10-Q 1 a18-7889_110q.htm 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 March 31, 2018

 

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

(Exact name of registrant as specified in its charter)

 

Delaware

 

61-1088522

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

1999 Avenue of the Stars, Suite 2600
Los Angeles, California 90067

(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes o    No o

 

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 May 2, 2018, 160,327,175 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

AECOM

 

INDEX

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and September 30, 2017

1

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2018 (unaudited) and March 31, 2017 (unaudited)

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2018 (unaudited) and March 31, 2017 (unaudited)

3

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2018 (unaudited) and March 31, 2017 (unaudited)

4

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

5

 

 

 

Item 2.

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

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

PART II.

OTHER INFORMATION

46

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

Item 4.

Mine Safety Disclosure

59

 

 

 

Item 5.

Other Information

60

 

 

 

Item 6.

Exhibits

60

 

 

 

SIGNATURES

 

62

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

AECOM

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

March 31,
2018

 

September 30,
2017

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

662,168

 

$

665,871

 

Cash in consolidated joint ventures

 

205,057

 

136,491

 

Total cash and cash equivalents

 

867,225

 

802,362

 

Accounts receivable—net

 

5,208,918

 

5,127,743

 

Prepaid expenses and other current assets

 

648,602

 

696,718

 

Current assets held for sale

 

116,755

 

 

Income taxes receivable

 

82,460

 

55,399

 

TOTAL CURRENT ASSETS

 

6,923,960

 

6,682,222

 

PROPERTY AND EQUIPMENT—NET

 

583,417

 

621,357

 

DEFERRED TAX ASSETS—NET

 

219,907

 

171,331

 

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

384,897

 

364,223

 

GOODWILL

 

5,942,572

 

5,992,881

 

INTANGIBLE ASSETS—NET

 

368,215

 

415,096

 

OTHER NON-CURRENT ASSETS

 

194,364

 

149,846

 

TOTAL ASSETS

 

$

14,617,332

 

$

14,396,956

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term debt

 

$

9,830

 

$

1,221

 

Accounts payable

 

2,286,166

 

2,249,872

 

Accrued expenses and other current liabilities

 

2,167,692

 

2,245,519

 

Income taxes payable

 

28,419

 

38,176

 

Billings in excess of costs on uncompleted contracts

 

979,366

 

902,812

 

Current liabilities held for sale

 

46,459

 

 

Current portion of long-term debt

 

123,909

 

140,779

 

TOTAL CURRENT LIABILITIES

 

5,641,841

 

5,578,379

 

OTHER LONG-TERM LIABILITIES

 

340,938

 

322,199

 

DEFERRED TAX LIABILITY—NET

 

6,467

 

20,515

 

PENSION BENEFIT OBLIGATIONS

 

548,485

 

559,068

 

LONG-TERM DEBT

 

3,814,976

 

3,702,109

 

TOTAL LIABILITIES

 

10,352,707

 

10,182,270

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 14)

 

 

 

 

 

 

 

 

 

 

 

AECOM STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock—authorized, 300,000,000 shares of $0.01 par value as of March 31, 2018 and September 30, 2017; issued and outstanding 160,237,598 and 157,529,419 shares as of March 31, 2018 and September 30, 2017, respectively

 

1,602

 

1,575

 

Additional paid-in capital

 

3,792,929

 

3,733,572

 

Accumulated other comprehensive loss

 

(707,000

)

(700,661

)

Retained earnings

 

953,221

 

961,640

 

TOTAL AECOM STOCKHOLDERS’ EQUITY

 

4,040,752

 

3,996,126

 

Noncontrolling interests

 

223,873

 

218,560

 

TOTAL STOCKHOLDERS’ EQUITY

 

4,264,625

 

4,214,686

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

14,617,332

 

$

14,396,956

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM

Consolidated Statements of Operations

(unaudited - in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2018

 

March 31,
2017

 

March 31,
2018

 

March 31,
2017

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

4,790,910

 

$

4,427,198

 

$

9,701,742

 

$

8,785,547

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

4,649,638

 

4,258,754

 

9,424,318

 

8,447,130

 

Gross profit

 

141,272

 

168,444

 

277,424

 

338,417

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures

 

13,038

 

21,738

 

42,758

 

43,209

 

General and administrative expenses

 

(30,217

)

(29,844

)

(64,887

)

(62,483

)

Impairment of assets held for sale, including goodwill

 

(168,178

)

 

(168,178

)

 

Acquisition and integration expense

 

 

(19,997

)

 

(35,409

)

Gain on disposal activities

 

 

572

 

 

572

 

(Loss) income from operations

 

(44,085

)

140,913

 

87,117

 

284,306

 

 

 

 

 

 

 

 

 

 

 

Other income

 

12,507

 

1,241

 

14,790

 

2,101

 

Interest expense

 

(100,577

)

(61,801

)

(156,742

)

(115,438

)

(Loss) income before income tax benefit

 

(132,155

)

80,353

 

(54,835

)

170,969

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

(24,400

)

(35,487

)

(71,493

)

(10,649

)

Net (loss) income

 

(107,755

)

115,840

 

16,658

 

181,618

 

Noncontrolling interests in income of consolidated subsidiaries, net of tax

 

(11,978

)

(13,444

)

(25,077

)

(32,043

)

Net (loss) income attributable to AECOM

 

$

(119,733

)

$

102,396

 

$

(8,419

)

$

149,575

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to AECOM per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.75

)

$

0.66

 

$

(0.05

)

$

0.97

 

Diluted

 

$

(0.75

)

$

0.65

 

$

(0.05

)

$

0.94

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

159,495

 

155,366

 

158,702

 

154,810

 

Diluted

 

159,495

 

158,650

 

158,702

 

158,322

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM

Consolidated Statements of Comprehensive Income (Loss)

(unaudited—in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2018

 

March 31,
2017

 

March 31,
2018

 

March 31,
2017

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(107,755

)

$

115,840

 

$

16,658

 

$

181,618

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on derivatives, net of tax

 

(1,625

)

2,333

 

(840

)

3,700

 

Foreign currency translation adjustments

 

15,496

 

40,885

 

9,513

 

(33,039

)

Pension adjustments, net of tax

 

(16,103

)

(1,545

)

(13,635

)

15,428

 

Other comprehensive (loss) income, net of tax

 

(2,232

)

41,673

 

(4,962

)

(13,911

)

Comprehensive (loss) income, net of tax

 

(109,987

)

157,513

 

11,696

 

167,707

 

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

 

(12,562

)

(13,837

)

(26,454

)

(32,128

)

Comprehensive (loss) income attributable to AECOM, net of tax

 

$

(122,549

)

$

143,676

 

$

(14,758

)

$

135,579

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM

Consolidated Statements of Cash Flows

(unaudited - in thousands)

 

 

 

Six Months Ended March 31,

 

 

 

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

16,658

 

$

181,618

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

133,483

 

138,866

 

Equity in earnings of unconsolidated joint ventures

 

(42,758

)

(43,209

)

Distribution of earnings from unconsolidated joint ventures

 

72,513

 

39,871

 

Non-cash stock compensation

 

37,196

 

38,053

 

Prepayment premium on redemption of unsecured senior notes

 

34,504

 

 

Impairment of assets held for sale, including goodwill

 

168,178

 

 

Foreign currency translation

 

(27,414

)

(8,719

)

Write-off of debt issuance costs

 

7,048

 

 

Gain on disposal activities

 

 

(572

)

Other

 

1,245

 

(8,008

)

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

 

 

 

 

 

Accounts receivable

 

(159,872

)

(96,595

)

Prepaid expenses and other assets

 

(54,408

)

13,713

 

Accounts payable

 

49,305

 

35,871

 

Accrued expenses and other current liabilities

 

(53,028

)

(227,685

)

Billings in excess of costs on uncompleted contracts

 

69,033

 

13,844

 

Other long-term liabilities

 

(80,860

)

(45,628

)

Net cash provided by operating activities

 

170,823

 

31,420

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from purchase price adjustment to business acquisition

 

2,203

 

 

Cash acquired from consolidation of joint venture

 

7,630

 

 

Proceeds from disposal of businesses, net of cash disposed

 

 

2,200

 

Investment in unconsolidated joint ventures

 

(66,034

)

(24,561

)

Return of investment in unconsolidated joint ventures

 

10,442

 

2,535

 

Proceeds from sales of investments

 

161

 

600

 

Proceeds from disposal of property and equipment

 

13,499

 

5,321

 

Payments for capital expenditures

 

(55,701

)

(44,026

)

Net cash used in investing activities

 

(87,800

)

(57,931

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowings under credit agreements

 

5,713,366

 

3,123,108

 

Repayments of borrowings under credit agreements

 

(4,836,488

)

(4,003,059

)

Proceeds from issuance of unsecured senior notes

 

 

1,000,000

 

Redemption of unsecured senior notes

 

(800,000

)

 

Prepayment premium on redemption of unsecured senior notes

 

(34,504

)

 

Cash paid for debt issuance costs

 

(10,386

)

(12,491

)

Proceeds from issuance of common stock

 

15,570

 

14,341

 

Proceeds from exercise of stock options

 

3,194

 

3,679

 

Payments to repurchase common stock

 

(27,237

)

(17,966

)

Net distributions to noncontrolling interests

 

(24,058

)

(33,457

)

Other financing activities

 

(23,722

)

(10,078

)

Net cash (used in) provided by financing activities

 

(24,265

)

64,077

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

6,105

 

(3,739

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

64,863

 

33,827

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

802,362

 

692,145

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

867,225

 

$

725,972

 

 

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

 

AECOM

Notes to Consolidated Financial Statements

(unaudited)

 

1.              Basis of Presentation

 

The accompanying consolidated financial statements of AECOM (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 intercompany 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, 2017 (the Annual Report). The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (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 consolidated financial statements included in this report have been prepared consistently with the accounting policies described in the Annual Report and should be read together with the Annual Report.

 

The results of operations for the three and six months ended March 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2018.

 

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 May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance which amended the existing accounting standards for revenue recognition. The new accounting guidance establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company continues to evaluate the impact of the new guidance on its consolidated financial statements, including the expected impact on its business processes, systems, and controls, and potential differences in the timing or method of revenue recognition for its contracts. The Company expects to adopt the new standard on October 1, 2018, using the modified retrospective method that may result in a cumulative effect adjustment as of the date of adoption.

 

In February 2016, the FASB issued new accounting guidance which changes accounting requirements for leases. The new guidance requires lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance, on the balance sheet. It also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. The new guidance will be effective for the Company’s fiscal year beginning October 1, 2019 with early adoption permitted. The new guidance must be adopted using a modified retrospective transition approach and provides for certain practical expedients. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements.

 

In February 2016, the FASB issued new accounting guidance to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under previous guidance does not, in and of itself, require redesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company adopted the new guidance on October 1, 2017; and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued new accounting guidance which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The Company adopted the new guidance on October 1, 2017; and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

5



Table of Contents

 

In June 2016, the FASB issued a new credit loss standard that changes the impairment model for most financial assets and certain other instruments. The new guidance will replace the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance will be effective for the Company’s fiscal year starting October 1, 2020. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements.

 

In August 2016, the FASB issued new accounting guidance clarifying how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The new guidance will be effective for the Company in its fiscal year beginning October 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact that the new guidance will have on its consolidated statement of cash flows.

 

In October 2016, the FASB issued additional guidance on how a single decision maker considers its indirect interests when performing the primary beneficiary analysis under the variable interest model. Under the new guidance, the single decision maker will consider its indirect interests on a proportionate basis. The Company adopted the new guidance on October 1, 2017 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued new accounting guidance to simplify the test for goodwill impairment. This guidance eliminates step two from the goodwill impairment test. Under the new guidance, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The Company early adopted the new guidance on January 1, 2018 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In August 2017, the FASB issued new accounting guidance on derivatives and hedging. This guidance better aligns an entity’s risk management activities and financial reporting for hedging relationships through change to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. The Company early adopted the guidance on January 1, 2018 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

3.              Business Acquisitions, Goodwill and Intangible Assets

 

The Company completed one acquisition during the six months ended March 31, 2018, and two acquisitions during the year ended September 30, 2017 for a total consideration of $5.6 million and $164.4 million, respectively. The business combinations did not meet the quantitative thresholds to require separate disclosures based on the Company’s consolidated net assets, investments and net income. The acquisitions were accounted for under the purchase method of accounting. As such, the purchase considerations were allocated to acquired tangible and intangible assets and liabilities based upon their fair values. The determination of fair values of assets and liabilities acquired requires the Company to make estimates and use valuation techniques when market value is not readily available. Transaction costs associated with business acquisitions are expensed as they are incurred.

 

On October 17, 2014, the Company completed the acquisition of the U.S. headquartered URS Corporation (URS), an international provider of engineering, construction, and technical services, by purchasing 100% of the outstanding shares of URS common stock. The Company paid total consideration of approximately $2.3 billion in cash and issued approximately $1.6 billion of AECOM common stock to the former stockholders and certain equity award holders of URS. In connection with the acquisition, the Company also assumed URS’s senior notes totaling $0.4 billion, net of Company repayments. The Company repaid in full URS’s $0.6 billion 2011 term loan and $0.1 billion of URS’s revolving line of credit.

 

The Company acquired backlog and customer relationship intangible assets valued at $973.8 million representing the fair value of existing contracts and the underlying customer relationships that have lives ranging from 1 to 11 years (weighted average lives of approximately 3 years) in connection with the URS acquisition. Acquired accrued expenses and other current liabilities include URS project liabilities and approximately $240 million related to estimated URS legal settlements and uninsured legal damages; see Note 14, “Commitments and Contingencies,” including legal matters related to former URS affiliates.

 

Amortization of intangible assets relating to URS, included in cost of revenue, was $18.2 million and $20.9 million during the three months ended March 31, 2018 and 2017, respectively, and $36.4 million and $41.8 million during the six months ended March 31, 2018 and 2017, respectively. Additionally, included in equity in earnings of joint ventures and noncontrolling interests was intangible amortization expense of $1.7 million and ($2.1) million, respectively, during the three months ended March 31, 2018 and $2.5 million and ($2.1) million, respectively, during the three months ended March 31, 2017, related to joint venture fair value adjustments. Included in equity in earnings of joint ventures and noncontrolling interests was intangible amortization expense of $3.6 million and ($4.2) million, respectively, during the six months ended March 31, 2018 and $4.5 million and ($4.2) million, respectively, during the six months ended March 31, 2017, related to joint venture fair value adjustments.

 

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Billings in excess of costs on uncompleted contracts includes a margin fair value liability associated with long-term contracts acquired in connection with the acquisition of URS. This margin fair value liability was $149.1 million at the acquisition date and its carrying value was $6.4 million at March 31, 2018 and $8.6 million at September 30, 2017, and is recognized as revenue on a percentage-of-completion basis as the applicable projects progress. The majority of this liability was recognized over the first two years from the acquisition date. Revenue and the related income from operations related to the margin fair value liability recognized during the three months ended March 31, 2018 and 2017 was $1.1 million and $1.6 million, respectively; revenue and the related income from operations related to the margin fair value liability recognized during the six months ended March 31, 2018 and 2017 was $2.2 million and $3.2 million, respectively.

 

Acquisition and integration expenses, relating to business acquisitions, in the accompanying consolidated statements of operations are comprised of the following:

 

 

 

Three months ended

 

Six months ended

 

 

 

Mar 31,
2018

 

Mar 31,
2017

 

Mar 31,
2018

 

Mar 31,
2017

 

 

 

(in millions)

 

Severance and personnel costs

 

$

 

$

18.4

 

$

 

$

29.9

 

Professional service, real estate-related, and other expenses

 

 

1.6

 

 

5.5

 

Total

 

$

 

$

20.0

 

$

 

$

35.4

 

 

Included in severance and personnel costs for the six months ended March 31, 2017 was $7.7 million of severance expenses, which was substantially all paid as of March 31, 2018. All acquisition and integration expenses are classified within the Corporate segment, as presented in Note 15.

 

In line with the Company’s capital allocation policy prioritizing that future capital be allocated to the reduction of long-term debt and lowering its leverage ratio, management approved a plan to sell certain non-core oil and gas businesses in North America, included in the Company’s Construction Services segment (the Disposal Group). The Company classified the related assets and liabilities of the Disposal Group as held for sale in the consolidated balance sheet. The Company recorded losses related to the remeasurement of the Disposal Group based on estimated fair value less costs to sell resulting in total asset impairments of $168.2 million, recorded in Impairment of Assets Held for Sale. Fair value was estimated using Level 3 inputs, such as forecasted cash flows, and Level 2 inputs, including bid prices from potential buyers. In connection with the classification of the Disposal Group as held for sale, the Company tested the amount of goodwill and other intangible assets allocated to the Disposal Group for impairment. The Company recorded an impairment of goodwill during the three months ended March 31, 2018 of $125.4 million and an impairment of intangible and other noncurrent assets of $42.8 million. The Company expects to complete the sale of the Disposal Group by the end of the fiscal year. A summary of certain financial information of the Disposal Group is as follows:

 

 

 

March 31, 2018
(in millions)

 

Current assets

 

$

78.1

 

Non-current assets

 

81.5

 

Goodwill

 

125.4

 

Less: Impairment of assets held for sale

 

(168.2

)

Total assets held for sale

 

$

116.8

 

 

 

 

 

Current liabilities

 

$

36.2

 

Non-current liabilities

 

10.3

 

Total liabilities held for sale

 

$

46.5

 

 

 

 

 

Net Assets Held for Sale

 

$

70.3

 

 

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Table of Contents

 

The changes in the carrying value of goodwill by reportable segment for the six months ended March 31, 2018 were as follows:

 

 

 

September 30,
2017

 

Measurement
Period
Adjustments

 

Impairment

 

Foreign
Exchange
Impact

 

March 31,
2018

 

 

 

(in millions)

 

Design and Consulting Services

 

$

3,218.9

 

$

 

$

 

$

3.5

 

$

3,222.4

 

Construction Services

 

1,049.9

 

64.4

 

(125.4

)

(7.0

)

981.9

 

Management Services

 

1,724.1

 

 

 

14.2

 

1,738.3

 

Total

 

$

5,992.9

 

$

64.4

 

$

(125.4

)

$

10.7

 

$

5,942.6

 

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of March 31, 2018 and September 30, 2017, included in intangible assets—net, in the accompanying consolidated balance sheets, were as follows:

 

 

 

March 31, 2018

 

September 30, 2017

 

 

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Intangible
Assets, Net

 

Gross
Amount

 

Accumulated
Amortization

 

Intangible
Assets, Net

 

Amortization
Period

 

 

 

(in millions)

 

(years)

 

Backlog and customer relationships

 

$

1,287.5

 

$

(920.8

)

$

366.7

 

$

1,283.6

 

$

(870.2

)

$

413.4

 

1 - 11

 

Trademark / tradename

 

18.3

 

(16.8

)

1.5

 

18.3

 

(16.6

)

1.7

 

0.3 - 2

 

Total

 

$

1,305.8

 

$

(937.6

)

$

368.2

 

$

1,301.9

 

$

(886.8

)

$

415.1

 

 

 

 

Amortization expense of acquired intangible assets included within cost of revenue was $50.8 million and $50.6 million for the six months ended March 31, 2018 and 2017, respectively. The following table presents estimated amortization expense of existing intangible assets for the remainder of fiscal 2018 and for the succeeding years:

 

Fiscal Year

 

(in millions)

 

2018 (six months remaining)

 

$

45.6

 

2019

 

84.1

 

2020

 

70.1

 

2021

 

57.4

 

2022

 

44.6

 

Thereafter

 

66.4

 

Total

 

$

368.2

 

 

4.              Accounts Receivable—Net

 

Net accounts receivable consisted of the following:

 

 

 

March 31,
2018

 

September 30,
2017

 

 

 

(in millions)

 

Billed

 

$

2,448.8

 

$

2,317.8

 

Unbilled

 

2,201.3

 

2,293.5

 

Contract retentions

 

607.1

 

568.6

 

Total accounts receivable—gross

 

5,257.2

 

5,179.9

 

Allowance for doubtful accounts

 

(48.3

)

(52.2

)

Total accounts receivable—net

 

$

5,208.9

 

$

5,127.7

 

 

Billed accounts receivable represents amounts billed to clients that have yet to be collected. Unbilled accounts receivable represents the contract revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end. Substantially all unbilled receivables as of March 31, 2018 and September 30, 2017 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 a project. These retention agreements vary from project to project and could be outstanding for several months or years.

 

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Table of Contents

 

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 outstanding receivables at March 31, 2018 and September 30, 2017.

 

The Company sold trade receivables to financial institutions, of which $344.8 million and $325.2 million were outstanding as of March 31, 2018 and September 30, 2017, respectively. The Company does not retain financial or legal obligations for these receivables that would result in material losses. The Company’s ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables.

 

5.              Joint Ventures and Variable Interest Entities

 

The Company’s joint ventures provide architecture, engineering, program management, construction management, operations and maintenance services, and invest in real estate, public-private partnership (P3) and infrastructure projects. 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 a 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 joint ventures of this type, 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 result 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 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 and is treated as an equity method investment 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.

 

As part of the above analysis, 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.

 

Contractually required support provided to the Company’s joint ventures is further discussed in Note 14.

 

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Table of Contents

 

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

 

 

 

March 31,
2018

 

September 30,
2017

 

 

 

(in millions)

 

Current assets

 

$

933.1

 

$

832.1

 

Non-current assets

 

196.5

 

188.8

 

Total assets

 

$

1,129.6

 

$

1,020.9

 

 

 

 

 

 

 

Current liabilities

 

$

632.7

 

$

524.9

 

Non-current liabilities

 

12.3

 

12.4

 

Total liabilities

 

645.0

 

537.3

 

Total AECOM equity

 

261.3

 

274.7

 

Noncontrolling interests

 

223.3

 

208.9

 

Total owners’ equity

 

484.6

 

483.6

 

Total liabilities and owners’ equity

 

$

1,129.6

 

$

1,020.9

 

 

Total revenue of the consolidated joint ventures was $1,202.6 million and $910.8 million for the six months ended March 31, 2018 and 2017, respectively. The assets of the Company’s consolidated joint ventures are restricted for use only by the particular joint venture and are not available for the general operations of the Company.

 

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

 

 

 

March 31,
2018

 

September 30,
2017

 

 

 

(in millions)

 

Current assets

 

$

1,839.2

 

$

1,912.2

 

Non-current assets

 

846.2

 

749.8

 

Total assets

 

$

2,685.4

 

$

2,662.0

 

 

 

 

 

 

 

Current liabilities

 

$

1,528.1

 

$

1,570.2

 

Non-current liabilities

 

217.7

 

185.1

 

Total liabilities

 

1,745.8

 

1,755.3

 

Joint ventures’ equity

 

939.6

 

906.7

 

Total liabilities and joint ventures’ equity

 

$

2,685.4

 

$

2,662.0

 

 

 

 

 

 

 

AECOM’s investment in joint ventures

 

$

384.9

 

$

364.2

 

 

 

 

Six Months Ended

 

 

 

March 31,
2018

 

March 31,
2017

 

 

 

(in millions)

 

Revenue

 

$

2,814.8

 

$

2,529.8

 

Cost of revenue

 

2,683.0

 

2,396.0

 

Gross profit

 

$

131.8

 

$

133.8

 

Net income

 

$

127.7

 

$

125.5

 

 

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

 

 

 

Six Months Ended

 

 

 

March 31,
2018

 

March 31,
2017

 

 

 

(in millions)

 

Pass through joint ventures

 

$

20.2

 

$

17.9

 

Other joint ventures

 

22.6

 

25.3

 

Total

 

$

42.8

 

$

43.2

 

 

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Table of Contents

 

6.              Pension Benefit Obligations

 

In the U.S., the Company sponsors various qualified defined benefit pension plans. Benefits under these plans generally are based on the employee’s years of creditable service and compensation; however, all U.S. defined benefit plans are closed to new participants and have frozen accruals.

 

The Company also sponsors various non-qualified plans in the U.S.; all of these plans are frozen. Outside the U.S., the Company sponsors various pension plans, which are appropriate to the country in which the Company operates, some of which are government mandated.

 

The following table details the components of net periodic cost for the Company’s pension plans for the three and six months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

March 31, 2017

 

 

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

U.S.

 

Int’l

 

 

 

(in millions)

 

Components of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service costs

 

$

1.2

 

$

0.3

 

$

1.1

 

$

0.3

 

$

2.4

 

$

0.6

 

$

2.2

 

$

0.6

 

Interest cost on projected benefit obligation

 

5.2

 

8.3

 

4.8

 

6.9

 

10.4

 

16.2

 

9.6

 

13.9

 

Expected return on plan assets

 

(7.8

)

(11.1

)

(7.7

)

(10.1

)

(15.7

)

(21.8

)

(15.5

)

(20.3

)

Amortization of prior service cost

 

 

(0.1

)

 

 

 

(0.1

)

 

(0.1

)

Amortization of net loss

 

1.0

 

2.2

 

1.1

 

3.2

 

2.0

 

4.2

 

2.2

 

6.4

 

Settlement loss recognized

 

 

0.1

 

 

 

 

0.2

 

 

 

Net periodic (benefit) cost

 

$

(0.4

)

$

(0.3

)

$

(0.7

)

$

0.3

 

$

(0.9

)

$

(0.7

)

$

(1.5

)

$

0.5

 

 

The total amounts of employer contributions paid for the six months ended March 31, 2018 were $4.3 million for U.S. plans and $14.2 million for non-U.S. plans. The expected remaining scheduled annual employer contributions for the fiscal year ending September 30, 2018 are $7.5 million for U.S. plans and $13.1 million for non-U.S. plans.

 

7.              Debt

 

Debt consisted of the following:

 

 

 

March 31,
2018

 

September 30,
2017

 

 

 

(in millions)

 

2014 Credit Agreement

 

$

1,797.7

 

$

908.7

 

2014 Senior Notes

 

800.0

 

1,600.0

 

2017 Senior Notes

 

1,000.0

 

1,000.0

 

URS Senior Notes

 

247.8

 

247.7

 

Other debt

 

153.6

 

140.0

 

Total debt

 

3,999.1

 

3,896.4

 

Less: Current portion of debt and short-term borrowings

 

(133.7

)

(142.0

)

Less: Unamortized debt issuance costs

 

(50.4

)

(52.3

)

Long-term debt

 

$

3,815.0

 

$

3,702.1

 

 

The following table presents, in millions, scheduled maturities of the Company’s debt as of March 31, 2018:

 

Fiscal Year

 

 

 

2018 (six months remaining)

 

$

59.7

 

2019

 

118.1

 

2020

 

78.6

 

2021

 

477.7

 

2022

 

294.6

 

Thereafter

 

2,970.4

 

Total

 

$

3,999.1

 

 

11



Table of Contents

 

2014 Credit Agreement

 

The Company entered into a credit agreement (Credit Agreement) on October 17, 2014, which, as amended to date, consists of (i) a term loan A facility that includes a $510 million (US) term loan A facility with a term expiring on March 13, 2021 and a $500 million Canadian dollar (CAD) term loan A facility and a $250 million Australian dollar (AUD) term loan A facility each with terms expiring on March 13, 2023; (ii) a $600 million term loan B facility with a term expiring on March 13, 2025; and (iii) a revolving credit facility in an aggregate principal amount of $1.35 billion with a term expiring on March 13, 2023. Some subsidiaries of the Company (Guarantors) have guaranteed the obligations of the borrowers under the Credit Agreement. The borrowers’ obligations under the Credit Agreement are secured by a lien on substantially all of the assets of the Company and the Guarantors pursuant to a security and pledge agreement (Security Agreement). The collateral under the Security Agreement is subject to release upon fulfillment of certain conditions specified in the Credit Agreement and Security Agreement.

 

The Credit Agreement contains covenants that limit the ability of the Company and the ability of certain of its subsidiaries to, among other things: (i) create, incur, assume, or suffer to exist liens; (ii) incur or guarantee indebtedness; (iii) pay dividends or repurchase stock; (iv) enter into transactions with affiliates; (v) consummate asset sales, acquisitions or mergers; (vi) enter into certain types of burdensome agreements; or (vii) make investments.

 

On July 1, 2015, the Credit Agreement was amended to revise the definition of “Consolidated EBITDA” to increase the allowance for acquisition and integration expenses related to the acquisition of URS.

 

On December 22, 2015, the Credit Agreement was amended to further revise the definition of “Consolidated EBITDA” by further increasing the allowance for acquisition and integration expenses related to the acquisition of URS and to allow for an internal corporate restructuring primarily involving its international subsidiaries.

 

On September 29, 2016, the Credit Agreement and the Security Agreement were amended to (1) lower the applicable interest rate margins for the term loan A and the revolving credit facilities, and lower the applicable letter of credit fees and commitment fees to the revised consolidated leverage levels; (2) extend the term of the term loan A and the revolving credit facility to September 29, 2021; (3) add a new delayed draw term loan A facility tranche in the amount of $185.0 million; (4) replace the then existing $500 million performance letter of credit facility with a $500 million basket to enter into secured letters of credit outside the Credit Agreement; and (5) revise certain covenants, including the Maximum Consolidated Leverage Ratio so that the step down from a 5.00 to a 4.75 leverage ratio is effective as of March 31, 2017 as well as the investment basket for its AECOM Capital business.

 

On March 31, 2017, the Credit Agreement was amended to (1) expand the ability of restricted subsidiaries to borrow under “Incremental Term Loans;” (2) revise the definition of “Working Capital” as used in “Excess Cash Flow;” (3) revise the definitions for “Consolidated EBITDA” and “Consolidated Funded Indebtedness” to reflect the expected gain and debt repayment of an AECOM Capital disposition, which disposition was completed on April 28, 2017; and (4) amend provisions relating to the Company’s ability to undertake certain internal restructuring steps to accommodate changes in tax laws.

 

On March 13, 2018, the Credit Agreement was amended to (1) refinance the existing term loan A facility to include a $510 million (US) term loan A facility with a term expiring on March 13, 2021 and a $500 million CAD term loan A facility and a $250 million AUD term loan A facility each with terms expiring on March 13, 2023; (2) issue a new $600 million term loan B facility to institutional investors with a term expiring on March 13, 2025; (3) increase the capacity of the Company’s revolving credit facility from $1.05 billion to $1.35 billion and extend its term until March 13, 2023; (4) reduce the Company’s interest rate borrowing costs as follows: (a) the term loan B facility, at the Company’s election, Base Rate (as defined in the Credit Agreement) plus 0.75% or Eurocurrency Rate (as defined in the Credit Agreement) plus 1.75%, (b) the (US) term loan A facility, at the Company’s election, Base Rate plus 0.50% or Eurocurrency Rate plus 1.50%, and (c) the Canadian (CAD) term loan A facility, the Australian (AUD) term loan A facility, and the revolving credit facility, an initial rate of, at the Company’s election, Base Rate plus 0.75% or Eurocurrency Rate plus 1.75%, and after the end of the Company’s fiscal quarter ending June 30, 2018, Base Rate loans plus a margin ranging from 0.25% to 1.00% or Eurocurrency Rate plus a margin from 1.25% to 2.00%, based on the Consolidated Leverage Ratio (as defined in the Credit Agreement); and (5) revise certain covenants including increasing the amounts available under the restricted payment negative covenant and revising the Maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) to include a 4.5 leverage ratio through September 30, 2019 after which the leverage ratio steps down to 4.0.

 

Under the Credit Agreement, the Company is subject to a maximum consolidated leverage ratio and minimum consolidated interest coverage ratio at the end of each fiscal quarter. The Company’s Consolidated Leverage Ratio was 4.0 at March 31, 2018. The Company’s Consolidated Interest Coverage Ratio was 4.7 at March 31, 2018. As of March 31, 2018, the Company was in compliance with the covenants of the Credit Agreement.

 

12



Table of Contents

 

At March 31, 2018 and September 30, 2017, outstanding standby letters of credit totaled $64.2 million and $58.1 million, respectively, under the Company’s revolving credit facilities. As of March 31, 2018 and September 30, 2017, the Company had $1,159.0 million and $991.9 million, respectively, available under its revolving credit facility.

 

2014 Senior Notes

 

On October 6, 2014, the Company completed a private placement offering of $800,000,000 aggregate principal amount of its unsecured 5.750% Senior Notes due 2022 (2022 Notes) and $800,000,000 aggregate principal amount of its unsecured 5.875% Senior Notes due 2024 (the 2024 Notes and, together with the 2022 Notes, the 2014 Senior Notes). On November 2, 2015, the Company completed an exchange offer to exchange the unregistered 2014 Senior Notes for registered notes, as well as all related guarantees. On March 16, 2018, the Company redeemed all of the 2022 Notes at a redemption price that was 104.313% of the principal amount outstanding plus accrued and unpaid interest. The $34.5 million prepayment premium was included in interest expense.

 

As of March 31, 2018, the estimated fair value of its 2024 Notes was approximately $836.0 million. The fair value of the 2024 Notes as of March 31, 2018 was derived by taking the mid-point of the trading prices from an observable market input (Level 2) in the secondary bond market and multiplying it by the outstanding balance of the 2024 Notes.

 

At any time prior to July 15, 2024, the Company may redeem on one or more occasions all or part of the 2024 Notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a “make-whole” premium as of the date of the redemption, plus any accrued and unpaid interest to the date of redemption. In addition, on or after July 15, 2024, the 2024 Notes may be redeemed at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption.

 

The indenture pursuant to which the 2024 Notes were issued contains customary events of default, including, among other things, payment default, exchange default, failure to provide certain notices thereunder and certain provisions related to bankruptcy events. The indenture also contains customary negative covenants.

 

The Company was in compliance with the covenants relating to the 2024 Notes as of March 31, 2018.

 

2017 Senior Notes

 

On February 21, 2017, the Company completed a private placement offering of $1,000,000,000 aggregate principal amount of its unsecured 5.125% Senior Notes due 2027 (the 2017 Senior Notes) and used the note proceeds to immediately retire the remaining $127.6 million outstanding on the then existing term loan B facility as well as repay $600 million of the term loan A facility and $250 million of the revolving credit facility under its Credit Agreement. On June 30, 2017, the Company completed an exchange offer to exchange the unregistered 2017 Senior Notes for registered notes, as well as related guarantees.

 

As of March 31, 2018, the estimated fair value of the Company’s 2017 Senior Notes was approximately $961.3 million. The fair value of the Company’s 2017 Senior Notes as of March 31, 2018 was derived by taking the mid-point of the trading prices from an observable market input (Level 2) in the secondary bond market and multiplying it by the outstanding balance of the 2017 Senior Notes. Interest is payable on the 2017 Senior Notes at a rate of 5.125% per annum. Interest on the 2017 Senior Notes is payable semi-annually on March 15 and September 15 of each year. The 2017 Senior Notes will mature on March 15, 2027.

 

At any time and from time to time prior to December 15, 2026, the Company may redeem all or part of the 2017 Senior Notes, at a redemption price equal to 100% of their principal amount, plus a “make whole” premium as of the redemption date, and accrued and unpaid interest to the redemption date.

 

In addition, at any time and from time to time prior to March 15, 2020, the Company may redeem up to 35% of the original aggregate principal amount of the 2017 Senior Notes with the proceeds of one or more qualified equity offerings, at a redemption price equal to 105.125%, plus accrued and unpaid interest. Furthermore, at any time on or after December 15, 2026, the Company may redeem on one or more occasions all or part of the 2017 Senior Notes at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest.

 

The indenture pursuant to which the 2017 Senior Notes were issued contains customary events of default, including, among other things, payment default, exchange default, failure to provide certain notices thereunder and certain provisions related to bankruptcy events. The indenture also contains customary negative covenants.

 

The Company was in compliance with the covenants relating to the 2017 Senior Notes as of March 31, 2018.

 

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URS Senior Notes

 

In connection with the URS acquisition, the Company assumed URS 3.85% Senior Notes due 2017 (2017 URS Senior Notes) and the URS 5.00% Senior Notes due 2022 (2022 URS Senior Notes), totaling $1.0 billion (URS Senior Notes). The URS acquisition triggered change in control provisions in the URS Senior Notes that allowed the holders of the URS Senior Notes to redeem their URS Senior Notes at a cash price equal to 101% of the principal amount and, accordingly, the Company redeemed $572.3 million of the URS Senior Notes on October 24, 2014. The remaining 2017 URS Senior Notes matured and were fully redeemed on April 3, 2017 for $179.2 million using proceeds from a $185 million delayed draw term loan A facility tranche under the Credit Agreement. The 2022 URS Senior Notes are general unsecured senior obligations of AECOM Global II, LLC (as successor in interest to URS) and are fully and unconditionally guaranteed on a joint-and-several basis by certain former URS domestic subsidiary guarantors.

 

As of March 31, 2018, the estimated fair value of the 2022 URS Senior Notes was approximately $253.5 million. The carrying value of the 2022 URS Senior Notes on the Company’s Consolidated Balance Sheets as of March 31, 2018 was $247.8 million. The fair value of the 2022 URS Senior Notes as of March 31, 2018 was derived by taking the mid-point of the trading prices from an observable market input (Level 2) in the secondary bond market and multiplying it by the outstanding balance of the 2022 URS Senior Notes.

 

As of March 31, 2018, the Company was in compliance with the covenants relating to the 2022 URS Senior Notes.

 

Other Debt

 

Other debt consists primarily of obligations under capital leases and loans, and unsecured credit facilities. The Company’s unsecured credit facilities are primarily used for standby letters of credit issued for payment of performance guarantees. At March 31, 2018 and September 30, 2017, these outstanding standby letters of credit totaled $455.1 million and $445.7 million, respectively. As of March 31, 2018, the Company had $482.7 million available under these unsecured credit facilities.

 

Effective Interest Rate

 

The Company’s average effective interest rate on its total debt, including the effects of the interest rate swap agreements, during the six months ended March 31, 2018 and 2017 was 4.7% and 4.2%, respectively.

 

Interest expense in the consolidated statements of operations for the three and six months ended March 31, 2018 included a prepayment premium of $34.5 million to redeem the 2022 Notes. Additionally, amortization of deferred debt issuance costs for the three and six months ended March 31, 2018 was $9.8 million and $12.6 million, respectively, and for the three and six months ended March 31, 2017 was $8.7 million and $11.5 million, respectively.

 

8.              Derivative Financial Instruments and Fair Value Measurements

 

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 operations as cost of revenue, interest expense 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 contracts 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 when the interest expense on the variable rate debt is recognized, or to cost of revenue 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 contracts would be recognized in other income (expense). Further, the Company excludes the change in the time value of the foreign currency contracts from the assessment of hedge effectiveness. The Company records the premium paid or time value of a contract on the date of purchase as an asset. Thereafter, the Company recognizes any change to this time value in cost of revenue.

 

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The notional principal in U.S. dollar (USD), Canadian dollar (CAD), and Australian dollar (AUD), fixed rates and related expiration dates of the Company’s outstanding interest rate swap agreements were as follows:

 

March 31, 2018

 

Notional Amount
Currency

 

Notional Amount
(in millions)

 

Fixed
Rate

 

Expiration
Date

 

USD

 

300.0

 

1.63

%

June 2018

 

USD

 

300.0

 

1.54

%

September 2018

 

AUD

 

200.0

 

2.19

%

February 2021

 

CAD

 

400.0

 

2.49

%

September 2022

 

USD

 

200.0

 

2.60

%

February 2023

 

 

September 30, 2017

 

Notional Amount
Currency

 

Notional Amount
(in millions)

 

Fixed
Rate

 

Expiration
Date

 

USD

 

300.0

 

1.63

%

June 2018

 

USD

 

300.0

 

1.54

%

September 2018

 

 

The notional principal of outstanding foreign currency contracts to purchase AUD was AUD 2.9 million (or $2.3 million) and AUD 15.1 million (or $11.3 million) at March 31, 2018 and September 30, 2017, respectively.

 

Other 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 were not material for the six months ended March 31, 2018 and 2017.

 

Fair Value Measurements

 

The Company’s non-pension financial assets and liabilities recorded at fair value relate to derivative instruments and were not material at March 31, 2018 or 2017.

 

See Note 13 for accumulated balances and reporting period activities of derivatives related to reclassifications out of accumulated other comprehensive income or loss for the six months ended March 31, 2018 and 2017. Amounts recognized in accumulated other comprehensive loss from the Company’s foreign currency contracts were immaterial for all periods presented. Amounts reclassified from accumulated other comprehensive loss into income from the foreign currency options were immaterial for all periods presented. Additionally, there were no losses recognized in income due to amounts excluded from effectiveness testing from the Company’s interest rate swap agreements.

 

During the year ended September 30, 2015, the Company entered into a contingent consideration arrangement in connection with a business acquisition. Under the arrangement, the Company agreed to pay cash to the sellers if certain financial performance thresholds are achieved in the future. The fair value of the contingent consideration liability, net of amounts paid, as of March 31, 2018 and September 30, 2017 was $12 million and $13 million, respectively. This liability is a Level 3 fair value measurement recorded within other accrued liabilities, and was valued based on estimated future net cash flows. Any future changes in the fair value of this contingent consideration liability will be recognized in earnings during the applicable period.

 

9.              Share-based Payments

 

The fair value of an outstanding employee stock option award is estimated on the date of grant. The expected term of the stock option granted represents the period of time the stock option 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 stock option on the grant date. The Company uses historical data as a basis to estimate the probability of forfeitures.

 

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Table of Contents

 

Stock option activity for the six months ended March 31 was as follows:

 

 

 

2018

 

2017

 

 

 

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

 

0.7

 

$

31.11

 

0.9

 

$

30.36

 

Options granted

 

 

 

 

 

Options exercised

 

(0.1

)

27.79

 

(0.2

)

26.42

 

Options forfeited or expired

 

 

 

 

 

Outstanding at March 31

 

0.6

 

31.62

 

0.7

 

31.11

 

 

 

 

 

 

 

 

 

 

 

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

 

0.6

 

$

31.62

 

0.7

 

$

31.11

 

 

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 and vest over a three-year service period. Additionally, the Company issues restricted stock units to employees which are earned based on service conditions. The grant date fair value of PEP awards and restricted stock unit awards is that day’s closing market price of the Company’s common stock. The weighted average grant date fair value of PEP awards were $37.69 and $38.16 during the six months ended March 31, 2018 and 2017, respectively. The weighted average grant date fair value of restricted stock unit awards were $36.91 and $38.05 during the six months ended March 31, 2018 and 2017, respectively. Total compensation expense related to share-based payments including stock options were $37.2 million and $38.1 million during the six months ended March 31, 2018 and 2017, respectively. Unrecognized compensation expense related to total share-based payments outstanding as of March 31, 2018 and September 30, 2017 was $133.5 million and $96.8 million, respectively, to be recognized on a straight-line basis over the awards’ respective vesting periods which are generally three years.

 

10.       Income Taxes

 

The Company’s effective tax rate was 130.4% and (6.2)% for the six months ended March 31, 2018 and 2017, respectively. The most significant items contributing to the difference between the statutory U.S. federal income tax rate of 24.5% and the Company’s effective tax rate for the six-month period ended March 31, 2018 were a $41.7 million net benefit related to one-time U.S. federal tax law changes, a benefit of $36.0 million related to changes in uncertain tax positions primarily in the U.S. and Canada, and a benefit of $13.7 million related to income tax credits and incentives, partially offset by tax expense of $33.9 million related to the goodwill impairment charge, which was non-deductible for tax purposes. These items are not expected to have a continuing impact on the effective tax rate for the remainder of the fiscal year except for the benefits related to income tax credits and incentives.

 

During the second quarter of fiscal year 2018, the Company received a favorable settlement of uncertain tax positions in the U.S. related to R&D credits for tax years 2012, 2013 and 2014 and as a result, recorded an income tax benefit of $26.2 million, which included the remeasurement of its U.S. R&D credit uncertain tax positions for future years based on the favorable outcome of the examination.

 

During the quarter ended December 31, 2017, President Trump signed what is commonly referred to as The Tax Cuts and Jobs Act (Tax Act) into law. The Tax Act reduced the Company’s U.S. federal corporate tax rate from 35% to a blended tax rate of 24.5% for the Company’s fiscal year ending September 30, 2018 and 21% for fiscal years thereafter, requires companies to pay a one-time transition tax on accumulated earnings of foreign subsidiaries, creates new taxes on certain foreign sourced earnings and eliminates or reduces certain deductions.

 

Given the significance of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

 

At March 31, 2018, the Company has not completed its accounting for the tax effects of enactment of the Tax Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and certain other assets and liabilities and the one-time transition tax during the quarter ended December 31, 2017. The Company has not been able to make a reasonable estimate of the impact on its indefinite reinvestment of earnings of certain foreign subsidiaries and therefore will continue to account for those items based on its existing accounting under ASC 740. As further guidance and accounting interpretations are expected, the Company’s analysis is considered incomplete.

 

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Table of Contents

 

Other significant provisions include a base erosion anti-abuse tax (BEAT) on excessive amounts paid to foreign related parties and a minimum tax on global intangible low-taxed income (GILTI). The Company has not elected a method of accounting for BEAT and GILTI and will only do so after completion of the analysis of the provisions and the impact to the Company.

 

In the first quarter of 2018, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and refining its calculations which could potentially affect the measurement of these balances. The provisional amount recorded in the first quarter related to the remeasurement of the Company’s deferred tax balance was a $36.1 million tax benefit. In addition in the first quarter, the Company released the deferred tax liability and recorded a tax benefit of $77.0 million related to certain foreign subsidiaries for which the undistributed earnings are not intended to be reinvested indefinitely and accrued current tax on these earnings as part of the one-time transition tax. As of March 31, 2018, the Company has not made any additional measurement period adjustments related to these items.

 

During the first quarter of 2018, the Company recorded a provisional amount for the one-time transition tax liability for its foreign subsidiaries resulting in an increase in income tax expense of $71.4 million. The Company has not yet completed its calculation of the total foreign earnings and profits of its foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets at the end of the fiscal year. This amount may change when the Company finalizes the calculation of foreign earnings and finalize the amounts held in cash or other specified assets. As of March 31, 2018, the Company has not made any additional measurement period adjustments related to these items.

 

The Company is utilizing the annual effective tax rate method under ASC 740 to compute its interim tax provision. The Company’s effective tax rate fluctuates from quarter to quarter due to various factors including the change in the mix of global income and expenses, outcomes of administrative audits, changes in the assessment of valuation allowances due to management’s consideration of new positive or negative evidence during the quarter, and changes in enacted tax laws and their interpretations which upon enactment include possible tax reform around the world arising from the result of the base erosion and profit shifting project undertaken by the Organisation for Economic Co-operation Development which, if finalized and adopted, could have a material impact on the Company’s income tax expense and deferred tax balances.

 

The Company believes the outcomes which are reasonably possible within the next twelve months, including lapses in statutes of limitations, will not result in a material change in the liability for uncertain tax positions.

 

Generally, the Company does not provide for U.S. taxes or foreign withholding taxes on gross book-tax differences in its non-U.S. subsidiaries because such basis differences of approximately $1.7 billion are able to and intended to be reinvested indefinitely. At March 31, 2018, the Company has not determined whether it will continue to indefinitely reinvest the earnings of certain foreign subsidiaries and therefore will continue to account for these undistributed earnings based on existing accounting under ASC 740 and not accrue additional tax outside of the one-time transition tax described above. There may also be additional U.S. or foreign income tax liability upon repatriation, although the calculation of such additional taxes is not practicable.

 

11.       Earnings Per Share

 

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income attributable to AECOM 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 shares for the period. The Company includes as potential common shares the weighted average dilutive effects of equity awards using the treasury stock method. The computation of diluted loss per share for the three and six months ended March 31, 2018 excludes 2.7 million and 3.3 million, respectively, of potential common shares due to their anti-dilutive effect.

 

The following table sets forth a reconciliation of the denominators for basic and diluted earnings per share:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2018

 

March 31,
2017

 

March 31,
2018

 

March 31,
2017

 

 

 

(in millions)

 

Denominator for basic earnings per share

 

159.5

 

155.4

 

158.7

 

154.8

 

Potential common shares

 

 

3.3

 

 

3.5

 

Denominator for diluted earnings per share

 

159.5

 

158.7

 

158.7

 

158.3

 

 

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Table of Contents

 

12.       Other Financial Information

 

Accrued expenses and other current liabilities consist of the following:

 

 

 

March 31,
2018

 

September 30,
2017

 

 

 

(in millions)

 

Accrued salaries and benefits

 

$

950.0

 

$

1,018.5

 

Accrued contract costs

 

872.2

 

911.9

 

Other accrued expenses

 

345.5

 

315.1

 

 

 

$

2,167.7

 

$

2,245.5

 

 

Accrued contract costs above include balances related to professional liability accruals of $546.6 million and $547.9 million as of March 31, 2018 and September 30, 2017, respectively. The remaining accrued contract costs primarily relate to costs for services provided by subcontractors and other non-employees. Liabilities recorded related to accrued contract losses were not material as of March 31, 2018 and September 30, 2017. The Company did not have material revisions to estimates for contracts where revenue is recognized using the percentage-of-completion method during the six months ended March 31, 2018. The Company incurred $25.6 million of primarily severance expenses relating to restructuring activities during the six months ended March 31, 2018, of which $18.0 million was paid as of March 31, 2018.

 

During the twelve months ended September 30, 2016, the Company recorded revenue related to the expected accelerated recovery of a pension related entitlement from the federal government of approximately $50 million, which is included in accounts receivable-net at March 31, 2018. The entitlement resulted from pension costs that are reimbursable through certain government contracts in accordance with Cost Accounting Standards. The accelerated recognition resulted from an amendment to freeze pension benefits under URS Federal Services, Inc. Employees Retirement Plan. The actual amount of reimbursement may vary from the Company’s expectation.

 

13.       Reclassifications out of Accumulated Other Comprehensive Loss

 

The accumulated balances and reporting period activities for the three and six months ended March 31, 2018 and 2017 related to reclassifications out of accumulated other comprehensive loss are summarized as follows (in millions):

 

 

 

Pension
Related
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Loss on
Derivative
Instruments

 

Accumulated
Other
Comprehensive
Loss

 

Balances at December 31, 2017

 

$

(279.4

)

$

(425.2

)

$

0.4

 

$

(704.2

)

Other comprehensive (loss) income before reclassification

 

(18.8

)

15.0

 

(1.6

)

(5.4

)

Amounts reclassified from accumulated other comprehensive loss

 

2.7

 

 

(0.1

)

2.6

 

Balances at March 31, 2018

 

$

(295.5

)

$

(410.2

)

$

(1.3

)

$

(707.0

)

 

 

 

Pension
Related
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Loss on
Derivative
Instruments

 

Accumulated
Other
Comprehensive
Loss

 

Balances at December 31, 2016

 

$

(352.0

)

$

(557.2

)

$

(3.7

)

$

(912.9

)

Other comprehensive (loss) income before  reclassification

 

(4.6

)

40.4

 

1.5

 

37.3

 

Amounts reclassified from accumulated other comprehensive loss

 

3.1

 

 

0.9

 

4.0

 

Balances at March 31, 2017

 

$

(353.5

)

$

(516.8

)

$

(1.3

)

$

(871.6

)

 

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Table of Contents

 

 

 

Pension
Related
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Loss on
Derivative
Instruments

 

Accumulated
Other
Comprehensive
Loss

 

Balances at September 30, 2017

 

$

(281.9

)

$

(418.4

)

$

(0.4

)

$

(700.7

)

Other comprehensive loss before reclassification

 

(18.8

)

8.2

 

(1.1

)

(11.7

)

Amounts reclassified from accumulated other comprehensive loss

 

5.2

 

 

0.2

 

5.4

 

Balances at March 31, 2018

 

$

(295.5

)

$

(410.2

)

$

(1.3

)

$

(707.0

)

 

 

 

Pension
Related
Adjustments

 

Foreign
Currency
Translation
Adjustments

 

Loss on
Derivative
Instruments

 

Accumulated
Other
Comprehensive
Loss

 

Balances at September 30, 2016

 

$

(368.9

)

$

(483.7

)

$

(5.0

)

$

(857.6

)

Other comprehensive income (loss) before  reclassification

 

9.1

 

(33.1

)

2.2

 

(21.8

)

Amounts reclassified from accumulated other comprehensive loss

 

6.3

 

 

1.5

 

7.8

 

Balances at March 31, 2017

 

$

(353.5

)

$

(516.8

)

$

(1.3

)

$

(871.6

)

 

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 Company’s claims administrators as of the respective balance sheet dates. The Company includes any adjustments to such insurance reserves in its consolidated results of operations. The Company’s reasonably possible loss disclosures are presented on a gross basis prior to the consideration of insurance recoveries. The Company does not record gain contingencies until they are realized. In the ordinary course of business, the Company may not be aware that it or its affiliates are under investigation and may not be aware of whether or not a known investigation has been concluded.

 

In the ordinary course of business, the Company may enter into various arrangements providing financial or performance assurance to clients, lenders, or partners. Such arrangements include standby letters of credit, surety bonds, and corporate guarantees to support the creditworthiness or the project execution commitments of its affiliates, partnerships and joint ventures. Performance arrangements typically have various expiration dates ranging from the completion of the project contract and extending beyond contract completion in certain circumstances such as for warranties. The Company may also guarantee that a project, when complete, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, the Company may incur additional costs, pay liquidated damages or be held responsible for the costs incurred by the client to achieve the required performance standards. The potential payment amount of an outstanding performance arrangement is typically 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) may be required to complete those activities.

 

At March 31, 2018 and September 30, 2017, the Company was contingently liable in the amount of approximately $519.3 million and $503.8 million, respectively, in issued standby letters of credit and $5.3 billion and $5.7 billion, respectively, in issued surety bonds primarily to support project execution.

 

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.

 

In addition, in connection with the investment activities of AECOM Capital, the Company provides guarantees of certain obligations, including guarantees for completion of projects, repayment of debt, environmental indemnity obligations and other lender required guarantees.

 

DOE Deactivation, Demolition, and Removal Project

 

Washington Group International, an Ohio company (WGI Ohio), an affiliate of URS, executed a cost-reimbursable task order with the Department of Energy (DOE) in 2007 to provide deactivation, demolition and removal services at a New York State project site that, during 2010, experienced contamination and performance issues and remains uncompleted. In February 2011, WGI Ohio and the DOE executed a Task Order Modification that changed some cost-reimbursable contract provisions to at-risk. The Task Order Modification, including subsequent amendments, requires the DOE to pay all project costs up to $106 million, requires WGI Ohio and the DOE to equally share in all project costs incurred from $106 million to $146 million, and requires WGI Ohio to pay all project costs exceeding $146 million.

 

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Due to unanticipated requirements and permitting delays by federal and state agencies, as well as delays and related ground stabilization activities caused by Hurricane Irene in 2011, WGI Ohio has been required to perform work outside the scope of the Task Order Modification. In December 2014, WGI Ohio submitted claims against the DOE pursuant to the Contracts Disputes Acts seeking recovery of $103 million, including additional fees on changed work scope. WGI Ohio has incurred and continues to incur additional project costs outside the scope of the contract as a result of differing site and ground conditions and intends to submit additional formal claims against the DOE.

 

Due to significant delays and uncertainties about responsibilities for the scope of remaining work, final project completion costs and other associated costs have exceeded $100 million over the contracted and claimed amounts. WGI Ohio assets and liabilities, including the value of the above costs and claims, were measured at their fair value on October 17, 2014, the date AECOM acquired WGI Ohio’s parent company, see Note 3, which measurement has been reevaluated to account for developments pertaining to this matter.

 

WGI Ohio can provide no certainty that it will recover the claims submitted against DOE in December 2014, any future claims or any other project costs after December 2014 that WGI Ohio may be obligated to incur including the remaining project completion costs, which could have a material adverse effect on the Company’s results of operations.

 

SR-91

 

One of the Company’s wholly-owned subsidiaries, URS Corporation, entered into a partial fixed cost and partial time and material design agreement in 2012 with a design build contractor for a state route highway construction project in Riverside County and Orange County, California. On April 5, 2017, URS Corporation filed an $8.2 million amended complaint in the Superior Court of California against the design build contractor for its failure to pay for services performed under the design agreement. On July 3, 2017, the design build contractor filed an amended counterclaim in Superior Court alleging breaches of contract, negligent interference and professional negligence pertaining to URS Corporation’s performance of design services under the design agreement, seeking purported damages of $70 million. URS Corporation cannot provide assurances that it will be successful in the recovery of the amounts owed to it under the design agreement or in its defense against the amounts alleged under the counterclaim that URS Corporation believes are without merit and that it intends to vigorously defend against. The potential range of loss in excess of any current accrual cannot be reasonably estimated at this time, primarily because the matter involves complex appellate and legal issues; there is substantial uncertainty regarding any alleged damages, including due to liability of and payments, by third parties; and the matter is at a preliminary stage of litigation.

 

New York Department of Environmental Conservation

 

The following matter is disclosed pursuant to Regulation S-K, Item 103, Instruction 5.C pertaining to a government authority environmental claim exceeding $100,000 against an AECOM affiliate. In September 2017, AECOM USA, Inc., one of the Company’s wholly-owned subsidiaries, was advised by the New York State Department of Environmental Conservation (DEC) of allegations that it committed environmental permit violations pursuant to the New York Environmental Conservation Law (ECL) associated with AECOM USA, Inc.’s oversight of a stream restoration project for Schoharie County which could result in substantial penalties if calculated under the ECL’s maximum civil penalty provisions. AECOM USA, Inc. disputes this claim and intends to continue to defend this matter vigorously; however, AECOM USA, Inc., cannot provide assurances that it will be successful in these efforts. The potential range of loss in excess of any current accrual cannot be reasonably estimated at this time, primarily because the matter involves complex and unique environmental and regulatory issues; the project site involves the oversight and involvement of various local, state and federal government agencies; there is substantial uncertainty regarding any alleged damages; and the matter is in its preliminary stage of the government’s claims and any negotiations of a consent order.

 

15.       Reportable Segments

 

The Company’s operations are organized into four reportable segments: Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS), and AECOM Capital (ACAP). During the third quarter of fiscal 2017, operating activities of ACAP achieved a level of significance sufficient to warrant disclosure as a separate reportable segment. Prior to the third quarter of fiscal 2017, ACAP’s operating results were included in the corporate segment, and comparable periods were reclassified to reflect the change. The Company’s DCS reportable segment delivers planning, consulting, architectural, environmental, and engineering design services to commercial and government clients worldwide. The Company’s CS reportable segment provides construction services primarily in the Americas. The Company’s MS reportable segment provides program and facilities management and maintenance, training, logistics, consulting, technical assistance, and systems integration and information technology services, primarily for agencies of the U.S. government. The Company’s ACAP segment invests in real estate, public-private partnership (P3) and infrastructure projects. 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 reportable segments 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.

 

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Table of Contents

 

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

 

Reportable Segments:

 

Design and
Consulting
Services

 

Construction
Services

 

Management
Services

 

AECOM
Capital

 

Corporate

 

Total

 

 

 

(in millions)

 

Three Months Ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,004.7

 

$

1,888.3

 

$

897.9

 

$

 

$

 

$

4,790.9

 

Gross profit

 

120.3

 

(13.3

)

34.2

 

 

 

141.2

 

Equity in earnings of joint ventures

 

2.8

 

1.2

 

9.1

 

 

 

13.1

 

General and administrative expenses

 

 

 

 

(2.9

)

(27.3

)

(30.2

)

Impairment of assets held for sale, including goodwill

 

 

(168.2

)

 

 

 

(168.2

)

Operating income

 

123.1

 

(180.3

)

43.3

 

(2.9

)

(27.3

)

(44.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

6.0

%

(0.7

)%

3.8

%

 

 

2.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,867.5

 

$

1,732.7

 

$

827.0

 

$

 

$

 

$

4,427.2

 

Gross profit

 

106.1

 

20.4

 

41.9

 

 

 

168.4

 

Equity in earnings of joint ventures

 

6.0

 

5.3

 

10.5

 

 

 

21.8

 

General and administrative expenses

 

 

 

 

(1.8

)

(28.1

)

(29.9

)

Acquisition and integration expenses

 

 

 

 

 

(20.0

)

(20.0

)

Gain on disposal activities

 

0.6

 

 

 

 

 

0.6

 

Operating income

 

112.7

 

25.7

 

52.4

 

(1.8

)

(48.1

)

140.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

5.7

%

1.2

%

5.1

%

 

 

3.8

%

 

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Table of Contents

 

Reportable Segments:

 

Design and
Consulting
Services

 

Construction
Services

 

Management
Services

 

AECOM
Capital

 

Corporate

 

Total

 

 

 

(in millions)

 

Six Months Ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,946.6

 

$

4,013.8

 

$

1,741.3

 

$

 

$

 

$

9,701.7

 

Gross profit

 

198.1

 

13.8

 

65.5

 

 

 

277.4

 

Equity in earnings of joint ventures

 

10.3

 

14.6

 

17.9

 

 

 

42.8

 

General and administrative expenses

 

 

 

 

(5.5

)

(59.4

)

(64.9

)

Impairment of assets held for sale, including goodwill

 

 

(168.2

)

 

 

 

(168.2

)

Operating income

 

208.4

 

(139.8

)

83.4

 

(5.5

)

(59.4

)

87.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

5.0

%

0.3

%

3.8

%

 

 

2.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,708.3

 

$

3,482.9

 

$

1,594.3

 

$

 

$

 

$

8,785.5

 

Gross profit

 

201.3

 

34.2

 

102.9

 

 

 

338.4

 

Equity in earnings of joint ventures

 

10.1

 

9.6

 

23.5

 

 

 

43.2

 

General and administrative expenses

 

 

 

 

(4.5

)

(58.0

)

(62.5

)

Acquisition and integration expenses

 

 

 

 

 

(35.4

)

(35.4

)

Gain on disposal activities

 

0.6

 

 

 

 

 

0.6

 

Operating income

 

212.0

 

43.8

 

126.4

 

(4.5

)

(93.4

)

284.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

 

5.4

%

1.0

%

6.5

%

 

 

3.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

$

7,112.5

 

$

4,175.2

 

$

2,636.4

 

$

208.4

 

$

484.8

 

$

14,617.3

 

September 30, 2017

 

6,992.6

 

4,114.5

 

2,704.6

 

199.1

 

386.2

 

14,397.0

 

 

16.       Condensed Consolidating Financial Information

 

In connection with the registration of the Company’s 2014 Senior Notes that were declared effective by the SEC on September 29, 2015, AECOM became subject to the requirements of Rule 3-10 of Regulation S-X regarding financial statements of guarantors and issuers of guaranteed securities. Both the 2014 Senior Notes and the 2017 Senior Notes are fully and unconditionally guaranteed on a joint and several basis by certain of AECOM’s directly and indirectly 100% owned subsidiaries (the Subsidiary Guarantors). Other than customary restrictions imposed by applicable statutes, there are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to AECOM in the form of cash dividends, loans or advances.

 

The following condensed consolidating financial information, which is presented for AECOM, the Subsidiary Guarantors on a combined basis and AECOM’s non-guarantor subsidiaries on a combined basis, is provided to satisfy the disclosure requirements of Rule 3-10 of Regulation S-X.

 

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Table of Contents

 

Condensed Consolidating Balance Sheets

(unaudited — in millions)

March 31, 2018

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

4.6

 

$

262.3

 

$

600.3

 

$

 

$

867.2

 

Accounts receivable—net

 

 

2,556.0

 

2,652.9

 

 

5,208.9

 

Intercompany receivable

 

735.9

 

78.0

 

135.3

 

(949.2

)

 

Prepaid expenses and other current assets

 

66.8

 

332.8

 

249.0

 

 

648.6

 

Current assets held for sale

 

 

 

116.8

 

 

116.8

 

Income taxes receivable

 

30.1

 

 

52.4

 

 

82.5

 

TOTAL CURRENT ASSETS

 

837.4

 

3,229.1

 

3,806.7

 

(949.2

)

6,924.0

 

PROPERTY AND EQUIPMENT—NET

 

176.5

 

225.3

 

181.6

 

 

583.4

 

DEFERRED TAX ASSETS—NET

 

149.9

 

56.0

 

172.6

 

(158.6

)

219.9

 

INVESTMENTS IN CONSOLIDATED SUBSIDIARIES

 

6,797.7

 

2,280.9

 

 

(9,078.6

)

 

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

10.9

 

60.1

 

313.9

 

 

384.9

 

GOODWILL

 

 

3,392.7

 

2,549.9

 

 

5,942.6

 

INTANGIBLE ASSETS—NET

 

 

243.3

 

124.9

 

 

368.2

 

OTHER NON-CURRENT ASSETS

 

50.3

 

49.3

 

94.7

 

 

194.3

 

TOTAL ASSETS

 

$

8,022.7

 

$

9,536.7

 

$

7,244.3

 

$

(10,186.4

)

$

14,617.3

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

9.8

 

$

 

$

 

$

 

$

9.8