquired companies was $2.3 million for the three months ended December 31, 2013. Excluding gross profit provided by acquired companies, gross profit decreased $2.2 million, or 2.8%, from the three months ended December 31, 2012. For the three months ended December 31, 2013, gross profit, as a percentage of revenue, net of other direct costs, increased to 6.8% from 6.3% in the three months ended December 31, 2012.

Equity in Earnings of Joint Ventures

Our equity in earnings of joint ventures for the three months ended December 31, 2013 increased $30.2 million, or 511.9%, to $36.1 million as compared to $5.9 million in the corresponding period last year primarily due to a $37.4 million gain on change in control of an unconsolidated joint venture that performs engineering and program management services in the Middle East and is included in the Company's PTS segment. The gain relates to the excess of fair value over the carrying value of the previously held equity interest in the unconsolidated joint venture. See further discussion in Note 6 to the accompanying financial statements. The gain on change in control was partially offset by an impairment of an unrelated joint venture investment.

General and Administrative Expenses

Our general and administrative expenses for the three months ended December 31, 2013 increased $1.8 million, or 8.1%, to $23.9 million as compared to $22.1 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% from 1.8% in the three months ended December 31, 2012.

Other Income

There was no other income for the three months ended December 31, 2013, a decrease of $0.7 million from $0.7 million for the three months ended December 31, 2012.

Interest Expense

Our interest expense for the three months ended December 31, 2013 decreased $0.5 million to $10.4 million as compared to $10.9 million for the three months ended December 31, 2012.

Income Tax Expense

Our income tax expense for the three months ended December 31, 2013 increased $10.8 million, or 85.0%, to $23.5 million as compared to $12.7 million for the three months ended December 31, 2012.

The increase in income tax expense for the three months ended December 31, 2013 was primarily due to the gain recognized on the change in control of the unconsolidated joint venture discussed above.

Net Income Attributable to AECOM

The factors described above resulted in net income attributable to AECOM of $56.4 million for the three months ended December 31, 2013 as compared to net income attributable to AECOM of $38.1 million for the three months ended December 31, 2012.


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Results of Operations by Reportable Segment:



Professional Technical Services



                                                        Three Months Ended
                                     December 31,      December 31,             Change
                                         2013              2012             $            %
                                                          (in millions)
Revenue                             $      1,770.2    $      1,771.2    $    (1.0 )       (0.1 )%
Other direct costs                           728.6             677.4         51.2          7.6
Revenue, net of other direct
costs                                      1,041.6           1,093.8        (52.2 )       (4.8 )
Cost of revenue, net of other
direct costs                                 981.6           1,024.5        (42.9 )       (4.2 )
Gross profit                        $         60.0    $         69.3    $    (9.3 )      (13.4 )%

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

                                                 Three Months Ended
                                             December 31,   December 31,
                                                 2013           2012
Revenue, net of other direct costs                  100.0 %        100.0 %
Cost of revenue, net of other direct costs           94.2           93.7
Gross margin                                          5.8 %          6.3 %

Revenue

Revenue for our PTS segment for the three months ended December 31, 2013 decreased $1.0 million, or 0.1%, to $1,770.2 million as compared to $1,771.2 million for the corresponding period last year. Revenue provided by acquired companies was $18.6 million for the three months ended December 31, 2013. Excluding revenue provided by acquired companies, revenue decreased $19.6 million, or 1.1%, from the three months ended December 31, 2012.

The decrease in revenue, excluding acquired companies, for the three months ended December 31, 2013 was primarily attributable to a decrease in Australia of approximately $70 million substantially from decreased mining related services. These decreases were partially offset by increases in the Americas and the Middle East of approximately $20 million each. The increase in the Americas was primarily due to an increase in construction services, partially offset by a reduction in engineering and program management services.

Revenue, Net of Other Direct Costs

Revenue, net of other direct costs, for our PTS segment for the three months ended December 31, 2013 decreased $52.2 million, or 4.8%, to $1,041.6 million as compared to $1,093.8 million for the corresponding period last year. Revenue, net of other direct costs, provided by acquired companies was $15.9 million for the three months ended December 31, 2013. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, decreased $68.1 million, or 6.2%, from the three months ended December 31, 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 December 31, 2013 was primarily due to a decrease in Australia of approximately $40 million substantially from decreased mining related services, and a reduction in engineering and program management services in the Americas of approximately $40 million. These decreases were partially offset by increases in the Europe, Middle East and Africa region of $10 million and Asia of $10 million.

Gross Profit

Gross profit for our PTS segment for the three months ended December 31, 2013 decreased $9.3 million, or 13.4%, to $60.0 million as compared to $69.3 million for the corresponding period last year. Gross profit provided by acquired companies was $2.3 million for the three months ended December 31, 2013. Excluding gross profit provided by acquired companies, gross profit decreased $11.6 million, or 16.7%, from the three months ended December 31, 2012. As a percentage of revenue, net of other direct costs, gross profit decreased to 5.8% of revenue, net of other direct costs, for the three months ended December 31, 2013 from 6.3% 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 gross profit in Australia and the Americas.


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Management Support Services



                                                       Three Months Ended
                                     December 31,     December 31,            Change
                                         2013             2012             $           %
                                                          (in millions)
Revenue                              $       183.7    $       246.1    $   (62.4 )     (25.4 )%
Other direct costs                            73.8             94.9        (21.1 )     (22.2 )
Revenue, net of other direct
costs                                        109.9            151.2        (41.3 )     (27.3 )
Cost of revenue, net of other
direct costs                                  91.7            142.4        (50.7 )     (35.6 )
Gross profit                         $        18.2    $         8.8    $     9.4       106.8 %

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

                                                 Three Months Ended
                                             December 31,   December 31,
                                                 2013           2012
Revenue, net of other direct costs                  100.0 %        100.0 %
Cost of revenue, net of other direct costs           83.4           94.2
Gross margin                                         16.6 %          5.8 %

Revenue

Revenue for our MSS segment for the three months ended December 31, 2013 decreased $62.4 million, or 25.4%, to $183.7 million as compared to $246.1 million for the corresponding period last year. No revenue, net of other direct costs, was provided by acquired companies.

The decrease was primarily due to decreased services provided to the U.S. government 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, 2013 decreased $41.3 million, or 27.3%, to $109.9 million as compared to $151.2 million for the corresponding period last year. No revenue, net of other direct costs, was provided by acquired companies.

The decrease was primarily due to decreased services provided to the U.S. government in the Middle East.

Gross Profit

Gross profit for our MSS segment for the three months ended December 31, 2013 increased $9.4 million, or 106.8%, to $18.2 million as compared to $8.8 million for the corresponding period last year. As a percentage of revenue, net of other direct costs, gross profit increased to 16.6% of revenue, net of other direct costs, for the three months ended December 31, 2013 from 5.8% in the corresponding period last year. No gross profit was provided by acquired companies.

The increase in gross profit and gross profit, as a percentage of revenue, net of other direct costs, for the three months ended December 31, 2013 was primarily due to the collection of a previously reserved Libya-related project receivable, partially offset by decreased services provided to the U.S. government in the Middle East.

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.


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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, 2013, cash and cash equivalents were $681.7 million, an increase of $81.0 million, or 13.5%, from $600.7 million at September 30, 2013. The increase in cash and cash equivalents was primarily attributable to cash provided by operating activities and net borrowings under credit agreements, partially offset by cash payments for stock repurchases, capital expenditures, and purchases of investments.

Net cash provided by operating activities was $137.4 million for the three months ended December 31, 2013, an increase of $70.3 million, or 104.8%, from $67.1 million for the three months ended December 31, 2012. 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 sale of trade receivables to financial institutions during the three months ended December 31, 2013 provided a net benefit of $9.3 million as compared to $51.0 million during the three months ended December 31, 2012. 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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