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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one) | ||
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 0-52423
AECOM TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
61-1088522 (I.R.S. Employer Identification No.) |
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555 South Flower Street, Suite 3700 Los Angeles, California 90071 (Address of principal executive offices, including zip code) |
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(213) 593-8000 (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |
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Common Stock, par value $0.01 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
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. ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
The aggregate market value of registrant's common stock held by non-affiliates on March 31, 2008 (the last business day of the registrant's most recently completed second fiscal quarter), based upon the closing price of a share of the registrant's common stock on such date as reported on the New York Stock Exchange was approximately $1.97 billion.
Number of shares of the registrant's common stock outstanding as of November 17, 2008: 103,101,460
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant's definitive proxy statement for the 2009 Annual Meeting of Stockholders, to be filed within 120 days of the registrant's fiscal 2008 year end.
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ITEM 1. |
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ITEM 1A. |
12 | |||
ITEM 1B. |
18 | |||
ITEM 2. |
19 | |||
ITEM 3. |
19 | |||
ITEM 4. |
19 | |||
ITEM 5. |
20 | |||
ITEM 6. |
23 | |||
ITEM 7. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 7A. |
44 | |||
ITEM 8. |
46 | |||
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
94 | ||
ITEM 9A. |
94 | |||
ITEM 9B. |
95 | |||
ITEM 10. |
96 | |||
ITEM 11. |
96 | |||
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
96 | ||
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
96 | ||
ITEM 14. |
96 | |||
ITEM 15. |
96 |
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In this report, we use the terms "AECOM," "the Company," "we," "us" and "our" to refer to AECOM Technology Corporation and its consolidated subsidiaries. Unless otherwise noted, references to years are for fiscal years. Our fiscal year consists of 52 or 53 weeks, ending on the Friday closest to September 30. For clarity of presentation, we present all periods as if the year ended on September 30. We refer to the fiscal year ended September 30, 2007 as "fiscal 2007" and the fiscal year ended September 30, 2008, as "fiscal 2008."
Overview
We are a leading global provider of professional technical and management support services for commercial and government clients around the world. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the U.S. government.
Through our network of approximately 43,000 employees, we provide our services in a broad range of end markets, including the transportation, facilities, environmental, and energy markets. According to Engineering News-Record's (ENR) 2008 Design Survey, we are the largest general architectural and engineering design firm in the world, ranked by 2007 design revenue. In addition, we are ranked by ENR as the leading firm in a number of design end markets, including transportation and general building.
We were formed in 1980 as Ashland Technology Company, a Delaware corporation and a wholly owned subsidiary of Ashland, Inc., an oil and gas refining and distribution company. Since becoming independent of Ashland Inc., we have grown by a combination of organic growth and strategic mergers and acquisitions from approximately 3,300 employees and $387 million in revenue in fiscal 1991, the first full fiscal year of operations, to approximately 43,000 employees at September 30, 2008 and $5.2 billion in revenue for fiscal 2008. We completed the initial public offering of our common stock in May 2007 and such shares are traded on the New York Stock Exchange.
We offer our services through two business segments: Professional Technical Services and Management Support Services.
Professional Technical Services (PTS). 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, and energy and power markets. For example, we are providing master planning services for the 2012 London Summer Olympic Games, program management services through a joint venture for the Second Avenue subway line in New York City, development management services to create the new Saadiyat Island Cultural District in Abu Dhabi and engineering and environmental management services to support global energy infrastructure development for a number of large petroleum companies. Our PTS segment contributed $4.3 billion, or 83% of our fiscal 2008 revenue.
Management Support Services (MSS). 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. For example, we manage more than 8,000 personnel in Kuwait that provide logistics, security, communications and information technology services for the U.S. Army Central Command-Kuwait. We also provide operations and maintenance services for the U.S. Army's Fort Polk Joint Readiness Training Center in Louisiana. Our MSS segment contributed $867 million, or 17% of our fiscal 2008 revenue.
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Our Business Strategy
Our business strategy focuses on leveraging our competitive strengths and leadership positions in our core markets while opportunistically entering new markets and geographies. Key elements of our strategy include:
Expand our long-standing client relationships and provide our clients with a broad range of services
We have long-standing relationships with a number of large corporations, public and private institutions and governmental agencies worldwide. We will continue to focus on client satisfaction along with opportunities to sell a greater range of services to clients and deliver full-service solutions for their needs. For example, as our environmental business has grown, we have provided environmental services for transportation and other infrastructure projects where such services have in the past been subcontracted to third parties.
By integrating and providing a broad range of services, we believe we deliver maximum value to our clients at competitive costs. Also, by coordinating and consolidating our knowledge base, we believe we have the ability to export our leading edge technical skills to any region in the world in which our clients may need them.
Capitalize on opportunities in our core markets
We intend to leverage our leading positions in the transportation, facilities, environmental and energy and power markets to continue to expand our services and revenue. We believe that the need for infrastructure upgrades, environmental management and government outsourcing of support services, among other things, will result in continued growth opportunities in our core markets. With our track record and our global resources, we believe we are well positioned to compete for projects in these markets.
Continue to pursue our acquisition strategy
We intend to continue to attract other successful companies whose growth can be enhanced by joining us. This approach has served us well as we have strengthened and diversified our leadership positions geographically, technically and across end markets. We believe that the trend towards consolidation in our industry will continue to produce candidates that align with our acquisition strategy. For example, we increased our global presence, particularly in the Americas, United Kingdom and Australia, with the addition of Earth Tech, Inc. (Earth Tech) in July 2008. For additional information regarding our acquisition of Earth Tech, see Note 3 to our consolidated financial statements.
Strengthen and support human capital
Our experienced employees and management are our most valuable resources. Attracting and retaining key personnel has been and will remain critical to our success. We will continue to focus on providing our personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits in order to strengthen and support our human capital base. We believe that our employee programs align the interests of our personnel with those of our clients and stockholders.
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Our Business Segments
The following table sets forth the revenue attributable to our business segments for the periods indicated(1):
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Year Ended September 30, (in thousands) |
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2008 | 2007 | 2006 | |||||||
Professional Technical Services (PTS) |
$ | 4,327,671 | $ | 3,418,683 | $ | 2,774,304 | ||||
Management Support Services (MSS) |
866,811 | 818,587 | 647,188 | |||||||
Total |
$ | 5,194,482 | $ | 4,237,270 | $ | 3,421,492 | ||||
Our Professional Technical Services Segment (PTS)
Our PTS segment is comprised of a broad array of services, generally provided on a fee-for-service basis. These services include planning, architecture and engineering, design, consulting, program management and construction management for industrial, commercial, institutional and government clients worldwide. For each of these services, our technical expertise includes civil, structural, process, mechanical, geotechnical systems and electrical engineering, architecture, landscape and interior design, urban and regional planning, project economics, and environmental, health and safety work.
With our technical and management expertise, we are able to provide our clients with a broad spectrum of services. For example, within our environmental management service offerings, we provide regulatory compliance planning and management, environmental modeling, environmental impact assessment and environmental permitting for major capital/infrastructure projects.
Our services may be sequenced over multiple phases. For example, in the area of program management and construction management services, these services may begin with a small consulting or planning contract, and may later develop into an overall management role for the project or a series of projects, which we refer to as a program. Program and construction management contracts typically employ a staff of 10 to more than 100 and, in many cases, operate as an outsourcing arrangement with our staff located at the project site. For example, since 1990, we have been managing the renovation work at the Pentagon for the U.S. Department of Defense. Another example of our program and construction management services would be our services related to the development of educational facilities for K-12 school districts and/or community colleges throughout the United States, including the cities of Dallas, Los Angeles and Houston.
We provide the services in our PTS segment both directly and through joint ventures or similar partner arrangements to the following key end markets:
Transportation. We serve several key transportation sectors, including:
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Jersey, the new $7 billion Doha Port project in Qatar and waterfront transshipment facilities for oil and liquid natural gas.
Facilities.
Environmental
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reconstruction, and have had a major role in Hong Kong's Harbor Area Treatment Scheme for Victoria Harbor.
Energy/Power
Our Management Support Services Segment (MSS)
Through our MSS segment, we offer program and facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government.
We provide a wide array of services in our MSS segment, both directly and through joint ventures or similar partner arrangements, including:
Installation, Operations and Maintenance. Projects include Department of Defense and Department of Energy installations where we provide comprehensive services for the operation and maintenance of complex government installations, including military bases, test ranges and equipment. We have undertaken assignments in this category in the Middle East and the United States. We also provide services for the operations and maintenance of the Department of Energy's Nevada Test Site.
Logistics and Field Services. Projects include logistics support services for a number of Department of Defense agencies and defense prime contractors focused on developing and managing integrated supply and distribution networks. We oversee warehousing, packaging, delivery and traffic management for the distribution of government equipment and materials.
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Training. Projects include training applications in live, virtual and simulation training environments. We have conducted training at the U.S. Army's Center for Security Training in Maryland for law enforcement and military personnel. We have also supported the training of international police officers and peacekeepers for deployment in various locations around the world in the areas of maintaining electronics and communications equipment.
Systems Support. Projects cover a diverse set of operational and support systems for the maintenance, operation and modernization of Department of Defense and Department of Energy installations. Our services in this area range from information technology and communications to life cycle optimization and engineering, including environmental management services. Through our joint venture operations at the Nevada Test Site and the Combat Support Services operation in Kuwait, our teams are responsible for facility and infrastructure support for critical missions of the U.S. government in its nonproliferation efforts, emergency response readiness, and force support and sustainment. Enterprise network operations and information systems support, including remote location engineering and operation in classified environments, are also specialized services we provide.
Technical Personnel Placement. Projects include the placement of personnel in key functional areas of military and other government agencies, as these entities continue to outsource critical services to commercial entities. We provide systems, processes and personnel in support of the Department of Justice's management of forfeited assets recovered by law enforcement agencies. We also support the Department of State in its enforcement programs by recruiting, training and supporting police officers for international and homeland security missions.
Field Services. Projects include maintaining, modifying and overhauling ground vehicles, armored carriers and associated support equipment both within and outside of the United States under contracts with the Department of Defense. We also maintain and repair telecommunications systems for military and civilian entities.
Our Clients
Our clients consist primarily of national, state, regional and local governments, public and private institutions and major corporations. The following table sets forth our total revenue attributable to these categories of clients for each of the periods indicated:
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Year Ended September 30, (dollars in thousands) |
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2008 | % | 2007 | % | 2006 | % | ||||||||||||||
U.S. Federal Government |
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PTS |
$ | 329,333 | 6 | % | $ | 279,530 | 7 | % | $ | 319,675 | 9 | % | ||||||||
MSS |
866,811 | 17 | % | 818,587 | 19 | % | 641,764 | 19 | % | |||||||||||
U.S. State and Local Governments |
1,051,234 | 20 | % | 949,870 | 22 | % | 848,530 | 25 | % | |||||||||||
Non-U.S. Governments |
1,085,686 | 21 | % | 556,893 | 13 | % | 355,835 | 10 | % | |||||||||||
Subtotal Governments |
3,333,064 | 64 | % | 2,604,880 | 61 | % | 2,165,804 | 63 | % | |||||||||||
Private Entities (worldwide) |
1,861,418 | 36 | % | 1,632,390 | 39 | % | 1,255,688 | 37 | % | |||||||||||
Total |
$ | 5,194,482 | 100 | % | $ | 4,237,270 | 100 | % | $ | 3,421,492 | 100 | % | ||||||||
Other than the U.S. government, no single client accounted for 10% or more of our revenue in any of the past five fiscal years. Approximately 23%, 26% and 28% of the Company's revenue was derived through direct contracts with agencies of the U.S. federal government in the years ended September 30, 2008, 2007 and 2006, respectively. One of these contracts accounted for approximately 10%, 13% and 10% of the Company's revenue in the years ended September 30, 2008, 2007 and 2006 respectively. The work
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attributed to the U.S. federal government includes our work for the Department of Defense, Department of Energy and the Department of Homeland Security.
Contracts
The price provisions of the contracts we undertake can be grouped into two broad categories: cost-reimbursable contracts and fixed-price contracts. The majority of our contracts fall under the category of cost-reimbursable contracts, which we believe are generally less subject to loss than fixed-price contracts. As detailed below, our fixed-price contracts relate primarily to design and construction management contracts where we do not self-perform or take the risk of construction.
Cost-Reimbursable Contracts
Cost-reimbursable contracts consist of two similar contract types, cost-plus and time and material.
Cost-Plus. Cost-plus is the predominant contracting method used by U.S. federal, state and local governments. These contracts provide for reimbursement of actual costs and overhead incurred by us, plus a predetermined fee. Under some cost-plus contracts, our fee may be based on quality, schedule and other performance factors.
Time and Material. Time and material is common for smaller scale engineering and consulting services. Under these types of contracts, we negotiate hourly billing rates and charge our clients based upon actual hours expended on a project. Unlike cost-plus contracts, however, there is no predetermined fee. In addition, any direct project expenditures are passed through to the client and are reimbursed. These contracts may have a fixed-price element in the form of not-to-exceed or guaranteed maximum price provisions.
For fiscal 2008 and 2007, cost-reimbursable contracts represented approximately 63% and 62%, respectively, of our total revenue, consisting of cost-plus contracts and time and material contracts as follows:
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Year Ended September 30, | |||||||
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2008 | 2007 | ||||||
Cost-plus contracts |
30 | % | 35 | % | ||||
Time and materials contracts |
33 | 27 | ||||||
Total |
63 | % | 62 | % | ||||
Fixed-Price Contracts
Fixed-price contracts are the predominant contracting method outside of the United States. There are typically two types of fixed-price contracts. The first and more common type, lump-sum, involves performing all of the work under the contract for a specified lump-sum fee. Lump-sum contracts are typically subject to price adjustments if the scope of the project changes or unforeseen conditions arise. The second type, fixed-unit price, involves performing an estimated number of units of work at an agreed price per unit, with the total payment under the contract determined by the actual number of units delivered.
Many of our fixed-price contracts are negotiated and arise in the design of projects with a specified scope. Fixed-price contracts often arise in the areas of construction management and design-build services. Construction management services can be in the form of general administrative oversight (in which we do not assume responsibility for construction means and methods and which is on a cost-reimbursable basis), or on a fixed price, "at risk" basis. Under our design-build projects, we are typically responsible for the
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design of a facility with the fixed contract price negotiated after we have had the opportunity to secure specific bids from various subcontractors and to add a contingency and fee.
We typically attempt to mitigate the risks of fixed-price design-build contracts by contracting to complete the projects based on our design as opposed to a third party's design, by not self-performing any construction, by not guaranteeing new or untested processes or technologies and by working only with experienced subcontractors with sufficient bonding capacity. When public agencies seek a design-build approach for major infrastructure projects, we generally act as a fixed-price design subcontractor to the general construction contractor and do not assume overall project or construction risk.
Some of our fixed-price contracts require us to provide performance bonds or parent company guarantees to assure our clients that their project will be completed in accordance with the terms of the contracts. In such cases, we typically require our primary subcontractors to provide similar bonds and guarantees or be adequately insured, and we pass the terms and conditions set forth in our agreement on to our subcontractors.
For fiscal 2008 and 2007, fixed-price contracts represented approximately 37% of our total revenue. Less than 10% of our revenue was generated from contracts where we have exposure to construction cost overruns. There may be risks associated with completing these projects' profitably if we are not able to perform our professional services for the amount of the fixed fee. However, we attempt to mitigate these risks as described above.
Joint Ventures
Some of our larger contracts may operate under joint ventures or other arrangements under which we team with other reputable companies, typically companies with which we have worked for many years. This is often done where the scale of the project dictates such an arrangement or when we want to strengthen either our market position or our technical skills.
Backlog
Our contracted backlog includes revenue we expect to record in the future from signed contracts, and in the case of a public client, where the project has been funded. Our awarded backlog includes revenue we expect to record in the future where we have been awarded the work, but the contractual agreement has not yet been completed. For non-government contracts, our backlog includes future revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client. For contracts with a not-to-exceed maximum amount, we include revenue from such contracts in backlog to the extent of the remaining estimated amount. We calculate backlog without regard to possible project reductions or expansions or potential cancellations until such changes or cancellations occur.
Backlog is expressed in terms of gross revenue and therefore may include significant estimated amounts of third party, or pass-through costs to subcontractors and other parties. Moreover, our backlog for the period beyond 12 months may be subject to variations from year to year as existing contracts are completed, delayed or renewed or new contracts are awarded, delayed or cancelled. As a result, we believe that year-to-year comparisons of the portion of backlog expected to be performed more than one year in the future are difficult to interpret and not necessarily indicative of future revenue or profitability. Because backlog is not a defined accounting term, our computation of backlog may not necessarily be comparable to that of our peers. No assurance can be given that we will ultimately realize our full backlog.
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The following summarizes contracted and awarded backlog excluding backlog related to businesses which we intend to divest, as discussed in Notes 4 and 10 to the Consolidated Financial Statements (in billions):
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September 30, | ||||||||
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2008 | 2007 | |||||||
Contracted backlog: |
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PTS segment |
$ | 4.2 | $ | 2.6 | |||||
MSS segment |
0.6 | 0.4 | |||||||
Total contracted backlog |
$ | 4.8 | $ | 3.0 | |||||
Awarded backlog: |
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PTS segment |
$ | 3.5 | $ | 2.2 | |||||
MSS segment |
0.3 | 0.8 | |||||||
Total awarded backlog |
$ | 3.8 | $ | 3.0 | |||||
Total backlog: |
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PTS segment |
$ | 7.7 | $ | 4.8 | |||||
MSS segment |
0.9 | 1.2 | |||||||
Total backlog |
$ | 8.6 | $ | 6.0 | |||||
Competition
The professional technical and management support services markets we serve are highly fragmented and we compete with a large number of regional, national and international companies. Certain of these competitors have greater financial and other resources than we do. Others are smaller and more specialized, and concentrate their resources in particular areas of expertise. The extent of our competition varies according to the particular markets and geographic area. The degree and type of competition we face is also influenced by the type and scope of a particular project. Our clients make competitive determinations based upon experience, reputation and ability to provide the relevant services in a timely, safe and cost-efficient manner.
Seasonality
The fourth quarter of our fiscal year (July 1 to September 30) is typically our strongest quarter. The U.S. federal government tends to authorize more work during the period preceding the end of its fiscal year, September 30. In addition, many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during the fiscal first quarter when new funding budgets become available. Within the United States, as well as other parts of the world, we generally benefit from milder weather conditions in our fiscal fourth quarter, which allows for more productivity from our field inspection and other on-site civil services. Our construction and project management services also typically expand during the high construction season of the summer months. 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.
Insurance and Risk Management
We maintain insurance covering professional liability and claims involving bodily injury and property damage. We consider our present limits of coverage, deductibles, and reserves to be adequate. Wherever possible, we endeavor to eliminate or reduce the risk of loss on a project through the use of quality assurance/control, risk management, workplace safety and similar methods. A majority of our operating subsidiaries are quality certified under ISO 9001:2000 or an equivalent standard, and we plan to continue
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to obtain certification where applicable. ISO 9001:2000 refers to international quality standards developed by the International Organization for Standardization, or ISO.
Risk management is an integral part of our project management approach for fixed-price contracts and our project execution process. We have a risk management group that reviews and oversees the risk profile of our operations. This group also participates in evaluating risk through internal risk analyses in which our corporate management reviews higher-risk projects, contracts or other business decisions that require corporate approval.
Regulation
We are regulated in a number of fields in which we operate. In the United States, we deal with numerous U.S. government agencies and entities, including branches of the U.S. military, the Department of Defense, the Department of Energy, intelligence agencies and the Nuclear Regulatory Commission. When working with these and other U.S. government agencies and entities, we must comply with laws and regulations relating to the formation, administration and performance of contracts. These laws and regulations, among other things:
Internationally, we are subject to various government laws and regulations (including the U.S. Foreign Corrupt Practices Act, Proceeds of Crime Act and other similar non-U.S. laws and regulations), local government regulations and procurement policies and practices and varying currency, political and economic risks.
To help ensure compliance with these laws and regulations, all of our employees are required to complete tailored ethics and other compliance training relevant to their position and our operations.
Personnel
Our principal asset is our employees. A large percentage of our employees have technical and professional backgrounds and undergraduate and/or advanced degrees. We believe that we attract and retain talented employees by offering them the opportunity to work on highly visible and technically challenging projects in a stable work environment. The tables below identify our personnel by segment and geographic region.
Personnel by Segment
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As of September 30, | |||||||||
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2008 | 2007 | 2006 | |||||||
Professional Technical Services |
33,700 | 22,700 | 18,700 | |||||||
Management Support Services |
9,000 | 9,000 | 8,300 | |||||||
Corporate |
300 | 300 | 300 | |||||||
Total |
43,000 | 32,000 | 27,300 | |||||||
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Personnel by Geographic Region
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As of September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
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2008 | 2007 | 2006 | |||||||
Americas |
20,000 | 12,500 | 10,400 | |||||||
Europe |
4,100 | 3,400 | 3,100 | |||||||
Middle East |
11,100 | 10,000 | 8,800 | |||||||
Asia/Pacific |
7,800 | 6,100 | 5,000 | |||||||
Total |
43,000 | 32,000 | 27,300 | |||||||
Personnel by Segment and Geographic Region
|
As of September 30, 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
PTS | MSS | Total | |||||||
Americas |
18,800 | 900 | 19,700 | |||||||
Europe |
4,100 | | 4,100 | |||||||
Middle East |
3,000 | 8,100 | 11,100 | |||||||
Asia/Pacific |
7,800 | | 7,800 | |||||||
Total |
33,700 | 9,000 | 42,700 | |||||||
We have a number of personnel with "Top Secret" or "Q" security clearances. Some of our contracts with the U.S. government relate to projects that have elements that are classified for national security reasons. Although most of our contracts are not themselves classified, persons with high security clearances are often required to perform portions of the contracts.
A portion of our employees are employed on a project-by-project basis to meet our contractual obligations, generally in connection with government projects in our MSS segment. We believe our employee relations are good.
Geographic Information
For geographic information, please refer to Note 21 to the notes to our consolidated financial statements found elsewhere in this Form 10-K.
Available Information
The reports we file with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy materials, are available free of charge on our website at www.aecom.com. You may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a web site (www.sec.gov) containing reports, proxy, and other information that we file with the SEC. Our Corporate Governance Guidelines and our Code of Ethics are available on our website at www.aecom.com under the "Investors" section. Copies of the information identified above may be obtained without charge from us by writing to AECOM Technology Corporation, 555 South Flower Street, Suite 3700, Los Angeles, California 90071, Attention: Corporate Secretary.
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The Company operates in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. The risks described below highlight some of the factors that have affected, and in the future could affect our operations. Additional risks we do not yet know of or that we currently think are immaterial may also affect our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected.
We depend on long-term government contracts, some of which are only funded on an annual basis. If appropriations for funding are not made in subsequent years of a multiple-year contract, we may not be able to realize all of our anticipated revenue and profits from that project.
A substantial majority of our revenue is derived from contracts with agencies and departments of national, state and local governments. During fiscal 2008, 2007 and 2006, approximately 64%, 61% and 63%, respectively, of our revenue was derived from contracts with government entities.
Most government contracts are subject to the government's budgetary approval process. Legislatures typically appropriate funds for a given program on a year-by-year basis, even though contract performance may take more than one year. As a result, at the beginning of a program, the related contract is only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent fiscal year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by, among other things, the state of the economy, competing priorities for appropriation, changes in administration or control of legislatures and the timing and amount of tax receipts and the overall level of government expenditures. If appropriations are not made in subsequent years on our government contracts, then we will not realize all of our potential revenue and profit from that contract.
For instance, a significant portion of historical funding for state and local transportation projects has come from the U.S. federal government through its "SAFETEA-LU" infrastructure funding program and predecessor programs. This $286 billion program covers federal fiscal years 2004-2009. Approximately 79% of the SAFETEA-LU funding is for highway programs, 18.5% is for transit programs and 2.5% is for other programs such as motor carrier safety, national highway traffic safety and research. A key uncertainty in the outlook for federal transportation funding in the United States is the future viability of the Highway Trust Fund, which has experienced shortfalls due to a decrease in the federal gas tax receipts that fund it. In September 2008, the President signed HR 6532, a bill to amend the Internal Revenue Code to restore the Highway Trust Fund balance, transferring funds from the general Treasury to the Highway Trust Fund to provide for the funding of authorized federal transportation priorities through the end of fiscal year 2009. This raises concerns about the future funding structure for federal highway programs, particularly after SAFETEA-LU expires on September 30, 2009.
Governmental agencies may modify, curtail or terminate our contracts at any time prior to their completion and, if we do not replace them, we may suffer a decline in revenue.
Most government contracts may be modified, curtailed or terminated by the government either at its convenience or upon the default of the contractor. If the government terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenue and profits from that contract. If the government terminates the contract due to our default, we could be liable for excess costs incurred by the government in obtaining services from another source.
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A delay in the completion of the budget process of government agencies could delay procurement of our services and have an adverse effect on our future revenue.
In years when the U.S. government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a "continuing resolution" that authorizes agencies of the U.S. government to continue to operate, but does not authorize new spending initiatives. When the U.S. government operates under a continuing resolution, government agencies may delay the procurement of services, which could reduce our future revenue. Delays in the budgetary processes of states or other jurisdictions may similarly have adverse effects on our future revenue.
Demand for our services is cyclical and may be vulnerable to sudden economic downturns and reductions in government and private industry spending. If the economy weakens, our revenue and profitability could be adversely affected.
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. Due to the recent economic downturn in the U.S. and international markets and severe tightening of the global credit markets, some of our clients may face considerable budget shortfalls that may limit their overall demand for our services. In addition, our clients may find it more difficult to raise capital in the future to fund their projects due to uncertainty in the municipal and general credit markets. Also, the global demand for commodities has increased raw material costs, which will cause our clients' projects to increase in overall cost and may result in the more rapid depletion of the funds that are available to our clients to spend on projects.
Because of an overall weakening economy, our clients may demand more favorable pricing terms while their ability to pay our invoices or to pay them in a timely manner may be adversely affected. Our government clients may face budget deficits that prohibit them from funding proposed and existing projects. If the economy continues to weaken and/or government spending is reduced, our revenue and profitability could be adversely affected.
Our contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if we are charged with wrongdoing, possible temporary or permanent suspension from participating in government programs.
Our books and records are subject to audit by the various governmental agencies we serve and their representatives. These audits can result in adjustments to the amount of contract costs we believe are reimbursable by the agencies and the amount of our overhead costs allocated to the agencies. In addition, if one of our subsidiaries is charged with wrongdoing as a result of an audit, that subsidiary, and possibly our company as a whole, could be temporarily suspended or could be prohibited from bidding on and receiving future government contracts for a period of time. Furthermore, as a government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not, the results of which could harm our business.
Our business and operating results could be adversely affected by losses under fixed-price contracts.
Fixed-price contracts require us to either perform all work under the contract for a specified lump-sum or to perform an estimated number of units of work at an agreed price per unit, with the total payment determined by the actual number of units performed. In fiscal 2008, approximately 37% of our revenue was recognized under fixed-price contracts. Fixed-price contracts are the predominant method of contracting outside of the United States and our exposure to fixed-price contracts will likely increase as we increase the non-U.S. portions of our business. Fixed-price contracts expose us to a number of risks not
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inherent in cost-plus and time and material contracts, including underestimation of costs, ambiguities in specifications, unforeseen costs or difficulties, problems with new technologies, delays beyond our control, failures of subcontractors to perform and economic or other changes that may occur during the contract period. Losses under fixed- price contracts could be substantial and harm our results of operations.
We conduct a portion of our operations through joint venture entities, over which we may have limited control.
Approximately 21% of our fiscal 2008 revenue was derived from our operations through joint ventures or similar partnership arrangements, where control may be shared with unaffiliated third parties. As with most joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or disputes. We also cannot control the actions of our joint venture partners, and we typically have joint and several liability with our joint venture partners under the applicable contracts for joint venture projects. These factors could potentially harm the business and operations of a joint venture and, in turn, our business and operations.
Operating through joint ventures in which we are minority holders results in us having limited control over many decisions made with respect to projects and internal controls relating to projects. Approximately 7% of our fiscal 2008 revenue was derived from our unconsolidated joint ventures where we generally do not have control of the joint venture. These joint ventures may not be subject to the same requirements regarding internal controls and internal control over financial reporting that we follow. As a result, internal control problems may arise with respect to these joint ventures, which could have a material adverse effect on our financial condition and results of operations.
Misconduct by our employees or consultants or our failure to comply with laws or regulations applicable to our business could cause us to lose customers or lose our ability to contract with government agencies.
As a government contractor, misconduct, fraud or other improper activities caused by our employees' or consultants' failure to comply with laws or regulations could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with federal procurement regulations, regulations regarding the protection of classified information, legislation regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, and other applicable laws or regulations. Our failure to comply with applicable laws or regulations, misconduct by any of our employees or consultants or our failure to make timely and accurate certifications to government agencies regarding misconduct or potential misconduct could subject us to fines and penalties, loss of security clearance, cancellation of contracts and suspension or debarment from contracting with government agencies, any of which may adversely affect our business.
Our defined benefit plans have significant deficits that could grow in the future and cause us to incur additional costs.
We have defined benefit pension plans for employees in the United States, United Kingdom and Australia. At September 30, 2008, our defined benefit pension plans had an aggregate deficit (the excess of projected benefit obligations over the fair value of plan assets) of approximately $116.3 million. In the future, our pension deficits may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors. If we are forced or elect to make up all or a portion of the deficit for unfunded benefit plans, our profits could be materially and adversely affected.
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Our operations worldwide expose us to legal, political and economic risks in different countries as well as currency exchange rate fluctuations that could harm our business and financial results.
During fiscal 2008, revenue attributable to our services provided outside of the United States was approximately 54% of our total revenue. There are risks inherent in doing business internationally, including:
Any of these factors could have a material adverse effect on our business, results of operations or financial condition.
We work in international locations where there are high security risks, which could result in harm to our employees and contractors or material costs to us.
Some of our services are performed in high-risk locations, such as Iraq and Afghanistan, where the country or location is suffering from political, social or economic problems, or war or civil unrest. In those locations where we have employees or operations, we may incur material costs to maintain the safety of our personnel. Despite these precautions, the safety of our personnel in these locations may continue to be at risk. Acts of terrorism and threats of armed conflicts in or around various areas in which we operate could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts, or the loss of key employees and contractors or assets.
Failure to successfully execute our acquisition strategy may inhibit our growth.
We have grown in part as a result of our acquisitions over the last several years, and we expect continued growth in the form of additional acquisitions and expansion into new markets. We cannot assure you that suitable acquisitions or investment opportunities will continue to be identified or that any of these transactions can be consummated on favorable terms or at all. Any future acquisitions will involve various inherent risks, such as:
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Furthermore, during the acquisition process and thereafter, our management may need to assume significant transaction-related responsibilities, which may cause them to divert their attention from our existing operations. For example, our management and other personnel have been, and will continue to be, required to devote considerable amounts of time away from other business activities to focus on the integration of Earth Tech, which we acquired in July 2008, and its employees into our business operations. If our management is unable to successfully integrate acquired companies or implement our growth strategy, our operating results could be harmed. Moreover, we cannot assure you that we will continue to successfully expand or that growth or expansion will result in profitability.
Our ability to grow and to compete in our industry will be harmed if we do not retain the continued services of our key technical and management personnel and identify, hire and retain additional qualified personnel.
There is strong competition for qualified technical and management personnel in the sectors in which we compete. We may not be able to continue to attract and retain qualified technical and management personnel, such as engineers, architects and project managers, who are necessary for the development of our business or to replace qualified personnel. Our planned growth may place increased demands on our resources and will likely require the addition of technical and management personnel and the development of additional expertise by existing personnel. Also, some of our personnel hold security clearances required to obtain government projects; if we were to lose some or all of these personnel, they would be difficult to replace. Loss of the services of, or failure to recruit, key technical and management personnel could limit our ability to complete existing projects successfully and to compete for new projects.
Our revenue and growth prospects may be harmed if we or our employees are unable to obtain the security clearances or other qualifications we and they need to perform services for our customers.
A number of government programs require contractors to have security clearances. Depending on the level of required clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain necessary security clearances, we may not be able to win new business, and our existing customers could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue or profit anticipated from such contract.
Our industry is highly competitive and we may be unable to compete effectively, which could result in reduced revenue, profitability and market share.
We are engaged in a highly competitive business. The extent of competition varies with the types of services provided and the locations of the projects. Generally, we compete on the bases of technical and management capability, personnel qualifications and availability, geographic presence, experience and price. Increased competition may result in our inability to win bids for future projects and loss of revenue, profitability and market share.
Our services expose us to significant risks of liability and our insurance policies may not provide adequate coverage.
Our services involve significant risks of professional and other liabilities that may substantially exceed the fees that we derive from our services. In addition, we sometimes contractually assume liability under indemnification agreements. We cannot predict the magnitude of potential liabilities from the operation of our business.
Our professional liability policies cover only claims made during the term of the policy. Additionally, our insurance policies may not protect us against potential liability due to various exclusions in the policies
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and self-insured retention amounts. Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse affect on our business.
Our backlog of uncompleted projects under contract is subject to unexpected adjustments and cancellations and thus, may not accurately reflect future revenue and profits.
At September 30, 2008, our contracted backlog was approximately $4.8 billion and our awarded backlog was approximately $3.8 billion for a total backlog of $8.6 billion. Our contracted backlog includes revenue we expect to record in the future from signed contracts, and in the case of a public client, where the project has been funded. Our awarded backlog includes revenue we expect to record in the future where we have been awarded the work, but the contractual agreement has not yet been completed. We cannot guarantee that future revenue will be realized from either category of backlog or, if realized, will result in profits. Many projects may remain in our backlog for an extended period of time because of the size or long-term nature of the contract. In addition, from time to time projects are delayed, scaled back or cancelled. These types of backlog reductions adversely affect the revenue and profits that we ultimately receive from contracts reflected in our backlog.
We have submitted claims to clients for work we performed beyond the scope of some of our contracts. If these clients do not approve these claims, our results of operations could be adversely impacted.
We typically have pending claims submitted under some of our contracts for payment of work performed beyond the initial contractual requirements for which we have already recorded revenue. In general, we cannot guarantee that such claims will be approved in whole, in part, or at all. If these claims are not approved, our revenue may be reduced in future periods.
In conducting our business, we depend on other contractors and subcontractors. If these parties fail to satisfy their obligations to us or other parties, or if we are unable to maintain these relationships, our revenue, profitability and growth prospects could be adversely affected.
We depend on contractors and subcontractors in conducting our business. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, or our failure to extend existing task orders or issue new task orders under a subcontract. In addition, if any of our subcontractors fail to deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services, our ability to fulfill our obligations as a prime contractor may be jeopardized.
We also rely on relationships with other contractors when we act as their subcontractor or joint venture partner. Our future revenue and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts or joint venture relationships with us, or if a government agency terminates or reduces these other contractors' programs, does not award them new contracts or refuses to pay under a contract.
Our quarterly operating results may fluctuate significantly.
Our quarterly revenue, expenses and operating results may fluctuate significantly because of a number of factors, including:
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Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter.
Systems and information technology interruption could adversely impact our ability to operate.
We rely heavily on computer, information and communications technology and related systems in order to properly operate. From time to time, we experience occasional system interruptions and delays. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of and protect our systems, systems operation could be interrupted or delayed. In addition, our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures, acts of war or terrorism, computer viruses, physical or electronic security breaches and similar events or disruptions. Any of these or other events could cause system interruption, delays and loss of critical data, or delay or prevent operations, and adversely affect our operating results.
Our charter documents contain provisions that may delay, defer or prevent a change of control.
Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. These provisions include the following:
We do not expect to pay any cash dividends for the foreseeable future.
We do not anticipate paying any cash dividends to our stockholders for the foreseeable future. Our credit facilities also restrict our ability to pay dividends. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our common stock and may lose some or all of the amount of your
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investment. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our corporate offices are located in approximately 121,000 square feet of space at 555 and 515 South Flower Street, Los Angeles, California. Our other offices consist of an aggregate of approximately 6.4 million square feet worldwide. We also maintain smaller administrative or project offices. Virtually all of our offices are leased. See Note 14 of the notes to our consolidated financial statements for information regarding our lease obligations. We believe our current properties are adequate for our business operations and are not currently underutilized. We may add additional facilities from time to time in the future as the need arises.
As a government contractor, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. Intense government scrutiny of contractors' compliance with those laws and regulations through audits and investigations is inherent in government contracting, and, from time to time, we receive inquiries, subpoenas, and similar demands related to our ongoing business with government entities. Violations can result in civil or criminal liability as well as suspension or debarment from eligibility for awards of new government contracts or option renewals.
We are involved in various investigations, claims and lawsuits in the normal conduct of our business. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, in the opinion of our management, based upon current information and discussions with counsel, none of the investigations, claims and lawsuits in which we are involved is expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business. From time to time we establish reserves for litigation when we consider it probable that a loss will occur and the loss is estimable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES
Our common stock is listed on the New York Stock Exchange (NYSE). According to the records of our transfer agent, there were 1,422 stockholders of record as of November 17, 2008. The following table sets forth the low and high closing sales prices of a share of our common stock during each of the fiscal quarters presented, based upon quotations on the NYSE consolidated reporting system:
|
Low Sales Price ($) |
High Sales Price ($) |
||||||
---|---|---|---|---|---|---|---|---|
Fiscal 2008: |
||||||||
First quarter |
26.47 | 37.25 | ||||||
Second quarter |
23.01 | 29.95 | ||||||
Third quarter |
25.31 | 34.13 | ||||||
Fourth quarter |
19.79 | 33.18 |
|
Low Sales Price ($) |
High Sales Price ($) |
||||||
---|---|---|---|---|---|---|---|---|
Fiscal 2007: |
||||||||
Third quarter(1) |
21.00 | 26.00 | ||||||
Fourth quarter |
24.40 | 35.94 |
Our policy is to use cash flow from operations to fund future growth and pay down debt. Accordingly, we have not paid a cash dividend since our inception and we currently have no plans to pay cash dividends in the foreseeable future. Additionally, our term credit agreement and revolving credit facility restrict our ability to pay cash dividends.
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The following table presents certain information about our equity compensation plans as of September 30, 2008:
|
Column A | Column B | Column C | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants, and rights |
Weighted-average exercise price of outstanding options, warrants, and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A) |
||||||||
Equity compensation plans not approved by stockholders: |
N/A | N/A | N/A | ||||||||
Equity compensation plans approved by stockholders: |
|||||||||||
AECOM Technology Corporation 2006 Stock Incentive Plan |
1,059,082 | $ | 21.04 | 14,010,062 | |||||||
AECOM Technology Corporation Stock Incentive Plan |
425,600 | $ | 5.47 | 0 | |||||||
AECOM Technology Corporation 2000 Stock Incentive Plan |
3,581,713 | $ | 9.88 | 0 | |||||||
AECOM Technology Corporation Stock Incentive Plan for Non-Employee Directors |
172,350 | $ | 9.87 | 0 | |||||||
AECOM Technology Corporation Equity Incentive Plan |
N/A | N/A | 4,189,556 | ||||||||
AECOM Technology Corporation 2006 Stock Incentive Plan for Non-Employee Directors |
70,000 | $ | 12.54 | 0 | |||||||
AECOM Technology Corporation Global Stock Program(1) |
N/A | N/A | 27,493,678 | ||||||||
Total |
5,308,745 | $ | 11.78 | 45,693,296 | |||||||
During the three-month period ended September 30, 2008, we have issued the following securities that were not registered under the Securities Act:
On September 30, 2008, 0.727 shares of our Class C preferred stock to U.S. Trust for the benefit of our employee stockholders under our Deferred Compensation Plan.
We issued the securities identified in the paragraph above to our directors, officers, employees and consultants under written compensatory benefit plans in reliance upon Rule 701 under the Securities Act and/or Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering.
Performance Measurement Comparison(1)
The following chart compares the percentage change of AECOM stock with that of the Russell 3000 and the S&P 1500 SuperComposite Engineering and Construction indices from March 31, 2007 to September 30, 2008. We believe the Russell 3000 Index is an appropriate independent broad market index, since it measures the performance of companies in numerous sectors with small and large market capitalizations. In addition, we believe the S&P 1500 SuperComposite Engineering and Construction Index is an appropriate published industry index since it measures the performance of engineering and construction companies.
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Comparison of Percentage Change
March 1, 2007September 30, 2008
End-of-Month Prices
|
Mar. 31, 2007 |
June 30, 2007 |
Sept. 30, 2007 |
Dec. 31, 2007 |
Mar. 31, 2008 |
June 30, 2008 |
Sept. 30, 2008 |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
AECOM(2) |
15.40 | 24.81 | 34.93 | 28.57 | 26.01 | 32.53 | 24.44 | |||||||||||||||
Russell 3000 |
829.05 | 873.19 | 882.79 | 849.22 | 764.63 | 748.10 | 678.50 | |||||||||||||||
S&P 1500 Super Composite Engineering and Construction |
141.40 | 176.08 | 209.65 | 215.20 | 176.98 | 222.13 | 145.96 |
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes, which are included in this Form 10-K. We derived the selected consolidated financial data from our audited consolidated financial statements.
|
Year Ended September 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||
|
(in millions, except share data) |
||||||||||||||||
Consolidated Statement of Income Data: |
|||||||||||||||||
Revenue |
$ | 5,194 | $ | 4,237 | $ | 3,421 | $ | 2,395 | $ | 2,012 | |||||||
Cost of revenue(1) |
4,907 | 4,039 | 3,278 | 2,278 | 1,907 | ||||||||||||
Gross profit |
287 | 198 | 143 | 117 | 105 | ||||||||||||
Equity in earnings of joint ventures |
22 | 12 | 6 | 2 | 3 | ||||||||||||
General and administrative expenses(1) |
70 | 54 | 46 | 21 | 21 | ||||||||||||
Income from operations |
239 | 156 | 103 | 98 | 87 | ||||||||||||
Minority interest share of earnings |
14 | 16 | 14 | 8 | 3 | ||||||||||||
Gain on the sale of equity investment |
| 11 | | | | ||||||||||||
Other expense |
(3 | ) | | | | | |||||||||||
Interest income (expense)net |
1 | (3 | ) | (10 | ) | (7 | ) | (8 | ) | ||||||||
Income before income tax expense |
223 | 148 | 79 | 83 | 76 | ||||||||||||
Income tax expense |
77 | 48 | 25 | 29 | 26 | ||||||||||||
Income from continuing operations |
146 | 100 | 54 | 54 | 50 | ||||||||||||
Discontinued operations, net of tax |
1 | | | | | ||||||||||||
Net income |
$ | 147 | $ | 100 | $ | 54 | $ | 54 | $ | 50 | |||||||
Net income allocation: |
|||||||||||||||||
Preferred stock dividend |
$ | | $ | | $ | 2 | $ | 6 | $ | 5 | |||||||
Net income available for common stockholders |
147 | 100 | 52 | 48 | 45 | ||||||||||||
Net income |
$ | 147 | $ | 100 | $ | 54 | $ | 54 | $ | 50 | |||||||
Earnings per share from continuing operations available for common stockholders: |
|||||||||||||||||
Basic |
$ | 1.44 | $ | 1.37 | $ | 0.94 | $ | 0.93 | $ | 0.86 | |||||||
Diluted |
$ | 1.40 | $ | 1.15 | $ | 0.74 | $ | 0.84 | $ | 0.78 | |||||||
Weighted average shares outstanding (in thousands): |
|||||||||||||||||
Basic |
101,456 | 73,091 | 54,856 | 51,880 | 52,600 | ||||||||||||
Diluted |
104,215 | 87,537 | 72,658 | 63,978 | 64,254 |
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|
Year Ended September 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||
|
(in millions, except employee data) |
|||||||||||||||
Other Data: |
||||||||||||||||
Depreciation and amortization |
$ | 63 | $ | 45 | $ | 40 | $ | 20 | $ | 13 | ||||||
Amortization expense of acquired intangible assets(2) |
18 | 12 | 15 | 3 | | |||||||||||
Capital expenditures |
69 | 43 | 32 | 31 | 19 | |||||||||||
Contracted backlog |
4,811 | 3,043 | 2,480 | 1,980 | 1,620 | |||||||||||
Number of full-time and part-time employees |
43,000 | 32,000 | 27,300 | 22,000 | 17,700 |
|
As of September 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||
|
(in millions) |
|||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||
Cash and cash equivalents |
$ | 195 | $ | 217 | $ | 128 | $ | 54 | $ | 121 | ||||||
Working capital |
631 | 598 | 201 | 171 | 225 | |||||||||||
Total assets |
3,596 | 2,492 | 1,826 | 1,425 | 1,115 | |||||||||||
Long-term debt excluding current portion |
366 | 39 | 123 | 216 | 105 | |||||||||||
Redeemable preferred and common stock and stock units, net of notes receivable |
| | 970 | 661 | 576 | |||||||||||
Stockholders' (deficit)/equity |
1,423 | 1,278 | (291 | ) | (240 | ) | (159 | ) |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and the related notes included in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors."
Overview
We are a leading global provider of professional technical and management support services for commercial and government clients around the world. We provide our services in a broad range of end markets and strategic geographic markets through a global network of operating offices and approximately 43,000 employees and staff employed in the field on projects.
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 operate our business through two segments: Professional Technical Services (PTS) and Management Support Services (MSS).
Our PTS segment delivers planning, consulting, architecture and engineering design, and program and construction management services to institutional, commercial and government clients worldwide in end markets such as the transportation, facilities, environmental and energy 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. Revenue for our PTS segment for the year ended September 30, 2008 was $4.3 billion.
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Our MSS segment provides facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. MSS revenue typically includes a significant amount of pass-through fees from subcontractors and other direct costs. Revenue for our MSS segment for the year ended September 30, 2008 was $866.8 million.
Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contractsand renew existing client agreements. Moreover, as a professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation.
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.
Components of Income and Expense
Our management analyzes the results of our operations using several non-GAAP measures. 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. 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.
The following table presents, for the periods indicated, a presentation of the non-GAAP financial measures reconciled to the closest GAAP measure:
|
Year Ended September 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||
|
(in millions) |
||||||||||||||||
Other Financial Data: |
|||||||||||||||||
Revenue |
$ | 5,194 | $ | 4,237 | $ | 3,421 | $ | 2,395 | $ | 2,012 | |||||||
Other direct costs* |
1,905 | 1,832 | 1,521 | 933 | 776 | ||||||||||||
Revenue, net of other direct costs* |
3,289 | 2,405 | 1,900 | 1,462 | 1,236 | ||||||||||||
Cost of revenue, net of other direct costs* |
3,002 | 2,207 | 1,757 | 1,349 | 1,134 | ||||||||||||
Gross profit |
287 | 198 | 143 | 113 | 102 | ||||||||||||
Equity in earnings of joint ventures |
23 | 12 | 6 | 2 | 3 | ||||||||||||
Amortization expense of acquired intangible assets |
18 | 12 | 15 | 3 | | ||||||||||||
Other general and administrative expenses |
53 | 42 | 31 | 14 | 18 | ||||||||||||
General and administrative expenses |
71 | 54 | 46 | 17 | 18 | ||||||||||||
Income from operations |
$ | 239 | $ | 156 | $ | 103 | $ | 98 | $ | 87 | |||||||
Reconciliation of Cost of Revenue: |
|||||||||||||||||
Other direct costs* |
$ | 1,905 | $ | 1,832 | $ | 1,521 | $ | 933 | $ | 776 | |||||||
Cost of revenue, net of other direct costs* |
3,002 | 2,207 | 1,757 | 1,349 | 1,134 | ||||||||||||
Cost of revenue |
$ | 4,907 | $ | 4,039 | $ | 3,278 | $ | 2,282 | $ | 1,910 | |||||||
25
Other Direct Costs
In the course of providing its services, the Company routinely subcontracts for services and incurs other direct costs on behalf of its clients. These costs are passed through to clients and, in accordance with industry practice and generally accepted accounting principles, are included in the Company's revenue and cost of revenue. Since subcontractor services and other direct costs can change significantly from project to project and period to period, changes in revenue may not accurately reflect business trends.
Revenue, Net of Other Direct Costs
Our discussion and analysis of our financial condition and results of operations uses revenue, net of other direct costs as a point of reference. Revenue, net of other direct costs is a non-GAAP measure and may not be comparable to similarly titled items reported by other companies.
Cost of Revenue, Net of Other Direct Costs
Cost of revenue, net of other direct costs reflects the cost of our own personnel (including fringe benefits and overhead expense) associated with revenue, net of other direct costs.
Equity in Earnings of Joint Ventures
Equity in earnings of joint ventures includes our portion of fees charged by unconsolidated joint ventures in which we participate to clients for services performed by us and other joint venture partners along with earnings we receive from investments in unconsolidated joint ventures.
Amortization Expense of Acquired Intangible Assets
Included in our general and administrative expenses is amortization of acquired intangible assets. Under SFAS No. 141, "Business Combinations" (SFAS 141), we must ascribe value to identifiable intangible assets other than goodwill in our purchase price allocations for companies we have acquired. These assets include but are not limited to backlog, customer lists and trade names. To the extent we ascribe value to identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of the assets. Such amortization expense, although non-cash in the period expensed, directly impacts our results of operations.
It is difficult to predict with any precision the amount of expense we may record relating to acquired intangible assets. As backlog is typically the shortest lived intangible asset in our business, we would expect to see higher amortization expense in the first 12 to 18 months (the typical backlog amortization period) after an acquisition has been consummated.
Other General and Administrative Expenses
Other general and administrative expenses include corporate overhead expenses, including personnel, occupancy, and administrative expenses. To date we have not recognized any expense related to goodwill impairment. Should we determine, however, that in future periods our goodwill is impaired, the related expense would be a component of our general and administrative expenses.
Income Tax Expense
Income tax expense varies as a function of income before income tax expense and permanent non-tax deductible expenses. Acquisitions have a material effect on our income tax expense. We anticipate continuing our acquisition strategy and, as such, we anticipate that there will be variability in our effective tax rate from quarter to quarter and year to year, especially to the extent that our permanent differences increase or decrease.
26
Acquisitions
One of our key strategies is to focus on acquisitions of companies that complement our business sectors and/or expand our geographic presence.
The aggregate value of consideration for our acquisitions consummated during the year ended September 30, 2008 was $632 million, the largest of which were:
The aggregate value of all consideration for our acquisitions consummated during the year ended September 30, 2007 was $184 million, the largest of which were:
The purchase prices of certain of these acquisitions are subject to purchase allocation adjustments based upon the final determination of the acquired firms' tangible and intangible net asset values as of their respective closing dates. All of our acquisitions have been accounted for as purchases and the results of operations of the acquired companies have been included in our consolidated results since the dates of the acquisitions.
Critical Accounting Policies
Our financial statements are presented in accordance with GAAP. Highlighted below are the accounting policies that management considers significant to understanding the operations of our business.
Revenue Recognition
The Company generally utilizes a cost-to-cost approach in applying the percentage-of-completion method of revenue recognition, under which revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred. Recognition of revenue and profit under this method is dependent upon a number of factors, including the accuracy of a variety of estimates, including engineering progress, materials quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates. Due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates. If estimated total costs on contracts indicate a loss, the Company recognizes that estimated loss in the period the estimated loss first becomes known.
27
Claims Recognition
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. In accordance with the American Institute of Certified Public Accountants Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts," the Company records contract revenue related to claims 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, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. The amounts recorded, if material, are disclosed in the notes to the financial statements. Costs attributable to claims are treated as costs of contract performance as incurred.
Unbilled Accounts Receivable and Billings in Excess of Costs on Uncompleted Contracts
Unbilled accounts receivable represents the contract revenue recognized to date using the percentage-of-completion accounting method but not yet invoiced to the client due to contract terms or the timing of the accounting invoicing cycle.
Billings in excess of costs on uncompleted contracts represent the billings to date, as allowed under the terms of a contract, but not yet recognized as contract revenue using the percentage-of-completion accounting method.
Investments in Unconsolidated Joint Ventures
The Company has non-controlling operational interests in joint ventures accounted for under the equity method. Fees received for and the associated costs of services performed by the Company and billed to joint ventures with respect to work done by the Company for third-party customers are recorded as revenues and costs of the Company in the period in which such services are rendered. In certain joint ventures, a fee is added to the respective billings from the Company and the other joint venture partners on the amounts billed to the third-party customers. These fees result in earnings to the joint venture and are split with each of the joint venture partners and paid to the joint venture partners upon collection from the third-party customer. The Company records its allocated share of these fees as equity in earnings of joint ventures.
Income Taxes
Valuation Allowance. Deferred income taxes are provided on the liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment of such changes to laws and rates.
Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Whether a deferred tax asset may be realized requires considerable judgment by us. In considering the need for a valuation allowance, we consider the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry-forwards, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would normally be taken by management, in the absence of the desire to realize the deferred tax asset. Whether a deferred tax asset will ultimately be realized is also dependent on varying factors, including, but not limited to, changes in tax laws and audits by tax jurisdictions in which we operate.
28
We review the need for a valuation allowance annually. If we determine we will not realize all or part of our deferred tax asset in the future, we will record an additional valuation allowance. Conversely, if a valuation allowance exists and we determine that the ultimate realizability of all or part of the net deferred tax asset is more likely than not to be realized, then the amount of the valuation allowance will be reduced. This adjustment will increase or decrease income tax expense in the period of such determination.
Undistributed Non-U.S. Earnings. The results of our operations outside of the United States are consolidated by us for financial reporting; however, earnings from investments in non-U.S. operations are included in domestic U.S. taxable income only when actually or constructively received. No deferred taxes have been provided on the undistributed earnings of non-U.S. operations of approximately $229.3 million because we plan to permanently reinvest these earnings overseas. If we were to repatriate these earnings, additional taxes would be due at that time. However, these additional U.S. taxes may be offset in part by the use of foreign tax credits.
Goodwill
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", requires that the Company perform an impairment test of its goodwill at least annually for each reporting unit of the Company. Inherent in such fair value determination are certain judgments and estimates, including assumptions about our forecasts with regard to our operations as well as the interpretation of current economic indicators and market valuations. Reporting units for purposes of this test are consistent with the Company's reportable segments, Professional Technical Services and Management Support Services segments. The impairment test is a two-step process. During the first step, the Company estimates the fair value of the reporting unit and compares that amount to the carrying value of that reporting unit's goodwill. In the event the fair value of the reporting unit is determined to be less than the carrying value, a second step is required. The second step requires the Company to perform a hypothetical purchase allocation to compare the current implied fair value of the goodwill to the current carrying value of the goodwill. In the event that the current implied fair value of the goodwill is less than the carrying value, an impairment charge is recognized. The Company performs this test annually in its fiscal fourth quarter and concluded that no impairment existed at September 30, 2008, 2007, or 2006.
Accrued Professional Liability Costs
We carry professional liability insurance policies or self-insure for our initial layer of professional liability claims under our professional liability insurance policies and for a deductible for each claim even after exceeding the self-insured retention. We accrue for our portion of the estimated ultimate liability for the estimated potential incurred losses. We establish our estimate of loss for each potential claim in consultation with legal counsel handling the specific matters and based on historic trends taking into account recent events. We also use an outside actuarial firm to assist us in estimating our future claims exposure. It is possible that our estimate of loss may be revised based on the actual or revised estimate of liability of the claims.
29
Fiscal year ended September 30, 2008 compared to the fiscal year ended September 30, 2007
Consolidated Results
|
Twelve Months Ended | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
$ | % | ||||||||||
|
($ in thousands) |
|
|
|||||||||||
Revenue |
$ | 5,194,482 | $ | 4,237,270 | $ | 957,212 | 22.6 | % | ||||||
Other direct costs |
1,905,773 | 1,832,001 | 73,772 | 4.0 | ||||||||||
Revenue, net of other direct costs |
3,288,709 | 2,405,269 | 883,440 | 36.7 | ||||||||||
Cost of revenue, net of other direct costs |
3,001,513 | 2,207,316 | 794,197 | 36.0 | ||||||||||
Gross profit |
287,196 | 197,953 | 89,243 | 45.1 | ||||||||||
Equity in earnings of joint ventures |
22,192 | 11,828 | 10,364 | 87.6 | ||||||||||
General and administrative expense |
70,581 | 53,842 | 16,739 | 31.1 | ||||||||||
Income from operations |
238,807 | 155,939 | 82,868 | 53.1 | ||||||||||
Minority interest in share of earnings |
13,590 | 16,404 | (2,814 | ) | (17.2 | ) | ||||||||
Gain on sale of equity investment |
| 11,286 | (11,286 | ) | (100.0 | ) | ||||||||
Other expense |
(3,438 | ) | | (3,438 | ) | | ||||||||
Interest income (expense)net |
736 | (3,321 | ) | 4,057 | (122.2 | ) | ||||||||
Income before income tax expense |
222,515 | 147,500 | 75,015 | 50.9 | ||||||||||
Income tax expense |
76,321 | 47,203 | 29,118 | 61.7 | ||||||||||
Income from continuing operations |
146,194 | 100,297 | 45,897 | 45.8 | ||||||||||
Income from discontinued operations, net of tax |
1,032 | | 1,032 | 0.0 | ||||||||||
Net income |
$ | 147,226 | $ | 100,297 | $ | 46,929 | 46.8 | % | ||||||
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
|
Fiscal Year Ended | |||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
||||||
Revenue, net of other direct costs |
100.0 | % | 100.0 | % | ||||
Cost of revenue, net of other direct costs |
91.3 | 91.8 | ||||||
Gross profit |
8.7 | 8.2 | ||||||
Equity in earnings of joint ventures |
0.7 | 0.5 | ||||||
General and administrative expense |
2.1 | 2.2 | ||||||
Income from operations |
7.3 | 6.5 | ||||||
Minority interest in share of earnings |
0.4 | 0.7 | ||||||
Gain on sale of equity investment |
| 0.5 | ||||||
Other expense |
(0.1 | ) | | |||||
Interest income (expense)net |
| (0.2 | ) | |||||
Income before income tax expense |
6.8 | 6.1 | ||||||
Income tax expense |
2.4 | 1.9 | ||||||
Income from continuing operations |
4.4 | 4.2 | ||||||
Income from discontinued operations, net of tax |
0.1 | | ||||||
Net income |
4.5 | % | 4.2 | % | ||||
30
Revenue
Our revenue for the year ended September 30, 2008 increased $957.2 million, or 22.6%, to $5.2 billion as compared to $4.2 billion for the corresponding period last year. Of this increase, $424.1 million, or 44.3%, was provided by companies acquired in the past twelve months. Excluding the revenue provided by acquired companies, revenue increased $533.1 million, or 12.6%, over the year ended September 30, 2007. This increase was primarily attributable to greater volumes of work performed in our environmental management services business in all of our geographic markets, continued strength in our engineering design services in the United Arab Emirates, higher government spending for highway and transit infrastructure projects in Australia and an increase in demand for work performed in our planning and urban design business. Increased demand in these markets was partially offset by a decline in our design/build services business due to the completion of a significant facility project in the fourth quarter of fiscal 2007.
Revenue, Net of Other Direct Costs
Our revenue, net of other direct costs for the year ended September 30, 2008 increased $883.4 million, or 36.7%, to $3.3 billion as compared to $2.4 billion for the corresponding period last year. Of this increase, $300.6 million, or 34.0%, was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by acquired companies, revenue, net of other direct costs increased $582.8 million, or 24.2%, over fiscal 2007. The increase was primarily due to strong demand in the markets noted above, resulting in increased project staffing. The larger percentage increases in revenue, net of other direct costs, compared to the increase in revenue during the same period resulted from the decline in our design/build services business in the United States which contains a proportionately higher component of subcontractor costs.
Gross Profit
Our gross profit for the year ended September 30, 2008 increased $89.2 million, or 45.1%, to $287.2 million, as compared to $198.0 million for the corresponding period last year. Of this increase, $20.5 million, or 23.0%, was provided by companies acquired in the past twelve months. Excluding gross profit provided by acquired companies, gross profit increased $68.7 million, or 34.7%, over the year ended September 30, 2007, consistent with the increase in revenue, net of other direct costs. For the year ended September 30, 2008, gross profit as a percentage of revenue, net of other direct costs, increased to 8.7% from 8.2% in the year ended September 30, 2007. The increase was primarily due to greater demand for services in higher margin end markets including our world-wide environmental management services business, and our engineering design business in the United Arab Emirates. As discussed in Notes 1, 22, and 23 to the financial statements, we reclassified certain indirect expenses which had previously been presented within general and administrative expenses.
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for the year ended September 30, 2008 increased $10.4 million, or 87.6%, to $22.2 million as compared to $11.8 million for the corresponding period last year. The increase was primarily attributable to $3.4 million contributed by the acquisitions of Earth Tech and Tecsult, increased joint venture activity in the Middle East, and improved performance in a European joint venture that was in its initial phase in the prior year.
General and Administrative Expenses
Our general and administrative expenses for the year ended September 30, 2008 increased $16.8 million, or 31.1%, to $70.6 million as compared to $53.8 million for the corresponding period last year. Of this increase, $3.0 million, or 17.9%, was incurred by companies acquired in the past twelve
31
months. The increase was primarily attributable to the growth in revenue noted above, continued investments to support strategic initiatives and expenses incurred related to our becoming a public reporting company in March 2007, including compliance efforts related to our initial implementation of the requirements of Section 404 the Sarbanes-Oxley Act of 2002, relating to internal controls over financial reporting. As a percentage of revenue, net of other direct costs, general and administrative expenses decreased slightly from 2.2% in the year ended September 30, 2007 to 2.1% in the year ended September 30, 2008. As discussed in Notes 1, 22, and 23 to the financial statements, we reclassified certain indirect expenses which had previously been presented within general and administrative expenses.
Gain on Sale of Equity Investment
In December 2006, we sold our minority interest in an equity investment in the United Kingdom for 7.5 million GBP, or approximately $14.7 million. As a result, we recorded a gain on the sale of $11.3 million for the year ended September 30, 2007.
Interest Income / ExpenseNet
Our interest income for the year ended September 30, 2008 was $0.7 million as compared to $3.3 million of net interest expense for the year ended September 30, 2007. The increase in net interest income was primarily attributable to higher investment balances and lower borrowings resulting from the use of proceeds received in our initial public offering completed in May 2007, partially offset by debt incurred in connection with the purchase of Earth Tech in the quarter ended September 30, 2008.
Income Tax Expense
Our income tax expense for the year ended September 30, 2008 increased $29.1 million, or 61.7%, to $76.3 million as compared to $47.2 million for the year ended September 30, 2007. The effective tax rate was 34.3% and 32.0% for the years ended September 30, 2008 and 2007, respectively. The increase in the effective tax rate was due to proportionately less income in low tax jurisdictions and the increase in the reserve for uncertain income tax position.
Net Income
The factors described above resulted in net income of $147.2 million in the year ended September 30, 2008, as compared to net income of $100.3 million in the year ended September 30, 2007.
Results of Operations by Reportable Segment
Professional Technical Services
|
Fiscal Year Ended | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
$ | % | ||||||||||
|
($ in thousands) |
|
|
|||||||||||
Revenue |
$ | 4,327,671 | $ | 3,418,683 | $ | 908,988 | 26.6 | % | ||||||
Other direct costs |
1,194,739 | 1,122,967 | 71,772 | 6.4 | ||||||||||
Revenue, net of other direct costs |
3,132,932 | 2,295,716 | 837,216 | 36.5 | ||||||||||
Cost of revenue, net of other direct costs |
2,871,020 | 2,117,271 | 753,749 | 35.6 | ||||||||||
Gross profit |
$ | 261,912 | $ | 178,445 | $ | 83,467 | 46.8 | % | ||||||
32
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
|
Fiscal Year Ended | ||||||
---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
|||||
Revenue, net of other direct costs |
100.0 | % | 100.0 | % | |||
Cost of revenue, net of other direct costs |
91.6 | 92.2 | |||||
Gross profit |
8.4 | % | 7.8 | % | |||
Revenue
Revenue for our PTS segment for the year ended September 30, 2008 increased $909.0 million, or 26.6%, to $4.3 billion as compared to $3.4 billion for prior year. Of this increase, $424.1 million, or 46.7%, was provided by companies acquired in the past twelve months. Excluding revenue provided by acquired companies , revenue increased $484.9 million, or 14.2%, over the year ended September 30, 2007. The increase was primarily attributable to an increase in demand for our environmental management services in all of our geographic markets, continued strength in our engineering design services in the United Arab Emirates, higher government spending for highway and transit infrastructure projects in Australia, greater volumes of work performed in our planning and urban design business, and the start up of program management services on our Libya Housing and Infrastructure Board project. Increased demand in these markets was partially offset by a decline in our design/build services business in the United States due to the completion of a significant educational facility project in the fourth quarter of fiscal 2007.
Revenue, Net of Other Direct Costs
Revenue, net of other direct costs for our PTS segment for the year ended September 30, 2008 increased $837.2 million, or 36.5%, to $3.1 billion as compared to $2.3 billion for the corresponding period last year. Of this increase, $300.6 million, or 35.9%, was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by acquired companies, revenue, net of other direct costs increased $536.6 million, or 23.4%, over the year ended September 30, 2007. This increase was primarily attributable to the factors mentioned above.
Gross Profit
Gross profit for our PTS segment for the year ended September 30, 2008 increased $83.5 million, or 46.8%, to $261.9 million as compared to $178.4 million for the corresponding period last year. Of this increase, $17.5 million, or 21.0%, was provided by companies acquired in the past twelve months. Excluding gross profit provided by acquired companies, gross profit increased $66.0 million, or 37.0%, consistent with the increase in revenue, net of other direct costs. As a percentage of revenue, net of other direct costs, gross profit increased to 8.4% of revenue, net of other direct costs in the year ended September 30, 2008 from 7.8% in the corresponding period last year primarily due to greater demand for services in higher margin end markets including our world-wide environmental management services business and our engineering design business in the United Arab Emirates.
Equity in Earnings of Joint Ventures
Equity in earnings of joint ventures for our PTS segment for the year ended September 30, 2008 increased $10.6 million, or 393%, to $13.3 million as compared to $2.7 million for the corresponding period last year. The increase was primarily attributable to $3.4 million contributed by the acquisitions of Earth Tech and Tecsult, increased joint venture activity in the Middle East, and improved performance in a European joint venture that was in its initial phase in the prior year.
33
Management Support Services
|
Fiscal Year Ended | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
$ | % | ||||||||||
|
($ in thousands) |
|
|
|||||||||||
Revenue |
$ | 866,811 | $ | 818,587 | $ | 48,224 | 5.9 | % | ||||||
Other direct costs |
711,034 | 709,034 | 2,000 | 0.3 | ||||||||||
Revenue, net of other direct costs |
155,777 | 109,553 | 46,224 | 42.2 | ||||||||||
Cost of revenue, net of other direct costs |
130,493 | 90,045 | 40,448 | 44.9 | ||||||||||
Gross profit |
$ | 25,284 | $ | 19,508 | $ | 5,776 | 29.6 | % | ||||||
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
|
Fiscal Year Ended | ||||||
---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
|||||
Revenue, net of other direct costs |
100.0 | % | 100.0 | % | |||
Cost of revenue, net of other direct costs |
83.8 | 82.2 | |||||
Gross profit |
16.2 | % | 17.8 | % | |||
Revenue
Revenue for our MSS segment for the year ended September 30, 2008 increased $48.2 million, or 5.9%, to $866.8 million as compared to $818.6 million for the corresponding period last year, none of which was provided by companies acquired in the past twelve months. This increase was primarily attributable to a higher volume of task orders received related to our global maintenance and depot services projects for 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 year ended September 30, 2008 increased $46.2 million, or 42.2%, to $155.8 million as compared to $109.6 million for the corresponding period last year. The increase was primarily attributable to an increase in our personnel associated with additional task orders received in support of United States government activities in the Middle East, and the successful negotiation of certain modifications on our combat support project.
Gross Profit
Gross profit for our MSS segment for the year ended September 30, 2008 increased $5.8 million, or 29.6%, to $25.3 million as compared to $19.5 million for the corresponding period last year. This increase in gross profit was primarily due to the increase in revenue, net of other direct costs, partially offset by a $5.8 million reduction in accrued award fees on a U.S. government project pending final negotiation of such fees.
As a percentage of revenue, net of other direct costs, gross profit decreased to 16.2% in the year ended September 30, 2008 from 17.8% in the corresponding period last year. This decrease was due to the $5.8 million reduction in award fees noted above.
34
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for our MSS segment for the year ended September 30, 2008 decreased $0.2 million, or 2.3%, to $8.9 million as compared to $9.1 million for the corresponding period last year.
Fiscal year ended September 30, 2007 compared to the fiscal year ended September 30, 2006
Consolidated Results
|
Twelve Months Ended | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2007 |
September 30, 2006 |
$ | % | ||||||||||
|
($ in thousands) |
|
|
|||||||||||
Revenue |
$ | 4,237,270 | $ | 3,421,492 | $ | 815,778 | 23.8 | % | ||||||
Other direct costs |
1,832,001 | 1,521,775 | 310,226 | 20.4 | ||||||||||
Revenue, net of other direct costs |
2,405,269 | 1,899,717 | 505,552 | 26.6 | ||||||||||
Cost of revenue, net of other direct costs |
2,207,316 | 1,756,655 | 450,661 | 25.7 | ||||||||||
Gross profit |
197,953 | 143,062 | 54,891 | 38.4 | ||||||||||
Equity in earnings of joint ventures |
11,828 | 6,554 | 5,274 | 80.5 | ||||||||||
General and administrative expense |
53,842 | 46,207 | 7,635 | 16.5 | ||||||||||
Income from operations |
155,939 | 103,409 | 52,530 | 50.8 | ||||||||||
Minority interest in share of earnings |
16,404 | 13,924 | 2,480 | 17.8 | ||||||||||
Gain on sale of equity investment |
11,286 | | 11,286 | | ||||||||||
Interest income (expense)net |
(3,321 | ) | (10,576 | ) | (7,255 | ) | (68.6 | ) | ||||||
Income before income tax expense |
147,500 | 78,909 | 68,591 | 86.9 | ||||||||||
Income tax expense |
47,203 | 25,223 | 21,980 | 87.1 | ||||||||||
Net income |
$ | 100,297 | $ | 53,686 | $ | 46,611 | 86.8 | % | ||||||
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
|
Fiscal Year Ended | |||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2007 |
September 30, 2006 |
||||||
Revenue, net of other direct costs |
100.0 | % | 100.0 | % | ||||
Cost of revenue, net of other direct costs |
91.8 | 92.5 | ||||||
Gross profit |
8.2 | 7.5 | ||||||
Equity in earnings of joint ventures |
0.5 | 0.3 | ||||||
General and administrative expense |
2.2 | 2.4 | ||||||
Income from operations |
6.5 | 5.4 | ||||||
Minority interest in share of earnings |
0.7 | 0.7 | ||||||
Gain on sale of equity investment |
0.5 | | ||||||
Interest expensenet |
(0.2 | ) | (0.5 | ) | ||||
Income before income tax expense |
6.1 | 4.2 | ||||||
Income tax expense |
1.9 | 1.4 | ||||||
Net income |
4.2 | % | 2.8 | % | ||||
35
Revenue
Our revenue for the year ended September 30, 2007 increased $0.8 billion, or 23.8%, to $4.2 billion as compared to $3.4 billion for the corresponding period in fiscal 2006. Of this increase, $300 million, or 36.8%, was provided by companies acquired in the past twelve months. Excluding the revenue provided by acquired companies, revenue increased $516 million, or 15.1%, over fiscal 2006. This increase was primarily attributable to increased spending for infrastructure development in Australia, Canada, and the United Arab Emirates as a result of continued economic growth in these regions, higher volume of work performed for clients in the building and transportation sectors of our operations in the United Kingdom, and an increase in task orders received associated with U.S. government activity in the Middle East. Increased demand in these markets was partially offset by a decline in revenue from contracts we hold with the Federal Emergency Management Agency (FEMA) as a result of a decrease in hurricane recovery activities in the Gulf Coast region.
Revenue, Net of Other Direct Costs
Our revenue, net of other direct costs for the year ended September 30, 2007 increased $0.5 billion, or 26.6%, to $2.4 billion as compared to $1.9 billion for the corresponding period in fiscal 2006. Of this increase, $242 million, or 47.9%, was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by acquired companies, revenue, net of other direct costs increased $264 million, or 13.9%, over fiscal 2006. This increase was primarily attributable to the revenue growth factors noted above.
Gross Profit
Our gross profit for the year ended September 30, 2007 increased $54.9 million, or 38.4%, to $198.0 million, as compared to $143.1 million for the corresponding period in fiscal 2006. Of this increase, $17.4 million, or 31.7%, was provided by companies acquired in the past twelve months. Excluding gross profit provided by acquired companies, gross profit increased $37.5 million, or 26.2%, over the year ended September 30, 2006, consistent with the increase in revenue, net of other direct costs. For the year ended September 30, 2007, gross profit as a percentage of revenue, net of other direct costs, increased to 8.2% from 7.5% in fiscal 2006 primarily due to improved project performance.
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for the year ended September 30, 2007 increased $5.3 million, or 80.5%, to $11.8 million as compared to $6.6 million for the corresponding period in fiscal 2006. The increase was primarily attributable to an additional $3.9 million contribution from our participation in a joint venture at the Department of Energy's Nevada Test Site that commenced in the fourth quarter of the year ended September 30, 2006.
General and Administrative Expenses
Our general and administrative expenses for the year ended September 30, 2007 increased $7.6 million, or 16.5%, to $53.8 million as compared to $46.2 million for the corresponding period in fiscal 2006. The increase was primarily attributable to growth in revenue noted above, increased headcount associated with acquired companies, continued investments throughout the organization to support strategic initiatives and expenses incurred related to our becoming a public reporting company, including compliance efforts related to the requirements of the Sarbanes-Oxley Act of 2002. As a percentage of revenue, net of other direct costs, general and administrative expenses decreased slightly from 2.4% in fiscal 2006 to 2.2% in the year ended September 30, 2007.
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Gain on Sale of Equity Investment
In December 2006, we sold our minority interest in an equity investment in the United Kingdom for 7.5 million GBP, or approximately $14.7 million. As a result, we recorded a gain on the sale of $11.3 million for the year ended September 30, 2007.
Interest Income / ExpenseNet
Our interest expense, net of $6.4 million of interest income, for the year ended September 30, 2007 decreased $7.3 million, or 68.6%, to $3.3 million as compared to $10.6 million for the corresponding period in fiscal 2006. This decrease was primarily attributable to lower average borrowings and higher interest income as a result of our initial public offering completed in May 2007, partially offset by $3.2 million in make whole premiums incurred on the early repayment of fixed rate senior notes. At September 30, 2007, borrowings under our revolving credit facility, term credit agreement and senior notes outstanding totaled $45.3 million, as compared to $133.8 million at September 30, 2006.
Income Tax Expense
Our income tax expense for the year ended September 30, 2007 increased $22.0 million, or 87.1%, to $47.2 million as compared to $25.2 million for fiscal 2006. The effective tax rate was 32.0% for the years ended September, 30 2007 and 2006.
Net Income
The factors described above resulted in net income of $100.3 million in the year ended September 30, 2007, as compared to net income of $53.7 million in fiscal 2006.
Results of Operations by Reportable Segment
Professional Technical Services
|
Fiscal Year Ended | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2007 |
September 30, 2006 |
$ | % | ||||||||||
|
($ in thousands) |
|
|
|||||||||||
Revenue |
$ | 3,418,683 | $ | 2,774,304 | $ | 644,379 | 23.2 | % | ||||||
Other direct costs |
1,122,967 | 971,299 | 151,668 | 15.6 | ||||||||||
Revenue, net of other direct costs |
2,295,716 | 1,803,005 | 492,711 | 27.3 | ||||||||||
Cost of revenue, net of other direct costs |
2,117,271 | 1,677,930 | 439,341 | 26.2 | ||||||||||
Gross profit |
$ | 178,445 | $ | 125,075 | $ | 53,370 | 42.7 | % | ||||||
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
|
Fiscal Year Ended | ||||||
---|---|---|---|---|---|---|---|
|
September 30, 2007 |
September 30, 2006 |
|||||
Revenue, net of other direct costs |
100.0 | % | 100.0 | % | |||
Cost of revenue, net of other direct costs |
92.2 | 93.1 | |||||
Gross profit |
7.8 | % | 6.9 | % | |||
37
Revenue
Revenue for our PTS segment for the year ended September 30, 2007 increased $0.6 billion, or 23.2%, to $3.4 billion as compared to $2.8 billion for the corresponding period in fiscal 2006. Of this increase, $300 million, or 46.5%, was provided by companies acquired in the past twelve months. Excluding revenue provided by companies acquired in the past twelve months, revenue increased $344 million, or 12.4%, over fiscal 2006. This increase was primarily attributable to increased government and private sector spending for infrastructure development in Australia, Canada, and the United Arab Emirates as a result of continued economic growth, and an increase in our building and transportation business in the U.K. These increases were partially offset by a decline in task orders received from FEMA as result of decreased hurricane recovery activities in the Gulf Coast region.
Revenue, Net of Other Direct Costs
Revenue, net of other direct costs for our PTS segment for the year ended September 30, 2007 increased $0.5 billion, or 27.3%, to $2.3 billion as compared to $1.8 billion for the corresponding period in fiscal 2006. Of this increase, $242 million, or 49.1%, was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by companies acquired in the past twelve months, revenue, net of other direct costs increased $251 million, or 13.9%, over fiscal 2006. This increase was primarily attributable to the factors mentioned above.
Gross Profit
Gross profit for our PTS segment for the year ended September 30, 2007 increased $53.3 million, or 42.7%, to $178.4 million as compared to $125.1 million for the corresponding period in fiscal 2006. Of this increase, $17.4 million, or 32.6%, was provided by companies acquired in the past twelve months. Excluding gross profit provided by acquired companies, gross profit increased $35.9 million, or 28.7%, consistent with the increase in revenue, net of other direct costs. As a percentage of revenue, net of other direct costs, gross profit increased to 7.8% of revenue, net of other direct costs in the year ended September 30, 2007 from 6.9% in the corresponding period in fiscal 2006 primarily due to improved project performance.
Equity in Earnings of Joint Ventures
Equity in earnings of joint ventures for our PTS segment for the year ended September 30, 2007 increased $1.1 million, or 68.1%, to $2.7 million as compared to $1.6 million for the corresponding period in fiscal 2006.
Management Support Services
|
Fiscal Year Ended | Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2007 |
September 30, 2006 |
$ | % | ||||||||||
|
($ in thousands) |
|
|
|||||||||||
Revenue |
$ | 818,587 | $ | 647,188 | $ | 171,399 | 26.5 | % | ||||||
Other direct costs |
709,034 | 550,476 | 158,558 | 28.8 | ||||||||||
Revenue, net of other direct costs |
109,553 | 96,712 | 12,841 | 13.3 | ||||||||||
Cost of revenue, net of other direct costs |
90,045 | 78,725 | 11,320 | 14.4 | ||||||||||
Gross profit |
$ | 19,508 | $ | 17,987 | $ | 1,521 | 8.5 | % | ||||||
38
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
|
Fiscal Year Ended | ||||||
---|---|---|---|---|---|---|---|
|
September 30, 2007 |
September 30, 2006 |
|||||
Revenue, net of other direct costs |
100.0 | % | 100.0 | % | |||
Cost of revenue, net of other direct costs |
82.2 | 81.4 | |||||
Gross profit |
17.8 | % | 18.6 | % | |||
Revenue
Revenue for our MSS segment for the year ended September 30, 2007 increased $171 million, or 26.5%, to $818 million as compared to $647 million for the corresponding period in fiscal 2006, none of which was provided by companies acquired. This increase was primarily attributable to a higher volume of task orders received related to U.S. government activities in the Middle East.
Revenue, Net of Other Direct Costs
Revenue, net of other direct costs for our MSS segment for the year ended September 30, 2007 increased $12.8 million, or 13.3%, to $109.6 million as compared to $96.7 million for the corresponding period in fiscal 2006. The increase was primarily due to an increase in Company personnel associated with a higher volume of task orders received related to U.S. government activities in the Middle East.
Gross Profit
Gross profit for our MSS segment for the year ended September 30, 2007 increased $1.5 million, or 8.5%, to $19.5 million as compared to $18.0 million for the corresponding period in fiscal 2006 due to the increase in revenue, net of other direct costs. As a percentage of revenue, net of other direct costs, gross profit decreased to 17.8% in the year ended September 30, 2007 from 18.6% in the corresponding period in fiscal 2006.
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for our MSS segment for the year ended September 30, 2007 increased $4.2 million, or 84.5%, to $9.1 million as compared to $4.9 million for the corresponding period in fiscal 2006. The increase was primarily attributable to our participation in the Nevada Test Site project that commenced in the fourth quarter of the year ended September 30, 2006.
Seasonality
The fourth quarter of our fiscal year (July 1 to September 30) is typically our strongest quarter. The U.S. federal government tends to authorize more work during the period preceding the end of its fiscal year, September 30. In addition, many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during the fiscal first quarter when new funding budgets become available. Within a number of parts of the world in which we operate, we generally benefit from milder weather conditions in our fiscal fourth quarter, which allows for more productivity from our field inspection and other on-site civil services. Our construction and project management services also typically expand during the high construction season of the summer months. 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. For these reasons, coupled with the number and significance of client contracts commenced and completed
39
during a particular period, as well as the timing 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
In May 2007, we completed the initial public offering of 40.4 million shares of our common stock, which included the exercise of the underwriters' over-allotment option to purchase 5.3 million shares, at $20.00 per share. Of the total shares sold in the offering, 15.3 million were sold by stockholders of the Company. Proceeds to the Company, net of underwriting discounts, commissions, and other offering-related costs, were $468.3 million, of which $75.4 million was used to fund elections by employees to diversify their holdings of AECOM stock units in the Company's stock purchase plan.
Our principal source of liquidity is cash flows from operations, and our principal uses of cash are for operating expenses, capital expenditures, working capital requirements, acquisitions, and repayment of debt. We believe our anticipated sources of liquidity including operating cash flows, existing cash and cash equivalents, and borrowing capacity under our revolving credit facility will be sufficient to meet our projected cash requirements for at least the next 12 months.
At September 30, 2008, cash and cash equivalents were $194.5 million, a decrease of $22.4 million, or 10.3%, from $216.9 million at September 30, 2007. This decrease was primarily attributable to cash consideration paid in business acquisitions during fiscal 2008, offset by proceeds from borrowings and cash provided by operating activities.
Net cash provided by operating activities was $155.2 million for the year ended September 30, 2008, an increase of $17.8 million, or 12.9%, from $137.5 million for the year ended September 30, 2007. This increase was primarily attributable to increased net income, partially offset by an increase in working capital.
Net cash used in investing activities was $521.3 million for the year ended September 30, 2008, an increase of $131.8 million, or 33.8%, from the net cash used in investing activities of $389.5 million in the year ended September 30, 2007. For the year ended September 30, 2008, net cash used in business combinations was $656.9 million as compared to $158.7 million for the year ended September 30, 2007. Acquisitions during the year ended September 30, 2008 included Tecsult Inc., Boyle Engineering Corporation, and Earth Tech.
Net cash provided by financing activities was $346.7 million for the year ended September 30, 2008, an increase of $8.5 million from cash provided by financing activities of $338.2 million in the year ended September 30, 2007. This increase was primarily a result of proceeds from borrowings under our credit facility, offset by our May 2007 initial public offering of common stock.
Working Capital
Working capital, or current assets less current liabilities, increased $33.5 million, or 5.6%, to $631.2 million at September 30, 2008 from $597.7 million at September 30, 2007 primarily as a result of newly acquired companies. Net accounts receivable, which includes billed and unbilled costs and fees, net of billings in excess of costs on uncompleted contracts, increased $432.9 million, or 48.1%, to $1.3 billion at September 30, 2008 from $899.3 million at September 30, 2007, primarily attributable to an increase of $514.6 million, or 46.2%, in our fiscal 2008 fourth quarter revenue as compared to the corresponding period last year.
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,
40
which are generally paid on either a bi-weekly or monthly basis, other direct costs are generally not paid until we receive payment (in some cases in the form of advances) from our customers.
Borrowings and Lines of Credit
Long-Term Debt
Long-term debt consisted of the following:
|
September 30, 2008 |
September 30, 2007 |
||||||
---|---|---|---|---|---|---|---|---|
|
(in thousands) |
|||||||
Unsecured revolving credit facility |
$ | 310,000 | $ | | ||||
Senior notes |
8,333 | 8,333 | ||||||
Term credit agreement |
25,985 | 37,015 | ||||||
Other debt |
53,691 | 2,602 | ||||||
Total long-term obligations |
398,009 | 47,950 | ||||||
Less: Current portion of long-term debt and short-term borrowings |
(32,035 | ) | (8,764 | ) | ||||
Long-term debt, less current portion |
$ | 365,974 | $ | 39,186 | ||||
Unsecured Revolving Credit Facility
We have an unsecured revolving credit facility with a syndicate of banks to support our working capital and acquisition needs. The borrowing capacity under our unsecured revolving credit facility is $600 million, and pursuant to the terms of the associated credit agreement, has an expiration date of August 31, 2012. We may also, at our option, request an increase in the commitments under the facility up to a total of $750 million, subject to lender approval. The credit agreement contains customary representations and warranties, affirmative and negative covenants and events of default and includes a sub-limit for financial and commercial standby letters of credit. We may borrow, at our option, at either (a) a base rate (the greater of the federal funds rate plus 0.50% or the bank's reference rate), or (b) an offshore, or LIBOR, rate plus a margin which ranges from 0.50% to 1.375%. In addition to these borrowing rates, there is a commitment fee which ranges from 0.10% to 0.25% on any unused commitment. At September 30, 2008, $310.0 million was outstanding, and at September 30, 2007 there were no borrowings under our credit facility. At September 30, 2008 and 2007, outstanding standby letters of credit totaled $26.7 million and $24.3 million, respectively, under the credit facility. At September 30, 2008, we had $263.3 million available for borrowing under the credit facility.
We entered into three interest rate swap agreements with financial institutions during the fiscal fourth quarter ended September 30, 2008. The swap agreements fixed the variable interest rates of $150 million of the outstanding debt under our revolving credit facility. We applied cash flow hedge accounting to the interest rate swap agreements in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Accordingly, the derivatives are recorded as assets or liabilities at fair value and the effective portion of changes in the fair value of the derivative, as measured quarterly, are reported in other comprehensive income. The change in fair value related to the derivatives included in other
41
comprehensive income/(loss) for the year ended September 30, 2008 was $(0.3) million. The applicable fixed rates and the related expiration dates of the swap agreements are as follows:
Notional Amount (in thousands) |
Fixed Rate |
Expiration Date |
||
---|---|---|---|---|
$50,000 | 2.8% | August 2009 | ||
$50,000 | 3.0% | February 2010 | ||
$50,000 | 3.2% | August 2010 |
Senior Notes
At September 30, 2008, $8.3 million in unsecured senior notes due October 15, 2008 were outstanding. Subsequent to September 30, 2008, these notes were fully paid.
Term Credit Agreement
In September 2006, through certain of our wholly-owned subsidiaries, we entered into an unsecured term credit agreement with a syndicate of banks to facilitate dividend repatriations under Section 965 of the American Jobs Creation Act of 2004, which provided for a limited time opportunity to repatriate non-U.S. earnings to the U.S. at a 5.25% tax rate. The term credit agreement provides for a $65.0 million, five-year term loan among four subsidiary borrowers and one subsidiary guarantor. In order to obtain favorable pricing, we also provided a parent company guarantee. The terms and conditions of the term credit agreement are similar to those contained in our revolving credit facility.
Other Debt
Other debt includes $27 million in notes payable to a bank, collateralized by real property, which we assumed in connection with our acquisition of Boyle Engineering Corporation during the year ended September 30, 2008. These notes payable bear interest at 6.04% and mature in December 2028.
In addition to the credit facility discussed above, at September 30, 2008, we had $151.4 million which was primarily comprised of non-U.S. unsecured credit facilities to cover periodic overdrafts and letters of credit. At September 30, 2008, we also had a $50 million U.S. unsecured bank facility that expires in December 2008.
The following table presents, in thousands, scheduled maturities of our debt:
Year Ending September 30,
|
|
||||
---|---|---|---|---|---|
2009 |
$ | 32,035 | |||
2010 |
7,478 | ||||
2011 |
22,061 | ||||
2012 |
311,143 | ||||
2013 |
989 | ||||
Thereafter |
24,303 | ||||
Total |
$ | 398,009 | |||
Commitments and Contingencies
Other than normal property and equipment additions and replacements, expenditures to further the implementation of our Enterprise Resource Planning (ERP) system, commitments under our incentive compensation programs, repurchases of shares of our common stock, and acquisitions from time to time, we currently do not have any significant capital expenditures or outlays planned except as described below.
42
However, as we acquire additional businesses in the future or if we embark on other capital-intensive initiatives, additional working capital may be required.
As of September 30, 2008, there was approximately $94.4 million outstanding under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for contract performance guarantees. In addition, in some instances we guarantee that a project, when complete, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, we may either incur significant additional costs or be held responsible for the costs incurred by the client to achieve the required performance standards.
As discussed in Notes 1 and 12 to the consolidated financial statements, we adopted certain provisions of SFAS 158 as of September 30, 2007, and as such, were required to recognize on our balance sheet the funded status (measured as the difference between the fair value of plan assets and the projected benefit obligation) of the Company's pension plans. We currently expect to contribute $17.2 million to our non-U.S. plans in fiscal 2009. We do not have a required minimum contribution for our domestic plans; however, we may make additional discretionary contributions. We currently expect to contribute $6.6 million to our domestic plans in the fiscal 2009. In the future, such pension funding may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors.
Contractual Commitments
The following summarizes our contractual obligations and commercial commitments as of September 30, 2008:
Contractual Obligations and Commitments
|
Total | Less than One Year |
One to Three Years |
Three to Five Years |
More than Five Years |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in thousands) |
|||||||||||||||
Long-term debt |
$ | 398,009 | $ | 32,035 | $ | 29,539 | $ | 312,132 | $ | 24,303 | ||||||
Operating leases |
637,839 | 147,073 | 293,847 | 64,026 | 132,893 | |||||||||||
Capital leases |
4,000 | 1,208 | 1,831 | 235 | 726 | |||||||||||
Pension obligations |
304,160 | 22,027 | 48,501 | 57,724 | 175,908 | |||||||||||
Total Contractual Obligations and Commitments |
$ | 1,344,008 | $ | 202,343 | $ | 373,718 | $ | 434,117 | $ | 333,830 | ||||||
Recently Issued Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," (SFAS 161), which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance and cash flows. SFAS 161 is effective beginning in our fiscal second quarter ending March 31, 2009. We are currently evaluating the impact of SFAS 161 on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS 141R). SFAS 141R significantly changes the way companies account for business combinations and will generally require more assets acquired and liabilities assumed to be measured at their acquisition-date fair value. Under SFAS 141R, legal fees and other transaction-related costs are expensed as incurred and are no longer included in goodwill as a cost of acquiring the business. SFAS 141R also requires, among other things, acquirers to estimate the acquisition-date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings. In addition, restructuring costs the acquirer expected, but was not obligated to incur, will be recognized separately from the business acquisition. This accounting standard is effective for our fiscal year ending September 30, 2010. We are currently evaluating the impact of SFAS 141R on our financial statements.
43
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" (SFAS 160). SFAS 160 requires all entities to report noncontrolling interests in subsidiaries as a separate component of equity in the consolidated financial statements. SFAS 160 establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation. Under SFAS 160, companies will no longer recognize a gain or loss on partial disposals of a subsidiary where control is retained. In addition, in partial acquisitions, where control is obtained, the acquiring company will recognize and measure at fair value 100 percent of the assets and liabilities, including goodwill, as if the entire target company had been acquired. SFAS 160 is effective for our fiscal year ending September 30, 2010. We are currently evaluating the impact of SFAS 160 on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to measure eligible assets and liabilities at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective as of October 1, 2008. We do not expect SFAS 159 to have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of October 1, 2008. We do not expect SFAS 157 to have a material impact on our financial statements.
Off-Balance Sheet Arrangements
We enter into various joint venture arrangements to provide architectural, engineering, program management, construction management and operations and maintenance services. The ownership percentage of these joint ventures is typically representative of the work to be performed or the amount of risk assumed by each joint venture partner. Some of these joint ventures are considered variable interest entities under Financial Accounting Standards Board (FASB) Financial Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" (FIN 46R). We have consolidated all joint ventures for which we are the primary beneficiary. For all others, the Company's portion of the earnings is recorded in equity in earnings of joint ventures. See Note 10 to the consolidated financial statements. We do not believe that we have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to foreign currency exchange rates and interest rate exposure of our debt obligations that bear interest based on floating rates. We actively monitor these exposures. Our objective is to reduce, where we deem appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign exchange rates and interest rates. In the past, we have entered into derivative financial instruments, such as forward contracts and interest rate hedge contracts. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage our exposures. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rates
We are exposed to foreign currency exchange rate risk resulting from our operations outside of the U.S. We do not comprehensively hedge our exposure to currency rate changes; however, we limit exposure to foreign currency fluctuations in most of our contracts through provisions that require client payments to
44
be in currencies corresponding to the currency in which costs are incurred. As a result, we typically do not need to hedge foreign currency cash flows for contract work performed. The functional currency of our significant foreign operations is the local currency.
Interest Rates
Our senior revolving credit facility and certain other debt obligations are subject to variable rate interest which could be adversely affected by an increase in interest rates. As of September 30, 2008 and 2007, we had $336.0 and $37.0 million, respectively, outstanding in borrowings under our credit facility and our term credit agreement. Interest on amounts borrowed under the credit facility and our term credit agreement is subject to adjustment based on certain levels of financial performance. For borrowings at offshore rates, the applicable margin added can range from 0.50% to 1.38%. For the year ended September 30, 2008, our weighted average borrowings on our senior credit facility were $101 million. If short term floating interest rates were to increase or decrease by 1%, our annual interest expense could have increased or decreased by $1.0 million. We invest our cash in a variety of financial instruments, consisting principally of money market securities or other highly liquid, short-term securities that are subject to minimal credit and market risk.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AECOM Technology Corporation
Index to Consolidated Financial Statements
September 30, 2008
Audited Annual Financial Statements |
||||
Report of Independent Registered Public Accounting Firm |
47 | |||
Consolidated Balance Sheets at September 30, 2008 and 2007 |
50 | |||
Consolidated Statements of Income for the Years Ended September 30, 2008, 2007 and 2006 |
51 | |||
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2008, 2007 and 2006 |
52 | |||
Consolidated Statements of Cash Flows for the Years Ended September 30, 2008, 2007 and 2006 |
53 | |||
Notes to Consolidated Financial Statements |
55 |
46
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders of
AECOM Technology Corporation
We have audited the accompanying Consolidated Balance Sheets of AECOM Technology Corporation (the "Company") as of September 30, 2008 and 2007 and the related Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for each of the three years in the period ended September 30, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AECOM Technology Corporation at September 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, in fiscal 2008, the Company adopted Statement of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109". Also, as discussed in Note 1 to the consolidated financial statements, in fiscal 2007, the Company changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment", and its method of accounting for defined benefit pension and other post retirement plans in accordance with Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statement No. 87, 88, 106 and 132(R)".
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AECOM Technology Corporation's internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 14, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP Los Angeles, California November 14, 2008 |
47
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders of
AECOM Technology Corporation
We have audited AECOM Technology Corporation's internal control over financial reporting as of September 30, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AECOM Technology Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Earth Tech, Boyle Engineering Corporation, and Tecsult, Inc., which are included in the fiscal 2008 Consolidated Financial Statements of AECOM Technology Corporation and constituted $0.9 billion and $0.5 billion of total and net assets, respectively, as of September 30, 2008 and $0.3 billion and $6 million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of AECOM Technology Corporation also did not include an evaluation of the internal control over financial reporting of these entities.
In our opinion, AECOM Technology Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on the COSO criteria.
48
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of AECOM Technology Corporation as of September 30, 2008 and 2007, and the related Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for each of the three years in the period ended September 30, 2008 of AECOM Technology Corporation and our report dated November 14, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP Los Angeles, California November 14, 2008 |
49
AECOM Technology Corporation
Consolidated Balance Sheets
(in thousands, except share data)
|
September 30, 2008 |
September 30, 2007 |
|||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||
CURRENT ASSETS: |
|||||||||
Cash and cash equivalents |
$ | 170,871 | $ | 180,339 | |||||
Cash in consolidated joint ventures |
23,651 | 36,572 | |||||||
Total cash and cash equivalents |
194,522 | 216,911 | |||||||
Marketable securities |
81,449 | 200,783 | |||||||
Accounts receivablenet |
1,638,814 | 1,091,682 | |||||||
Prepaid expenses and other current assets |
80,243 | 67,087 | |||||||
Other current assets held for sale |
75,802 | | |||||||
Deferred tax assetnet |
34,420 | | |||||||
TOTAL CURRENT ASSETS |
2,105,250 | 1,576,463 | |||||||
PROPERTY AND EQUIPMENTNET |
223,017 | 118,202 | |||||||
DEFERRED TAX ASSETSNET |
45,886 | 61,594 | |||||||
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES |
46,432 | 23,551 | |||||||
GOODWILL |
949,089 | 592,233 | |||||||
INTANGIBLE AND OTHER ASSETSNET |
80,297 | 30,928 | |||||||
OTHER NON-CURRENT ASSETS |
146,219 | 88,850 | |||||||
TOTAL ASSETS |
$ | 3,596,190 | $ | 2,491,821 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||||
CURRENT LIABILITIES: |
|||||||||
Short-term debt |
$ | 7,898 | $ | 1,926 | |||||
Accounts payable |
406,963 | 228,350 | |||||||
Accrued expenses and other current liabilities |
642,693 | 491,989 | |||||||
Billings in excess of costs on uncompleted contracts |
306,610 | 192,400 | |||||||
Income taxes payable |
17,744 | 42,664 | |||||||
Deferred tax liabilitynet |
| 14,641 | |||||||
Current liabilities held for sale |
68,034 | | |||||||
Current portion of long-term obligations |
24,137 | 6,838 | |||||||
TOTAL CURRENT LIABILITIES |
1,474,079 | 978,808 | |||||||
OTHER LONG-TERM LIABILITIES |
282,394 | 174,253 | |||||||
LONG-TERM DEBT |
365,974 | 39,186 | |||||||
TOTAL LIABILITIES |
2,122,447 | 1,192,247 | |||||||
MINORITY INTEREST |
50,750 | 21,089 | |||||||
STOCKHOLDERS' EQUITY: |
|||||||||
Convertible preferred stockauthorized, 7,799,780; issued and outstanding, 26,423 and 49,779 shares as of September 30, 2008 and 2007; respectively, $100 liquidation preference value |
2,642 | 4,978 | |||||||
Preferred stock, Class Cauthorized, 200 shares; issued and outstanding, 69 and 72 shares as of September 30, 2008 and 2007, respectively; no par value, $1.00 liquidation preference value |
| | |||||||
Preferred stock, Class Eauthorized, 20 shares; issued and outstanding, 5 shares as of September 30, 2008 and 2007, respectively; no par value, $1.00 liquidation preference value |
| | |||||||
Common stockauthorized, 150,000,000 shares of $0.01 par value; issued and outstanding, 102,983,378 and 99,061,692 shares, as of September 30, 2008 and 2007, respectively |
1,030 | 991 | |||||||
Additional paid-in capital |
1,309,493 | 1,224,164 | |||||||
Accumulated other comprehensive loss |
(111,549 | ) | (26,211 | ) | |||||
Retained earnings |
221,377 | 74,563 | |||||||
TOTAL STOCKHOLDERS' EQUITY |
1,422,993 | 1,278,485 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ | 3,596,190 | $ | 2,491,821 | |||||
See accompanying Notes to Consolidated Financial Statements.
50
AECOM Technology Corporation
Consolidated Statements of Income
(in thousands, except per share data)
|
Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
September 30, 2006 |
|||||||||
Revenue |
$ | 5,194,482 | $ | 4,237,270 | $ | 3,421,492 | ||||||
Cost of revenue (as reclassified) |
4,907,286 | 4,039,317 | 3,278,430 | |||||||||
Gross profit |
287,196 | 197,953 | 143,062 | |||||||||
Equity in earnings of joint ventures |
22,192 |
11,828 |
6,554 |
|||||||||
General and administrative expenses (as reclassified) |
70,581 | 53,842 | 46,207 | |||||||||
Income from operations |
238,807 | 155,939 | 103,409 | |||||||||
Minority interest in share of earnings |
13,590 |
16,404 |
13,924 |
|||||||||
Gain on sale of equity investment |
| 11,286 | | |||||||||
Other expense |
(3,438 | ) | | | ||||||||
Interest income (expense), net |
736 | (3,321 | ) | (10,576 | ) | |||||||
Income from continuing operations before income tax expense |
222,515 | 147,500 | 78,909 | |||||||||
Income tax expense |
76,321 |
47,203 |
25,223 |
|||||||||
Income from continuing operations |
146,194 | 100,297 | 53,686 | |||||||||
Discontinued operations, net of tax |
1,032 |
|
|
|||||||||
Net income |
$ | 147,226 | $ | 100,297 | $ | 53,686 | ||||||
Net income allocation: |
||||||||||||
Preferred stock dividend |
$ | 168 | $ | 249 | $ | 2,205 | ||||||
Net income available for common stockholders |
147,058 | 100,048 | 51,481 | |||||||||
Net income |
$ | 147,226 | $ | 100,297 | $ | 53,686 | ||||||
Net income per share: |
||||||||||||
Basic |
||||||||||||
Continuing operations |
$ | 1.44 | $ | 1.37 | $ | 0.94 | ||||||
Discontinued operations |
0.01 | | | |||||||||
|
$ | 1.45 | $ | 1.37 | $ | 0.94 | ||||||
Diluted |
||||||||||||
Continuing operations |
$ | 1.40 | $ | 1.15 | $ | 0.74 | ||||||
Discontinued operations |
0.01 | | | |||||||||
|
$ | 1.41 | $ | 1.15 | $ | 0.74 | ||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
101,456 | 73,091 | 54,856 | |||||||||
Diluted |
104,215 | 87,537 | 72,658 |
See accompanying Notes to Consolidated Financial Statements.
51
AECOM Technology Corporation
Consolidated Statements of Stockholders' Equity
(in thousands)
|
Convertible Preferred Stock |
Common Stock |
Stock Warrants |
Additional Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCE AT SEPTEMBER 30, 2005 |
$ | | $ | | $ | 1,605 | $ | (176,089 | ) | $ | (65,397 | ) | $ | | $ | (239,881 | ) | |||||
Comprehensive income: |
||||||||||||||||||||||
Net income |
53,686 | 53,686 | ||||||||||||||||||||
Foreign currency translation adjustments |
11,236 | 11,236 | ||||||||||||||||||||
Defined benefit minimum pension liability adjustment |
17,492 | 17,492 | ||||||||||||||||||||
Total comprehensive income |
82,414 | |||||||||||||||||||||
Tax benefit related to appreciation in value under stock purchase plan |
14,807 | 14,807 | ||||||||||||||||||||
Preferred stock dividend and preferred stock units |
(305 | ) | (305 | ) | ||||||||||||||||||
Dividend on Class D preferred stock |
(1,900 | ) | (1,900 | ) | ||||||||||||||||||
Tax benefit from exercise of stock options |
3,479 | 3,479 | ||||||||||||||||||||
Class D preferred stock issuance costs |
2,100 | 2,100 | ||||||||||||||||||||
Redemption of Class D preferred stock |
(41,486 | ) | (41,486 | ) | ||||||||||||||||||
Class F and Class G preferred stock issuance costs |
(2,880 | ) | (2,880 | ) | ||||||||||||||||||
Liquidation of Class D preferred stock |
(1,605 | ) | (1,605 | ) | ||||||||||||||||||
Increase in carrying value of redeemable common and preferred stock and stock units |
(39,349 | ) | (66,288 | ) | (105,637 | ) | ||||||||||||||||
BALANCE AT SEPTEMBER 30, 2006 |
| | | (254,225 | ) | (36,669 | ) | | (290,894 | ) | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net income |
25,520 | 74,777 | 100,297 | |||||||||||||||||||
Foreign currency translation adjustments |
15,020 | 15,020 | ||||||||||||||||||||
Defined benefit minimum pension liability adjustment |
(4,562 | ) | (4,562 | ) | ||||||||||||||||||
Total comprehensive income |
110,755 | |||||||||||||||||||||
Proceeds from the issuance of common stock in initial public offering, net of $4.0 million of issuance costs |
199 | 392,667 | 392,866 | |||||||||||||||||||
Conversion of preferred stock |
187 | 234,813 | 235,000 | |||||||||||||||||||
Reclassification of common and preferred stock units |
5,012 | 664 | 816,952 | 822,628 | ||||||||||||||||||
Issuance of stock |
33 | 65,232 | 65,265 | |||||||||||||||||||
Repurchases of stock |
(283 | ) | (63 | ) | (50,464 | ) | (50,810 | ) | ||||||||||||||
Preferred stock dividend |
249 | (35 | ) | (214 | ) | | ||||||||||||||||
Proceeds from exercise of options |
4 | 3,005 | 3,009 | |||||||||||||||||||
Tax benefit from exercise of options |
7,225 | 7,225 | ||||||||||||||||||||
Stock based compensation |
13 | 24,953 | 24,966 | |||||||||||||||||||
Repayment of stockholder notes |
(46 | ) | (14,254 | ) | (14,300 | ) | ||||||||||||||||
Tax effect related to stock purchase plan |
(27,225 | ) | (27,225 | ) | ||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2007 |
4,978 | 991 | | 1,224,164 | (26,211 | ) | 74,563 | 1,278,485 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net income |
147,226 | 147,226 | ||||||||||||||||||||
Foreign currency translation adjustments |
(45,369 | ) | (45,369 | ) | ||||||||||||||||||
Defined benefit minimum pension liability adjustment |
(39,670 | ) | (39,670 | ) | ||||||||||||||||||
Swap valuation |
(299 | ) | (299 | ) | ||||||||||||||||||
Total comprehensive income |
61,888 | |||||||||||||||||||||
Issuance of stock |
12 | 33,008 | 33,020 | |||||||||||||||||||
Repurchases of stock |
(2,504 | ) | (10 | ) | (11,423 | ) | (13,937 | ) | ||||||||||||||
Preferred stock dividend |
168 | (168 | ) | | ||||||||||||||||||
Proceeds from exercise of options |
8 | 19,040 | 19,048 | |||||||||||||||||||
Tax benefit from exercise of stock options |
20,586 | 20,586 | ||||||||||||||||||||
Stock based compensation |
29 | 24,118 | 24,147 | |||||||||||||||||||
FIN 48 adjustment |
(244 | ) | (244 | ) | ||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2008 |
$ | 2,642 | $ | 1,030 | $ | | $ | 1,309,493 | $ | (111,549 | ) | $ | 221,377 | $ | 1,422,993 | |||||||
See accompanying Notes to Consolidated Financial Statements.
52
AECOM Technology Corporation
Consolidated Statements of Cash Flows
(in thousands)
|
Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
September 30, 2006 |
|||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 147,226 | $ | 100,297 | $ | 53,686 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
62,752 | 45,126 | 39,830 | |||||||||
Equity in earnings of unconsolidated joint ventures |
(22,192 | ) | (11,828 | ) | (6,554 | ) | ||||||
Distribution of earnings from unconsolidated affiliates |
20,163 | 10,912 | 6,867 | |||||||||
Non-cash stock compensation |
24,147 | 24,966 | 14,779 | |||||||||
Excess tax benefit from share based payment |
(20,586 | ) | (7,225 | ) | | |||||||
Write-off of deferred financing costs and make-whole premium |
| 3,166 | 2,100 | |||||||||
Interest income on notes from stockholders |
| (754 | ) | (2,111 | ) | |||||||
Foreign currency translation |
(16,989 | ) | 14,625 | 6,445 | ||||||||
Deferred income tax expense (benefit) |
(34,470 | ) | 15,667 | (12,136 | ) | |||||||
Gain on sale of equity investment |
| (11,286 | ) | | ||||||||
Gain on sale-leaseback |
| (2,010 | ) | | ||||||||
Gain on termination of interest rate hedge |
| | (1,139 | ) | ||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||||||
Accounts receivable |
(150,932 | ) | (114,548 | ) | (135,418 | ) | ||||||
Prepaid expenses and other assets |
33,100 | 1,022 | (12,845 | ) | ||||||||
Accounts payable |
36,113 | (51,154 | ) | 47,433 | ||||||||
Accrued expenses and other current liabilities |
50,606 | 88,403 | 74,550 | |||||||||
Billings in excess of costs on uncompleted contracts |
46,910 | 42,410 | 14,525 | |||||||||
Other long-term liabilities |
(33,844 | ) | (19,017 | ) | 1,432 | |||||||
Income taxes payable |
14,091 | 8,691 | 29,822 | |||||||||
Net cash provided by operating activities from continuing operations |
156,095 | 137,463 | 121,266 | |||||||||
Net cash used by operating activities from discontinued operations |
(868 | ) | | | ||||||||
Net cash provided by operating activities |
155,227 | 137,463 | 121,266 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Payments for business acquisitions, net of cash acquired |
(656,920 | ) | (158,742 | ) | (53,296 | ) | ||||||
Proceeds from sales of businesses |
90,020 | | | |||||||||
Purchases of investments securities |
(9,900 | ) | (357,288 | ) | | |||||||
Sales of investment securities |
129,234 | 156,505 | | |||||||||
Deferred income tax on gain from the sale of a building |
| | (6,494 | ) | ||||||||
Net investment in unconsolidated affiliates |
(4,653 | ) | (1,704 | ) | (1,026 | ) | ||||||
Payments for capital expenditures |
(69,387 | ) | (43,203 | ) | (32,300 | ) | ||||||
Proceeds from sale of equity investment |
| 14,683 | | |||||||||
Proceeds from sale of property and equipment |
301 | 225 | 21,301 | |||||||||
Net cash used in investing activities |
(521,305 | ) | (389,524 | ) | (71,815 | ) | ||||||
53
AECOM Technology Corporation
Consolidated Statements of Cash Flows (Continued)
(in thousands)
|
Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
September 30, 2006 |
|||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net proceeds from issuance of common stock in initial public offering |
| 468,280 | | |||||||||
Proceeds from borrowings under credit agreements |
333,350 | 197,579 | 342,161 | |||||||||
Repayments of borrowings under long-term debt |
(21,265 | ) | (287,084 | ) | (442,013 | ) | ||||||
Funding of stock purchase plan rabbi trust |
| (75,413 | ) | | ||||||||
Proceeds from issuance of common and preferred stock and units |
9,339 | 55,395 | 62,178 | |||||||||
Proceeds from exercise of stock options |
19,048 | 3,009 | 5,754 | |||||||||
Payments to repurchase common stock and common stock units |
(13,937 | ) | (50,076 | ) | (59,155 | ) | ||||||
Proceeds from payment of notes receivable from stockholders |
| 22,663 | | |||||||||
Payment of debt prepayment premium |
| (3,166 | ) | | ||||||||
Excess tax benefit from share based payment |
20,586 | 7,225 | | |||||||||
Net proceeds from issuance of Class F and G preferred stock |
| | 232,120 | |||||||||
Payments to redeem Class D preferred stock |
| | (116,486 | ) | ||||||||
Proceeds from terminating interest rate hedge |
| | 1,139 | |||||||||
FIN 48 adjustment |
(244 | ) | | | ||||||||
Payments of dividends on convertible preferred stock |
(168 | ) | (249 | ) | (1,900 | ) | ||||||
Net cash provided by financing activities |
346,709 | 338,163 | 23,798 | |||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(3,020 | ) | 2,939 | 269 | ||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(22,389 | ) | 89,041 | 73,518 | ||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
216,911 | 127,870 | 54,352 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 194,522 | $ | 216,911 | $ | 127,870 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||||||
Retirement of fully depreciated equipment (non-cash) |
$ | 16,506 | $ | 16,676 | $ | 8,122 | ||||||
Interest paid |
$ | 9,474 | $ | 7,751 | $ | 14,584 | ||||||
Income taxes paid, net of refunds received |
$ | 60,717 | $ | 36,345 | $ | 16,366 | ||||||
See accompanying Notes to Consolidated Financial Statements.
54
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
OrganizationAECOM Technology Corporation and its consolidated subsidiaries (Company) provide professional technical and management support services for commercial and government clients around the world. These services encompass a variety of technical disciplines, including consulting, planning, architectural and engineering design, and program and construction management for a broad range of projects. These services are applied to a number of areas and industries, including transportation infrastructure; research, testing and defense facilities; water, wastewater and other environmental programs; land development; security and communication systems; institutional, mining, industrial and commercial and energy-related facilities. The Company also provides operations and maintenance services to governmental agencies throughout the U.S. and abroad.
Fiscal YearThe Company reports results of operations based on 52 or 53-week periods ending on the Friday nearest September 30. For clarity of presentation, all periods are presented as if the year ended on September 30. Fiscal years 2008, 2007 and 2006 contained 53, 52 and 52 weeks and ended on October 3, September 28 and September 29, respectively. As discussed in Note 3, the Company acquired Earth Tech in July 2008. Due to different fiscal period-ends for the Company and Earth Tech, Earth Tech's results for the fiscal year ended September 26, 2008 have been combined with the Company's results for the fiscal year ended October 3, 2008. The use of the different fiscal period for Earth Tech did not have a material impact on the Company's results of operations.
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates affecting amounts reported in the consolidated financial statements relate to revenues under long-term contracts and self-insurance accruals. Actual results could differ from those estimates.
Principles of Consolidation and PresentationThe consolidated financial statements include the accounts of all subsidiaries and material joint ventures in which the Company is the primary beneficiary. All inter-company accounts have been eliminated in consolidation.
Investments in Unconsolidated Joint VenturesThe Company has non-controlling operational interests in joint ventures accounted for under the equity method. Services performed by the Company and billed to joint ventures with respect to work done by the Company for third-party customers are recorded as revenues and costs of the Company in the period in which such services are rendered. In certain joint ventures, a fee is added to the respective billings from the Company and the other joint venture partners on the amounts billed to the third-party customers. These fees result in earnings to the joint venture and are split with each of the joint venture partners and paid to the joint venture partners upon collection from the third-party customer. The Company records its allocated share of these fees as equity in earnings of joint ventures.
Variable Interest EntitiesThe Financial Accounting Standards Board (FASB) Financial Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities," (FIN 46R) requires the primary beneficiary of a variable interest entity (VIE) among other things, to consolidate into its financial statements the financial results of the VIE and to make certain disclosures regarding the VIEs, unless the primary beneficiary also holds a majority voting interest. See Note 10.
55
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
Revenue RecognitionThe Company generally utilizes a cost-to-cost approach in applying the percentage-of-completion method of revenue recognition, under which revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred. Recognition of revenue and profit under this method is dependent upon a number of factors including, the accuracy of a variety of estimates, including engineering progress, materials quantities, the achievement of milestones, penalty provisions, labor productivity and cost estimates. Due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates. If estimated total costs on contracts indicate a loss, the Company recognizes that estimated loss in the period the estimated loss first becomes known.
In the course of providing its services, the Company routinely subcontracts for services and incurs other direct costs on behalf of its clients. These costs are passed through to clients and, in accordance with industry practice and GAAP, are included in the Company's revenue and cost of revenue. Because subcontractor services and other direct costs can change significantly from project to project and period to period, changes in revenue may not be indicative of business trends. These other direct costs for the years ended September 30, 2008, 2007 and 2006 were $1.9, $1.8 and $1.5 billion, respectively.
Cost-Plus Contracts. The Company enters into two major types of cost-plus contracts:
Cost-Plus Fixed Fee. Under cost-plus fixed fee contracts, the Company charges clients for its costs, including both direct and indirect costs, plus a fixed negotiated fee. The total estimated cost plus the fixed negotiated fee represents the total contract value. The Company recognizes revenue based on the actual labor and other direct costs incurred, plus the portion of the fixed fee it has earned to date.
Cost-Plus Fixed Rate. Under the Company's cost-plus fixed rate contracts, the Company charges clients for its direct and indirect costs based upon a negotiated rate. The Company recognizes revenue based on the actual total costs it has expended and the applicable fixed rate.
Certain cost-plus contracts provide for award fees or a penalty based on performance criteria in lieu of a fixed fee or fixed rate. Other contracts include a base fee component plus a performance-based award fee. In addition, the Company may share award fees with subcontractors. The Company records accruals for fee-sharing as fees are earned. The Company generally recognizes revenue to the extent of costs actually incurred plus a proportionate amount of the fee expected to be earned. The Company takes the award fee or penalty on contracts into consideration when estimating revenue and profit rates, and it records revenue related to the award fees when there is sufficient information to assess anticipated contract performance. On contracts that represent higher than normal risk or technical difficulty, the Company may defer all award fees until an award fee letter is received. Once an award fee letter is received, the estimated or accrued fees are adjusted to the actual award amount.
Certain cost-plus contracts provide for incentive fees based on performance against contractual milestones. The amount of the incentive fees varies, depending on whether the Company achieves above, at, or below target results. The Company originally recognizes revenue on these contracts based upon expected results. These estimates are revised when necessary based upon additional information that becomes available as the contract progresses.
Fixed-Price Contracts.
Firm Fixed-Price. The Company's firm fixed-price contracts have historically accounted for most of its fixed-price contracts. Under firm fixed-price contracts, clients pay the Company an agreed amount
56
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
negotiated in advance for a specified scope of work. The Company recognizes revenue on firm fixed-price contracts using the percentage-of-completion method described above. Prior to completion, recognized profit margins on any firm fixed-price contract depend on the accuracy of the Company's estimates and will increase to the extent that its actual costs are below the estimated amounts. Conversely, if the Company's costs exceed these estimates, its profit margins will decrease and the Company may realize a loss on a project. The Company recognizes anticipated losses on contracts in the period in which they become evident.
Time-and-Materials Contracts.
Time-and-Materials. Under the Company's time-and-materials contracts, the Company negotiates hourly billing rates and charges its clients based on the actual time that it expends on a project. In addition, clients reimburse the Company for its actual out-of-pocket costs of materials and other direct incidental expenditures that it incurs in connection with its performance under the contract. The Company's profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that it directly charges or allocates to contracts compared to negotiated billing rates. Many of the Company's time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were a fixed-price contract.
Service-Related Contracts.
Service-Related. Service-related contracts, including operations and maintenance services and a variety of technical assistance services, are accounted for over the period of performance, in proportion to the costs of performance.
Contract ClaimsIn accordance with the American Institute of Certified Public Accountants Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts," the Company records contract revenue related to claims 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, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. As of September 30, 2008 and 2007, the Company had no significant net receivables related to contract claims.
Government Contract MattersThe Company's federal government and certain state and local agency contracts are subject to, among other regulations, regulations issued under the Federal Acquisition Regulations (FAR). These regulations can limit the recovery of certain specified indirect costs on contracts and subjects the Company to multiple audits by government agencies such as the Defense Contract Audit Agency (DCAA). In addition, most of the Company's federal and state and local contracts are subject to termination at the discretion of the client.
Audits by the DCAA and other agencies consist of reviews of the Company's overhead rates, operating systems and cost proposals to ensure that the Company accounted for such costs in accordance with the Cost Accounting Standards of the FAR (CAS). If the DCAA determines the Company has not accounted for such costs consistent with CAS, the DCAA may disallow these costs. Historically, the Company has not had any material cost disallowances by the DCAA as a result of audit. However, there can be no assurance that audits by the DCAA or other governmental agencies will not result in material cost disallowances in the future.
57
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
Cash and Cash EquivalentsThe Company's cash equivalents include highly liquid investments which have an initial maturity of 90 days or less.
Allowance for Doubtful AccountsThe Company records its accounts receivable net of an allowance for doubtful accounts. This allowance for doubtful accounts is estimated based on management's evaluation of the contracts involved and the financial condition of its clients. The factors the Company considers in its contract evaluations include, but are not limited to:
Concentration of Credit RiskFinancial instruments, which subject the Company to credit risk, consist primarily of cash and cash equivalents and net accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions. As of September 30, 2008 and 2007, no accounts receivable from a single commercial client exceeded 10% of the Company's total accounts receivable. The Company regularly performs credit evaluations of its clients and considers these evaluations in the determination of its allowance for doubtful accounts.
Fair Value of Financial InstrumentsThe carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. The carrying amount of the revolving credit facility approximates fair value because the interest rates are based upon variable reference rates. See also Note 15. The fair value of the senior secured notes as of September 30, 2008 and September 30, 2007 was not materially different than the carrying value.
Property and EquipmentProperty and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are expensed as incurred. Typically, estimated useful lives range from three to ten years for equipment, furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining terms of the underlying lease agreement.
Deferred Loan CostsDeferred loan costs that relate to the Company's long term debt are being amortized over the terms of the respective agreements.
Long-lived AssetsLong-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the assets may be impaired. For assets to be held and used, impairment losses are recognized based upon the excess of the asset's carrying amount over the fair value of the asset. For long-lived assets to be disposed, impairment losses are recognized at the lower of the carrying amount or fair value less cost to sell.
Goodwill and Related Intangible AssetsGoodwill represents the excess amounts paid over the fair value of net assets acquired in mergers and acquisitions. In order to determine the amount of goodwill resulting from a merger or acquisition, the Company performs an assessment to determine the value of the acquired company's tangible and identifiable intangible assets and liabilities. In its assessment, the Company
58
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
determines whether identifiable intangible assets exist, such as backlog and customer relationships, patents, trademarks/trade names and other assets.
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", requires that the Company perform an impairment test of its goodwill at least annually for each reporting unit of the Company. Inherent in such fair value determination are certain judgments and estimates, including assumptions about the Company's forecasts with regard to its operations as well as the interpretation of current economic indicators and market valuations. Reporting units for purposes of this test are consistent with the Company's reportable segments and consist of Professional Technical Services and Management Support Services. The impairment test is a two-step process. During the first step, the Company estimates the fair value of the reporting unit and compares that amount to the carrying value of that reporting unit's goodwill. In the event the fair value of the reporting unit is determined to be less than the carrying value, a second step is required. The second step requires the Company to perform a hypothetical purchase allocation to compare the current implied fair value of the goodwill to the current carrying value of the goodwill. In the event that the current fair value of the goodwill is less than the carrying value, an impairment charge is recognized. The Company performs this test annually in its fiscal fourth quarter and concluded that no impairment existed at September 30, 2008, 2007, or 2006.
Pension PlansThe Company has certain defined benefit pension plans. The Company calculates the market-related value of assets, which is used to determine the return-on-assets component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. This calculation reflects the Company's anticipated long-term rate of return and amortization of the difference between the actual return (including capital, dividends, and interest) and the expected return over a five-year period. Cumulative net unrecognized gains or losses that exceed 10% of the greater of the projected benefit obligation or the market related value of plan assets are subject to amortization.
Insurance ReservesThe Company maintains insurance for business risks. Insurance coverage contains various retention and deductible amounts for which the Company provides accruals based upon reported claims and an actuarially determined estimated liability for certain claims incurred but not reported. It is the Company's policy not to accrue for any potential legal expense to be incurred in defending the Company's position. The Company believes that its accruals for estimated liabilities associated with professional and other liabilities are sufficient and any excess liability beyond the accrual is not expected to have a material adverse effect on the Company's results of operations or financial position.
Foreign Currency TranslationResults of operations for foreign entities are translated to U.S. dollars using the average exchange rates during the period. Assets and liabilities for foreign entities are translated using the exchange rates in effect as of the date of the balance sheet. Resulting translation adjustments are recorded as a foreign currency translation adjustment into other accumulated comprehensive income/(loss) in stockholders' equity.
The Company uses forward exchange contracts from time to time to mitigate foreign currency risk. The Company limits exposure to foreign currency fluctuations in most of its contracts through provisions that require client payments in currencies corresponding to the currency in which costs are incurred. As a result of this natural hedge, the Company generally does not need to hedge foreign currency cash flows for contract work performed. The functional currency of all significant foreign operations is the respective local currency.
59
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
Accounting for Derivative Instruments and HedgingSFAS No. 133, Accounting for Derivative Instruments and Hedging requires all derivatives to be stated on the balance sheet at fair value. Derivatives that are not hedges or are ineffective hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income/(loss) until the hedged item is recognized in earnings. As of September 30, 2008, the Company recorded a liability of $0.3 million related to interest rate swaps entered into during the year ended September 30, 2008. See also Note 15.
Other Comprehensive IncomeThe components of accumulated other comprehensive loss are as follows:
|
September 30, | ||||||
---|---|---|---|---|---|---|---|
|
2008 | 2007 | |||||
|
(in millions) |
||||||
Foreign currency translation adjustment |
$ | (23.1 | ) | $ | 22.3 | ||
Defined benefit minimum pension liability adjustment |
(88.1 | ) | (48.5 | ) | |||
Interest rate swap valuation |
(0.3 | ) | | ||||
|
$ | (111.5 | ) | $ | (26.2 | ) | |
General and Administrative ExpensesGeneral and administrative expenses are expensed in the period incurred.
During 2008, in connection with the acquisition of Earth Tech, the Company undertook a review of the historical manner of presentation of its Consolidated Statement of Income and adopted a revised presentation which the Company believes is more like that presented by other companies in its industry. As a result, the Company has changed the classification of certain indirect expenses, which had previously been presented within general and administrative expenses, and grouped them with cost of revenue. This change in manner of presentation did not affect the Company's income from operations, net income, or the determination of income or loss on the Company's contracts. Conforming changes have been made for all periods presented, as follows:
|
Fiscal Year Ended | |||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2007 | September 30, 2006 | ||||||
Cost of revenue: |
||||||||
As previously reported |
$ | 3,076,092 | $ | 2,515,684 | ||||
Amount reclassified |
963,225 | 762,746 | ||||||
As reported herein |
$ | 4,039,317 | $ | 3,278,430 | ||||
General and administrative expenses: |
||||||||
As previously reported |
$ | 1,017,067 | $ | 808,953 | ||||
Amount reclassified |
(963,225 | ) | (762,746 | ) | ||||
As reported herein |
$ | 53,842 | $ | 46,207 | ||||
Income TaxesThe Company files a consolidated federal income tax return and combined California franchise tax return. In addition, the Company files other returns that are required in the states and
60
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
jurisdictions in which the Company and its subsidiaries do business. The Company accounts for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections, and potential tax planning strategies. Based upon management's assessment of all available evidence, the Company has concluded that it is more likely than not that the deferred tax assets will be realized, net of valuation allowance.
Stock-Based CompensationThe Company's stock compensation plans including its employee stock option plan are accounted for in accordance with SFAS No. 123 (revised 2004), "Share-Based Payments" (SFAS 123R), which requires the Company to expense the value of employee stock options and similar awards. Under SFAS 123R, such awards result in a cost that is measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. The Company adopted the prospective transition method under SFAS 123R. Under this method, prior periods were not restated to reflect the impact of SFAS 123R. See also Note 16.
Defined Benefit Pension PlansIn September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" (SFAS 158). SFAS 158 requires employers to fully recognize the obligations associated with defined benefit pension plans in their financial statements. See also Note 12.
Recently Issued Accounting PronouncementsIn March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," (SFAS 161), which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance and cash flows. SFAS 161 is effective beginning in the Company's fiscal second quarter ending March 31, 2009. The Company is currently evaluating the impact of SFAS 161 on its financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS 141R). SFAS 141R significantly changes the way companies account for business combinations and will generally require more assets acquired and liabilities assumed to be measured at their acquisition-date fair value. Under SFAS 141R, legal fees and other transaction-related costs are expensed as incurred and are no longer included in goodwill as a cost of acquiring the business. SFAS 141R also requires, among other things, acquirers to estimate the acquisition-date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings. In addition, restructuring costs the acquirer expected, but was not obligated to incur, will be recognized separately from the business acquisition. This accounting standard is effective for the Company's fiscal year ending September 30, 2010. The Company is currently evaluating the impact of SFAS 141R on its financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" (SFAS 160). SFAS 160 requires all entities to report noncontrolling interests in subsidiaries as a separate component of equity in the consolidated financial statements. SFAS 160 establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation. Under SFAS 160, companies will no longer recognize a gain or loss on partial disposals of a subsidiary where control is retained. In addition, in partial
61
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
acquisitions, where control is obtained, the acquiring company will recognize and measure at fair value 100 percent of the assets and liabilities, including goodwill, as if the entire target company had been acquired. SFAS 160 is effective for the Company's fiscal year ending September 30, 2010. The Company is currently evaluating the impact of SFAS 160 on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to measure eligible assets and liabilities at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for the Company as of October 1, 2008. The Company does not expect SFAS 159 to have a material impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the Company as of October 1, 2008. The Company does not expect SFAS 157 to have a material impact on its financial statements.
2. Initial Public Offering
In May 2007, the Company completed the initial public offering (IPO) of 40.4 million shares of common stock, which included the exercise of the underwriters' over-allotment option to purchase 5.3 million shares, at $20.00 per share, before underwriting discounts and commissions. Of the total shares sold in the offering, 15.3 million were sold by stockholders of the Company. Proceeds to AECOM, net of underwriting discounts, commissions, and other offering related costs, were approximately $468.3 million, of which $75.4 million was used to fund elections by employees to diversify their holdings in the Company's stock purchase plan.
Prior to the IPO, redeemable common and preferred stock and stock units were classified outside permanent equity because redemption was not solely within the control of the Company. Effective with the closing of the IPO, $235 million of the Company's redeemable preferred stock class F and G were converted into common stock and stock units and $817 million of redeemable common stock and stock units were classified by the Company into equity. The Company had notes receivable from employees that were paid prior to the closing of the IPO, of which approximately $14.3 million were repaid by the employees in equity consideration.
As noted above, prior to the IPO, redeemable common and preferred stock and stock units were classified outside permanent equity because redemption was not solely within the control of the Company. As a result of this treatment in the prior year, the Company had recorded a deferred tax allowance which was reversed with the closing of the IPO impacting equity by $27.2 million in fiscal 2007.
3. Acquisitions
The Company completed 14 and 11 business acquisitions during the years ended September 30, 2008 and 2007, respectively. These acquisitions included Earth Tech, Boyle Engineering Corporation, and Tecsult, Inc. during the year ended September 30, 2008 and Hayes, Seay, Mattern & Mattern, Inc. during the year ended September 30, 2007. The aggregate value of all consideration for acquisitions consummated during the years ended September 30, 2008 and 2007 were $632 million and $184 million, respectively. The
62
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions (Continued)
following table summarizes the estimated fair values of the assets acquired and liabilities assumed, as of the dates of acquisitions, of acquisitions consummated during the fiscal years presented:
|
Fiscal Year Ended | |||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2008 | September 30, 2007 | ||||||
|
(in thousands) |
|||||||
Cash acquired |
$ | 41,169 | $ | 10,353 | ||||
Other current assets |
455,931 | $ | 74,745 | |||||
Goodwill |
355,527 | 125,725 | ||||||
Intangible assets |
68,000 | 25,146 | ||||||
Other non-current assets |
249,873 | 18,177 | ||||||
Current liabilities |
(346,400 | ) | (67,378 | ) | ||||
Non-current liabilities |
(192,100 | ) | (2,713 | ) | ||||
Net assets acquired |
$ | 632,000 | $ | 184,055 | ||||
|
Fiscal Year Ended | |||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2008 | September 30, 2007 | ||||||
|
(in thousands) |
|||||||
Cash paid, net of $90.0 and $0 million proceeds from sales of businesses |
$ | 608,100 | $ | 174,055 | ||||
Stock issued |
23,900 | 10,000 | ||||||
Total consideration |
$ | 632,000 | $ | 184,055 | ||||
All of the acquisitions were accounted for under the purchase method of accounting. As such, the purchase consideration of each acquired company was allocated to acquired tangible and intangible assets and liabilities based upon their fair values. The excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The results of operations of each company acquired have been included in the Company's financial statements from the date of acquisition.
On July 25, 2008, the Company completed its previously announced acquisition of Earth Tech, Inc., (Earth Tech), a business unit of Tyco International Ltd., pursuant to a Purchase Agreement (Purchase Agreement), dated as of February 11, 2008, by and among the Company, Tyco International Finance, S.A. and other seller parties thereto. The total purchase price for Earth Tech, net of proceeds from Earth Tech businesses sold to date of $90 million, as described in Note 4 below, was $326 million. This total purchase price calculation is preliminary and prior to the final settlement of working capital adjustments between the Company and Tyco, and does not include the proceeds from the planned divestitures of the Earth Tech assets being held for sale. See also Note 4. No gain or loss resulted from the sales of these operations since they were sold for amounts that materially approximated their fair values at the acquisition date.
The table below presents summarized unaudited pro forma operating results assuming that the Company had acquired Earth Tech at the beginning of fiscal year ended September 30, 2007 (in thousands,
63
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions (Continued)
except share data)unaudited. Other acquisitions completed during the periods presented did not meet the requirements for pro forma disclosure.
|
Pro Forma | ||||||
---|---|---|---|---|---|---|---|
|
Fiscal Year Ended | ||||||
|
September 30, 2008 | September 30, 2007 | |||||
Revenue |
$ | 6,000,000 | $ | 5,200,000 | |||
Income from continuing operations |
$ | 242,000 | $ | 109,000 | |||
Net income |
$ | 143,000 | $ | 72,400 | |||
Earnings per share from continuing operations: |
|||||||
Basic |
$ | 1.41 | $ | 0.99 | |||
Diluted |
$ | 1.37 | $ | 0.83 | |||
Weighted average shares outstanding: |
|||||||
Basic |
101,456 | 73,091 | |||||
Diluted |
104,215 | 87,537 |
4. Discontinued Operations
As part of the acquisition of Earth Tech, the Company acquired non-strategic businesses that provide operations and maintenance services. Concurrent with the close of the purchase of Earth Tech, the Company divested Earth Tech's Water & Power Technologies and North American Contract Operations businesses and Earth Tech's Mexican operations. Additionally, the Company divested Earth Tech's Swedish business in September 2008 and intends to divest its Irish business. As a result, the Swedish and Irish businesses have been segregated from continuing operations and presented as discontinued operations in the accompanying Consolidated Statements of Income and Cash Flows. Financial data for the Irish business has been presented as held for sale in the accompanying financial statements in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
For the year ended September 30, 2008, the summarized results of the discontinued operations, included in the Company's results of operations, is as follows (in thousands):
Fiscal Year Ended
|
September 30, 2008 | |||
---|---|---|---|---|
Revenue |
$ | 21,700 | ||
Earnings before income taxes |
$ |
1,300 |
||
Income tax expense |
268 | |||
Earnings from discontinued operations, net of tax |
$ | 1,032 | ||
Pursuant to Amendment No. 1 to the Purchase Agreement, the parties agreed to exclude the purchase of Tyco's equity participations in certain Earth Tech Chinese joint venture operations and allow those operations to be sold directly by Tyco to third parties. Accordingly, the financial statements of these operations are not included in the accompanying financial statements.
64
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Marketable Securities
From time to time, the Company invests its excess cash in financial instruments. Marketable securities as of September 30, 2008 consist of auction rate securities. Auction rate securities held by the Company are primarily AAA rated long-term debt obligations secured by student loans and have interest rates which are reset every 7 to 35 days. At September 30, 2008, $81.4 million in auction rate securities were classified within current assets. In November 2008, the Company liquidated its holdings in these auction rate securities for their par value, plus accrued interest, in cash.
6. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill by segment for the fiscal years ended September 30, 2008 and 2007 were as follows:
|
Fiscal Year 2008 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2007 |
Goodwill Additions |
Post-Acquisition Adjustments |
September 30, 2008 |
||||||||||
|
(in thousands) |
|||||||||||||
Reporting Unit: |
||||||||||||||
Professional Technical Services |
$ | 583,807 | $ | 355,527 | $ | 6,929 | $ | 946,263 | ||||||
Management Support Services |
8,426 | | (5,600 | ) | 2,826 | |||||||||
Total |
$ | 592,233 | $ | 355,527 | $ | 1,329 | $ | 949,089 | ||||||
|
Fiscal Year 2007 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2006 |
Goodwill Additions |
Post-Acquisition Adjustments |
September 30, 2007 |
||||||||||
|
(in thousands) |
|||||||||||||
Reporting Unit: |
||||||||||||||
Professional Technical Services |
$ | 457,575 | $ | 125,725 | $ | 507 | $ | 583,807 | ||||||
Management Support Services |
8,933 | | (507 | ) | 8,426 | |||||||||
Total |
$ | 466,508 | $ | 125,725 | $ | | $ | 592,233 | ||||||
The gross amounts and accumulated amortization of the Company's acquired identifiable intangible assets with finite useful lives as of September 30, 2008 and 2007, included in intangible assetsnet in the accompanying Consolidated Balance Sheets, were as follows:
|
September 30, 2008 | September 30, 2007 | |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Amount |
Accumulated Amortization |
Gross Amount |
Accumulated Amortization |
Amortization Period (years) |
||||||||||||
|
(in thousands) |
|
|||||||||||||||
Backlog |
$ | 65,639 | $ | 36,001 | $ | 28,669 | $ | 24,849 | 0.8 - 1.5 | ||||||||
Customer relationships |
59,649 | 8,990 | 30,478 | 4,645 | 10 | ||||||||||||
Trademarks/trade-names |
2,684 | 2,684 | 1,764 | 489 | 5 | ||||||||||||
Total |
$ | 127,972 | $ | 47,675 | $ | 60,911 | $ | 29,983 | |||||||||
At the time of each acquisition, the Company estimates the amount of the identifiable intangible assets acquired based upon historical valuations and the facts and circumstances available at the time. The Company determines the value of the identifiable intangible assets during the purchase allocation period,
65
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Goodwill and Other Intangible Assets (Continued)
which does not extend beyond 12 months from the date of acquisition. However, based upon the date of acquisition, the purchase allocation period may cross into subsequent fiscal periods. Acquisitions for which the purchase allocation period has not ended include Earth Tech, Boyle Engineering Corporation, and Tecsult Inc.
For the years ended September 30, 2008, 2007 and 2006, the Company's amortization expense for acquired intangible assets with finite useful lives was $17.7 million, $12.4 million, and $14.5 million, respectively. The following table presents, in thousands, estimated future amortization expense for acquired intangibles:
Year Ending September 30,
|
|
||||
---|---|---|---|---|---|
2009 |
$ | 33,937 | |||
2010 |
7,398 | ||||
2011 |
5,941 | ||||
2012 |
5,941 | ||||
2013 |
5,941 | ||||
Thereafter |
21,139 | ||||
Total |
$ | 80,297 | |||
A normalized contract profit asset or liability is recognized in purchase accounting, when material, such that the rate of return reflected in the post-acquisition financial statements for the acquired contracts is equal to a market return for the acquirer's remaining performance effort under the contract. Above- or below-market rates of return can occur for a variety of reasons, including: proposing and securing a contract at above or below market profitability levels; cost over- or under-runs primarily on fixed price and lump-sum contracts; changed conditions that cannot be resolved through change orders or claims; and shifts in market prices resulting in higher or lower margins occurring after a particular contract was established. Included in billings in excess of earnings is $0.5 million related to normal profit from acquired Earth Tech contracts, net of accumulated amortization of $0.1 million recorded during the year ended September 30, 2008.
7. Accounts ReceivableNet
Net accounts receivable consisted of the following:
|
Fiscal Year Ended | |||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2008 | September 30, 2007 | ||||||
|
(in thousands) |
|||||||
Billed |
$ | 971,222 | $ | 635,996 | ||||
Unbilled |
703,271 | 466,612 | ||||||
Contract retentions |
47,241 | 40,522 | ||||||
Total accounts receivablegross |
1,721,734 | 1,143,130 | ||||||
Allowance for doubtful accounts |
(82,920 | ) | (51,448 | ) | ||||
Total accounts receivablenet |
$ | 1,638,814 | $ | 1,091,682 | ||||
66
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accounts ReceivableNet (Continued)
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 September 30, 2008 and 2007 are expected to be billed and collected within twelve months of such date. Contract retentions represent amounts invoiced to clients where payments have been withheld pending the completion of certain milestones, other contractual conditions or upon the completion of the project. These retention agreements vary from project to project and could be outstanding 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 outstanding receivables at September 30, 2008 or 2007.
8. Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company's cash balances and short-term investments are maintained in accounts held by major banks and financial institutions located primarily in the U.S., Canada, Europe, Australia, Middle East and Hong Kong. If the Company extends a significant portion of its credit to clients in a specific geographic area or industry, the Company may experience disproportionately high levels of default if those clients are adversely affected by factors particular to their geographic area or industry. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, including, in large part, governments, government agencies and quasi-government organizations, and their dispersion across many different industries and geographies. See Note 21 regarding the Company's foreign revenues. In order to mitigate credit risk, the Company continually reviews the credit worthiness of its major private clients.
67
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes
Income tax expense for fiscal years 2008, 2007 and 2006 consisted of the following:
|
Fiscal Year Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
September 30, 2007 |
September 30, 2006 |
|||||||||
|
(in thousands) |
|||||||||||
Current: |
||||||||||||
Federal |
$ | 57,443 | $ | 14,159 | $ | 19,135 | ||||||
State |
13,800 | (237 | ) | 5,916 | ||||||||
Foreign |
39,548 | 17,614 | 12,308 | |||||||||
Total current income tax expense |
110,791 | 31,536 | 37,359 | |||||||||
Deferred: |
||||||||||||
Federal |
(28,660 | ) | 6,551 | (10,388 | ) | |||||||
State |
(7,188 | ) | 1,753 | (3,165 | ) | |||||||
Foreign |
1,378 | 7,363 | 1,417 | |||||||||
Total deferred income tax expense/(benefit) |
(34,470 | ) | 15,667 | (12,136 | ) | |||||||
Total income tax expense |
$ | 76,321 | $ | 47,203 | $ | 25,223 | ||||||
68
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
Temporary differences comprising the net deferred income tax asset (liability) shown on the accompanying Consolidated Balance Sheets were as follows:
|
Fiscal Year Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 | September 30, 2007 | |||||||
|
(in thousands) |
||||||||
Deferred tax asset: |
|||||||||
Compensation and benefit accruals not currently deductible |
$ | 117,607 | $ | 67,778 | |||||
Gain on the disposal of assets |
| 6,319 | |||||||
Net operating loss carryover |
46,923 | 38,578 | |||||||
Self insurance reserves |
38,500 | 28,317 | |||||||
R&D tax credit carryover |
1,670 | 6,550 | |||||||
Pension liability |
27,843 | 21,879 | |||||||
Foreign tax attributes |
2,570 | | |||||||
Accrued liabilities |
57,749 | 31,050 | |||||||
Investments in joint ventures/non-controlled subsidiaries |
103 | 16 | |||||||
Other |
537 | 335 | |||||||
Total deferred tax asset |
293,502 | 200,822 | |||||||
Deferred tax liability: |
|||||||||
Unearned revenue |
(120,527 | ) | (98,405 | ) | |||||
Depreciation and amortization |
(18,488 | ) | (11,778 | ) | |||||
Acquired intangible assets |
(35,321 | ) | (10,840 | ) | |||||
State taxes |
(451 | ) | (3,278 | ) | |||||
Total deferred tax liability |
(174,787 | ) | (124,301 | ) | |||||
Valuation allowance |
(38,409 | ) | (29,568 | ) | |||||
Net deferred tax asset |
$ | 80,306 | $ | 46,953 | |||||
As of September 30, 2008, the Company had state research & development (R&D) credit carry-forwards for income tax purposes of approximately $1.7 million, gross federal net operating loss carry-forwards of approximately $89.7 million, and gross state net operating loss carry-forwards of approximately $200.1 million, which expire in fiscal 2009 through 2016. Under the Tax Reform Act of 1986, federal and California tax credits may be subject to a future annual limitation on their usage if the Company has an ownership change as defined in the Internal Revenue Code (IRC). The foreign tax attributes of $2.6 million begin to expire in 2026.
As of September 30, 2008, the deferred tax asset was $293.5 million. The Company has recorded a valuation allowance of approximately $38.4 million related to net operating loss carryovers and foreign credits. The Company has performed the required assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with SFAS No. 109, "Accounting for Income Taxes." This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry-forwards and estimates of projected future taxable income. Although realization is not assured, based on the Company's assessment, the Company has concluded that it is more likely than not
69
AECOM TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes (Continued)
that the remaining asset of $255.1 million will be realized and, as such, no additional valuation allowance has been provided.
Total income tax expense was different than the amount computed by applying the Federal statutory rate as follows:
|
Fiscal Year Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 | September 30, 2007 | September 30, 2006 | |||||||||||||||||
|
Amount | < |