AECOM - Quarter Report: 2012 December (Form 10-Q)

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, 2012

 

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)

 

 

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 25, 2013, 104,746,739 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, 2012 (unaudited) and September 30, 2012	1
		Consolidated Statements of Income for the Three Months Ended December 31, 2012 (unaudited) and December 31, 2011 (unaudited)	2
		Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 (unaudited) and December 31, 2011 (unaudited)	3
		Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 (unaudited) and December 31, 2011 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	31
PART II.		OTHER INFORMATION	31
	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	39
	Item 6.	Exhibits	40
SIGNATURES			41

 

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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, 2012			September 30, 2012
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	459,276		$	456,983
Cash in consolidated joint ventures		132,020			136,793
Total cash and cash equivalents		591,296			593,776
Accounts receivable—net		2,481,834			2,395,881
Prepaid expenses and other current assets		156,613			140,764
Income taxes receivable		11,916			—
Deferred tax assets—net		16,873			16,872
TOTAL CURRENT ASSETS		3,258,532			3,147,293
PROPERTY AND EQUIPMENT—NET		322,714			325,917
DEFERRED TAX ASSETS—NET		117,263			126,948
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES		86,323			91,049
GOODWILL		1,816,965			1,775,352
INTANGIBLE ASSETS—NET		100,659			96,973
OTHER NON-CURRENT ASSETS		105,569			101,036
TOTAL ASSETS		$	5,808,025		$	5,664,568
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt		$	18,403		$	1,641
Accounts payable		698,765			761,211
Accrued expenses and other current liabilities		927,061			821,663
Income taxes payable		—			12,641
Billings in excess of costs on uncompleted contracts		395,832			320,296
Current portion of long-term debt		193,063			160,950
TOTAL CURRENT LIABILITIES		2,233,124			2,078,402
OTHER LONG-TERM LIABILITIES		443,003			454,537
LONG-TERM DEBT		1,021,772			907,141
TOTAL LIABILITIES		3,697,899			3,440,080
COMMITMENTS AND CONTINGENCIES (Note 15)
AECOM STOCKHOLDERS’ EQUITY:
Preferred stock, Class E—authorized, 20 shares; issued and outstanding, 3 shares as of December 31 and September 30, 2012; no par value, $1.00 liquidation preference value		—			—
Common stock—authorized, 300,000,000 shares of $0.01 par value as of  December 31 and September 30, 2012; issued and outstanding, 100,935,219 and 107,041,003 as of December 31 and September 30, 2012, respectively		1,009			1,070
Additional paid-in capital		1,759,881			1,741,478
Accumulated other comprehensive loss		(182,621		)	(179,173		)
Retained earnings		471,199			606,089
TOTAL AECOM STOCKHOLDERS’ EQUITY		2,049,468			2,169,464
Noncontrolling interests		60,658			55,024
TOTAL STOCKHOLDERS’ EQUITY		2,110,126			2,224,488
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,808,025		$	5,664,568

 

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, 2012			December 31, 2011
Revenue		$	2,017,272		$	2,029,180
Cost of revenue		1,939,154			1,938,834
Gross profit		78,118			90,346
Equity in earnings of joint ventures		5,915			8,962
General and administrative expenses		(22,102		)	(22,611		)
Income from operations		61,931			76,697
Other income		301			1,919
Interest expense, net		(10,551		)	(10,614		)
Income before income tax expense		51,681			68,002
Income tax expense		12,703			19,578
Net income		38,978			48,424
Noncontrolling interests in income of consolidated subsidiaries, net of tax		(869		)	(493		)
Net income attributable to AECOM		$	38,109		$	47,931
Net income attributable to AECOM per share:
Basic and diluted		$	0.36		$	0.42
Weighted average shares outstanding:
Basic		104,759			113,965
Diluted		105,538			114,591

 

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, 2012			December 31, 2011
Net income		$	38,978		$	48,424
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(5,978		)	19,476
Unrealized gain (loss) on derivatives:
Unrealized holding gain (loss) on derivatives		(11		)	(776		)
Reclassification adjustments for losses included in net income		438			371
Net unrealized gain (loss) on derivatives, net of tax		427			(405		)
Pension adjustments, net of tax		2,103			(391		)
Comprehensive income, net of tax		35,530			67,104
Noncontrolling interests in comprehensive income of consolidated subsidiaries, net of tax		(869		)	(493		)
Comprehensive income attributable to AECOM, net of tax		$	34,661		$	66,611

 

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,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	38,978		$	48,424
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		23,902			25,548
Equity in earnings of unconsolidated joint ventures		(5,915		)	(8,962		)
Distribution of earnings from unconsolidated joint ventures		11,332			7,837
Non-cash stock compensation		6,834			8,634
Excess tax benefit from share-based payment		(685		)	(687		)
Foreign currency translation		(1,452		)	3,740
Other		837			(702		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(48,392		)	(128,612		)
Prepaid expenses and other assets		(19,415		)	(5,837		)
Accounts payable		(73,427		)	57,569
Accrued expenses and other current liabilities		75,084			(56,141		)
Billings in excess of costs on uncompleted contracts		69,018			57,260
Other long-term liabilities		(9,610		)	(14,497		)
Net cash provided by (used in) operating activities		67,089			(6,426		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for business acquisitions, net of cash acquired		(41,713		)	(8,972		)
Net investment in unconsolidated joint ventures		—			363
Proceeds from sale of investments		2,470			5,272
Payments for capital expenditures		(12,925		)	(18,284		)
Net cash used in investing activities		(52,168		)	(21,621		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under credit agreements		590,547			380,354
Repayments of borrowings under credit agreements		(428,877		)	(301,384		)
Proceeds from issuance of common stock		1,840			4,634
Proceeds from exercise of stock options		2,851			2,320
Payments to repurchase common stock under the Repurchase Program		(167,055		)	(7,271		)
Payments for other repurchases of common stock		(7,875		)	(6,398		)
Excess tax benefit from share-based payment		685			687
Net distributions to noncontrolling interests		(9,002		)	(244		)
Net cash (used in) provided by financing activities		(16,886		)	72,698
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(515		)	5,895
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(2,480		)	50,546
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		593,776			456,940
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	591,296		$	507,486
NON-CASH INVESTING AND FINANCING ACTIVITY
Common stock issued in acquisitions		$	14,322		$	857

 

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, 2012. 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, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2013.

 

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 June 2011, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of comprehensive income. The standard requires 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. This guidance was effective for the Company in its fiscal year beginning October 1, 2012 and it did not have a material impact on its financial condition or results of operations.

 

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 was effective for goodwill impairment tests performed in interim and annual periods for the Company in its fiscal year beginning October 1, 2012. This guidance did not 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 (Repurchase Program), pursuant to which the Company could initially purchase up to $200 million of its common stock. The Company completed the initial authorization to purchase $200 million of its common stock during the quarter ended June 30, 2012. In August 2012, the Company’s Board of Directors authorized an additional $300 million to repurchase its common stock under the Repurchase Program. Share repurchases under the Repurchase Program can be made through open market purchases, unsolicited or solicited privately negotiated transactions or other methods, including pursuant to a Rule 10b5-1 plan. As of December 31, 2012, $64.6 million of shares was available for repurchase of the Company’s common stock pursuant to the Repurchase Program. Repurchased shares are retired, but remain authorized for registration and issuance in the future.

 

Accelerated Share Repurchase

 

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 was contractually obligated to provide under the ASR agreement.

 

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The number of shares that ultimately were repurchased by the Company under the ASR agreement was 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 established a maximum and minimum price and other customary conditions under the ASR agreement. The ASR agreement was settled in full on March 7, 2012 and the total number of shares repurchased was 4.8 million at an average price of $20.97 per share.

 

Rule 10b5-1 Repurchase Plan and Open Market Purchases

 

In connection with the Repurchase Program, the Company entered into Rule 10b5-1 repurchase plans. The timing, nature and amount of purchases depended on a variety of factors, including market conditions and the volume limit defined by Rule 10b-18.

 

As of June 30, 2012, the Company had repurchased under the initial authorization approximately 4.4 million shares under the Rule 10b5-1 plans and through open market purchases, at an average price of $22.59 per share, for a total cost of approximately $100.0 million, thereby completing its initial authorization under the Repurchase Program.

 

As of December 31, 2012, the Company had repurchased, under the second authorization, through open market purchases and purchases made under a Rule 10b5-1 plan, 10.8 million shares at an average price of $21.77 per share, for a total cost of $235.4 million, which included 0.3 million shares repurchased in transactions that were settled in the second quarter of fiscal 2013.

 

$500 million share repurchase authorization

 

In January 2013, the Company’s Board of Directors authorized an additional $500 million to repurchase its common stock under the Repurchase Program.

 

4.              Business Acquisitions, Goodwill and Intangible Assets

 

Consideration for business acquisitions during the quarter ended December 31, 2012 totaled $54.3 million in cash and $14.3 million in stock. Business acquisitions included South Africa-based BKS Group and Asia-based KPK Quantity Surveyors. These business acquisitions did not meet the quantitative thresholds, either individually or in the aggregate, 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. Post-acquisition adjustments primarily relate to project related liabilities.

 

The changes in the carrying value of goodwill by reportable segment for the three months ended December 31, 2012 and 2011 were as follows:

 

		September 30, 2012			Post- Acquisition Adjustments			Foreign Exchange Impact			Acquired			December 31, 2012
								(in millions)
Professional Technical Services		$	1,608.6		$	—		$	(2.9	)	$	44.5		$	1,650.2
Management Support Services		166.8			—			—			—			166.8
Total		$	1,775.4		$	—		$	(2.9	)	$	44.5		$	1,817.0
		September 30, 2011			Post- Acquisition Adjustments			Foreign Exchange Impact			Acquired			December 31, 2011
								(in millions)
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

 

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The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of December 31, 2012 and September 30, 2012, included in intangible assets—net, in the accompanying consolidated balance sheets, were as follows:

 

		December 31, 2012									September 30, 2012
		Gross Amount			Accumulated Amortization			Intangible Assets, Net			Gross Amount			Accumulated Amortization			Intangible Assets, Net			Amortization Period
		(in millions)																		(years)
Backlog		$	95.2		$	(85.4	)	$	9.8		$	91.1		$	(83.8	)	$	7.3		1 – 5
Customer relationships		148.5			(57.8		)	90.7			143.6			(54.1		)	89.5			10
Trademark / tradename		7.8			(7.6		)	0.2			7.8			(7.6		)	0.2			2
Total		$	251.5		$	(150.8	)	$	100.7		$	242.5		$	(145.5	)	$	97.0

 

Amortization expense of acquired intangible assets included within cost of revenue was $5.3 million and $5.9 million for the three months ended December 31, 2012 and 2011, respectively. The following table presents estimated amortization expense of intangible assets for the remainder of fiscal 2013 and for the succeeding years:

 

Fiscal Year		(in millions)
2013 (nine months remaining)		$	15.9
2014		19.0
2015		16.0
2016		13.3
2017		12.1
Thereafter		24.4
Total		$	100.7

 

5.              Accounts Receivable—Net

 

Net accounts receivable consisted of the following as of December 31, 2012 and September 30, 2012:

 

		December 31, 2012			September 30, 2012
		(in millions)
Billed		$	1,277.6		$	1,207.0
Unbilled		1,152.7			1,145.1
Contract retentions		157.9			156.6
Total accounts receivable—gross		2,588.2			2,508.7
Allowance for doubtful accounts		(106.4		)	(112.8		)
Total accounts receivable—net		$	2,481.8		$	2,395.9

 

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, 2012 and September 30, 2012 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, or other contractual conditions or upon the completion of a 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, 2012 or September 30, 2012.

 

The Company sold trade receivables to financial institutions, of which $89.6 million was outstanding as of December 31, 2012. The Company does not retain financial or legal interest in these receivables.

 

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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 representatives 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.

 

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.

 

The Company follows guidance issued by the FASB on the consolidation of variable interest entities (VIEs) that 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 that indicate a party has the power to direct the activities that most significantly impact the joint venture’s 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 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 venture’s economic performance, the Company considers whether or not it has the obligation to absorb losses or rights to receive benefits of the VIE that could potentially be significant to the VIE.

 

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 15.

 

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

 

		December 31, 2012			September 30, 2012
		(in millions)
Current assets		$	208.4		$	243.2
Non-current assets		—			—
Total assets		$	208.4		$	243.2
Current liabilities		$	39.8		$	43.1
Non-current liabilities		—			—
Total liabilities		39.8			43.1
Total AECOM equity		121.7			145.1
Noncontrolling interests		46.9			55.0
Total owners’ equity		168.6			200.1
Total liabilities and owners’ equity		$	208.4		$	243.2

 

Total revenue of the consolidated joint ventures was $130.7 million and $100.2 million for the three months ended December 31, 2012 and 2011, 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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Summary of unaudited financial information of the unconsolidated joint ventures is as follows:

 

		December 31, 2012			September 30, 2012
		(in millions)
Current assets		$	587.7		$	598.8
Non-current assets		16.1			15.2
Total assets		$	603.8		$	614.0
Current liabilities		$	416.4		$	411.2
Non-current liabilities		3.2			2.7
Total liabilities		419.6			413.9
Joint ventures’ equity		184.2			200.1
Total liabilities and joint ventures’ equity		$	603.8		$	614.0
AECOM’s investment in joint ventures		$	86.3		$	91.0

 

Total revenue of the unconsolidated joint ventures was $527.5 million and $523.7 million for the three months ended December 31, 2012 and 2011, respectively.

 

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

 

		Three Months Ended
		December 31, 2012			December 31, 2011
		(in millions)
Pass through joint ventures		$	1.5		$	0.9
Other joint ventures		4.4			8.1
Total		$	5.9		$	9.0

 

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, 2012 and 2011:

 

		Three Months Ended
		December 31, 2012						December 31, 2011
		U.S.			Int’l			U.S.			Int’l
		(in millions)
Components of net periodic (benefit) cost:
Service costs		$	—		$	0.3		$	—		$	0.3
Interest cost on projected benefit obligation		1.6			6.1			1.9			6.4
Expected return on plan assets		(2.1		)	(5.9		)	(2.1		)	(6.3		)
Amortization of net loss		1.1			1.0			0.8			0.5
Settlement loss recognized		—			0.8			—			0.5
Net periodic cost		$	0.6		$	2.3		$	0.6		$	1.4

 

The total amounts of employer contributions paid for the three months ended December 31, 2012 were $1.8 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, 2013 are $7.1 million for U.S. plans and $12.9 million for non-U.S. plans. Included in other long-term liabilities are net pension liabilities of $185.9 million and $192.2 million as of December 31, 2012 and September 30, 2012, respectively.

 

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8.              Debt

 

Debt consisted of the following:

 

		December 31, 2012			September 30, 2012
		(in millions)
Unsecured term credit agreement		$	750.0		$	750.0
Unsecured senior notes		257.6			256.8
Unsecured revolving credit facility		159.6			24.0
Notes secured by real properties		24.0			24.2
Other debt		42.0			14.7
Total debt		1,233.2			1,069.7
Less: Current portion of debt and short-term borrowings		(211.4		)	(162.6		)
Long-term debt, less current portion		$	1,021.8		$	907.1

 

The following table presents, in millions, scheduled maturities of our debt as of December 31, 2012:

 

Fiscal Year
2013 (nine months remaining)		$	173.9
2014		167.9
2015		151.7
2016		461.3
2017		1.6
Thereafter		276.8
Total		$	1,233.2

 

Unsecured Term Credit Agreement

 

In September 2011, the Company entered into an Amended and Restated Credit Agreement (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 1.500% and the applicable margin for Eurodollar Rate loans is a range of 1.375% to 2.500%, both based on the debt-to-earnings leverage ratio of the Company at the end of each fiscal quarter. For the three months ended December 31, 2012 and 2011, the average interest rate of the Company’s term loan facility was 2.02% and 2.12%, 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, at its option, prepay the loans at any time, without penalty.

 

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, which have an effective interest rate of 5.62%, was $82.6 million and $81.8 million at December 31, 2012 and September 30, 2012, respectively. The fair value of the Company’s unsecured senior notes was approximately $276.0 million at December 31, 2012 and $277.8 million at September 30, 2012. 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.

 

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Unsecured Revolving Credit Facility

 

In July 2011, the Company entered into a Third Amended and Restated Credit Agreement (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 to $1.05 billion in order to support its working capital and acquisition needs. The Revolving Credit Agreement has an expiration date of July 20, 2016 and 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 0.00% 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, 2012 and September 30, 2012, $159.6 million and $24.0 million, respectively, were outstanding under the revolving credit facility. At both December 31, 2012 and September 30, 2012, outstanding standby letters of credit totaled $35.1 million under the revolving credit facility. As of December 31, 2012, the Company had $855.3 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 each 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, 2012, the consolidated leverage ratio was 2.56, 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.

 

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) merging with other entities, (iii) entering into a transaction resulting in a change of control, (iv) creating new liens, (v) selling assets outside of the ordinary course of business, (vi) entering into transactions with affiliates, and (vii) substantially changing 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 stockholders’ 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, 2012, this amount was $2.0 billion, which exceeds the calculated threshold of $1.5 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, 2012 and September 30, 2012, the Company was in compliance with all such covenants.

 

The Company’s average effective interest rate on total borrowings, including the effects of the interest rate swap agreements, during the three months ended December 31, 2012 and 2011 was 3.0% and 3.1%, respectively.

 

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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 and unsecured credit facilities. In addition to the unsecured revolving credit facility discussed above, the Company also has unsecured credit facilities. The unsecured credit facilities are primarily used for standby letters of credit issued primarily for payment and performance guarantees, see Note 15 herein. At December 31, 2012 and September 30, 2012, outstanding standby letters of credit totaled $202.0 million and $209.8 million, respectively.

 

The Company also had obligations under these unsecured credit facilities of $4.6 million as of December 31, 2012 and $4.8 million as of September 30, 2012, which were included in other debt. As of December 31, 2012, the Company had $254 million available under its unsecured credit facilities.

 

9.              Derivative Financial Instruments

 

The Company uses certain interest rate derivative contracts to hedge interest rate exposures on the Company’s variable rate debt. The Company enters into foreign currency derivative contracts with financial institutions to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company’s hedging program is not designated for trading or speculative purposes.

 

The Company recognizes derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. The Company records changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as accounting hedges in the accompanying consolidated statements of income as cost of revenue, interest expense, net, or to accumulated other comprehensive loss in the accompanying consolidated balance sheets.

 

Cash Flow Hedges

 

The Company uses interest rate swap agreements designated as cash flow hedges to fix the variable interest rates on portions of the Company’s debt. The Company also uses foreign currency options designated as cash flow hedges to hedge forecasted revenue transactions denominated in currencies other than the U.S. dollar. The Company initially reports any gain on the effective portion of a cash flow hedge as a component of accumulated other comprehensive loss. Depending on the type of cash flow hedge, the gain is subsequently reclassified to either interest expense, net when the interest expense on the variable rate debt is recognized, or to cost of sales when the hedged revenues are recorded. If the hedged transaction becomes probable of not occurring, any gain or loss related to interest rate swap agreements or foreign currency options would be recognized in other income (expense). Further, the Company excludes the change in the time value of the foreign currency options from the assessment of hedge effectiveness. The Company records the premium paid or time value of an option on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of sales.

 

At December 31, 2012, the effective portion of the Company’s interest rate swap agreements designated as cash flow hedges before tax effect was $5.4 million, of which $2.9 million is expected to be reclassified from accumulated other comprehensive loss to interest expense, net within the next 12 months. At December 31, 2012, the effective portion of the Company’s foreign currency options designated as cash flow hedges before tax effect, were immaterial.

 

As of December 31, 2012 and September 30, 2012, the notional principal, fixed rates and related expiration dates of the Company’s outstanding interest rate swap agreements were 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 notional principal of foreign currency options to purchase British Pounds (GBP) with Brazilian Reais (BRL) was BRL 4.5 million and BRL 16.4 million (or approximately $2.2 million and $8.1 million) at December 31, 2012 and September 30, 2012, respectively. These foreign exchange contracts have maturities of 24 months or less.

 

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Foreign Currency Forward Contracts

 

The Company uses foreign currency forward contracts, which are not designated as accounting hedges, to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts are recognized in cost of sales for those instruments related to the provision of our services or general and administrative expenses, along with the offsetting losses and gains of the related hedged items. The notional principal of foreign currency forward contracts to purchase U.S. dollars with foreign currencies was $126.3 million and $60.1 million at December 31, 2012 and September 30, 2012, respectively. The notional principal of foreign currency forward contracts to sell U.S. dollars for foreign currencies was $58.2 million and $110.2 million at December 31, 2012 and September 30, 2012, respectively. The notional principal of foreign currency forward contracts to purchase GBP with BRL was BRL 21.3 million and BRL 9.7 million (or approximately $10.4 million and $4.9 million) at December 31, 2012 and September 30, 2012, respectively.

 

Other Derivatives

 

Other derivatives that are not designated as hedging instruments consist of option contracts that the Company uses to hedge anticipated transactions in currencies other than the functional currency of a subsidiary. The Company recognizes gains and losses on these contracts as well as the offsetting losses and gains of the related hedged item costs in cost of sales. The Company records the premium paid or time value of an option on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of sales. The notional principal of option contracts to sell U.S. dollars for foreign currencies was $17.3 million at September 30, 2012 and no such option contracts were outstanding at December 31, 2012.

 

The fair values of our outstanding derivative instruments were as follows (in millions):

 

				Fair Value of Derivative Instruments as of
		Balance Sheet Location		Dec 31, 2012			Sep 30, 2012
Derivative assets
Derivatives designated as hedging instruments:
Foreign currency options		Prepaid expenses and other current assets		$	0.1		$	0.1
Derivatives not designated as hedging instruments:
Option contracts		Prepaid expenses and other current assets		—			0.1
Foreign currency forward contracts		Prepaid expenses and other current assets		0.2			0.4
Total				$	0.3		$	0.6
Derivative liabilities
Derivatives designated as hedging instruments:
Interest rate swap agreements		Accrued expenses and other current liabilities		$	2.9		$	2.9
Interest rate swap agreements		Other long-term liabilities		2.5			3.2
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		Accrued expenses and other current liabilities		1.5			0.6
Total				$	6.9		$	6.7

 

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income is summarized below (in millions):

 

		Increase in Losses Recognized in Accumulated Other Comprehensive Loss on Derivatives Before Tax Effect (Effective Portion) Three Months Ended Dec 31,
		2012			2011
Derivatives in cash flow hedging relationship:
Interest rate swap agreements		$	—		$	(0.8	)

 

				Losses Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) Three Months Ended Dec 31,
		Location		2012			2011
Derivatives in cash flow hedging relationship:
Interest rate swap agreements		Interest expense, net		$	(0.7	)	$	(0.4	)

 

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				Losses Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing and Ineffective Portion)(1) Three Months Ended Dec 31,
		Location		2012			2011
Derivatives in cash flow hedging relationship:
Foreign currency options		Cost of revenue		$	(0.1	)	$	—

 

(1)   Losses related to the ineffective portion of the hedges were not material in all periods presented.

 

The gain recognized in accumulated other comprehensive loss from the Company’s foreign currency options was immaterial for the three months ended December 31, 2012 and the Company had no foreign currency options outstanding for the three months ended December 31, 2011. There were no losses reclassified from accumulated other comprehensive loss into income from the foreign currency options in any of the years presented. Additionally, there were no losses recognized in income due to amounts excluded from effectiveness testing from the Company’s interest rate swap agreements.

 

The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):

 

				Gains / (Losses) Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing and Ineffective Portion) (1) Three Months Ended Dec 31,
		Location		2012			2011
Derivatives not designated as hedging instruments:
Foreign currency forward contracts		General and administrative expenses		$	(1.0	)	$	1.5
Option contracts		Cost of revenue		(0.1		)	—
				$	(1.1	)	$	1.5

(1)   Losses related to the ineffective portion of the hedges were not material in all periods presented.

 

10.       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, 2012 and 2011, the Company did not record any fair 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.

 

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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, 2012			Quoted Prices in Active Markets for Identical Assets (Level 2)
Foreign currency options		$	0.1		$	0.1
Foreign currency forward contracts		0.2			0.2
Total assets		$	0.3		$	0.3
Interest rate swap agreements		$	5.4		$	5.4
Foreign currency forward contracts		1.5			1.5
Total liabilities		$	6.9		$	6.9

 

		September 30, 2012			Quoted Prices in Active Markets for Similar Assets (Level 2)
Foreign currency options		$	0.1		$	0.1
Option contracts		0.1			0.1
Foreign currency forward contracts		0.4			0.4
Total assets		$	0.6		$	0.6
Interest rate swap agreements		$	6.1		$	6.1
Foreign currency forward contracts		0.6			0.6
Total liabilities		$	6.7		$	6.7

 

For additional information about the Company’s derivatives, refer to Note 9 herein.

 

11.       Share-based Payments

 

The fair value of the Company’s employee 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. 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. The Company did not grant any employee stock options during the three months ended December 31, 2012 and 2011.

 

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

 

		2012					2011
		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		2.5		$	22.81		2.9		$	21.38
Options granted		—		—			—		—
Options exercised		(0.3	)	12.71			(0.2	)	10.61
Options forfeited or expired		(0.1	)	27.18			—		25.22
Outstanding at December 31		2.1		23.67			2.7		22.22
Vested and expected to vest in the future as of December 31		2.1		$	23.65		2.7		$	22.16

 

The Company grants stock units to employees under its Performance Earnings Program (PEP), whereby units are earned and issued dependent upon meeting established cumulative performance objectives over a two or three year period. Additionally, the Company issues restricted stock units to employees which are earned based on service conditions. Total compensation expense related to share-based payments was $6.8 million and $8.6 million during the three months ended December 31, 2012 and 2011, respectively. Unrecognized compensation expense related to total share-based payments outstanding was $87.3 million and $39.0 million as of December 31, 2012 and September 30, 2012, respectively, to be recognized on a straight-line basis over the awards’ respective vesting periods which are generally three years.

 

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