Aecom Technology 10-Q 2012
WASHINGTON, D.C. 20549
For the quarterly period ended December 31, 2011
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
(Address of principal executive office and zip code)
(Registrants 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 registrants common stock were outstanding.
AECOM TECHNOLOGY CORPORATION
(in thousands, except share data)
See accompanying Notes to Consolidated Financial Statements.
(unaudited - in thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
(unaudited - in thousands)
See accompanying Notes to Consolidated Financial Statements.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
The changes in the carrying value of goodwill by reporting segment for the three months ended December 31, 2011 and 2010 were as follows:
The gross amounts and accumulated amortization of the Companys acquired identifiable intangible assets with finite useful lives as of December 31, 2011 and September 30, 2011, included in intangible assetsnet, in the accompanying consolidated balance sheets, were as follows:
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:
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.
Net accounts receivable consisted of the following as of December 31, 2011 and September 30, 2011:
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 Companys accounts receivable as of December 31, 2011 or September 30, 2011.
6. Joint Ventures and Variable Interest Entities
The Companys 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 ventures economics.
Some of the Companys joint ventures have no employees and minimal operating expenses. For these joint ventures, the Companys 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 Companys results of operations. For certain of these joint ventures where a fee is added by an unconsolidated joint venture to client billings, the Companys 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 ventures program manager, powers contained in the joint venture governing board, and to a certain extent, a companys 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 Companys joint ventures is further discussed in Note 14.
Summary of financial information of the consolidated joint ventures is as follows:
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 Companys 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:
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 AECOMs equity in earnings of unconsolidated joint ventures is as follows:
7. Pension Benefit Obligations
The following table details the components of net periodic cost for the Companys pension plans for the three months ended December 31, 2011 and 2010:
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.
Debt consisted of the following:
The following table presents, in millions, scheduled maturities of our debt:
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 Companys 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 Companys 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.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys acquisitions). As of December 31, 2011, the consolidated leverage ratio was 2.4, which did not exceed the Companys most restrictive maximum consolidated leverage ratio of 3.0.
The Companys Revolving Credit Agreement and Term Credit Agreement also contain certain covenants that limit the Companys 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 Companys 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 Companys 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, 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 Companys 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:
The Companys 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 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.
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 Companys non-pension financial assets and liabilities measured at fair value on a recurring basis (at least annually) in millions:
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:
10. Share-based Payment
The fair value of the Companys 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 Companys 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.
The fair value of options granted during the three months ended December 31, 2010 were determined using the following weighted average assumptions:
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:
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.
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:
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 options price is greater than the average market price of the Companys 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:
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:
The components of accumulated other comprehensive loss are as follows:
14. Commitments and Contingencies
The Company records amounts representing its probable estimated liabilities relating to claims, guarantees, litigation, audits and investigations. The Company relies in part on qualified actuaries to assist it in determining the level of reserves to establish for insurance-related claims that are known and have been asserted against it, and for insurance-related claims that are believed to have been incurred based on actuarial analysis, but have not yet been reported to the Companys claims administrators as of the respective balance sheet dates. The Company includes any adjustments to such insurance reserves in its consolidated results of operations.
The Company is a defendant in various lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on its consolidated balance sheet or statements of income or cash flows.
In some instances, the Company guarantees that a project, when complete, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, the Company may either incur significant additional costs or be held responsible for the costs incurred by the client to achieve the required performance standards. At December 31, 2011, the Company was contingently liable in the amount of approximately $228.2 million under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for payment and performance guarantees.
In the ordinary course of business, the Company enters into various agreements providing financial or performance assurances to clients on behalf of certain unconsolidated partnerships, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. The guarantees have various expiration dates. The maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties. Generally, under joint venture arrangements, if a partner is financially unable to complete its share of the contract, the other partner(s) will be required to complete those activities. The Company generally only enters into joint venture arrangements with partners who are reputable, financially sound and who carry appropriate levels of surety bonds for the project in order to adequately assure completion of their assignments. The Company does not expect that these guarantees will have a material adverse effect on its consolidated balance sheet or statements of income or cash flows.
Combat Support Associates Joint Venture
On March 24, 2010, the U.S. Defense Contract Audit Agency (DCAA) issued a DCAA Form 1 questioning costs incurred during fiscal 2007 by Combat Support Associates (CSA), a consolidated joint venture that includes AECOM Government Services, Inc., in the performance of a U.S. Government contract in Kuwait. The costs in question, which have been recognized as revenue on an accrual basis over the life of the contract, were incurred in paying Service Terminal Indemnity (STI) to CSAs employees at the end of their employment agreements. The DCAA questioned the reasonableness and allowability of the payments on the basis that CSA allegedly paid more than the amount required by the Kuwait Labor Law. As a result of the issuance of the DCAA Form 1, the U.S. Government withheld approximately $17 million from payments on current year billings pending final resolution of the questioned costs.
CSA has requested that the U.S. Government contracting officer make a final determination that the costs are proper under the contract. If the contracting officer declines to overrule the DCAA Form 1, CSA intends to utilize all proper avenues to defend against the Governments claim, including appeals processes.
The Company believes, based upon advice of Kuwaiti legal counsel, that CSA has been in compliance with STI requirements of Kuwait labor laws. Therefore, the Company presently believes that, if required, CSA would be successful in obtaining a favorable determination of this matter. However, if the DCAA Form 1 is not overruled and subsequent appeals are unsuccessful, the decision could have a material adverse effect on the Companys results of operations.
Global Linguists Solutions Joint Venture
On October 5, 2011, the DCAA issued a DCAA Form 1 questioning costs incurred by Global Linguists Solutions (GLS), an equity method joint venture, of which McNeil Technologies, Inc., acquired by the Company in August 2010, is an owner. The questioned costs were incurred by GLS during fiscal 2009, a period prior to the acquisition. Specifically, the DCAA questioned direct labor, associated burdens, and fees billed to the U.S. Government for linguists that allegedly did not meet specific contract requirements. As a result of the issuance of DCAA Form 1, the U.S. Government withheld approximately $14 million from payments on current year billings pending final resolution of the questioned costs.
GLS is performing a review of the issues raised in the Form 1 in order to respond fully to the questioned costs. Based on an initial review, GLS believes that the costs met the applicable contract requirements. However, if the DCAA Form 1 is not overruled and subsequent appeals are unsuccessful, the decision could have a material adverse effect on the Companys results of operations.
Due to the civil unrest in Libya, in February 2011, the Company ceased providing services as the program manager for the Libya Housing and Infrastructure Boards program to modernize the countrys infrastructure. The Company cannot currently determine when or if it will resume services. This business disruption resulted in a net expense of $10.0 million for the three months ended March 31, 2011, primarily comprised of demobilization and shutdown costs, certain asset write-downs and the reversal of certain previously recorded liabilities. As of December 31, 2011 and September 30, 2011, $25.6 million and $28.5 million, respectively, of liabilities related to this project are included in the accompanying consolidated balance sheet. The liabilities consist primarily of income taxes payable to Libyan authorities and trade accounts payable.
15. Reportable Segments
The Companys operations are organized into two reportable segments: Professional Technical Services (PTS) and Management Support Services (MSS). The Companys PTS reportable segment delivers planning, consulting, architectural and engineering design, and program and construction management services to commercial and government clients worldwide. The Companys MSS reportable segment provides program and facilities management and maintenance, training, logistics, consulting, and technical assistance and systems integration services, primarily for agencies of the U.S. government. These reportable segments are organized by the types of services provided, the differing specialized needs of the respective clients, and how the Company manages its business. The Company has aggregated various operating segments into its PTS reportable segment based on their similar characteristics, including similar long term financial performance, the nature of services provided, internal processes for delivering those services, and types of customers.
Management internally analyzes the results of its operations using several non-GAAP measures. A significant portion of the Companys revenues relates to services provided by subcontractors and other non-employees that it categorizes as other direct costs. Other direct costs are segregated from cost of revenues resulting in revenue, net of other direct costs, which is a measure of work performed by Company employees. The Company has included information on revenue, net of other direct costs, as it believes that it is useful to view our revenue exclusive of costs associated with external service providers.
The following tables set forth summarized financial information concerning the Companys reportable segments:
(1) Non-GAAP measure.
This Quarterly Report contains certain forward-looking statements, including the plans and objectives of management for our business, operations and economic performance. These forward-looking statements generally can be identified by the context of the statement or the use of forward-looking terminology, such as believes, estimates, anticipates, intends, expects, plans, is confident that or words of similar meaning, with reference to us or our management. Similarly, statements that describe our future operating performance, financial results, financial position, plans, objectives, strategies or goals are forward-looking statements. Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward-looking statements are subject to various factors, risks and uncertainties, many of which are beyond our control, including, but not limited to, our dependence on long-term government contracts, which are subject to uncertainties concerning the governments budgetary approval process, the possibility that our government contracts may be terminated by the government, the risk of employee misconduct or our failure to comply with laws and regulations, and our ability to successfully execute our mergers and acquisitions strategy, including the integration of new companies into our business. Accordingly, actual results could differ materially from those contemplated by any forward-looking statement. Please review Part II, Item 1A Risk Factors in this Quarterly Report for a discussion of the factors, risks and uncertainties that could affect our future results.
We are a leading global provider of professional technical and management support services for commercial and government clients around the world. We provide our services in a broad range of end markets and strategic geographic markets through a global network of operating offices and approximately 46,000 employees.
Our business focuses primarily on providing fee-based professional technical and support services and therefore our business is labor and not capital intensive. We derive income from our ability to generate revenue and collect cash from our clients through the billing of our employees time spent on client projects and our ability to manage our costs. We report our business through two segments: Professional Technical Services (PTS) and Management Support Services (MSS).
Our PTS segment delivers planning, consulting, architectural and engineering design, and program and construction management services to institutional, commercial and government clients worldwide in end markets such as transportation, facilities, environmental and energy markets. PTS revenue is primarily derived from fees from services that we provide, as opposed to pass-through fees from subcontractors and other direct costs.
Our MSS segment provides facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. MSS revenue typically includes a significant amount of pass-through fees from subcontractors and other direct costs.
Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, integrate and maximize the value of our recent acquisitions, allocate our labor resources to profitable and high growth markets, secure new contracts and renew existing client agreements. Demand for our services is cyclical and may be vulnerable to sudden economic downturns and reductions in government and private industry spending, which may result in clients delaying, curtailing or canceling proposed and existing projects. Moreover, as a professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation and profitability.
Our costs consist primarily of the compensation we pay to our employees, including salaries, fringe benefits, the costs of hiring subcontractors and other project-related expenses, and sales, general and administrative costs.
During the year ended September 30, 2011, we adopted a revised definition of revenue provided by acquired companies. We define revenue provided by acquired companies as revenue included in the current period up to twelve months subsequent to their acquisition date. Throughout this section, we refer to companies we acquired in the last twelve months as acquired companies.
As discussed in prior reports, due to the civil unrest in Libya in February 2011, we ceased providing services as the program manager for the Libya Housing and Infrastructure Boards program to modernize the countrys infrastructure. We cannot currently determine when or if we will resume services. For further information regarding this matter, see the discussion in Note 14 in the notes to our consolidated financial statements and below in this Managements Discussion and Analysis section.
Components of Income and Expense
Our management analyzes the results of our operations using several non-GAAP measures. As discussed in Overview above, a significant portion of our revenue relates to services provided by subcontractors and other non-employees that we categorize as other direct costs. Those costs are typically paid to service providers upon our receipt of payment from the client. We segregate other direct costs from revenue resulting in a measurement that we refer to as revenue, net of other direct costs, which is a measure of work performed by AECOM employees and, as discussed in Overview above, a large portion of our fees are derived through work performed by AECOM employees rather than other parties. We have included information on revenue, net of other direct costs, as we believe that it is useful to view our revenue exclusive of costs associated with external service providers, and the related gross margins, as discussed in Results of Operations below. Because of the importance of maintaining the high quality of work generated by our employees, gross margin, which measures revenue, net of other direct costs after subtracting the cost to generate such revenue, is another important metric that management reviews in evaluating the Companys operating performance.
The following table presents, for the periods indicated, a presentation of the non-GAAP financial measures reconciled to the closest GAAP measures:
Results of Operations
Three months ended December 31, 2011 compared to the three months ended December 31, 2010
The following table presents the percentage relationship of certain items to revenue, net of other direct costs:
Our revenue for the three months ended December 31, 2011 increased $93.0 million, or 4.8% to $2,029.2 million as compared to $1,936.2 million for the corresponding period last year. Revenue provided by acquired companies was $13.4 million for the three months ended December 31, 2011. Excluding the revenue provided by acquired companies, revenue increased $79.6 million, or 4.1%, from the three months ended December 31, 2010.
The increase in revenue, excluding acquired companies, for the three months ended December 31, 2011 was primarily attributable to increased demand for our construction management services in the Americas of $170 million, engineering and program management services on infrastructure projects in Australia, Asia and North America of approximately $35 million, $20 million and $20 million, respectively, partially offset by a reduction in services in our MSS segment noted below of $139 million and in Libya of $25 million.
Revenue, Net of Other Direct Costs
Our revenue, net of other direct costs, for the three months ended December 31, 2011 increased $17.0 million, or 1.4%, to $1,230.8 million as compared to $1,213.8 million for the corresponding period last year. Of this increase, $12.2 million, or 71.8%, was provided by acquired companies. Excluding revenue, net of other direct costs, provided by acquired companies, revenue, net of other direct costs, increased $4.8 million, or 0.4% over the three months ended December 31, 2010.
The increase in revenue, net of other direct costs, excluding revenue, net of other direct costs provided by acquired companies, was primarily due to increased demand for our engineering and program management services on infrastructure projects in Australia of approximately $25 million, partially offset by decreased activity in Libya of $15 million.
Our gross profit for the three months ended December 31, 2011 decreased $15.0 million, or 14.2%, to $90.3 million as compared to $105.3 million for the corresponding period last year. Gross profit provided by acquired companies was $2.1 million. Excluding gross profit provided by acquired companies, gross profit decreased $17.1 million, or 16.2%, from the three months ended December 31, 2010. For the three months ended December 31, 2011, gross profit, as a percentage of revenue, net of other direct costs, decreased to 7.3% from 8.7% in the three months ended December 31, 2010.
The decrease in gross profit, for the three months ended December 31, 2011 as compared to the corresponding period in the prior year was primarily attributable to a reduction in gross profit in our MSS segment noted below and the reduction in services in Libya.
The decrease in gross profit, as a percentage of revenue, net of other direct costs for the three months ended December 31, 2011 was primarily due to a reduction in gross profit in our MSS segment noted below and the reduction in services in Libya.
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for the three months ended December 31, 2011 increased $0.9 million, or 11.1%, to $9.0 million as compared to $8.1 million in the corresponding period last year.
General and Administrative Expenses
Our general and administrative expenses for the three months ended December 31, 2011 decreased $0.6 million, or 2.6%, to $22.6 million as compared to $23.2 million for the corresponding period last year. As a percentage of revenue, net of other direct costs, general and administrative expenses decreased from 2.0% in the three months ended December 31, 2010 to 1.8% in the three months ended December 31, 2011.
Our other income for the three months ended December 31, 2011 was $1.9 million as compared to other income of $2.3 million for the three months ended December 31, 2010.
Interest Expense, Net
Our net interest expense for the three months ended December 31, 2011 was $10.6 million as compared to $9.9 million of net interest expense for the three months ended December 31, 2010.