Aecom Technology (ACM)

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Aecom Technology (NYSE: ACM) is an engineering firm that specializes in transportation infrastructure. The company provides design services for projects including the new PATH terminal at the World Trade Center site, New York's Second Avenue Subway renovation, and the 1088-meter-span Sutong Bridge in China. In all, the company brought in over $4 billion in revenue and posted 85% growth in net income for 2007. ^[1]

While technical engineering services account for a large percentage of Aecom's total business, the company has been actively growing its Management Support Services (MSS) division as well. MSS projects can range from developing global supply chains for humanitarian groups to establishing natural disaster contingency plans for corporations. The business unit has posted double-digit revenue gains in each year since 2005. ^[2] Much of this growth has come from contracts with the U.S. Department of Defense, which relies on commercial contractors for most of its logistics support and maintenance services in Iraq and Afghanistan. The intersection of the Iraq troop surge of 2007-08 and the growing need to maintain and overhaul aging equipment in the field has been a boon for Aecom which has grown into one the military's top trainers/managers of maintenance service personnel.

Yet there is a certain amount of risk to catering this closely to active military operations. In 2008, President Bush declared that troop draw-downs in Iraq will begin as early as 2009^[3] and such actions will reduce the demand for Aecom's services. With more than 60% of its total revenues coming from publicly-funded sources,^[4] the company is often exposed to volatile project funding brought on by shifts in the legislative priorities of these clients. The company has sought to minimize this risk by catering to governments of many different nations.

Aecom has expanded its international business primarily through the acquisition of smaller firms already operating in the target region. This approach nearly doubled the company's international revenues in the period from 2005 to 2008. ^[5]

[edit] Business and Financial Profile

Fundamentals, FY 2005-2007 ^[1]

[edit] Fundamentals

[edit] Business Segments

FY 2007 Revenues by Business Segment ^[2]

Aecom divides its business operations into two broad business segments: Profesional Technical Services (PCS) and Management Support Services (MSS).

• Professional Technical Services (80.7% of FY 2007 Revenues, 86.0% of Operating Income)^[2] provides design, engineering, and construction management services with a particular focus on the transportation, environmental, and energy-related industries. Working for both government and corporate clients, PTS undertakes projects ranging from subway and light rail systems to water delivery and treatment facilities to wind and solar energy farms. Revenues for the segment rose 23.2% in 2007 on higher infrastructure expenditures in foreign markets and continued M&A activities.^[2]
• Management Support Services (19.3% of FY 2007 Revenues, 14.0% of Operating Income) ^[2] offers facility management, personnel training, and field logistics for agencies of the U.S. federal government. Active projects include the maintenance and management of military bases and test ranges, implementation of training activities for U.S. law enforcement officers and the modification and overhaul of army transport and combat vehicles for the Department of Defense (DOD) domestically and in the field. Revenues for MSS rose 26.5% as a result of increased DOD demand for base management and maintenance in the Middle East. ^[2]

[edit] Geographic Exposure

Aecom's strategy for international expansion centers around acquisition of firms in targeted locales, as evidenced by its 2006 purchase of the Canadian firm Cansult Ltd. to expand ACM's exposure in the United Arab Emirates.

FY 2007 Revenues by Client Type ^[4]

[edit] Clients

[edit] Backlog

As of September 2008, Aecom had upwards of $6.0 billion worth of backlogged work. Of this, $4.8 billion was attributable to the PTS segment with the remaining $1.2 Billion attributable to MSS. These figures include both uncompleted work on on-going projects as well as the projected value of newly-awarded projects.^[6]

[edit] Trends and Forces

[edit] Diversification of Government Clients Reduces Risk of Project Cancellations

In 2007, 61% of Aecom's total revenues came from contracts with national, state, and local governments.^[4] While this client distribution falls near the industry average (competitors CH2M Hill, KBR (KBR) , and Tetra Tech (TTEK) all received between 60% and 70% of their total 2007 revenues from government contracts)^[7][8], Aecom's focus on clients in foreign governments provides a buffer from spending volatility in any one country. A full 13% of all 2007 revenues came from non-U.S. government clients--compared to an average of around 6% for the competitors mentioned above.^[4] Most of the risk from government contracts comes from the fact that they are subject to periodic approval and can usually be canceled--without penalty--by the client. Government expenditures can vary greatly from year to year depending on tax revenues, the party in power, military realities, and public perception of a given issue, and budget cuts often lead to funding cuts or cancellations of government contracts. By spreading its projects between a number of different national governments, Aecom reduces the effect that volatility in any one government can have on its cash flow.

[edit] Improvements to U.S. Transportation Infrastructure Presents Opportunity for Domestic Growth

In 2007, Aecom generated more revenue from transportation-related engineering and construction projects than any other U.S. firm. ^[9] The company's history and expertise in this area position it well to take advantage of what industry experts say will be a necessary increase in total infrastructure spending in the time period between 2008 and 2013. ^[9] The American Society of Civil Engineers estimates that the U.S. will need to spend roughly $250 billion dollars over that time to ensure the continued safety and operation of the nation's transportation infrastructure. ^[10]

[edit] Continued U.S. Military and Reconstruction Efforts Important to Growth of MSS Business Unit

In 2007, Aecom's Management Support Services received over $800 million in revenues from contracts with the U.S. federal government (75% of ACM's total revenues from the federal government).^[4] This represents a 28% growth in revenues from this client since 2006 and a full 164% increase over 2005 revenues.^[4] This growth has been fueled in large part by new and increased contracts with the U.S. Department of Defense (DOD) for services provided in Afghanistan, Iraq and Kuwait. As the U.S. military presence in these regions stretches on, need for maintenance and overhauls on equipment and vehicles is growing. As a significant provider/and trainer of personnel for these types of field jobs, Aecom's MSS division is positioned to take advantage of this uptick. There is, however, a downside risk to this type of work as well. If, as promised by the candidates for president in 2008, the U.S. decides to pull out of the Iraq theater, there is the real potential that MSS's future revenue from DOD sources will shrink.

[edit] Competition

Aecom faces competition in both of its market segments from engineering giants KBR (KBR), Jacobs Engineering Group (JEC), Fluor (FLR), CH2MHill. Additionally, its PTS division competes for design and engineering projects with Tetra Tech (TTEK), Black & Veatch, SAIC (SAI) and URS (URS) among others.

Note: Selected financial information often not available on private companies.

[edit] Market Share

[edit] References

1. ↑ ^{1.0 1.1 1.2} | ACM, 2007 10-K report, Item 6: Selected Financial Data, p. 22
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5} | ACM, 2007 10-K Report, Note 19: Reportable Segments, p. 81
3. ↑ | CNN.com, "Bush to announce Iraq troop reduction," 9/8/2008
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} | ACM, 2007 10-K Report, 2007, Item 1: Business, p. 6
5. ↑ ^{5.0 5.1} | ACM, 2007 10-K Report, Notes to Consolidated Financial Statements, p. 82
6. ↑ | ACM, 2007 10-K Report, Item 1: Business, p. 8
7. ↑ ^{7.0 7.1} | JEC, 2007 10-K Report, Consolidated Statements of Earnings, F-4
8. ↑ ^{8.0 8.1} | CH2M Hill, 2007 Corporate Report, pp. 9
9. ↑ ^{9.0 9.1 9.2} "Top 200 Environmental Firms." Engineering News-Record. 6/30/2008, Vol. 260, Issue 22, pp. 28-35
10. ↑ | American Society of Civil Engineers, 2005 Infrastructure Report Card; Taken from sections: Bridges, Roads, Transit, and Rail
11. ↑ | Google Finance: ACM, Annual Income Statement
12. ↑ | ACM, 2007 10-K Report, Item 1: Business, pp. 8
13. ↑ Hoover's Company Records: Black & Veatch
14. ↑ | CH2M Hill, 2007 10-K, Item 1: Business, pp. 9
15. ↑ | Google Finance: FLR, Annual Income Statement
16. ↑ | FLR, 2007 10-K Report, Item 1: Business, pp.7
17. ↑ | JEC, 2007 10-K Report, Item 7: Management's Discussion and Analysis, pp. 20
18. ↑ | Google Finance: KBR, Annual Income Statement
19. ↑ | KDR, 2007 10-K Report, Item 1: Business, pp. 11
20. ↑ | Google Finance: SAI, Annual Income Statement
21. ↑ | SAI, 2008 10-K Report, Item 1: Business, pp. 3
22. ↑ | TTEK, 2007 10-K Report, Item 6: Selected Five-Year Consolidated Financial Data, pp. 37
23. ↑ | TTEK, 2007 10-K Report, Item 1: Business, pp. 16
24. ↑ | Google Finance: URS, Annual Income Statement
25. ↑ | URS, 2007 10-K Report, Item 1: Business, pp. 13
26. ↑ ^{26.0 26.1} This number represents the combined market share of existing Aecom operations and those of its subsidiary EarthTech. Aecom acquired EarthTech in 2008, shortly after these numbers were released.