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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2010

 

OR

 

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

 

For the transition period from            to          

 

Commission File Number 0-52423

 


 

AECOM TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

61-1088522

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

555 South Flower Street, Suite 3700
Los Angeles, California  90071

(Address of principal executive office and zip code)

 

(213) 593-8000

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of February 1, 2011, 118,727,138 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

AECOM TECHNOLOGY CORPORATION

 

INDEX

 

PART I.

 

FINANCIAL INFORMATION

1

 

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2010 (unaudited) and September 30, 2010

1

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited)

2

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited)

4

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

5

 

 

 

 

 

Item 2.

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

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

 

PART II.

 

OTHER INFORMATION

29

 

 

 

 

 

Item 1.

Legal Proceedings

29

 

Item 1A.

Risk Factors

29

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

Item 6.

Exhibits

36

 

 

 

 

SIGNATURES

 

37

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

AECOM Technology Corporation
Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

349,120

 

$

570,521

 

Cash in consolidated joint ventures

 

72,118

 

42,336

 

Total cash and cash equivalents

 

421,238

 

612,857

 

Accounts receivable—net

 

2,315,592

 

2,170,188

 

Prepaid expenses and other current assets

 

126,608

 

157,840

 

Income taxes receivable

 

120,826

 

 

Deferred tax assets—net

 

 

5,614

 

TOTAL CURRENT ASSETS

 

2,984,264

 

2,946,499

 

PROPERTY AND EQUIPMENT—NET

 

282,436

 

258,784

 

DEFERRED TAX ASSETS—NET

 

40,319

 

105,030

 

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

69,674

 

53,235

 

GOODWILL

 

2,007,684

 

1,690,386

 

INTANGIBLE ASSETS—NET

 

137,863

 

108,645

 

OTHER NON-CURRENT ASSETS

 

97,800

 

80,330

 

TOTAL ASSETS

 

$

5,620,040

 

$

5,242,909

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term debt

 

$

6,143

 

$

2,087

 

Accounts payable

 

553,619

 

589,076

 

Accrued expenses and other current liabilities

 

819,144

 

902,824

 

Billings in excess of costs on uncompleted contracts

 

358,262

 

341,959

 

Income taxes payable

 

 

1,960

 

Deferred tax liability—net

 

5,147

 

 

Current portion of long-term debt

 

12,750

 

14,354

 

TOTAL CURRENT LIABILITIES

 

1,755,065

 

1,852,260

 

OTHER LONG-TERM LIABILITIES

 

387,988

 

337,494

 

LONG-TERM DEBT

 

1,187,591

 

914,686

 

TOTAL LIABILITIES

 

3,330,644

 

3,104,440

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 14)

 

 

 

 

 

 

 

 

 

 

 

AECOM STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Convertible preferred stock—authorized, 2,500,000; issued and outstanding, 0 and 2,305 shares as of December 31 and September 30, 2010; respectively, $100.00 liquidation preference value

 

 

231

 

Common stock—authorized, 150,000,000 shares of $0.01 par value; issued and outstanding, 116,679,645 and 115,316,783 as of December 31 and September 30, 2010, respectively

 

1,167

 

1,153

 

Preferred stock, Class C—authorized, 200 shares; issued and outstanding, 0 and 52 shares as of December 31 and September 30, 2010; no par value, $1.00 liquidation preference value

 

 

 

Preferred stock, Class E—authorized, 20 shares; issued and outstanding, 4 and 4 shares as of December 31 and September 30, 2010; no par value, $1.00 liquidation preference value

 

 

 

Additional paid-in capital

 

1,662,764

 

1,585,044

 

Accumulated other comprehensive loss

 

(135,285

)

(147,521

)

Retained earnings

 

707,971

 

651,105

 

TOTAL AECOM STOCKHOLDERS’ EQUITY

 

2,236,617

 

2,090,012

 

Noncontrolling interests

 

52,779

 

48,457

 

TOTAL STOCKHOLDERS’ EQUITY

 

2,289,396

 

2,138,469

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

5,620,040

 

$

5,242,909

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



Table of Contents

 

AECOM Technology Corporation
Consolidated Statements of Income

(unaudited - in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Revenue

 

$

1,936,183

 

$

1,480,784

 

 

 

 

 

 

 

Cost of revenue

 

1,830,848

 

1,397,807

 

Gross profit

 

105,335

 

82,977

 

 

 

 

 

 

 

Equity in earnings of joint ventures

 

8,097

 

4,378

 

General and administrative expenses

 

23,262

 

21,865

 

Income from operations

 

90,170

 

65,490

 

 

 

 

 

 

 

Other income

 

2,288

 

1,704

 

Interest expense, net

 

(9,872

)

(975

)

Income from continuing operations before income tax expense

 

82,586

 

66,219

 

 

 

 

 

 

 

Income tax expense

 

20,503

 

16,465

 

 

 

 

 

 

 

Income from continuing operations

 

62,083

 

49,754

 

Discontinued operations, net of tax

 

 

113

 

Net income

 

62,083

 

49,867

 

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

(5,215

)

(4,085

)

Net income attributable to AECOM

 

$

56,868

 

$

45,782

 

 

 

 

 

 

 

Net income allocation:

 

 

 

 

 

Preferred stock dividend

 

$

2

 

$

35

 

Net income available for common stockholders

 

56,866

 

45,747

 

Net income attributable to AECOM

 

$

56,868

 

$

45,782

 

 

 

 

 

 

 

Net income attributable to AECOM per share:

 

 

 

 

 

Basic and diluted

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.40

 

Discontinued operations

 

 

 

 

 

$

0.48

 

$

0.40

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

118,001

 

113,153

 

Diluted

 

119,115

 

114,498

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

AECOM Technology Corporation
Consolidated Statements of Comprehensive Income

(unaudited—in thousands)

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

 

 

 

 

 

 

Net income

 

$

62,083

 

$

49,867

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

11,538

 

12,704

 

Swap valuation

 

 

400

 

Pension adjustments

 

698

 

870

 

Comprehensive income, net of tax

 

$

74,319

 

$

63,841

 

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

 

(5,215

)

(4,085

)

Comprehensive income attributable to AECOM, net of tax

 

$

69,104

 

$

59,756

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

AECOM Technology Corporation
Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

 

 

 

Three Months Ended
December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

62,083

 

$

49,867

 

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

 

 

 

 

 

Depreciation and amortization

 

29,843

 

22,340

 

Equity in earnings of unconsolidated joint ventures

 

(8,097

)

(4,378

)

Distribution of earnings from unconsolidated joint ventures

 

7,682

 

3,240

 

Non-cash stock compensation

 

8,030

 

8,813

 

Excess tax benefit from share-based payment

 

(60,051

)

(768

)

Foreign currency translation

 

(3,069

)

2,425

 

Other non-cash expense

 

749

 

 

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

 

 

 

 

 

Settlement of deferred compensation plan liability

 

(89,688

)

 

Accounts receivable

 

(10,148

)

(16,700

)

Prepaid expenses and other assets

 

4,177

 

(10,575

)

Accounts payable

 

(47,994

)

(51,727

)

Accrued expenses and other current liabilities

 

(54,766

)

(57,912

)

Billings in excess of costs on uncompleted contracts

 

9,562

 

23,794

 

Other long-term liabilities

 

(25,945

)

2,147

 

Income taxes payable

 

(1,713

)

(912

)

Net cash used in operating activities from continuing operations

 

(179,345

)

(30,346

)

Net cash used in operating activities from discontinued operations

 

 

(4,227

)

Net cash used in operating activities

 

(179,345

)

(34,573

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Payments for business acquisitions, net of cash acquired

 

(298,731

)

(39,600

)

Proceeds from disposal of business

 

 

25,799

 

Net investment in unconsolidated joint ventures

 

(18,897

)

4,768

 

Purchases of investment securities/funds

 

(16,595

)

 

Payments for capital expenditures

 

(16,019

)

(14,520

)

Net cash used in investing activities

 

(350,242

)

(23,553

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowings under credit agreements

 

582,009

 

19,246

 

Repayments of borrowings under credit agreements

 

(311,697

)

(4,291

)

Proceeds from loan on deferred compensation plan investments

 

59,324

 

 

Proceeds from issuance of common stock

 

6,081

 

2,876

 

Proceeds from exercise of stock options

 

2,902

 

1,191

 

Payments to repurchase common stock

 

(63,461

)

(1,222

)

Excess tax benefit from share-based payment

 

60,051

 

768

 

Net distributions to noncontrolling interests

 

(1,062

)

(973

)

Net cash provided by financing activities

 

334,147

 

17,595

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

3,821

 

2,703

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(191,619

)

(37,828

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

612,857

 

290,777

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

421,238

 

$

252,949

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY

 

 

 

 

 

Common stock issued in acquisitions

 

$

58,868

 

$

33,500

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

AECOM Technology Corporation
Notes to Consolidated Financial Statements

(unaudited)

 

1.              Basis of Presentation

 

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

 

The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2010.  The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

The results of operations for the three months ended December 31, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2011.

 

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

 

2.              New Accounting Pronouncements and Changes in Accounting

 

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to fair value measurements.  The Company adopted the guidance for the quarter ended March 31, 2010, except for the portion of the guidance that requires the disclosure of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).  This guidance becomes effective for the Company in its fiscal year beginning October 1, 2011.  The Company does not believe that the adoption of the separate disclosures related to Level 3 measurements in its fiscal year beginning October 1, 2011 will have a material impact on its consolidated financial statements.

 

On October 1, 2010, the Company adopted guidance issued by the FASB on revenue recognition.  The new guidance provides another alternative for determining the selling price of deliverables, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, and requires companies to allocate arrangement consideration to separate deliverables using the relative selling price method.  The adoption of the guidance did not have a material effect on the Company’s consolidated financial statements.

 

On October 1, 2010, the Company also adopted guidance issued by the FASB on the consolidation of variable interest entities.  The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of whether the Company has the power to direct the activities over such entities, and additional disclosures for variable interests.  Adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements, see Note 6.

 

3.              Business Acquisitions, Goodwill and Intangible Assets

 

The Company completed five business acquisitions during the quarter ended December 31, 2010.  Total consideration related to these acquisitions consisted of $298.7 million in cash, net of cash acquired, and $58.9 million in Company stock.  Business acquisitions completed during the quarter ended December 31, 2010 did not meet the quantitative thresholds to require pro forma disclosures of operating results either individually or in the aggregate based on the Company’s consolidated assets and income.  Significant acquisitions during the quarter ended December 31, 2010 included four separate global cost and project management consultancy firms, that operated under the Davis Langdon name, including businesses in Europe and Middle East, Australia and New Zealand, South Africa, and North America.  Each of the four acquisitions were separately negotiated, executed by separate purchase agreements, with no one acquisition contingent upon the other, and the four businesses, although operating as part of a Swiss Verein, under which they shared certain naming and marketing rights, were not under common control or management.  Business acquisitions during the quarter ended December 31, 2010 also included RSW, Inc., an international engineering firm based in Montreal, Quebec, Canada.

 

5



Table of Contents

 

The changes in the carrying value of goodwill by reporting segment for the three months ended December 31, 2010 and 2009 were as follows:

 

 

 

September 30,
2010

 

Post-
Acquisition
Adjustments

 

Foreign
Exchange
Impact

 

Acquired

 

December 31,
2010

 

 

 

(in millions)

 

Reporting Unit

 

 

 

 

 

 

 

 

 

 

 

Professional Technical Services

 

$

1,355.0

 

$

4.9

 

$

6.3

 

$

302.7

 

$

1,668.9

 

Management Support Services

 

335.4

 

3.4

 

 

 

338.8

 

Total

 

$

1,690.4

 

$

8.3

 

$

6.3

 

$

302.7

 

$

2,007.7

 

 

 

 

September 30,
2009

 

Post-
Acquisition
Adjustments

 

Foreign
Exchange
Impact

 

Acquired

 

December 31,
2009

 

 

 

(in millions)

 

Reporting Unit

 

 

 

 

 

 

 

 

 

 

 

Professional Technical Services

 

$

1,060.1

 

$

(1.9

)

$

4.8

 

$

46.1

 

$

1,109.1

 

Management Support Services

 

2.8

 

 

 

21.8

 

24.6

 

Total

 

$

1,062.9

 

$

(1.9

)

$

4.8

 

$

67.9

 

$

1,133.7

 

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of December 31, 2010 and September 30, 2010, included in intangible assets—net, in the accompanying consolidated balance sheets, were as follows:

 

 

 

December 31, 2010

 

September 30, 2010

 

 

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Intangible
Assets, Net

 

Gross
Amount

 

Accumulated
Amortization

 

Intangible
Assets, Net

 

Amortization
Period

 

 

 

(in millions)

 

(years)

 

Backlog

 

$

98.5

 

$

(70.0

)

$

28.5

 

$

80.7

 

$

(65.5

)

$

15.2

 

1 – 5

 

Customer relationships

 

134.8

 

(28.5

)

106.3

 

114.0

 

(24.6

)

89.4

 

10

 

Trademark / tradename

 

4.0

 

(0.9

)

3.1

 

4.2

 

(0.2

)

4.0

 

2

 

Total

 

$

237.3

 

$

(99.4

)

$

137.9

 

$

198.9

 

$

(90.3

)

$

108.6

 

 

 

 

At the time of acquisition, the Company preliminarily estimates the amount of the identifiable intangible assets acquired based upon historical valuations of similar acquisitions and the facts and circumstances available at the time.  The Company determines the final value of the identifiable intangible assets as soon as information is available, but not more than 12 months from the date of acquisition.  The Company has yet to complete its final valuation of intangible assets for certain recent acquisitions.  During the quarter ended December 31, 2010, the Company completed its final valuation of identifiable intangible assets for Tishman Construction Corporation (Tishman) and McNeil Technologies, Inc. (McNeil).  These final valuations were not materially different from previously recorded estimates.  The Company is in the process of finalizing deferred taxes and fair values relating to projects and leases for recent acquisitions including Tishman and McNeil.  Post-acquisition adjustments primarily relate to project related liabilities.

 

Amortization expense of acquired intangible assets included within cost of revenue was $9.1 million and $7.1 million for the three months ended December 31, 2010 and 2009, respectively. The following table presents estimated amortization expense of existing intangible assets for the remainder of fiscal 2011 and for the succeeding years:

 

Fiscal Year

 

(in millions)

 

2011 (nine months remaining)

 

$

25.6

 

2012

 

24.2

 

2013

 

16.1

 

2014

 

16.0

 

2015

 

14.7

 

Thereafter

 

41.3

 

Total

 

$

137.9

 

 

In addition to the above, amortization expense of acquired intangible assets included within equity in earnings of joint ventures was $2.2 million for the three months ended December 31, 2010.  This amortization expense is not expected to be significant for the remainder of fiscal 2011.

 

4.              Restructuring Costs

 

In fiscal 2009, in connection with the Earth Tech acquisition, the Company initiated plans for workforce reductions and facility closures.  In fiscal 2010, the Company initiated a restructuring plan for its United Kingdom operations to reduce ongoing overhead costs and improve operating efficiencies.  Restructuring costs are aggregated in cost of revenue within its consolidated statements of income.  The accrued facility costs are expected to be paid over the next four years.

 

6



Table of Contents

 

The following table presents a reconciliation of the restructuring reserve balance in the Company’s Professional Technical Services segment from October 1, 2010 to December 31, 2010.

 

 

 

Three Months Ended December 31, 2010

 

 

 

Severance
Costs

 

Facility
Costs

 

Total

 

 

 

(in millions)

 

Accrual, beginning of the period

 

$

1.3

 

$

15.8

 

$

17.1

 

Accrued and other adjustments during the period

 

0.2

 

 

0.2

 

Paid during the period

 

(1.0

)

(2.7

)

(3.7

)

Accrual, end of the period

 

$

0.5

 

$

13.1

 

$

13.6

 

 

5.              Accounts Receivable—Net

 

Net accounts receivable consisted of the following as of December 31, 2010 and September 30, 2010:

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Billed

 

$

1,312.8

 

$

1,254.8

 

Unbilled

 

1,019.5

 

956.3

 

Contract retentions

 

88.6

 

57.9

 

Total accounts receivable—gross

 

2,420.9

 

2,269.0

 

Allowance for doubtful accounts

 

(105.3

)

(98.8

)

Total accounts receivable—net

 

$

2,315.6

 

$

2,170.2

 

 

Billed accounts receivable represent amounts billed to clients that have yet to be collected.  Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end.  Substantially all unbilled receivables as of December 31, 2010 and September 30, 2010 are expected to be billed and collected within twelve months.  Contract retentions represent amounts invoiced to clients where payments have been withheld pending the completion of certain milestones, 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 accounts receivable as of December 31, 2010 or September 30, 2010.

 

6.              Joint Ventures and Variable Interest Entities

 

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

 

Some of the Company’s joint ventures have no employees and minimal operating expenses.  For these joint ventures, the Company’s employees perform work for the joint venture, which is then billed to a third-party customer by the joint venture.  These joint ventures function as pass through entities to bill the third-party customer.  The Company records its share of the services performed and the costs associated with these services, in the Company’s results of operations since it does not have risk related to services provided by the other joint venture partner(s).  For certain of these joint ventures where a fee is added by an unconsolidated joint venture to client billings, the Company’s portion of that fee is recorded in equity in earnings of joint ventures.

 

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

 

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Table of Contents

 

Adoption of new consolidation standard

 

Effective October 1, 2010, the Company adopted guidance issued by the FASB on the consolidation of variable interest entities (VIEs).  The new consolidation standard requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE.  The process for identifying the primary beneficiary of a VIE requires consideration of the factors which provide a party the power to direct the activities that most significantly impact the joint ventures’ economic performance, including powers granted to the joint venture’s program manager, powers contained in the joint venture governing board, and to a certain extent, a company’s economic interest in the joint venture.  The Company analyzed its joint ventures and effective October 1, 2010, prospectively classified them according to the new consolidation standard as either:

 

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

 

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

 

Once it was determined that the Company has the power to direct the activities that most significantly impact the joint ventures’ economic performance, the Company assessed whether or not it has the obligation to absorb losses or rights to receive benefits from the entities that could potentially be significant to the entities.

 

The adoption of the new consolidation standard did not result in the consolidation or de-consolidation of any joint ventures that were material either individually or in the aggregate to the consolidated financial statements of the Company.  The Company has not provided financial or other support during the periods presented to any of its VIEs that it was not previously contractually required to provide.  Contractually required support provided to the Company’s joint ventures is further discussed in Note 14.

 

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

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Current assets

 

$

245.3

 

$

242.2

 

Non-current assets

 

3.9

 

17.4

 

Total assets

 

$

249.2

 

$

259.6

 

 

 

 

 

 

 

Current liabilities

 

$

18.2

 

$

46.8

 

Non-current liabilities

 

39.3

 

33.4

 

Total liabilities

 

57.5

 

80.2

 

 

 

 

 

 

 

Total AECOM equity

 

138.9

 

130.9

 

Noncontrolling interests

 

52.8

 

48.5

 

Total owners’ equity

 

191.7

 

179.4

 

Total liabilities and owners’ equity

 

$

249.2

 

$

259.6

 

 

Total revenues of the consolidated joint ventures were $216.7 million and $184.4 million for the three months ended December 31, 2010 and December 31, 2009, respectively.  The assets of the Company’s consolidated joint ventures are restricted for use only by the particular joint venture and are not available for the general operations of the Company.

 

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Table of Contents

 

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

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Current assets

 

$

458.7

 

$

393.7

 

Non-current assets

 

34.7

 

6.1

 

Total assets

 

$

493.4

 

$

399.8

 

 

 

 

 

 

 

Current liabilities

 

$

333.7

 

$

319.8

 

Non-current liabilities

 

4.9

 

4.5

 

Total liabilities

 

338.6

 

324.3

 

 

 

 

 

 

 

Joint ventures’ equity

 

154.8

 

75.5

 

Total liabilities and joint ventures’ equity

 

$

493.4

 

$

399.8

 

 

 

 

 

 

 

AECOM’s investment in joint ventures

 

$

69.7

 

$

53.2

 

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

 

 

(in millions)

 

Unconsolidated joint ventures’:

 

 

 

 

 

Total revenues

 

$

440.0

 

$

389.2

 

Cost of revenues

 

415.1

 

353.1

 

 

 

 

 

 

 

AECOM’s equity in earnings of unconsolidated joint ventures:

 

 

 

 

 

Pass through joint ventures

 

$

0.9

 

$

1.0

 

Other joint ventures

 

7.2

 

3.4

 

Total

 

$

8.1

 

$

4.4

 

 

7.              Disclosures About Pension Benefit Obligations

 

The following table details the components of net periodic benefit cost for the Company’s pension plans for the three months ended December 31, 2010 and 2009:

 

 

 

Three Months Ended

 

 

 

December 31, 2010

 

December 31, 2009

 

 

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

 

 

(in millions)

 

Components of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

Service costs

 

$

 

$

1.1

 

$

 

$

1.3

 

Interest cost on projected benefit obligation

 

2.0

 

6.6

 

2.0

 

5.5

 

Expected return on plan assets

 

(2.0

)

(6.7

)

(2.0

)

(6.2

)

Amortization of net loss

 

0.6

 

0.7

 

0.3

 

0.6

 

Curtailment (gain) / loss recognized

 

 

 

(1.9

)

 

Net periodic (benefit) cost

 

$

0.6

 

$

1.7

 

$

(1.6

)

$

1.2

 

 

The total amounts of employer contributions paid for the three months ended December 31, 2010 were $14.1 million for U.S. plans and $4.0 million for non-U.S. plans.  The expected remaining scheduled annual employer contributions for the fiscal year ending September 30, 2011 are $3.5 million for U.S. plans and $14.5 million for non-U.S. plans.  During the quarter ended December 31, 2009, the Company adopted an amendment to freeze pension plan benefit accruals for certain U.S. employee plans resulting in a curtailment gain of $1.9 million.  Included in other long-term liabilities are net pension liabilities of $185.1 million and $164.2 million as of December 31, 2010 and September 30, 2010, respectively.

 

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Table of Contents

 

8.              Debt

 

Debt consisted of the following:

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Unsecured term credit agreements

 

$

607.4

 

$

609.1

 

Unsecured senior notes

 

251.3

 

250.5

 

Unsecured revolving credit facility

 

299.0

 

26.5

 

Secured notes

 

25.8

 

25.9

 

Other debt

 

23.0

 

19.1

 

Total debt

 

1,206.5

 

931.1

 

Less: Current portion of debt and short-term borrowings

 

(18.9

)

(16.4

)

Long-term debt, less current portion

 

$

1,187.6

 

$

914.7

 

 

The following table presents, in millions, scheduled maturities of our debt:

 

Fiscal Year

 

 

 

2011 (nine months remaining)

 

$

18.0

 

2012

 

339.7

 

2013

 

122.2

 

2014

 

451.4

 

2015

 

1.4

 

Thereafter

 

273.8

 

Total

 

$

1,206.5

 

 

Unsecured Term Credit Agreements

 

In September 2010, the Company entered into an unsecured term credit agreement with a syndicate of banks to support its working capital and acquisition needs.  Pursuant to the credit agreement, the Company borrowed $600 million in term loans and may borrow up to an additional $100 million in term loans upon request by the Company subject to certain conditions.  The loans under the credit agreement bear interest, at the Company’s option, at either the base rate (as defined in the credit agreement) plus an applicable margin or the Eurodollar rate (as defined in the credit agreement) plus an applicable margin.  The applicable margin for base rate loans is a range of 1.0% to 2.25% and the applicable margin for Eurodollar rate loans is a range of 2.0% to 3.25%, both based on the debt-to-earnings leverage ratio of the Company at the end of each fiscal quarter.  For the quarter ended December 31, 2010, the average interest rate was 2.8%.  Payments of the initial principal amount outstanding under the credit agreement are required on a quarterly basis beginning in September 2012.  Any remaining principal of the loans under the credit agreement is due no later than September 2014.

 

In September 2006, through certain wholly-owned subsidiaries, the Company 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, which provided for a limited time opportunity to repatriate foreign earnings to the U.S. at a 5.25% tax rate.  The agreement provided for a $65.0 million, five-year term loan among four subsidiary borrowers and one subsidiary guarantor.  In order to obtain favorable pricing, the Company also provided a parent company guarantee.  In June 2010, certain of our wholly-owned subsidiaries entered into an amendment to this credit agreement to, among other things, permit the Company to enter into the note purchase agreement for a private placement of senior unsecured notes (as described below) and permit the subsidiaries to enter into subsidiary guarantees in connection therewith.  The amounts outstanding on this credit agreement were $7.4 million and $9.1 million at December 31, 2010 and September 30, 2010, respectively.

 

Unsecured Senior Notes

 

In June 2010, the Company entered into a Note Purchase Agreement (Purchase Agreement) providing for a private placement of $300.0 million in aggregate principal amount of senior unsecured notes (Notes).  In July 2010 (Closing Date), the Notes were sold to institutional accredited investors pursuant to an exemption from registration under the Securities Act of 1933, as amended.  The Notes consisted of $175.0 million of 5.43% Senior Notes, Series A, due July 2020 and $125.0 million of 1.00% Senior Discount Notes, Series B, due July 2022 for net proceeds of $249.8 million.  The outstanding accreted balance of Series B Notes was $76.3 million at December 31, 2010.  The Company’s obligations under the Notes are guaranteed by certain subsidiaries of the Company pursuant to one or more subsidiary guarantees.

 

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Table of Contents

 

Unsecured Revolving Credit Facility

 

The Company has an unsecured revolving credit facility with a syndicate of banks to support its working capital and acquisition needs.  The borrowing capacity under the unsecured revolving credit facility is $600 million, and pursuant to the terms of the associated credit agreement, has an expiration date of August 2012.  The Company may also, at its option, request an increase in the commitments under the facility up to a total of $750 million, subject to lender approval.  The Company may borrow, at its 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 1.38%.  In addition to these borrowing rates, there is a commitment fee, which ranges from 0.10% to 0.25% on any unused commitment.  At December 31, 2010 and September 30, 2010, $299.0 million and $26.5 million were outstanding under the credit facility, respectively.  At December 31, 2010 and September 30, 2010, outstanding standby letters of credit totaled $31.8 million and $31.5 million, respectively, under the credit facility.  The Company could have drawn upon the remaining $269.2 million available under the credit facility.

 

Covenants and Restrictions

 

All of the Company’s debt agreements discussed above contain certain negative covenants relating to the Company’s leverage ratio, which is based on outstanding borrowings (including financial letters of credit) and earnings before interest, taxes, depreciation, and amortization.  The Company’s Unsecured Revolving Credit Facility and Unsecured Term Credit Agreements also contain certain covenants that limit the Company’s ability to, among other things, (i) issue financial and commercial standby letters of credit, (ii) issue performance guarantees, (iii) incur indebtedness and contingent obligations, and (iv) pay dividends or make certain other restricted payments or investments.  The Company’s Unsecured Senior Notes contain certain covenants that restrict indebtedness and require the Company to maintain a minimum net worth.  Should the Company fail to comply with these covenants, all or a portion of its borrowings under the Unsecured Senior Notes and Unsecured Term Credit Agreements could become immediately payable and its Unsecured Revolving Credit Facility could be terminated.  At December 31, 2010, the Company was in compliance with all such covenants.

 

Interest Rate Swaps

 

The Company previously had interest rate swap agreements with financial institutions to fix the variable interest rates on portions of debt outstanding under the Company’s revolving credit facility which expired in August 2010.  The Company applied cash flow hedge accounting for the interest rate swap agreements.  Accordingly, the derivatives were recorded at fair value as assets or liabilities and the effective portion of changes in the fair value of the derivative, as measured quarterly, was reported in other comprehensive income.

 

The Company’s average effective interest rate on borrowings under the revolving credit facility, including the effects of the swaps, during the three months ended December 31, 2010 and 2009 was 1.2% and 3.6%, respectively.

 

Secured Notes

 

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

 

Other Debt

 

Other debt consists primarily of bank overdrafts and obligations under capital leases.  In addition to the unsecured revolving credit facility discussed above, at December 31, 2010, the Company had $248.4 million of unsecured credit facilities primarily used to cover periodic overdrafts and letters of credit, of which, $158.1 million was utilized for outstanding letters of credit.

 

9.              Fair Value Measurements

 

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

 

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Table of Contents

 

Nonfinancial assets and liabilities include items such as goodwill and long lived assets that are measured at fair value resulting from impairment, if deemed necessary.  During the three months ended December 31, 2010 and December 31, 2009, the Company did not record any fair market value adjustments to those financial and nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.

 

Fair Value Hierarchy

 

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

 

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

 

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

 

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

 

There were no significant transfers between any of the levels of the fair value hierarchy during the three months ended December 31, 2010 and December 31, 2009.

 

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

 

 

 

December 31,
2010

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

 

 

 

 

 

 

 

 

U.S. government security (1)

 

$

10.2

 

$

10.2

 

$

 

Corporate notes and bonds (1)

 

2.9

 

2.9

 

 

Deferred compensation plan assets (2)

 

 

 

 

Total assets

 

$

13.1

 

$

13.1

 

$

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities (2)

 

$

0.9

 

$

 

$

0.9

 

Total liabilities

 

$

0.9

 

$

 

$

0.9

 

 

 

 

September 30,
2010

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

 

 

 

 

 

 

 

 

U.S. government security (1)

 

$

9.2

 

$

9.2

 

$

 

Corporate notes and bonds (1)

 

2.3

 

2.3

 

 

Deferred compensation plan assets (2)

 

 

 

 

Total assets

 

$

11.5

 

$

11.5

 

$

 

 

 

 

 

 

 

 

 

Deferred compensation plan liabilities (2)

 

$

88.8

 

$

 

$

88.8

 

Total liabilities

 

$

88.8

 

$

 

$

88.8

 

 


(1)

Corporate bonds and US government bonds are valued using quoted market prices.

(2)

For additional information about the Company’s deferred compensation plan, refer to Note 18 to the Consolidated Financial Statements in the Company’s 2010 Form 10-K and Note 13 herein.

 

10.       Share-based Payment

 

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model.  The expected term of awards granted represents the period of time the awards are expected to be outstanding.  As the Company’s common stock has only been publicly-traded since May 2007, expected volatility was based on a historical volatility, for a period consistent with the expected option term, of publicly-traded peer companies.  The risk-free interest rate is based on U.S. Treasury bond rates with maturities equal to the expected term of the option on the grant date.  The Company uses historical data as a basis to estimate the probability of forfeitures.

 

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Table of Contents

 

The fair value of options granted during the three months ended December 31, 2010 and 2009 were determined using the following weighted average assumptions:

 

 

 

Three Months Ended December 31,

 

 

 

2010

 

2009

 

Dividend yield

 

 

 

Expected volatility

 

38.6

%

39.9

%

Risk-free interest rate

 

1.5

%

1.6

%

Term (in years)

 

4.5

 

4.5

 

 

For the three months ended December 31, 2010 and 2009, compensation expense recognized related to stock options as a result of the fair value method was $1.1 million and $1.3 million, respectively.  Unrecognized compensation expense relating to stock options outstanding as of December 31, and September 30, 2010 was $6.6 million and $4.7 million, respectively, to be recognized on a straight-line basis over the awards’ respective vesting periods, which are generally three years.

 

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

 

 

 

2010

 

2009

 

 

 

Shares of stock
under options

 

Weighted average
exercise price

 

Shares of stock
under options

 

Weighted average
exercise price

 

 

 

(in millions)

 

(in millions)

 

Outstanding at September 30

 

3.1

 

$

19.09

 

3.8

 

$

16.36

 

Options granted

 

0.4

 

27.54

 

0.3

 

24.45

 

Options exercised

 

(0.3

)

11.39

 

(0.1

)

9.97

 

Options forfeited or expired

 

 

22.23

 

 

10.59

 

Outstanding at December 31

 

3.2

 

20.64

 

4.0

 

17.24

 

 

 

 

 

 

 

 

 

 

 

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

 

3.1

 

$

20.51

 

3.9

 

$

16.93

 

 

The weighted average grant-date fair value of stock options granted during the three months ended December 31, 2010 and 2009 was $9.39 and $8.60, respectively.

 

The Company grants stock units under the Performance Earnings Program (PEP), whereby units are earned and issued dependent upon meeting established cumulative performance objectives over a three-year period.  The Company recognized compensation expense relating to the PEP of $4.4 million and $5.3 million during the three months ended December 31, 2010 and 2009, respectively.  Additionally, the Company issues restricted stock units which are earned based on service conditions, resulting in compensation expense of $2.5 million and $1.8 million during the three months ended December 31, 2010 and 2009, respectively.  Unrecognized compensation expense related to PEP units and restricted stock units outstanding was $38.0 million and $31.5 million as of December 31, 2010 and $27.8 million and $16.0 million as of September 30, 2010, respectively, to be recognized on a straight-line basis over the awards’ respective vesting periods which are generally three years.

 

Cash flows attributable to tax benefits resulting from tax deductions in excess of compensation cost recognized for those stock options (excess tax benefits) is classified as financing cash flows.  Excess tax benefits of $60.1 million and $0.8 million for the three months ended December 31, 2010 and 2009, respectively, have been classified as financing cash inflows in the consolidated statements of cash flows.  See also Note 13.

 

11.       Income Taxes

 

The effective tax rate was 24.8% and 24.9% for the three months ended December 31, 2010 and 2009, respectively.  The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted on December 17, 2010, retroactively extended the Research and Experimentation Credits which had lapsed on December 31, 2009.  As a result of the extension, the Company recognized a $3.0 million benefit net of uncertainties during the three months ended December 31, 2010 reflecting anticipated credits for the nine months ended September 30, 2010.  During the three months ended December 31, 2009, the Company recorded a $3.2 million reduction to income tax expense as a result of settling the portion of the Internal Revenue Service audit relating to Research & Experimentation credits.

 

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Table of Contents

 

The Company is currently at Appeals with the U.S. Internal Revenue Service for fiscal 2006 and 2007 and under examination for fiscal 2008 and 2009.  The Company anticipates that the Appeals process will be concluded in the foreseeable future; however, based on the status of the process, it is not possible to estimate the impact of the conclusion on the Company’s unrecognized tax benefits.

 

As discussed in Note 13, the Company terminated its U.S. deferred compensation plan effective in December 2009 and distributed the plan balances to plan participants in December 2010.  Distributions valued at $223.0 million were made to plan participants, which resulted in taxable earnings to the participants and a tax deductible expense to the Company.  As a result of the distribution, the Company recorded a $89.2 million increase to its income taxes receivable, a $30.9 million reduction in its deferred tax asset and a $58.3 million increase to additional paid in capital.  The increase in additional paid in capital reflects the tax benefits resulting from income tax deductions in excess of recognized compensation expense.

 

12.       Earnings Per Share

 

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income available for common stockholders by the weighted average number of common shares outstanding for the period.  Diluted EPS is computed by dividing net income attributable to AECOM by the weighted average number of common shares outstanding and potential common stock equivalent shares for the period.  The Company includes as potential common stock equivalent shares the weighted average dilutive effects of outstanding share-based payment awards using the treasury stock method.

 

The following table sets forth a reconciliation of the denominators for basic and diluted EPS:

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

 

 

(in millions)

 

Denominator for basic earnings per share

 

118.0

 

113.2

 

Potential common shares:

 

 

 

 

 

Stock options

 

0.7

 

1.1

 

Other

 

0.4

 

0.2

 

Denominator for diluted earnings per share

 

119.1

 

114.5

 

 

For the three months ended December 31, 2010 and 2009, no share-based payment awards were excluded from the calculation of potential common shares because they were considered anti-dilutive.  The Company excludes stock options from the computation of diluted EPS when the option’s price is greater than the average market price of the Company’s common shares.  The Company also would exclude common stock equivalent shares from the computation in loss periods as their effect would be anti-dilutive.

 

13.       Other Financial Information

 

Accrued expenses consist of the following:

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Accrued salaries and benefits

 

$

324.4

 

$

363.7

 

Accrued contract costs

 

418.2

 

381.1

 

Deferred compensation plan liability

 

0.9

 

88.8

 

Other accrued expenses

 

75.6

 

69.2

 

 

 

$

819.1

 

$

902.8

 

 

Accrued contract costs above include balances related to professional liability accruals of $112.9 million and $108.6 million as of December 31, 2010 and September 30, 2010, respectively.  Other accrued contract costs primarily relate to costs for services provided by subcontractors and other non-employees.

 

14



Table of Contents

 

Deferred Compensation Plan Termination

 

In December 2009, the Company elected to terminate its U.S. deferred compensation plan.  In accordance with tax code requirements, deferred compensation plan account balances were distributed to all participants in December 2010.  As a result, substantially all of the Company’s deferred compensation plan liability listed in the above table and 5.2 million outstanding stock units were settled in December 2010.  The Company settled these stock units by issuing shares of common stock, which resulted in taxable earnings to the plan participants.  As such, the Company repurchased 1.7 million shares for $48.6 million to satisfy participants’ minimum statutory tax withholdings.

 

At September 30, 2010, $67.2 million in investments were held in a rabbi trust to fund the deferred compensation plan liability.  In December 2010, the Company borrowed $59.3 million against the balance of these investments to partially fund the distribution of the liability portion of the deferred compensation plan.  The loan is presented as an offset to the investment balance in the accompanying consolidated balance sheets and as proceeds from financing activities in the accompanying statements of cash flows.  As of December 31, 2010, the net investment balance held in the rabbi trust was $9.4 million, which is classified within other current assets.

 

Other long-term liabilities consist of the following:

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Pension liabilities (Note 7)

 

$

185.1

 

$

164.2

 

Reserve for uncertain tax positions (Note 11)

 

54.5

 

72.1

 

Other

 

148.4

 

101.2

 

 

 

$

388.0

 

$

337.5

 

 

The components of accumulated other comprehensive loss are as follows:

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Foreign currency translation adjustment

 

$

6.0

 

$

(5.5

)

Defined benefit minimum pension liability adjustment, net of tax

 

(141.3

)

(142.0

)

 

 

$

(135.3

)

$

(147.5

)

 

14.       Commitments and Contingencies

 

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

 

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

 

In some instances, the Company guarantees that a project, when complete, will achieve specified performance standards.  If the project subsequently fails to meet guaranteed performance standards, the Company may either incur significant additional costs or be held responsible for the costs incurred by the client to achieve the required performance standards.  At December 31, 2010, the Company was contingently liable in the amount of approximately $189.9 million under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for payment and performance guarantees.

 

In the ordinary course of business, the Company enters into various agreements providing financial or performance assurances to clients on behalf of certain unconsolidated partnerships, joint ventures and other jointly executed contracts.  These agreements are entered into primarily to support the project execution commitments of these entities.  The guarantees have various expiration dates.  The maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties.  Generally, under joint venture arrangements, if a partner is financially unable to complete its share of the contract, the other partner(s) will be required to complete those activities.  The Company generally only enters into joint venture arrangements with partners who are reputable, financially sound and who carry appropriate levels of surety bonds for the project in

 

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order to adequately assure completion of their assignments.  The Company does not expect that these guarantees will have a material adverse effect on its consolidated balance sheet or statements of income or cash flows.

 

Combat Support Associates Joint Venture—Kuwait Labor Law Matter

 

On March 24, 2010, the U.S. Defense Contract Audit Agency (DCAA) issued a DCAA Form 1 questioning costs incurred during fiscal 2007 by Combat Support Associates (CSA), a consolidated joint venture that includes AECOM Government Services, Inc., in the performance of a U.S. Government contract in Kuwait.  The costs in question, which have been recognized as revenue on an accrual basis over the life of the contract, were incurred in paying Service Terminal Indemnity (STI) to CSA’s employees at the end of their employment agreements.  The DCAA questioned the reasonableness and allowability of the payments on the basis that CSA allegedly paid more than the amount required by the Kuwait Labor Law.  As a result of the issuance of the DCAA Form 1, the U.S. Government withheld approximately $18 million from payments on current year billings pending final resolution of the questioned costs.

 

CSA has requested that the U.S. Government contracting officer make a final determination that the costs are proper under the contract.  If the contracting officer declines to overrule the DCAA Form 1, CSA intends to utilize all proper avenues to defend against the Government’s claim, including appeals processes.

 

The Company believes based upon advice of Kuwaiti legal counsel that CSA has been and continues to be in compliance with STI requirements of Kuwait labor laws.  Therefore, the Company presently believes that, if required, CSA would be successful in obtaining a favorable determination of this matter.  However, if the DCAA Form 1 is not overruled and subsequent appeals were unsuccessful, the decision could have a material adverse effect on the Company’s results of operations.

 

15.       Reportable Segments

 

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

 

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

 

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Table of Contents

 

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

 

Reportable Segments:

 

Professional
Technical
Services

 

Management
Support
Services

 

Corporate

 

Total

 

 

 

(in millions)

 

Three Months Ended December 31, 2010:

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,575.8

 

$

360.4

 

$

 

$

1,936.2

 

Revenue, net of other direct costs(1)

 

1,084.8

 

129.0

 

 

1,213.8

 

Gross profit

 

89.5

 

15.8

 

 

105.3

 

Equity in earnings of joint ventures

 

2.1

 

6.0

 

 

8.1

 

General and administrative expenses

 

 

 

23.2

 

23.2

 

Operating income

 

91.6

 

21.8

 

(23.2

)

90.2

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

5.7

%

4.4

%

 

5.4

%

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

 

8.3

%

12.2

%

 

8.7

%

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2009:

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,204.5

 

$

276.3

 

$

 

$

1,480.8

 

Revenue, net of other direct costs(1)

 

883.8

 

78.5

 

 

962.3

 

Gross profit

 

71.7

 

11.3

 

 

83.0

 

Equity in earnings of joint ventures

 

2.3

 

2.1

 

 

4.4

 

General and administrative expenses

 

 

 

21.9

 

21.9

 

Operating income

 

74.0

 

13.4

 

(21.9

)

65.5

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

6.0

%

4.1

%

 

5.6

%

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

 

8.1

%

14.4

%

 

8.6

%

 


(1)          Non-GAAP measure.

 

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

 

Forward-Looking Statements

 

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

 

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Table of Contents

 

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 51,200 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 report 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 commercial and government clients worldwide in end markets such as the transportation, facilities, environmental, energy, water and government markets.  PTS revenue is primarily derived from fees from services that we provide, as opposed to pass-through fees from subcontractors and other direct costs.

 

Our MSS segment provides program and facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government.  MSS revenue typically includes a significant amount of pass-through fees from subcontractors and other direct costs.

 

Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts and 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.

 

Throughout this section, we refer to companies we acquired in the last twelve months as “acquired companies.”

 

Components of Income and Expense

 

Our management analyzes the results of our operations using several non-GAAP measures.  As discussed in Overview above, 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 and, as discussed in Overview above, a large portion of our fees are derived through work performed by AECOM employees rather than other parties.  We have included information on revenue, net of other direct costs, as we believe that it is useful to view our revenue exclusive of costs associated with external service providers, and the related gross margins, as discussed in Results of Operations below.  Because of the importance of maintaining the high quality of work generated by our employees, gross margin is an important metric that management reviews in evaluating the Company’s operating performance.

 

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Table of Contents

 

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

 

 

 

Three Months
Ended December 31,

 

 

 

2010

 

2009

 

 

 

(in millions)

 

Other Financial Data:

 

 

 

 

 

Revenue

 

$

1,936.2

 

$

1,480.8

 

Other direct costs*

 

722.4

 

518.5

 

Revenue, net of other direct costs*

 

1,213.8

 

962.3

 

Cost of revenue, net of other direct costs*

 

1,108.5

 

879.3

 

Gross profit

 

105.3

 

83.0

 

Equity in earnings of joint ventures

 

8.1

 

4.4

 

General and administrative expenses

 

23.2

 

21.9

 

Income from operations

 

$

90.2

 

$

65.5

 

 

 

 

 

 

 

Reconciliation of Cost of Revenue:

 

 

 

 

 

Other direct costs

 

$

722.4

 

$

518.5

 

Cost of revenue, net of other direct costs

 

1,108.5

 

879.3

 

Cost of revenue

 

$

1,830.9

 

$

1,397.8

 

 


*Non-GAAP measure.

 

Results of Operations

 

Three months ended December 31, 2010 compared to the three months ended December 31, 2009

 

Consolidated Results

 

 

 

Three Months Ended

 

 

 

December 31,

 

December 31,

 

Change

 

 

 

2010

 

2009

 

$

 

%

 

 

 

(in millions)

 

Revenue

 

$

1,936.2

 

$

1,480.8

 

$

455.4

 

30.8

%

Other direct costs

 

722.4

 

518.5

 

203.9

 

39.3

 

Revenue, net of other direct costs

 

1,213.8

 

962.3

 

251.5

 

26.1

 

Cost of revenue, net of other direct costs

 

1,108.5

 

879.3

 

229.2

 

26.1

 

Gross profit

 

105.3

 

83.0

 

22.3

 

26.9

 

Equity in earnings of joint ventures

 

8.1

 

4.4

 

3.7

 

84.1

 

General and administrative expenses

 

23.2

 

21.9

 

1.3

 

5.9

 

Income from operations

 

90.2

 

65.5

 

24.7

 

37.7

 

Other income

 

2.3

 

1.7

 

0.6

 

35.3

 

Interest expense, net

 

(9.9

)

(1.0

)

(8.9

)

*

 

Income from continuing operations before income tax expense

 

82.6

 

66.2

 

16.4

 

24.8

 

Income tax expense

 

20.5

 

16.4

 

4.1

 

25.0

 

Income from continuing operations

 

62.1

 

49.8

 

12.3

 

24.7

 

Discontinued operations, net of tax

 

 

0.1

 

(0.1

)

(100.0

)

Net income

 

62.1

 

49.9

 

12.2

 

24.4

 

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

(5.2

)

(4.1

)

(1.1

)

26.8

 

Net income attributable to AECOM

 

$

56.9

 

$

45.8

 

$

11.1

 

24.2

%

 


* Not meaningful

 

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Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

91.3

 

91.4

 

Gross margin

 

8.7

 

8.6

 

Equity in earnings of joint ventures

 

0.7

 

0.5

 

General and administrative expense

 

2.0

 

2.3

 

Income from operations

 

7.4

 

6.8

 

Other income

 

0.2

 

0.2

 

Interest expense, net

 

(0.8

)

(0.1

)

Income from continuing operations before income tax expense

 

6.8

 

6.9

 

Income tax expense

 

1.7

 

1.7

 

Income from continuing operations

 

5.1

 

5.2

 

Discontinued operations, net of tax

 

 

 

Net income

 

5.1

 

5.2

 

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

(0.4

)

(0.4

)

Net income attributable to AECOM

 

4.7

%

4.8

%

 

Revenue

 

Our revenue for the three months ended December 31, 2010 increased $455.4 million, or 30.8% to $1.9 billion as compared to $1.5 billion for the corresponding period last year.  $385.4 million of our revenue for the three months ended December 31, 2010 was provided by companies acquired in the past twelve months.  Excluding the revenue provided by companies acquired in the past twelve months, revenue increased $70.0 million, or 4.7%, from the three months ended December 31, 2009.

 

The increase in revenue, excluding acquired companies, for the three months ended December 31, 2010 was primarily attributable to increased demand for our engineering and program management services on infrastructure projects in Australia, Asia and Canada of approximately $35 million, $15 million and $10 million, respectively, partially offset by a reduction in services for clients in Europe and the United States.  Additionally, approximately $20 million of the increase was attributable to stronger foreign currencies (primarily the Australian and Canadian dollars).

 

Revenue, Net of Other Direct Costs

 

Our revenue, net of other direct costs, for the three months ended December 31, 2010 increased $251.5 million, or 26.1%, to $1.2 billion as compared to $962.3 million for the corresponding period last year.  Of this increase, $181.1 million, or 72.0%, 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 $70.4 million, or 7.3% over the three months ended December 31, 2009.

 

The increase in revenue, net of other direct costs, excluding revenue, net of other direct costs provided by acquired companies, was primarily due to increased demand for our engineering and program management services on infrastructure projects in Australia and Asia of approximately $25 million and $15 million, respectively, and increased activity in various MSS projects. Additionally, approximately $15 million of the increase was attributable to stronger foreign currencies (primarily the Australian and Canadian dollars).

 

Gross Profit

 

Our gross profit for the three months ended December 31, 2010 increased $22.3 million, or 26.9%, to $105.3 million as compared to $83.0 million for the corresponding period last year.  $4.5 million of our gross profit for the three months ended December 31, 2010 was provided by companies acquired in the past twelve months.  Excluding gross profit provided by acquired companies, gross profit increased $17.8 million, or 21.4%, from the three months ended December 31, 2009.  For the three months ended December 31, 2010, gross profit, as a percentage of revenue, net of other direct costs, increased to 8.7% from 8.6% in the three months ended December 31, 2009.

 

$2 million of the increase in gross profit, excluding acquired companies, was attributable to stronger foreign currencies (primarily the Australian and Canadian dollars).

 

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Table of Contents

 

Equity in Earnings of Joint Ventures

 

Our equity in earnings of joint ventures for the three months ended December 31, 2010 increased $3.7 million, or 84.1%, to $8.1 million as compared to $4.4 million in the corresponding period last year.

 

$3.3 million of our equity in earnings of joint ventures for the three months ended December 31, 2010 was provided by companies acquired in the past twelve months.  Excluding the revenue provided by companies acquired in the past twelve months, equity in earnings of joint ventures increased $0.4 million, or 9.1%, from the three months ended December 31, 2009.

 

General and Administrative Expenses

 

Our general and administrative expenses for the three months ended December 31, 2010 increased $1.3 million, or 5.9%, to $23.2 million as compared to $21.9 million for the corresponding period last year.  As a percentage of revenue, net of other direct costs, general and administrative expenses decreased from 2.3% in the three months ended December 31, 2009 to 2.0% in the three months ended December 31, 2010.

 

The increase in general and administrative expenses was primarily attributable to costs associated with staffing and other expenses associated with the growth in our business.

 

Other Income

 

Our other income for the three months ended December 31, 2010 was $2.3 million as compared to other income of $1.7 million for the three months ended December 31, 2009.

 

Other income is primarily comprised of net gains and losses on investments we hold to offset our exposure related to employees’ investments in a deferred compensation plan.

 

Interest Expense, Net

 

Our net interest expense for the three months ended December 31, 2010 was $9.9 million as compared to $1.0 million of net interest expense for the three months ended December 31, 2009.

 

The increase in interest expense primarily relates to increased borrowings associated with the funding of acquisitions.

 

Income Tax Expense

 

Our income tax expense for the three months ended December 31, 2010 increased $4.1 million, or 25.0%, to $20.5 million as compared to $16.4 million for the three months ended December 31, 2009.  The effective tax rate was 24.8% and 24.9% for the three months ended December 31, 2010 and 2009, respectively.

 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted on December 17, 2010, retroactively extended the Research and Experimentation Credits which had lapsed on December 31, 2009.  As a result of the extension, the Company recognized a $3.0 million benefit net of uncertainties during the three months ended December 31, 2010 reflecting anticipated credits for the nine-months ended September 30, 2010.  The benefit recorded during the three-month period ended December 31, 2009 was primarily related to a $3.2 million reduction in the reserve for uncertain tax positions resulting from the Research and Experimentation Credit portion of the Internal Revenue Service examination of fiscal 2006 and 2007.

 

Net Income Attributable to AECOM

 

The factors described above resulted in net income of $56.9 million for the three months ended December 31, 2010, as compared to net income of $45.8 million for the three months ended December 30, 2009.

 

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Table of Contents

 

Results of Operations by Reportable Segment:

 

Professional Technical Services

 

 

 

Three Months Ended

 

 

 

December 31,

 

December 31,

 

Change

 

 

 

2010

 

2009

 

$

 

%

 

 

 

(in millions)

 

Revenue

 

$

1,575.8

 

$

1,204.5

 

$

371.3

 

30.8

%

Other direct costs

 

491.0

 

320.7

 

170.3

 

53.1

 

Revenue, net of other direct costs

 

1,084.8

 

883.8

 

201.0

 

22.7

 

Cost of revenue, net of other direct costs

 

995.3

 

812.1

 

183.2

 

22.6

 

Gross profit

 

$

89.5

 

$

71.7

 

$

17.8

 

24.8

%

 

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

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

91.7

 

91.9

 

Gross margin

 

8.3

%

8.1

%

 

Revenue

 

Revenue for our PTS segment for the three months ended December 31, 2010 increased $371.3 million, or 30.8%, to $1.6 billion as compared to $1.2 billion for the corresponding period last year.  Revenue provided by companies acquired in the past twelve months was $306.9 million.  Excluding revenue provided by acquired companies, revenue increased $64.4 million, or 5.3%, over the three months ended December 31, 2009.

 

The increase in revenue, excluding acquired companies, for the three months ended December 31, 2010 was primarily attributable to increased demand for our engineering and program management services on infrastructure projects in Australia, Asia and Canada of approximately $35 million, $15 million and $10 million, respectively, partially offset by a reduction in services for clients in Europe and the United States.  Additionally, approximately $20 million of the increase was attributable to stronger foreign currencies (primarily the Australian and Canadian dollars).

 

Revenue, Net of Other Direct Costs

 

Revenue, net of other direct costs, for our PTS segment for the three months ended December 31, 2010 increased $201.0 million, or 22.7%, to $1.1 billion as compared to $883.8 million for the corresponding period last year.  Of this increase, $150.2 million, or 74.7%, 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 $50.8 million, or 5.7%, over the three months ended December 31, 2009.

 

The increase in revenue, net of other direct costs, excluding revenue net of other direct costs provided by acquired companies for the three months ended December 31, 2010 was primarily due to increased demand for our engineering and program management services on infrastructure projects in Australia and Asia of approximately $25 million and $15 million, respectively.  Additionally, approximately $15 million of the increase was attributable to stronger foreign currencies (primarily the Australian and Canadian dollars).

 

Gross Profit

 

Gross profit for our PTS segment for the three months ended December 31, 2010 increased $17.8 million, or 24.8%, to $89.5 million as compared to $71.7 million for the corresponding period last year.  Gross profit provided by companies acquired in the past twelve months was $1.2 million.  Excluding gross profit provided by acquired companies, gross profit increased $16.6 million, or 23.2%, from the three months ended December 31, 2009.  As a percentage of revenue, net of other direct costs, gross profit increased to 8.3% of revenue, net of other direct costs, for the three months ended December 31, 2010 from 8.1% in the corresponding period last year.

 

The increase in gross profit, excluding acquired companies, and gross profit, as a percentage of revenue, net of other direct costs, was primarily attributable to the benefits realized from our continuing cost efficiency initiatives including the integration of our acquisitions and improved project performance.

 

$2 million of the increase in gross profit, excluding acquired companies, was attributable to stronger foreign currencies (primarily the Australian and Canadian dollars).

 

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Management Support Services

 

 

 

Three Months Ended

 

 

 

December 31,

 

December 31,

 

Change

 

 

 

2010

 

2009

 

$

 

%

 

 

 

(in millions)

 

Revenue

 

$

360.4

 

$

276.3

 

$

84.1

 

30.4

%

Other direct costs

 

231.4

 

197.8

 

33.6

 

17.0

 

Revenue, net of other direct costs

 

129.0

 

78.5

 

50.5

 

64.3

 

Cost of revenue, net of other direct costs

 

113.2

 

67.2

 

46.0

 

68.5

 

Gross profit

 

$

15.8

 

$

11.3

 

$

4.5

 

39.8

%

 

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

 

 

 

Three Months Ended

 

 

 

December 31,
2010

 

December 31,
2009

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

87.8

 

85.6

 

Gross margin

 

12.2

%

14.4

%

 

Revenue

 

Revenue for our MSS segment for the three months ended December 31, 2010 increased $84.1 million, or 30.4%, to $360.4 million as compared to $276.3 million for the corresponding period last year.  Of this increase, $78.5 million, or 93.3%, was provided by companies acquired in the past twelve months.  Excluding revenue provided by acquired companies, revenue increased $5.6 million, or 2.0%, over the three months ended December 31, 2009.

 

Revenue, Net of Other Direct Costs

 

Revenue, net of other direct costs, for our MSS segment for the three months ended December 31, 2010 increased $50.5 million, or 64.3%, to $129.0 million as compared to $78.5 million for the corresponding period last year.  Of this increase, $30.9 million, or 61.2%, 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 $19.6 million, or 25.0% over the three months ended December 31, 2009.

 

The increase in revenue, net of other direct costs, excluding acquired companies, for the three months ended December 31, 2010 was primarily attributable to increased activity of self-performed work for our global maintenance and support services for the United States Army and various projects with United States intelligence agencies.

 

Gross Profit

 

Gross profit for our MSS segment for the three months ended December 31, 2010 increased $4.5 million, or 39.8%, to $15.8 million as compared to $11.3 million for the corresponding period last year.  Of this increase, $3.3 million, or 73.3%, was provided by companies acquired in the past twelve months.  Excluding gross profit provided by acquired companies, gross profit increased $1.2 million, or 10.6%.  As a percentage of revenue, net of other direct costs, gross profit decreased to 12.2% in the three months ended December 31, 2010 from 14.4% in the corresponding period last year.

 

The increase in gross profit, excluding acquired companies, for the three months ended December 31, 2010 as compared to the corresponding period in the prior year was primarily attributable to improved performance of a contract with the U.S. government in the Middle East.

 

The decrease in gross profit, as a percentage of revenue, net of other direct costs for the three months ended December 31, 2010 was primarily due to decreased activity on a depot maintenance project for the United States Army.

 

Seasonality

 

We experience seasonal trends in our business.  The first quarter of our fiscal year (October 1 to December 31) is typically our weakest quarter.  The harsher weather conditions impact our ability to complete work in parts of North America and the holiday

 

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

 

Liquidity and Capital Resources

 

Cash Flows

 

Our principal sources of liquidity are cash flows from operations and access to financial markets.  Our principal uses of cash are 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, borrowing capacity under our revolving credit facility and our ability to issue debt or equity, if required, will be sufficient to meet our projected cash requirements for at least the next 12 months.

 

At December 31, 2010, cash and cash equivalents were $421.2 million, a decrease of $191.7 million, or 31.3%, from $612.9 million at September 30, 2010.  This decrease was primarily attributable to cash used by operating activities and payments for business acquisitions, offset by net proceeds from borrowings.

 

Net cash used in operating activities was $179.3 million for the three months ended December 31, 2010, an increase of $144.7 million from $34.6 million for the three months ended December 31, 2009.  This increase in cash used in operating activities was primarily attributable to the $89.7 million settlement of our U.S. deferred compensation plan liability, as described in Note 13 to the financial statements, and the $60.1 million excess tax benefit from share-based payment, which was primarily attributable to the settlement of this plan liability.

 

Net cash used in investing activities was $350.2 million for the three months ended December 31, 2010, an increase of $326.6 million from $23.6 million for the three months ended December 31, 2009.  This increase was primarily due to payments for business acquisitions.

 

Net cash provided by financing activities was $334.1 million for the three months ended December 31, 2010, compared with $17.6 million in the comparable period last year, an increase of $316.5 million.  This increase was primarily attributable to the increase in net borrowings to fund acquisitions.

 

Working Capital

 

Working capital, or current assets less current liabilities, increased $135.0 million, or 12.3%, to $1.2 billion at December 31, 2010 from $1.1 billion at September 30, 2010.  Net accounts receivable, which includes billed and unbilled costs and fees, net of billings in excess of costs on uncompleted contracts, increased $129.1 million, or 7.1%, to $2.0 billion at December 31, 2010, primarily attributable to recent acquisitions.

 

Accounts receivable increased 6.7%, or $145.4 million, from September 30, 2010 to December 31, 2010 primarily due to recent acquisitions.

 

Days Sales Outstanding (DSO), including accounts receivable, net of billings in excess of costs on uncompleted contracts, adjusted for the effects of recent acquisitions, at December 31, 2010, was 90 days compared to the 89 days at September 30, 2010.

 

In Note 5 to the consolidated financial statements, Accounts Receivable—Net, the Company provides a comparative analysis of the various components of accounts receivable.  Substantially all unbilled receivables as of December 31, 2010 and September 30, 2010 are expected to be billed and collected within twelve months.

 

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The Company records unbilled receivables 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 December 31, 2010 and September 30, 2010, the Company had no significant net receivables related to contract claims.  The Company accrues award fees in unbilled receivables only when there is sufficient information to assess 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.

 

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

 

Borrowings and Lines of Credit

 

Debt consisted of the following:

 

 

 

December 31,
2010

 

September 30,
2010

 

 

 

(in millions)

 

Unsecured term credit agreement

 

$

607.4

 

$

609.1

 

Unsecured senior notes

 

251.3

 

250.5

 

Unsecured revolving credit facility

 

299.0

 

26.5

 

Secured notes

 

25.8

 

25.9

 

Other debt

 

23.0

 

19.1

 

Total debt

 

1,206.5

 

931.1

 

Less: Current portion of debt and short-term borrowings

 

(18.9

)

(16.4

)

Long-term debt, less current portion

 

$

1,187.6

 

$

914.7

 

 

The following table presents, in millions, scheduled maturities of our debt:

 

Fiscal Year

 

 

 

2011 (nine months remaining)

 

$

18.0

 

2012

 

339.7

 

2013

 

122.2

 

2014

 

451.4

 

2015

 

1.4

 

Thereafter

 

273.8

 

Total

 

$

1,206.5

 

 

Unsecured Term Credit Agreements

 

In September 2010, we entered into an unsecured term credit agreement with a syndicate of banks to support our working capital and acquisition needs.  Pursuant to the credit agreement, we borrowed $600 million in term loans and may borrow up to an additional $100 million in term loans upon our request subject to certain conditions.  The loans under the credit agreement bear interest, at our option, at either the base rate (as defined in the credit agreement) plus an applicable margin or the Eurodollar rate (as defined in the credit agreement) plus an applicable margin.  The applicable margin for base rate loans is a range of 1.0% to 2.25% and the applicable margin for Eurodollar rate loans is a range of 2.0% to 3.25%, both based on our debt-to-earnings leverage ratio at the end of each fiscal quarter.  For the quarter ended December 31, 2010, the average interest rate was 2.8%.  Payments of the initial principal amount outstanding under the credit agreement are required on a quarterly basis beginning in September 2012.  Any remaining principal of the loans under the credit agreement is due no later than September 2014.

 

In September 2006, through certain 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, the opportunity to repatriate foreign earnings to the U.S. at a 5.25% tax rate.  The agreement provided 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.  In June 2010, certain of our wholly-owned subsidiaries entered into an amendment to this credit agreement to, among other things, permit the Company to enter into the note purchase agreement for a private placement of senior unsecured notes (as described below) and permit the subsidiaries to enter into subsidiary guarantees in

 

25