AECOM - Quarter Report: 2011 December (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended December 31, 2011

 

OR

 

 

For the transition period from            to           

 

Commission File Number 0-52423

 

 

AECOM TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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):

 

 

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

 

As of January 27, 2012, 117,124,163 shares of the registrant’s common stock were outstanding.

 

 

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AECOM TECHNOLOGY CORPORATION

 

INDEX

 

PART I.		FINANCIAL INFORMATION	1
	Item 1.	Financial Statements	1
		Consolidated Balance Sheets as of December 31, 2011 (unaudited) and September 30, 2011	1
		Consolidated Statements of Income for the Three Months Ended December 31, 2011 (unaudited) and December 31, 2010 (unaudited)	2
		Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2011 (unaudited) and December 31, 2010 (unaudited)	3
		Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2011 (unaudited) and December 31, 2010 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4.	Controls and Procedures	30
PART II.		OTHER INFORMATION	30
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	38
	Item 6.	Exhibits	39
SIGNATURES			40

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

AECOM Technology Corporation
Consolidated Balance Sheets

(in thousands, except share data)

 

		December 31, 2011			September 30, 2011
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	420,837		$	349,868
Cash in consolidated joint ventures		86,649			107,072
Total cash and cash equivalents		507,486			456,940
Accounts receivable—net		2,513,914			2,380,181
Prepaid expenses and other current assets		104,819			100,575
Income taxes receivable		54,565			45,239
Deferred tax assets—net		7,131			7,131
TOTAL CURRENT ASSETS		3,187,915			2,990,066
PROPERTY AND EQUIPMENT—NET		333,585			323,826
DEFERRED TAX ASSETS—NET		73,666			82,966
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES		66,888			71,124
GOODWILL		2,097,855			2,086,330
INTANGIBLE ASSETS—NET		113,514			119,140
OTHER NON-CURRENT ASSETS		121,192			115,876
TOTAL ASSETS		$	5,994,615		$	5,789,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt		$	12,957		$	6,570
Accounts payable		739,394			679,111
Accrued expenses and other current liabilities		738,309			792,690
Billings in excess of costs on uncompleted contracts		381,448			324,899
Current portion of long-term debt		10,849			11,176
TOTAL CURRENT LIABILITIES		1,882,957			1,814,446
OTHER LONG-TERM LIABILITIES		419,954			435,022
LONG-TERM DEBT		1,217,729			1,144,723
TOTAL LIABILITIES		3,520,640			3,394,191
COMMITMENTS AND CONTINGENCIES (Note 14)
AECOM STOCKHOLDERS’ EQUITY:
Common stock—authorized, 300,000,000 shares of $0.01 par value as of December 31 and September 30, 2011; issued and outstanding, 113,857,161 and 113,248,337 as of December 31 and September 30, 2011, respectively		1,139			1,132
Preferred stock, Class E—authorized, 20 shares; issued and outstanding, 3 shares as of December 31 and September 30, 2011; no par value, $1.00 liquidation preference value		—			—
Additional paid-in capital		1,712,456			1,699,207
Accumulated other comprehensive loss		(168,894		)	(187,574		)
Retained earnings		867,605			826,946
TOTAL AECOM STOCKHOLDERS’ EQUITY		2,412,306			2,339,711
Noncontrolling interests		61,669			55,426
TOTAL STOCKHOLDERS’ EQUITY		2,473,975			2,395,137
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,994,615		$	5,789,328

 

See accompanying Notes to Consolidated Financial Statements.

 

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AECOM Technology Corporation
Consolidated Statements of Income

(unaudited - in thousands, except per share data)

 

		Three Months Ended
		December 31, 2011			December 31, 2010
Revenue		$	2,029,180		$	1,936,183
Cost of revenue		1,938,834			1,830,848
Gross profit		90,346			105,335
Equity in earnings of joint ventures		8,962			8,097
General and administrative expenses		22,611			23,262
Income from operations		76,697			90,170
Other income		1,919			2,288
Interest expense, net		(10,614		)	(9,872		)
Income before income tax expense		68,002			82,586
Income tax expense		19,578			20,503
Net income		48,424			62,083
Noncontrolling interests in income of consolidated subsidiaries, net of tax		(493		)	(5,215		)
Net income attributable to AECOM		$	47,931		$	56,868
Net income allocation:
Preferred stock dividend		$	—		$	2
Net income available for common stockholders		47,931			56,866
Net income attributable to AECOM		$	47,931		$	56,868
Net income attributable to AECOM per share:
Basic and diluted		$	0.42		$	0.48
Weighted average shares outstanding:
Basic		113,965			118,001
Diluted		114,591			119,115

 

See accompanying Notes to Consolidated Financial Statements.

 

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AECOM Technology Corporation
Consolidated Statements of Comprehensive Income

(unaudited—in thousands)

 

		Three Months Ended
		December 31, 2011			December 31, 2010
Net income		$	48,424		$	62,083
Other comprehensive income, net of tax:
Foreign currency translation adjustments		19,476			11,538
Swap valuation		(405		)	—
Pension adjustments		(391		)	698
Comprehensive income, net of tax			67,104			74,319
Noncontrolling interests in comprehensive income of consolidated subsidiaries, net of tax		(493		)	(5,215		)
Comprehensive income attributable to AECOM, net of tax		$	66,611		$	69,104

 

See accompanying Notes to Consolidated Financial Statements.

 

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AECOM Technology Corporation
Consolidated Statements of Cash Flows

(unaudited - in thousands)

 

		Three Months Ended December 31,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	48,424		$	62,083
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		25,548			29,843
Equity in earnings of unconsolidated joint ventures		(8,962		)	(8,097		)
Distribution of earnings from unconsolidated joint ventures		7,837			7,682
Non-cash stock compensation		8,634			8,030
Excess tax benefit from share-based payment		(687		)	(60,051		)
Foreign currency translation		3,740			(3,069		)
Other		(702		)	749
Changes in operating assets and liabilities, net of effects of acquisitions:
Settlement of deferred compensation plan liability		—			(89,688		)
Accounts receivable		(128,612		)	(10,148		)
Prepaid expenses and other assets		(5,837		)	4,177
Accounts payable		57,569			(47,994		)
Accrued expenses and other current liabilities		(56,141		)	(54,766		)
Billings in excess of costs on uncompleted contracts		57,260			9,562
Other long-term liabilities		(14,497		)	(25,945		)
Income taxes payable		—			(1,713		)
Net cash used in operating activities		(6,426		)	(179,345		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for business acquisitions, net of cash acquired		(8,972		)	(298,731		)
Net investment in unconsolidated joint ventures		363			(18,897		)
Sales (purchases) of investments		3,314			(16,595		)
Proceeds from sale of investments in rabbi trust		1,958			—
Payments for capital expenditures		(18,284		)	(16,019		)
Net cash used in investing activities		(21,621		)	(350,242		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under credit agreements		380,354			582,009
Repayments of borrowings under credit agreements		(301,384		)	(311,697		)
Proceeds from loans on deferred compensation plan investments		—			59,324
Proceeds from issuance of common stock		4,634			6,081
Proceeds from exercise of stock options		2,320			2,902
Payments to repurchase common stock		(13,669		)	(63,461		)
Excess tax benefit from share-based payment		687			60,051
Net distributions to noncontrolling interests		(244		)	(1,062		)
Net cash provided by financing activities		72,698			334,147
EFFECT OF EXCHANGE RATE CHANGES ON CASH		5,895			3,821
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		50,546			(191,619		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		456,940			612,857
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	507,486		$	421,238
NON-CASH INVESTING AND FINANCING ACTIVITY
Common stock issued in acquisitions		$	857		$	58,868

 

See accompanying Notes to Consolidated Financial Statements.

 

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AECOM Technology Corporation
Notes to Consolidated Financial Statements

(unaudited)

 

1.              Basis of Presentation

 

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

 

The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, 2011. 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, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2012.

 

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). The Level 3 fair value measurement guidance was adopted by the Company in its fiscal year beginning October 1, 2011. Since the Company carries no Level 3 assets or liabilities, the adoption of the separate disclosures related to Level 3 measurements did not have a material impact on its consolidated financial statements. Additionally, the FASB issued a new accounting standard on fair value measurements that changes certain fair value measurement principles, clarifies the requirement for measuring fair value and expands disclosure requirements, particularly for Level 3 fair value measurements. This guidance is effective for the Company’s second quarter ending March 31, 2012 and is not expected to 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.

 

In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new standard will require companies to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of other comprehensive income in the statement of stockholders’ equity. The guidance also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. This guidance is effective for the Company’s fiscal year beginning October 1, 2012 and, although it will change the financial statement presentation, it is not expected to have a material impact on its financial condition or results of operations.

 

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In September 2011, the FASB issued guidance intended to simplify goodwill impairment testing. Entities are allowed to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect this guidance will have a material impact on its consolidated financial statements.

 

3.              Stock Repurchase Program

 

In August 2011, the Company’s Board of Directors authorized a stock repurchase program (the Repurchase Program), pursuant to which the Company may purchase up to $200 million of its common stock. Share repurchases under this program may be effected through open market purchases, unsolicited or solicited privately negotiated transactions or other methods, including pursuant to a Rule 10b5-1 plan.

 

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

 

The specific number of shares that ultimately will be repurchased by the Company under the ASR agreement will be based upon the volume-weighted average share price of the Company’s common stock during the term of the ASR agreement, less an agreed discount, subject to collar provisions which establish a maximum and minimum price and other customary conditions under the ASR agreement. The Company expects all ASR purchases to be completed, and the ASR agreement to be settled in full, during the first half of fiscal 2012, but no later than March 7, 2012. At settlement, the Company may be entitled to receive additional shares of common stock from Bank of America or, under certain circumstances, may be required to issue additional shares or make a cash payment to Bank of America at the Company’s option.

 

In connection with the Repurchase Program, on December 14, 2011, the Company also entered into a Rule 10b5-1 repurchase plan, with Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch). Under this plan, and consistant with the Company’s previously announced Repurchase Program, the Company agreed to repurchase a maximum of $100 million of its common stock through Merrill Lynch. The timing, nature and amount of purchases made by Merrill Lynch depend on a variety of factors, including market conditions and the volume limit defined by Rule 10b-18. As of December 31, 2011, the Company had repurchased approximately 360,000 shares under this plan, at an average price of $20.08, for a total cost of approximately $7.3 million. As of December 31, 2011, the Company had $92.7 million remaining to be purchased pursuant to this plan. Repurchased shares are retired, but remain authorized for registration and issuance in the future. This plan expired on February 3, 2012.

 

4.              Business Acquisitions, Goodwill and Intangible Assets

 

The Company completed one business acquisition, Capital Engineering Corporation (CEC), an environmental engineering firm in Taiwan, during the quarter ended December 31, 2011. Pursuant to the related acquisition agreement, the Company acquired a majority interest in the shares of CEC for $7.3 million in cash and agreed to purchase the remaining shares for $5.9 million in cash during the quarter ending March 31, 2012. This business acquisition did not meet the quantitative thresholds to require pro forma disclosures of operating results based on the Company’s consolidated assets and income.

 

At the time of acquisition, the Company preliminarily estimates the amount of the identifiable intangible assets acquired based upon historical valuations of similar acquisitions and the facts and circumstances available at the time. The Company determines the final value of the identifiable intangible assets as soon as information is available, but not more than 12 months from the date of acquisition. The Company is in the process of finalizing its valuation of intangible assets, deferred taxes and fair values related to projects and leases for certain recent acquisitions. Post-acquisition adjustments primarily relate to project related liabilities.

 

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The changes in the carrying value of goodwill by reporting segment for the three months ended December 31, 2011 and 2010 were as follows:

 

		September 30, 2011			Post- Acquisition Adjustments			Foreign Exchange Impact			Acquired			December 31, 2011
								(in millions)
Reporting Unit
Professional Technical Services		$	1,733.9		$	0.5		$	4.2		$	8.9		$	1,747.5
Management Support Services		352.4			(2.0		)	—			—			350.4
Total		$	2,086.3		$	(1.5	)	$	4.2		$	8.9		$	2,097.9

 

		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

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of December 31, 2011 and September 30, 2011, included in intangible assets—net, in the accompanying consolidated balance sheets, were as follows:

 

		December 31, 2011									September 30, 2011
		Gross Amount			Accumulated Amortization			Intangible Assets, Net			Gross Amount			Accumulated Amortization			Intangible Assets, Net			Amortization Period
								(in millions)												(years)
Backlog		$	92.4		$	(81.1	)	$	11.3		$	91.5		$	(79.8	)	$	11.7		1 – 5
Customer relationships		142.3			(43.0		)	99.3			143.2			(39.3		)	103.9			10
Trademark / tradename		7.7			(4.8		)	2.9			7.4			(3.9		)	3.5			2
Total		$	242.4		$	(128.9	)	$	113.5		$	242.1		$	(123.0	)	$	119.1

 

Amortization expense of acquired intangible assets included within cost of revenue was $5.9 million and $9.1 million for the three months ended December 31, 2011 and 2010, respectively. The following table presents estimated amortization expense of intangible assets for the remainder of fiscal 2012 and for the succeeding years:

 

Fiscal Year		(in millions)
2012 (nine months remaining)		$	17.2
2013		18.1
2014		16.7
2015		15.4
2016		12.7
Thereafter		33.4
Total		$	113.5

 

In addition to the above, amortization expense of acquired intangible assets included within equity in earnings of joint ventures was $0.2 million for the three months ended December 31, 2011.

 

5.               Accounts Receivable—Net

 

Net accounts receivable consisted of the following as of December 31, 2011 and September 30, 2011:

 

		December 31, 2011			September 30, 2011
		(in millions)
Billed		$	1,316.3		$	1,256.3
Unbilled		1,184.7			1,133.6
Contract retentions		131.6			110.5
Total accounts receivable—gross		2,632.6			2,500.4
Allowance for doubtful accounts		(118.7		)	(120.2		)
Total accounts receivable—net		$	2,513.9		$	2,380.2

 

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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, 2011 and September 30, 2011 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, 2011 or September 30, 2011.

 

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. For consolidated entities, the Company records the entire amount of the services performed and the costs associated with these services, including the services provided by the other joint venture partners, in the Company’s results of operations. For certain of these joint ventures where a fee is added by an unconsolidated joint venture to client billings, the Company’s portion of that fee is recorded in equity in earnings of joint ventures.

 

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

 

Effective October 1, 2010, the Company adopted guidance issued by the FASB on the consolidation of variable interest entities (VIEs). The 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 analyzes its joint ventures and classifies them according to the 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; and the Company holds the majority voting interest with no significant participative rights available to the other partners; or

 

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

 

If it is determined that the Company has the power to direct the activities that most significantly impact the joint ventures’ economic performance, the Company considers 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 joint ventures.

 

The adoption of the 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.

 

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

 

		December 31, 2011 (Unaudited)			September 30, 2011
		(in millions)
Current assets		$	241.1		$	262.6
Non-current assets		0.1			0.1
Total assets		$	241.2		$	262.7
Current liabilities		$	49.9		$	69.4
Non-current liabilities		—			—
Total liabilities		49.9			69.4
Total AECOM equity		135.5			137.9
Noncontrolling interests		55.8			55.4
Total owners’ equity		191.3			193.3
Total liabilities and owners’ equity		$	241.2		$	262.7

 

Total revenue of the consolidated joint ventures was $100.2 million and $216.7 million for the three months ended December 31, 2011 and December 31, 2010, 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.

 

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

 

		December 31, 2011 (Unaudited)			September 30, 2011
		(in millions)
Current assets		$	537.7		$	510.7
Non-current assets		18.7			22.6
Total assets		$	556.4		$	533.3
Current liabilities		$	384.1		$	357.8
Non-current liabilities		4.3			9.6
Total liabilities		388.4			367.4
Joint ventures’ equity		168.0			165.9
Total liabilities and joint ventures’ equity		$	556.4		$	533.3
AECOM’s investment in joint ventures		$	66.9		$	71.1

 

Total revenue of the unconsolidated joint ventures was $523.7 million and $440.0 million for the three months ended December 31, 2011 and 2010, respectively.

 

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

 

		Three Months Ended
		December 31, 2011			December 31, 2010
		(in millions )
Pass through joint ventures		$	0.9		$	0.9
Other joint ventures		8.1			7.2
Total		$	9.0		$	8.1

 

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7.              Pension Benefit Obligations

 

The following table details the components of net periodic cost for the Company’s pension plans for the three months ended December 31, 2011 and 2010:

 

		Three Months Ended
		December 31, 2011						December 31, 2010
		U.S.			Int’l			U.S.			Int’l
		(in millions)
Components of net periodic (benefit) cost:
Service costs		$	—		$	0.3		$	—		$	1.1
Interest cost on projected benefit obligation		1.9			6.4			2.0			6.6
Expected return on plan assets		(2.1		)	(6.3		)	(2.0		)	(6.7		)
Amortization of net loss		0.8			0.5			0.6			0.7
Settlement loss recognized		—			0.5			—			—
Net periodic cost		$	0.6		$	1.4		$	0.6		$	1.7

 

The total amounts of employer contributions paid for the three months ended December 31, 2011 were $8.8 million for U.S. plans and $4.4 million for non-U.S. plans. The expected remaining scheduled annual employer contributions for the fiscal year ending September 30, 2012 are $4.5 million for U.S. plans and $12.1 million for non-U.S. plans. Included in other long-term liabilities are net pension liabilities of $154.6 million and $166.5 million as of December 31, 2011 and September 30, 2011, respectively.

 

8.              Debt

 

Debt consisted of the following:

 

		December 31, 2011			September 30, 2011
		(in millions)
Unsecured term credit agreement		$	750.0		$	750.0
Unsecured senior notes		254.4			253.6
Unsecured revolving credit facility		174.4			101.4
Notes secured by real properties		24.9			25.2
Other debt		37.8			32.3
Total debt		1,241.5			1,162.5
Less: Current portion of debt and short-term borrowings		(23.8		)	(17.8		)
Long-term debt, less current portion		$	1,217.7		$	1,144.7

 

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

 

Fiscal Year
2012 (nine months remaining)		$	23.1
2013		153.4
2014		152.1
2015		151.8
2016		476.4
Thereafter		284.7
Total		$	1,241.5

 

Unsecured Term Credit Agreement

 

In September 2011, the Company entered into an Amended and Restated Credit Agreement (the “Term Credit Agreement”) with Bank of America, N.A., as administrative agent and a lender, and the other lenders party thereto. Pursuant to the Term Credit Agreement, the Company borrowed $750 million in term loans on the closing date and may borrow up to an additional $100 million in term loans upon request by the Company subject to certain conditions, including Company and lender approval. The Company used approximately $600 million of the proceeds from the loans to repay indebtedness under its prior term loan facility, approximately $147 million of the proceeds to pay down indebtedness under its revolving credit facility and a portion of the proceeds to pay fees and expenses related to the Term Credit Agreement. The loans under the Term Credit Agreement bear interest, at the Company’s option, at either the Base Rate (as defined in the Term Credit Agreement) plus an applicable margin or the Eurodollar Rate (as defined in the Term Credit Agreement) plus an applicable margin. The applicable margin for the Base Rate loans is a range of 0.375% to 1.50% and the applicable margin for Eurodollar Rate loans is a range of 1.375% to 2.50%, both based on the debt-to-earnings leverage ratio of the Company at the end of each fiscal quarter. The initial interest rate of the loans borrowed on September 30, 2011 is the 3 month Eurodollar rate plus 1.75%, or a total of 2.12%.  For the three months ended December 31, 2011 and 2010, the average interest rate of the Company’s term loan facility was 2.12% and 2.8%, respectively. Payments of the initial principal amount outstanding under the Term Credit Agreement are required on a quarterly basis beginning on December 31, 2012, while interest payments are required on a quarterly basis beginning December 31, 2011. Any remaining principal of the loans under the Term Credit Agreement is due no later than July 20, 2016. Accrued interest is payable in arrears on a quarterly basis for Base Rate loans, and at the end of the applicable interest period (but at least every three months) for Eurodollar Rate loans. The Company may optionally prepay the loans at any time, without penalty.

 

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Unsecured Senior Notes

 

In July 2010, the Company issued $300 million of notes to private institutional investors. The notes consisted of $175.0 million of 5.43% Senior Notes, Series A, due July 2020 and $125.0 million of 1.00% Senior Discount Notes, Series B, due July 2022 for net proceeds of $249.8 million. The outstanding accreted balance of Series B Notes was $79.4 million at December 31, 2011, which have an effective interest rate of 5.62%. The fair value of the Company’s unsecured senior notes was approximately $257 million at December 31, 2011 and $259 million at September 30, 2011. The Company calculated the fair values based on model- derived valuations using market observable inputs, which are Level 2 inputs under the accounting guidance. The Company’s obligations under the notes are guaranteed by certain subsidiaries of the Company pursuant to one or more subsidiary guarantees.

 

Unsecured Revolving Credit Facility

 

In July 2011, the Company entered into a Third Amended and Restated Credit Agreement (the “Revolving Credit Agreement”) with Bank of America, N.A., as an administrative agent and a lender and the other lenders party thereto, which amended and restated its unsecured revolving credit facility and increased its available borrowing capacity in order to support its working capital and acquisition needs. As of December 31, 2011 and September 30, 2011, the borrowing capacity under the unsecured revolving credit facility was $1.05 billion and pursuant to the terms of the Revolving Credit Agreement, has an expiration date of July 20, 2016. Prior to this expiration date, principal amounts outstanding under the Revolving Credit Agreement may be repaid and reborrowed at the option of the Company without prepayment or penalty, subject to certain conditions. The Company may also, at its option, request an increase in the commitments under the facility up to a total of $1.15 billion, subject to certain conditions, including Company and lender approval. The loans under the Revolving Credit Agreement may be borrowed in dollars or in certain foreign currencies and bear interest, at the Company’s option, at either the Base Rate (as defined in the Revolving Credit Agreement) plus an applicable margin or the Eurocurrency Rate (as defined in the Revolving Credit Agreement) plus an applicable margin. The applicable margin for the Base Rate loans is a range of 0.0% to 1.50% and the applicable margin for the Eurocurrency Rate loans is a range of 1.00% to 2.50%, both based on the Company’s debt-to-earnings leverage ratio at the end of each fiscal quarter. In addition to these borrowing rates, there is a commitment fee which ranges from 0.150% to 0.375% on any unused commitment. Accrued interest is payable in arrears on a quarterly basis for Base Rate loans, and at the end of the applicable interest period (but at least every three months) for Eurocurrency Loans. At December 31, 2011 and September 30, 2011, $174.4 million and $101.4 million, respectively, were outstanding under the revolving credit facility. At December 31, 2011 and September 30, 2011, outstanding standby letters of credit totaled $34.0 million and $32.1 million, respectively, under the revolving credit facility. As of December 31, 2011, the Company had $841.6 million available under its Revolving Credit Agreement.

 

Covenants and Restrictions

 

Under the Company’s debt agreements relating to its unsecured revolving credit facility and unsecured term credit agreements, the Company is subject to a maximum consolidated leverage ratio at the end of any fiscal quarter. This ratio is calculated by dividing consolidated funded debt (including financial letters of credit) by consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA). For the Company’s debt agreements, EBITDA is defined as consolidated net income attributable to AECOM plus interest, depreciation and amortization expense, amounts set aside for taxes and other non-cash items (including a calculated annualized EBITDA from the Company’s acquisitions). As of December 31, 2011, the consolidated leverage ratio was 2.4, which did not exceed the Company’s most restrictive maximum consolidated leverage ratio of 3.0.

 

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

 

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Additionally, the Company’s unsecured senior notes contain covenants that limit (i) certain types of indebtedness, which include indebtedness incurred by subsidiaries and indebtedness secured by a lien, (ii) merge with other entities, (iii) enter into a transaction resulting in a change of control, (iv) create new liens, (v) sell assets outside of the ordinary course of business, (vi) enter into transactions with affiliates, and (vii) substantially change the general nature of the Company and its subsidiaries taken as a whole. The unsecured senior notes also contain a financial covenant that requires the Company to maintain a net worth above a calculated threshold. The threshold is calculated as $1.2 billion plus 40% of the consolidated net income for each fiscal quarter commencing with the fiscal quarter ending June 30, 2010. In the calculation of this threshold, the Company cannot include a consolidated net loss that may occur in any fiscal quarter. The Company’s net worth for this financial covenant is defined as total AECOM stockholder’s equity, which is consolidated stockholders’ equity, including any redeemable common stock and stock units and the liquidation preference of any preferred stock. As of December 31, 2011, this amount was $2.4 billion, which exceeds the calculated threshold of $1.4 billion.

 

Should the Company fail to comply with these covenants, all or a portion of its borrowings under the unsecured senior notes and unsecured term credit agreements could become immediately payable and its unsecured revolving credit facility could be terminated. At December 31, 2011, and September 30, 2011 the Company was in compliance with all such covenants.

 

Interest Rate Swaps

 

The Company uses interest rate swap agreements with financial institutions to fix the variable interest rates on portions of the Company’s debt. In September 2011, the Company entered into two interest rate swap agreements to fix the interest rates on $250.0 million of its debt under the Term Credit Agreement. In December 2011, the Company entered into two additional interest rate swap agreements to fix the interest rate on an additional $350.0 million of its debt under the Term Credit Agreement. The Company applies cash flow hedge accounting for the interest rate swap agreements. Accordingly, the derivatives are recorded at fair value as assets or liabilities and the effective portion of changes in the fair value of the derivative, as measured quarterly, is reported in other comprehensive income. For the three months ended December 31, 2011, the amount recorded in other comprehensive income related to the decrease in fair value of the derivatives was $0.4 million. The fixed rates and the related expiration dates of the outstanding swap agreements are as follows:

 

Notional Amount (in millions)			Fixed Rate		Expiration Date
$	250.0		0.95	%	September 2015
200.0			0.68	%	December 2014
150.0			0.55	%	December 2013

 

The Company’s average effective interest rate on total borrowings, including the effects of the swaps, during the three months ended December 31, 2011 and 2010 was 3.1% and 3.3%, respectively.

 

Notes Secured by Real Properties

 

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

 

Other Debt

 

Other debt consists primarily of bank overdrafts and obligations under capital leases. In addition to the unsecured revolving credit facility discussed above, at December 31, 2011, the Company had $264.2 million of unsecured credit facilities primarily used to cover periodic overdrafts and letters of credit, of which $194.2 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.

 

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, 2011 and 2010, 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.

 

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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.

 

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

 

		December 31, 2011			Quoted Prices in Active Markets for Identical Assets (Level 1)
Foreign currency forwards		$	0.7		$	0.7
Total assets		$	0.7		$	0.7
Interest rate swaps (1)		$	0.4		$	0.4
Total liabilities		$	0.4		$	0.4

 

(1)

For additional information about the Company’s interest rate swaps, refer to Note 8 herein.

 

		September 30, 2011			Quoted Prices in Active Markets for Identical Assets (Level 1)
Foreign currency forwards		$	0.8		$	0.8
Total liabilities		$	0.8		$	0.8

 

Foreign currency forwards

 

The Company may enter into foreign currency forwards to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. The Company records all derivatives on the Consolidated Balance Sheets at fair value. Foreign currency forwards are not designated as hedging instruments, and accordingly, changes in fair value are recorded through earnings.

 

As of December 31, 2011, prepaid expenses and other current assets includes the fair value of two foreign currency forwards. At September 30, 2011 the fair value of the foreign currency forwards were recorded within other accrued expenses. The Company recognized in earnings a net gain of $1.5 million on the two foreign currency forwards during the three months ended December 31, 2011. The contract rates and the related contract maturity dates of the outstanding foreign currency forwards are as follows:

 

Notional Amount (in millions of Canadian dollars)		Contract Rate		Contract Maturity Date
60.0		1.04		September 2012

 

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

 

		Three Months Ended  December 31,
		2010
Dividend yield		—
Expected volatility		38.6	%
Risk-free interest rate		1.5	%
Term (in years)		4.5

 

For the three months ended December 31, 2011 and 2010, compensation expense recognized related to stock options as a result of the fair value method was $0.9 million and $1.1 million, respectively. Unrecognized compensation expense relating to stock options outstanding as of December 31 and September 30, 2011 was $2.9 million and $3.8 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:

 

		2011					2010
		Shares of stock under options		Weighted average exercise price			Shares of stock under options		Weighted average exercise price
		(in millions)					(in millions)
Outstanding at September 30		2.9		$	21.38		3.1		$	19.09
Options granted		—		—			0.4		27.54
Options exercised		(0.2	)	10.61			(0.3	)	11.39
Options forfeited or expired		—		25.22			—		22.23
Outstanding at December 31		2.7		22.22			3.2		20.64
Vested and expected to vest in the future as of December 31		2.7		$	22.16		3.1		$	20.51

 

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

 

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 $3.5 million and $4.4 million during the three months ended December 31, 2011 and 2010, respectively. Additionally, the Company issues restricted stock units which are earned based on service conditions, resulting in compensation expense of $4.2 million and $2.5 million during the three months ended December 31, 2011 and 2010, respectively. Unrecognized compensation expense related to PEP units and restricted stock units outstanding was $32.2 million and $44.1 million as of December 31, 2011 and $16.3 million and $23.8 million as of September 30, 2011, 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 $0.7 million and $60.1 million for the three months ended December 31, 2011 and 2010, respectively, have been classified as financing cash inflows in the consolidated statements of cash flows.

 

11.       Income Taxes

 

The effective tax rate was 28.8% and 24.8% for the three months ended December 31, 2011 and 2010, 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 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 some of the audits may be concluded in the foreseeable future, including in fiscal 2012. Based on the status of these audits, it is reasonably possible that the conclusion of the audits may result in a reduction of unrecognized tax benefits. However, it is not possible to estimate the impact of this change at this time due to the early status of the tax examinations.

 

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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, 2011		December 31, 2010
		(in millions)
Denominator for basic earnings per share		114.0		118.0
Potential common shares:
Stock options		0.2		0.7
Other		0.4		0.4
Denominator for diluted earnings per share		114.6		119.1

 

For the three months ended December 31, 2011 and 2010, share-based payment awards excluded from the calculation of potential common shares were not significant. 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 and other current liabilities consist of the following:

 

		December 31, 2011			September 30, 2011
		(in millions)
Accrued salaries and benefits		$	376.6		$	417.3
Accrued contract costs		304.2			320.2
Other accrued expenses		57.5			55.2
		$	738.3		$	792.7

 

Accrued contract costs above include balances related to professional liability accruals of $114.4 million and $118.4 million as of December 31, 2011 and September 30, 2011, respectively. The remaining accrued contract costs primarily relate to costs for services provided by subcontractors and other non-employees.

 

Other long-term liabilities consist of the following:

 

		December 31,  2011			September 30,  2011
		(in millions)
Pension liabilities (Note 7)		$	154.6		$	166.5
Reserve for uncertain tax positions (Note 11)		61.2			61.1
Other		204.2			207.4
		$	420.0		$	435.0

 

The components of accumulated other comprehensive loss are as follows:

 

		December 31, 2011			September 30, 2011
		(in millions)
Foreign currency translation adjustment		$	(31.6	)	$	(51.1	)
Swap valuation		(0.4		)	—
Defined benefit minimum pension liability adjustment, net of tax		(136.9		)	(136.5		)
		$	(168.9	)	$	(187.6	)

 

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