ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 that are not limited to historical facts, but reflect the Company's current beliefs, expectations or intentions regarding future
events. These statements include forward-looking statements with respect to the Company, including the Company's business and operations, and the engineering and construction industry. Statements that
are not historical facts, without limitation, including statements that use terms such as "anticipates," "believes," "expects," "estimates," "intends," "may," "plans," "potential," "projects," and
"will" and that relate to our future revenues, expenditures and business trends; future accounting estimates; future conversions of backlog; future capital allocation priorities including share
repurchases, trade receivables, debt pay downs; future post-retirement expenses; future tax benefits and expenses; future compliance with regulations; future legal claims and insurance coverage;
future effectiveness of our disclosure and internal controls over financial reporting; and other future economic and industry conditions, are forward-looking statements. In light of the risks and
uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Annual Report should not be considered as a representation by us or any other person that our
objectives or plans will be achieved. Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward-looking statements
are subject to various factors, risks and uncertainties, many of which are beyond our control, including, but not limited to, the fact that our business is cyclical and vulnerable to economic
downturns and client spending reductions; we are dependent on long-term government contracts and subject to uncertainties related to government contract appropriations; governmental agencies may
modify, curtail or terminate our contracts; government contracts are subject to audits and adjustments of contractual terms; we may experience losses under fixed-price contracts; we have not completed
our accounting for the tax effects of the United States Tax Cuts and Jobs Act legislation; we have limited control over operations run through our joint venture entities; we may be liable for
misconduct by our employees or consultants or our failure to comply with laws or regulations applicable to our business; we may not maintain adequate surety and financial capacity; we are highly
leveraged and may not be able to service our debt and guarantees; we have exposure to political and economic risks in different countries where we operate as well as currency exchange rate
fluctuations; we
may not be able to retain and recruit key technical and management personnel; we may be subject to legal claims; we may have inadequate insurance coverage; we are subject to environmental law
compliance and may not have adequate nuclear indemnification; there may be unexpected adjustments and cancellations related to our backlog; we are dependent on partners and third parties who may fail
to satisfy their obligations; we may not be able to manage pension costs; AECOM Capital's real estate development and investment activities are inherently risky; we may face cybersecurity issues and
data loss; as well as other additional risks and factors discussed in this Annual Report on Form 10-K and any subsequent reports we file with the SEC. Accordingly, actual results could differ
materially from those contemplated by any forward-looking statement.
All subsequent written and oral forward-looking statements concerning the Company or other matters attributable to the Company or any person acting on its behalf
are expressly qualified in their entirety by the cautionary statements above. You are cautioned not to place undue reliance on these forward-looking statements, which speak only to the date they are
made. The Company is under no obligation (and expressly disclaims any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new
information, future developments or otherwise. Please review "Part I, Item 1ARisk Factors" in this Annual Report for a discussion of the factors, risks and uncertainties
that could affect our future results.
Our fiscal year consists of 52 or 53 weeks, ending on the Friday closest to September 30. For clarity of presentation, we present all periods as if
the year ended on September 30. We refer to the fiscal year ended September 30, 2017 as "fiscal 2017" and the fiscal year ended September 30, 2018 as "fiscal
2018."
37
Table of Contents
Overview
We are a leading fully integrated firm positioned to design, build, finance and operate infrastructure assets for governments, businesses and
organizations throughout the world. We provide planning, consulting, architectural and engineering design services to commercial and government clients worldwide in major end markets such as
transportation, facilities, environmental, energy, water and government markets. We also provide construction services, including building construction and energy, infrastructure and industrial
construction. In addition, we provide 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 and also for national governments around the world.
Our
business focuses primarily on providing fee-based planning, consulting, architectural and engineering design services and, therefore, our business is labor intensive. We primarily
derive income from our ability to generate revenue and collect cash from our clients through the billing of our employees' time spent on client projects and our ability to manage our costs. AECOM
Capital primarily derives its income from real estate development sales.
We
report our business through four segments: Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS), and AECOM Capital (ACAP). Such segments are
organized by the types of services provided, the differing specialized needs of the respective clients, and how we manage the business. We have aggregated various operating segments into our
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.
Our
DCS segment delivers planning, consulting, architectural and engineering design services to commercial and government clients worldwide in major end markets such as transportation,
facilities, environmental, energy, water and government. DCS revenue is primarily derived from fees from services that we provide, as opposed to pass-through costs from subcontractors.
Our
CS segment provides construction services, including building construction and energy, infrastructure and industrial construction, primarily in the Americas. CS revenue typically
includes a significant amount of pass-through costs from subcontractors.
Our
MS 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 and also for national governments around the world. MS revenue typically includes a significant amount of pass-through costs from
subcontractors.
Our
ACAP segment invests in real estate, public-private partnership (P3) and infrastructure projects. ACAP typically partners with investors and experienced developers as co-general
partners. In addition, ACAP may, but is not required to, enter into contracts with our other AECOM affiliates to provide design, engineering, construction management, development and operations and
maintenance services for ACAP funded projects.
Our
revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, integrate and maximize the value of our recent
acquisitions, allocate our labor resources to profitable and high growth markets, secure new contracts and renew existing client agreements. Demand for our services is cyclical and may be vulnerable
to sudden economic downturns and reductions in government and private industry spending, which may result in clients delaying, curtailing or canceling proposed and existing projects. Moreover, as a
professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation and profitability.
38
Table of Contents
Our
costs consist primarily of the compensation we pay to our employees, including salaries, fringe benefits, the costs of hiring subcontractors, other project-related expenses and
sales, general and administrative costs.
During
our first quarter ended December 31, 2017, President Trump signed the
Tax Cuts and Jobs Act
legislation that went into law
(the Tax Act). The Tax Act reduces our U.S. federal corporate tax rate from 35% to a blended tax rate of 24.5% for our 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. We have not completed our accounting for the tax effects of the Tax Act. We have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition
tax but we have not made any estimate of the impact on our indefinite reinvestment of earnings of certain of our foreign subsidiaries.
In
December 2015, the federal legislation referred to as the Fixing America's Surface Transportation Act (the FAST Act) was authorized. The FAST Act is a five-year federal program
expected to provide infrastructure spending on roads, bridges, and public transit and rail systems. While client spending patterns are likely to remain uneven, we expect that the passage of the FAST
Act will continue to positively impact our transportation services business.
The
U.S. federal government has proposed significant legislative and executive infrastructure initiatives that, if enacted, could have a positive impact to our infrastructure business.
As
part of our capital allocation commitments, we repurchased common stocks under our $1 billion authorization and we intend to deploy future free cash flow towards ongoing debt
reduction and stock repurchases.
In
March 2018, President Trump signed proclamations to impose tariffs on steel and aluminum imports per the US Trade Expansion Act of 1962, increasing the price for steel and aluminum in
the United States, which could impact client spending and affect the profitability of our fixed-price construction projects.
We
expect to sell remaining non-core oil and gas assets in North America from our Construction Services business segment within the next twelve months.
We
expect to incur approximately $80 to $90 million in restructuring costs in the first half of fiscal year 2019, and we expect to evaluate our geographic exposure as part of a
proposed plan to exit more than 30 countries, subject to applicable laws, to improve profitability and reduce our risk profile.
We
expect to benefit from the return on AECOM Capital asset sales in fiscal year 2019.
We
cannot determine if future climate change and greenhouse gas laws and policies, such as the United Nation's COP-21 Paris Agreement, will have a material impact on our business or our
clients' business; however, we expect future environmental laws and policies could negatively impact demand for our services related to fossil fuel projects and positively impact demand for our
services related to environmental, infrastructure, nuclear and alternative energy projects.
The aggregate value of all consideration for our acquisitions consummated during the years ended September 30, 2018, 2017 and 2016 was
$5.6 million, $164.4 million and $5.5 million, respectively.
All
of our acquisitions have been accounted for as business combinations and the results of operations of the acquired companies have been included in our consolidated results since the
dates of the acquisitions.
39
Table of Contents
Components of Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in millions)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,156
|
|
$
|
18,203
|
|
$
|
17,411
|
|
$
|
17,990
|
|
$
|
8,357
|
|
Cost of revenue
|
|
|
19,505
|
|
|
17,519
|
|
|
16,768
|
|
|
17,455
|
|
|
7,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
651
|
|
|
684
|
|
|
643
|
|
|
535
|
|
|
403
|
|
Equity in earnings of joint ventures
|
|
|
81
|
|
|
142
|
|
|
104
|
|
|
106
|
|
|
58
|
|
General and administrative expenses
|
|
|
(136
|
)
|
|
(134
|
)
|
|
(115
|
)
|
|
(114
|
)
|
|
(81
|
)
|
Impairment of assets held for sale, including goodwill
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and integration expenses
|
|
|
|
|
|
(39
|
)
|
|
(214
|
)
|
|
(398
|
)
|
|
(27
|
)
|
(Loss) gain on disposal activities
|
|
|
(3
|
)
|
|
1
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
425
|
|
$
|
654
|
|
$
|
375
|
|
$
|
129
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We generate revenue primarily by providing planning, consulting, architectural and engineering design services to commercial and government
clients around the world. Our revenue consists of both services provided by our employees and pass-through fees from subcontractors and other direct costs. We generally utilize a cost-to-cost approach
in applying the percentage-of-completion method of revenue recognition. Under this approach, revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred.
Cost of revenue reflects the cost of our own personnel (including fringe benefits and overhead expense) associated with revenue.
Included in our cost of revenue is amortization of acquired intangible assets. We have ascribed value to identifiable intangible assets other
than goodwill in our purchase price allocations for companies we have acquired. These assets include, but are not limited to, backlog and customer relationships. To the extent we ascribe value to
identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of the assets. Such amortization expense, although non-cash in the period expensed,
directly impacts our results of operations. It is difficult to predict with any precision the amount of expense we may record relating to acquired intangible assets.
Equity in earnings of joint ventures includes our portion of fees charged by our unconsolidated joint ventures to clients for services performed
by us and other joint venture partners along with earnings we receive from our return on investments in unconsolidated joint ventures.
General and administrative expenses include corporate expenses, including personnel, occupancy, and administrative expenses.
40
Table of Contents
Acquisition and integration expenses are comprised of transaction costs, professional fees, and personnel costs, including due diligence and
integration activities, primarily related to business acquisitions.
See Critical Accounting Policies and Consolidated Results below.
As a global enterprise, income tax (benefit)/expense and our effective tax rates can be affected by many factors, including changes in our
worldwide mix of pre-tax losses/earnings, the effect of non-controlling interest in income of consolidated subsidiaries, the extent to which the earnings are indefinitely reinvested outside of the
United States, our acquisition strategy, tax incentives and credits available to us, changes in judgment regarding the realizability of our deferred tax assets, changes in existing tax laws and our
assessment of uncertain tax positions. Our tax returns are routinely audited by the taxing authorities and settlements of issues raised in these audits can also sometimes affect our effective tax
rate.
For geographic financial information, please refer to Note 19 in the notes to our consolidated financial statements found elsewhere in
the Form 10-K.
Critical Accounting Policies
Our financial statements are presented in accordance with accounting principles generally accepted in the United States (GAAP). Highlighted
below are the accounting policies that management considers significant to understanding the operations of our business.
We generally utilize a cost-to-cost approach in applying the percentage-of-completion method of revenue recognition, under which revenue is
earned in proportion to total costs incurred, divided by total costs expected to be incurred. Recognition of revenue and profit
under this method is dependent upon a number of factors, including the accuracy of a variety of estimates, including engineering progress, material quantities, the achievement of milestones, penalty
provisions, labor productivity and cost estimates. Due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates. If estimated total
costs on contracts indicate a loss, we recognize that estimated loss within cost of revenue in the period the estimated loss first becomes known.
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from
customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved contracts as to both scope and price or other causes of
unanticipated additional costs. We record contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably
estimated. In such cases, we record revenue only to the extent that contract costs relating to the claim have been incurred. The amounts recorded, if material, are disclosed in the notes to the
financial statements. Costs attributable to claims are treated as costs of contract performance as incurred.
41
Table of Contents
Our federal government and certain state and local agency contracts are subject to, among other regulations, regulations issued under the
Federal Acquisition Regulations (FAR). These regulations can limit the recovery of certain specified indirect costs on contracts and subject us to ongoing multiple audits by government agencies such
as the Defense Contract Audit Agency (DCAA). In addition, most of our federal and state and local contracts are subject to termination at the discretion of the client.
Audits
by the DCAA and other agencies consist of reviews of our overhead rates, operating systems and cost proposals to ensure that we account for such costs in accordance with the Cost
Accounting Standards of the FAR (CAS). If the DCAA determines we have not accounted for such costs consistent
with CAS, the DCAA may disallow these costs. There can be no assurance that audits by the DCAA or other governmental agencies will not result in material cost disallowances in the future.
We record accounts receivable net of an allowance for doubtful accounts. This allowance for doubtful accounts is estimated based on management's
evaluation of the contracts involved and the financial condition of our clients. The factors we consider in our contract evaluations include, but are not limited
to:
-
-
Client typefederal or state and local government or commercial client;
-
-
Historical contract performance;
-
-
Historical collection and delinquency trends;
-
-
Client credit worthiness; and
-
-
General economic conditions.
Unbilled accounts receivable represents the contract revenue recognized but not yet billed pursuant to contract terms or accounts billed after
the period end.
Billings
in excess of costs on uncompleted contracts represent the billings to date, as allowed under the terms of a contract, but not yet recognized as contract revenue using the
percentage-of-completion accounting method.
We have noncontrolling interests in joint ventures accounted for under the equity method. Fees received for and the associated costs of services
performed by us and billed to joint ventures with respect to work done by us for third-party customers are recorded as our revenues and costs in the period in which such services are rendered. In
certain joint ventures, a fee is added to the respective billings from both ourselves and the other joint venture partners on the amounts billed to the third-party customers. These fees result in
earnings to the joint venture and are split with each of the joint venture partners and paid to the joint venture partners upon collection from the third-party customer. We record our allocated share
of these fees as equity in earnings of joint ventures.
Additionally,
our ACAP segment invests in and develops real estate, public-private partnership (P3) and infrastructure projects.
We provide for income taxes in accordance with principles contained in ASC Topic 740, Income Taxes. Under these principles, we recognize the
amount of income tax payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements
or tax returns.
42
Table of Contents
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted. Deferred tax assets are evaluated for
future realization and reduced by a valuation allowance if it is more likely than not that a portion will not be realized.
We
measure and recognize the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return.
With respect to uncertain tax positions, we evaluate the recognized tax benefits for recognition, measurement, derecognition, classification, interest and penalties, interim period accounting and
disclosure requirements. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.
Valuation Allowance.
Deferred income taxes are provided on the liability method whereby deferred tax assets and liabilities are
established for the
difference between the financial reporting and income tax basis of assets and liabilities, as well as for tax attributes such as operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and tax rates on the date of enactment of such changes to laws and tax rates.
Deferred
tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets may not be realized. The
evaluation of the recoverability of the deferred tax asset requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some
portion of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. Whether a deferred tax asset may be
realized requires considerable judgment by us. In considering the need for a valuation allowance, we consider a number of factors including the nature, frequency, and severity of cumulative financial
reporting losses in recent years, the future reversal of existing temporary differences, predictability of future taxable income exclusive of reversing temporary differences of the character necessary
to realize the asset, relevant carryforward periods, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would be
implemented, if necessary, to protect against the loss of the deferred tax asset that would otherwise expire. Whether a deferred tax asset will ultimately be realized is also dependent on varying
factors, including, but not limited to, changes in tax laws and audits by tax jurisdictions in which we operate.
If
future changes in judgment regarding the realizability of our deferred tax assets lead us to determine that it is more likely than not that we will not realize all or part of our
deferred tax asset in the future, we will record an additional valuation allowance. Conversely, if a valuation allowance exists and we determine that the ultimate realizability of all or part of the
net deferred tax asset is more likely than not to be realized, then the amount of the valuation allowance will be reduced. This adjustment will increase or decrease income tax expense in the period of
such determination.
Undistributed Non-U.S. Earnings.
The results of our operations outside of the United States are consolidated for financial reporting;
however,
earnings from investments in non-U.S. operations are included in domestic U.S. taxable income only when actually or constructively received. No deferred taxes have been provided on the undistributed
gross book-tax basis differences of our non-U.S. operations of approximately $1.7 billion because we have the ability to and intend to permanently reinvest these basis differences overseas. If
we were to repatriate these basis differences, additional taxes could be due at that time.
We
continually explore initiatives to better align our tax and legal entity structure with the footprint of our non-U.S. operations and we recognize the tax impact of these initiatives,
including changes in assessment of its uncertain tax positions, indefinite reinvestment exception assertions and realizability of deferred tax assets, earliest in the period when management believes
all necessary internal and external
43
Table of Contents
approvals
associated with such initiatives have been obtained, or when the initiatives are materially complete.
Goodwill represents the excess of amounts paid over the fair value of net assets acquired from an acquisition. In order to determine the amount
of goodwill resulting from an acquisition, we perform an assessment to determine the value of the acquired company's tangible and identifiable intangible assets and liabilities. In our assessment, we
determine whether identifiable intangible assets exist, which typically include backlog and customer relationships.
We
test goodwill for impairment annually for each reporting unit in the fourth quarter of the fiscal year and between annual tests, if events occur or circumstances change which suggest
that goodwill should be evaluated. Such events or circumstances include significant changes in legal factors and business climate, recent losses at a reporting unit, and industry trends, among other
factors. A reporting unit is defined as an operating segment or one level below an operating segment. Our impairment tests are performed at the operating segment level as they represent our reporting
units.
During
the impairment test, we estimate the fair value of the reporting unit using income and market approaches, and compare that amount to the carrying value of that reporting unit. In
the event the fair value of the reporting unit is determined to be less than the carrying value, goodwill is impaired, and an impairment loss is recognized equal to the excess, limited to the total
amount of goodwill allocated to the reporting unit.
During
the fourth quarter, we conduct our annual goodwill impairment test. The impairment evaluation process includes, among other things, making assumptions about variables such as
revenue growth rates, profitability, discount rates, and industry market multiples, which are subject to a high degree of judgment.
Material
assumptions used in the impairment analysis included the weighted average cost of capital (WACC) percent and terminal growth rates. For example, as of September 30, 2018,
a 1% increase in
the WACC rate represents a $600 million decrease to the fair value of our reporting units. As of September 30, 2018, a 1% decrease in the terminal growth rate represents a
$300 million decrease to the fair value of our reporting units.
A number of assumptions are necessary to determine our pension liabilities and net periodic costs. These liabilities and net periodic costs are
sensitive to changes in those assumptions. The assumptions include discount rates, long-term rates of return on plan assets and inflation levels limited to the United Kingdom and are generally
determined based on the current economic environment in each host country at the end of each respective annual reporting period. We evaluate the funded status of each of our retirement plans using
these current assumptions and determine the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations and other factors. Based upon current
assumptions, we expect to contribute $27.2 million to our international plans in fiscal 2019. Our required minimum contributions for our U.S. qualified plans are not significant. In addition,
we may make additional discretionary contributions. We currently expect to contribute $14.3 million to our U.S. plans (including benefit payments to nonqualified plans and postretirement
medical plans) in fiscal 2019. If the discount rate was reduced by 25 basis points, plan liabilities would increase by approximately $70.8 million. If the discount rate and return on plan
assets were reduced by 25 basis points, plan expense would decrease by approximately $0.6 million and increase by approximately $3.4 million, respectively. If inflation increased by 25
basis points, plan liabilities in the United Kingdom would increase by approximately $36.6 million and plan expense would increase by approximately $2.1 million.
44
Table of Contents
At
each measurement date, all assumptions are reviewed and adjusted as appropriate. With respect to establishing the return on assets assumption, we consider the long term capital market
expectations for each asset class held as an investment by the various pension plans. In addition to expected returns for each asset class, we take into account standard deviation of returns and
correlation between asset classes. This is necessary in order to generate a distribution of possible returns which reflects diversification of assets. Based on this information, a distribution of
possible returns is generated based on the plan's target asset allocation.
Capital
market expectations for determining the long term rate of return on assets are based on forward-looking assumptions which reflect a 20-year view of the capital markets. In
establishing those capital market assumptions and expectations, we rely on the assistance of our actuaries and our investment consultants. We and the plan trustees review whether changes to the
various plans' target
asset allocations are appropriate. A change in the plans' target asset allocations would likely result in a change in the expected return on asset assumptions. In assessing a plan's asset allocation
strategy, we and the plan trustees consider factors such as the structure of the plan's liabilities, the plan's funded status, and the impact of the asset allocation to the volatility of the plan's
funded status, so that the overall risk level resulting from our defined benefit plans is appropriate within our risk management strategy.
Between
September 30, 2017 and September 30, 2018, the aggregate worldwide pension deficit decreased from $553.0 million to $400.5 million due to rising
global asset prices. If the various plans do not experience future investment gains to reduce this shortfall, the deficit will be reduced by additional contributions.
We carry professional liability insurance policies or self-insure for our initial layer of professional liability claims under our professional
liability insurance policies and for a deductible for each claim even after exceeding the self-insured retention. We accrue for our portion of the estimated ultimate liability for the estimated
potential incurred losses. We establish our estimate of loss for each potential claim in consultation with legal counsel handling the specific matters and based on historic trends taking into account
recent events. We also use an outside actuarial firm to assist us in estimating our future claims exposure. It is possible that our estimate of loss may be revised based on the actual or revised
estimate of liability of the claims.
Our functional currency is the U.S. dollar. Results of operations for foreign entities are translated to U.S. dollars using the average exchange
rates during the period. Assets and liabilities for foreign entities are translated using the exchange rates in effect as of the date of the balance sheet. Resulting translation adjustments are
recorded as a foreign currency translation adjustment into other accumulated comprehensive income/(loss) in stockholders' equity.
We
limit exposure to foreign currency fluctuations in most of our contracts through provisions that require client payments in currencies corresponding to the currency in which costs are
incurred. As a result of this natural hedge, we generally do not need to hedge foreign currency cash flows for contract work performed. However, we will use foreign exchange derivative financial
instruments from time to
time to mitigate foreign currency risk. The functional currency of all significant foreign operations is the respective local currency.
45
Table of Contents
Fiscal year ended September 30, 2018 compared to the fiscal year ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
20,155.5
|
|
$
|
18,203.4
|
|
$
|
1,952.1
|
|
|
10.7
|
%
|
Cost of revenue
|
|
|
19,504.9
|
|
|
17,519.7
|
|
|
1.985.2
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
650.6
|
|
|
683.7
|
|
|
(33.1
|
)
|
|
(4.8
|
)
|
Equity in earnings of joint ventures
|
|
|
81.1
|
|
|
141.6
|
|
|
(60.5
|
)
|
|
(42.7
|
)
|
General and administrative expenses
|
|
|
(135.7
|
)
|
|
(133.4
|
)
|
|
(2.3
|
)
|
|
1.7
|
|
Impairment of assets held for sale, including goodwill
|
|
|
(168.2
|
)
|
|
|
|
|
(168.2
|
)
|
|
NM
|
*
|
Acquisition and integration expenses
|
|
|
|
|
|
(38.7
|
)
|
|
38.7
|
|
|
(100.0
|
)
|
(Loss) gain on disposal activities
|
|
|
(2.9
|
)
|
|
0.6
|
|
|
(3.5
|
)
|
|
NM
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
424.9
|
|
|
653.8
|
|
|
(228.9
|
)
|
|
(35.0
|
)
|
Other income
|
|
|
20.1
|
|
|
6.7
|
|
|
13.4
|
|
|
200.0
|
|
Interest expense
|
|
|
(267.5
|
)
|
|
(231.3
|
)
|
|
(36.2
|
)
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (benefit) expense
|
|
|
177.5
|
|
|
429.2
|
|
|
(251.7
|
)
|
|
(58.6
|
)
|
Income tax (benefit) expense
|
|
|
(19.7
|
)
|
|
7.7
|
|
|
(27.4
|
)
|
|
(355.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
197.2
|
|
|
421.5
|
|
|
(224.3
|
)
|
|
(53.2
|
)
|
Noncontrolling interests in income of consolidated subsidiaries, net of tax
|
|
|
(60.7
|
)
|
|
(82.1
|
)
|
|
21.4
|
|
|
(26.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AECOM
|
|
$
|
136.5
|
|
$
|
339.4
|
|
$
|
(202.9
|
)
|
|
(59.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
96.8
|
|
|
96.2
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3.2
|
|
|
3.8
|
|
Equity in earnings of joint ventures
|
|
|
0.4
|
|
|
0.8
|
|
General and administrative expenses
|
|
|
(0.7
|
)
|
|
(0.8
|
)
|
Impairment of assets held for sale, including goodwill
|
|
|
(0.8
|
)
|
|
0.0
|
|
Acquisition and integration expenses
|
|
|
0.0
|
|
|
(0.2
|
)
|
(Loss) gain on disposal activities
|
|
|
0.0
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2.1
|
|
|
3.6
|
|
Other income
|
|
|
0.1
|
|
|
0.0
|
|
Interest expense
|
|
|
(1.3
|
)
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
Income before income tax (benefit) expense
|
|
|
0.9
|
|
|
2.4
|
|
Income tax (benefit) expense
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.0
|
|
|
2.3
|
|
Noncontrolling interests in income of consolidated subsidiaries, net of tax
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Net income attributable to AECOM
|
|
|
0.7
|
%
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Table of Contents
Our revenue for the year ended September 30, 2018 increased $1,952.1 million, or 10.7%, to $20,155.5 million as compared to
$18,203.4 million for the corresponding period last year.
The
increase in revenue for the year ended September 30, 2018 was primarily attributable to increases in our DCS segment of $656.3 million, our CS segment of
$943.3 million, and our MS segment of $352.5 million, as discussed further below.
In
the course of providing our services, we routinely subcontract for services and incur other direct costs on behalf of our clients. These costs are passed through to clients and, in
accordance with industry practice and GAAP, are included in our revenue and cost of revenue. Because subcontractor and other direct costs can change significantly from project to project and period to
period, changes in revenue may not be indicative of business trends. Subcontractor and other direct costs for the years ended September 30, 2018 and 2017 were $10.7 billion and
$9.2 billion, respectively. Subcontractor costs and other direct costs as a percentage of revenue, increased to 53% during the year ended September 30, 2018 from 51% during the year
ended September 30, 2017 due to increased building construction in our CS segment, as discussed below.
Our gross profit for the year ended September 30, 2018 decreased $33.1 million, or 4.8%, to $650.6 million as compared to
$683.7 million for the corresponding period last year. For the year ended September 30, 2018, gross profit, as a percentage of revenue, decreased to 3.2% from 3.8% in the year ended
September 30, 2017.
Gross
profit changes were due to the reasons noted in DCS, CS and MS segments below.
Our equity in earnings of joint ventures for the year ended September 30, 2018 was $81.1 million as compared to
$141.6 million in the corresponding period last year.
During
year ended September 30, 2017, ACAP completed a transaction to sell its 50% equity interest in Provost Square I LLC, an unconsolidated joint venture which invested
in a real estate development in New Jersey, for $133 million, which resulted in a gain of $52 million in our fiscal 2017. During the three months ended September 30, 2018, ACAP
completed several real estate transactions that resulted in total gains of $15.2 million and net cash proceeds of $102.8 million. Additionally, the decrease from prior year was due to
approximately $15 million in reduced equity in earnings from decreased volume at joint ventures in our MS segment.
Our general and administrative expenses for the year ended September 30, 2018 increased $2.3 million, or 1.7%, to
$135.7 million as compared to $133.4 million for the corresponding period last year. As a percentage of revenue, general and administrative expenses decreased to 0.7% for the year ended
September 30, 2018 from 0.8% for the year ended September 30, 2017.
Impairment of Assets Held for Sale, Including Goodwill
Impairment of assets held for sale, including goodwill, was $168.2 million for the year ended September 30, 2018. The loss was due
to the anticipated disposition of non-core oil and gas assets in North America from our CS segment after the second quarter of fiscal 2018. The anticipated disposition resulted in a remeasurement of
the assets held for sale, which were recorded at their estimated fair values less costs to sell. Included in the impairment of assets held for sale was a goodwill impairment charge of
47
Table of Contents
$125.4 million.
Goodwill associated with the assets held for sale was originally recognized in the acquisition of URS Corporation in October 2014. Weak market demand for oil and gas services in
the Canadian oil sands, primarily due to volatile commodity prices for Western Canada Select, resulted in lower fair value than previously measured at our annual impairment testing date as of
September 30, 2017. A portion of the assets classified as held for sale at the end of the second quarter of fiscal 2018 were sold during the year ended September 30, 2018. We expect to
sell the remaining assets held for sale within the next twelve months.
Loss on disposal activities in the accompanying statements of operations for the year ended September 30, 2018 was $2.9 million
compared to gain on disposal activities of $0.6 million for the year ended September 30, 2017. The loss on disposal activities in the current period relates to incremental losses on the
disposal of specific non-core oil and gas assets in North America from our CS segment previously classified as assets held for sale.
Our other income for the year ended September 30, 2018 increased $13.4 million to $20.1 million as compared to
$6.7 million for the year ended September 30, 2017.
The
increase in other income for the year ended September 30, 2018 was primarily due to a $9.1 million gain realized in the quarter ended March 31, 2018 from a
foreign exchange forward contract entered into as part of the refinancing of our credit agreement.
Our interest expense for the year ended September 30, 2018 was $267.5 million as compared to $231.3 million for the year
ended September 30, 2017.
The
increase in interest expense for the year ended September 30, 2018 was primarily due to a $34.5 million prepayment premium of our $800 million unsecured 5.750%
Senior Notes due 2022 at a price of 104.3% during the quarter ended March 31, 2018.
Our income tax benefit for the year ended September 30, 2018 was $19.6 million compared to income tax expense of
$7.7 million for the year ended September 30, 2017. The increase in tax benefit for the current period compared to the corresponding period last year is due primarily to a
$47.8 million net benefit related to one-time U.S. federal tax law changes, a benefit of $37.2 million related to income tax credits and incentives, a benefit of $31.4 million
related to changes in uncertain tax positions primarily in the U.S. and Canada, a benefit of $27.7 million related to an audit settlement in the U.S., a benefit of $18.5 million related
to return to provision adjustments in the U.S. primarily due to changes in foreign tax credits, a decrease in overall pre-tax income of $251.7 million, and a reduced U.S. federal corporate tax
rate of 24.5% for our fiscal year ending September 30, 2018. These benefits were partially offset by valuation allowance increases resulting in tax expense of $58.7 million including
$38.1 million related to foreign tax credits as a result of U.S. federal tax law changes and tax expense of $33.9 million related to the goodwill impairment charge in the second quarter
of fiscal 2018 which was non-deductible for tax purposes.
During
the first quarter of 2018, President Trump signed what is commonly referred to as
The Tax Cuts and Jobs Act
(the Tax Act) into law.
The Tax Act reduced our U.S. federal corporate tax rate from 35% to a blended tax rate of 24.5% for our fiscal year ending September 30, 2018 and 21% for fiscal years
48
Table of Contents
thereafter,
requires companies to pay a one-time transition tax on accumulated earnings of foreign subsidiaries, creates new taxes on foreign sourced earnings and eliminates or reduces 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.
During
the fiscal year 2018, we recorded a $32.0 million provisional tax benefit related to the remeasurement of our U.S. deferred tax assets and liabilities based on the rates at
which they are expected to reverse in the future, which is generally 21%. In addition, we released the deferred tax
liability and recorded a tax benefit related to foreign subsidiaries for which the undistributed earnings are not intended to be reinvested indefinitely for $79.8 million and accrued current
tax on these earnings as part of the one-time transition tax.
During
the fiscal year 2018, we recorded a $64.0 million provisional amount for the one-time transition tax liability for our foreign subsidiaries. We have not yet completed our
calculation of the total foreign earnings and profits of our foreign subsidiaries and accordingly this amount may change when we finalize the calculation of foreign earnings.
During
the fourth quarter of 2018, we restructured certain operations in Canada which resulted in a release of a valuation allowance of $13.1 million. Other operations in Canada
continue to have losses and the associated valuation allowances could be reduced if and when our current and forecast profits trend turns and sufficient evidence exists to support the release of the
related valuation allowances (approximately $41 million). During the second quarter of 2017, valuation allowances in the amount of $59.9 million in the United Kingdom were released due
to sufficient positive evidence.
During
the fourth quarter of 2018, we effectively settled a U.S. federal income tax examination for URS pre-acquisition tax years 2012, 2013 and 2014 and recorded a benefit of
$27.7 million related to various adjustments, in addition to the favorable settlement for R&D credits of $26.2 million recorded in the second quarter of 2018. We are currently under tax
audit in several jurisdictions including the U.S and believe the outcomes which are reasonably possible within the next twelve months, including lapses in statutes of limitations, could result in
adjustments, but will not result in a material change in the liability for uncertain tax positions.
We
regularly integrate and consolidate our business operations and legal entity structure, and such internal initiatives could impact the assessment of uncertain tax positions,
indefinite reinvestment assertions and the realizability of deferred tax assets.
The factors described above resulted in the net income attributable to AECOM of $136.5 million for the year ended September 30,
2018, as compared to the net income attributable to AECOM of $339.4 million for the year ended September 30, 2017.
49
Table of Contents
Results of Operations by Reportable Segment
Design and Consulting Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
8,223.1
|
|
$
|
7,566.8
|
|
$
|
656.3
|
|
|
8.7
|
%
|
Cost of revenue
|
|
|
7,783.9
|
|
|
7,172.0
|
|
|
611.9
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
439.2
|
|
$
|
394.8
|
|
$
|
44.4
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
94.7
|
|
|
94.8
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5.3
|
%
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for our DCS segment for the year ended September 30, 2018 increased $656.3 million, or 8.7%, to $8,223.1 million as
compared to $7,566.8 million for the corresponding period last year.
The
increase in revenue for the year ended September 30, 2018 was attributable to an increase in the Americas of $400 million, largely due to increased work performed on a
residential housing storm disaster relief program. Additionally, the increase was due to increases in Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA) of approximately $110 million
and $40 million, respectively, and favorable impacts from foreign currency of $100 million.
Gross profit for our DCS segment for the year ended September 30, 2018 increased $44.4 million, or 11.2%, to $439.2 million
as compared to $394.8 million for the corresponding period last year. As a percentage of revenue, gross profit increased to 5.3% of revenue for the year ended September 30, 2018 from
5.2% in the corresponding period last year.
The
increases in gross profit and gross profit as a percentage of revenue for the year ended September 30, 2018 were primarily due to increased revenues in the Americas, including
the residential housing disaster relief program discussed above.
Construction Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
8,238.9
|
|
$
|
7,295.6
|
|
$
|
943.3
|
|
|
12.9
|
%
|
Cost of revenue
|
|
|
8,198.5
|
|
|
7,202.7
|
|
|
995.8
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
40.4
|
|
$
|
92.9
|
|
$
|
(52.5
|
)
|
|
(56.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Table of Contents
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
99.5
|
|
|
98.7
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
0.5
|
%
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for our CS segment for the year ended September 30, 2018 increased $943.3 million, or 12.9%, to $8,238.9 million as
compared to $7,295.6 million for the corresponding period last year.
The
increase in revenue for the year ended September 30, 2018 was primarily attributable to approximately $400 million in increased revenue due to the construction of
residential high-rise buildings in the city of New York. Additionally, the increase was due to the inclusion of approximately $500 million of revenue from entities acquired during fiscal 2018
and the fourth quarter of fiscal 2017.
Gross profit for our CS segment for the year ended September 30, 2018 decreased $52.5 million, or 56.5%, to $40.4 million
as compared to $92.9 million for the corresponding period last year. As a percentage of revenue, gross profit decreased to 0.5% of revenue for the year ended September 30, 2018 from 1.3%
in the corresponding period last year.
The
decrease in gross profit and gross profit as a percentage of revenue for the year ended September 30, 2018 were primarily due to losses in the oil and gas business in North
America of approximately $50 million, and projects in the construction services business, partially offset by earnings from entities acquired in fiscal 2017 and the revenue increase in our
residential high-rise construction business noted above.
Management Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
3,693.5
|
|
$
|
3,341.0
|
|
$
|
352.5
|
|
|
10.6
|
%
|
Cost of revenue
|
|
|
3,522.5
|
|
|
3,145.0
|
|
|
377.5
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
171.0
|
|
$
|
196.0
|
|
$
|
(25.0
|
)
|
|
(12.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
95.4
|
|
|
94.1
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4.6
|
%
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Table of Contents
Revenue for our MS segment for the year ended September 30, 2018 increased $352.5 million, or 10.6%, to $3,693.5 million as
compared to $3,341.0 million for the corresponding period last year.
The
increase in revenue for the year ended September 30, 2018 was primarily due to various projects with the U.S. government, including projects with the United States Army in the
Middle East and with the United States Air Force.
Gross profit for our MS segment for the year ended September 30, 2018 decreased $25.0 million, or 12.8%, to $171.0 million
as compared to $196.0 million for the corresponding period last year. As a percentage of revenue, gross profit decreased to 4.6% of revenue for the year ended September 30, 2018 from
5.9% in the corresponding period last year.
The
decrease in gross profit and gross profit as a percentage of revenue for the year ended September 30, 2018 were primarily due to a benefit recorded in the first quarter of
fiscal 2017 of $35 million from the favorable settlement of a federal lawsuit, net of legal fees, and $23 million of incentive fees earned on contracts with the Department of Energy,
which did not repeat in the current year. These decreases were partially offset by the benefits of approximately $15 million from an increase in anticipated recoveries on a contract with the
Department of Energy recorded in the year ended September 30, 2018. Additionally, the decreases were offset by increased gross profits from projects with the United States Army in the Middle
East and with the United States Air Force, discussed above.
AECOM Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Equity in earnings of joint ventures
|
|
$
|
15.2
|
|
$
|
57.7
|
|
$
|
(42.5
|
)
|
|
(73.7
|
)%
|
General and administrative expenses
|
|
|
(11.2
|
)
|
|
(8.7
|
)
|
|
(2.5
|
)
|
|
28.7
|
%
|
During
the three months ended June 30, 2017, ACAP completed a transaction to sell its 50% equity interest in Provost Square I LLC, an unconsolidated joint venture which
invested in a real estate development in New Jersey, for $133 million, which resulted in a gain of $52 million in fiscal 2017. During the three months ended September 30, 2018,
ACAP completed several real estate transactions that resulted in total gains of $15.2 million and net cash proceeds of $102.8 million.
52
Table of Contents
Fiscal year ended September 30, 2017 compared to the fiscal year ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
18,203.4
|
|
$
|
17,410.8
|
|
$
|
792.6
|
|
|
4.6
|
%
|
Cost of revenue
|
|
|
17,519.7
|
|
|
16,768.0
|
|
|
751.7
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
683.7
|
|
|
642.8
|
|
|
40.9
|
|
|
6.4
|
|
Equity in earnings of joint ventures
|
|
|
141.6
|
|
|
104.0
|
|
|
37.6
|
|
|
36.2
|
|
General and administrative expenses
|
|
|
(133.4
|
)
|
|
(115.1
|
)
|
|
(18.3
|
)
|
|
15.9
|
|
Acquisition and integration expenses
|
|
|
(38.7
|
)
|
|
(213.6
|
)
|
|
174.9
|
|
|
(81.9
|
)
|
Gain (loss) on disposal activities
|
|
|
0.6
|
|
|
(42.6
|
)
|
|
43.2
|
|
|
(101.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
653.8
|
|
|
375.5
|
|
|
278.3
|
|
|
74.1
|
|
Other income
|
|
|
6.7
|
|
|
8.2
|
|
|
(1.5
|
)
|
|
(18.3
|
)
|
Interest expense
|
|
|
(231.3
|
)
|
|
(258.1
|
)
|
|
26.8
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
429.2
|
|
|
125.6
|
|
|
303.6
|
|
|
241.7
|
|
Income tax expense (benefit)
|
|
|
7.7
|
|
|
(37.9
|
)
|
|
45.6
|
|
|
(120.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
421.5
|
|
|
163.5
|
|
|
258.0
|
|
|
157.8
|
|
Noncontrolling interests in income of consolidated subsidiaries, net of tax
|
|
|
(82.1
|
)
|
|
(67.4
|
)
|
|
(14.7
|
)
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AECOM
|
|
$
|
339.4
|
|
$
|
96.1
|
|
$
|
243.3
|
|
|
253.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
96.2
|
|
|
96.3
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3.8
|
|
|
3.7
|
|
Equity in earnings of joint ventures
|
|
|
0.8
|
|
|
0.6
|
|
General and administrative expenses
|
|
|
(0.8
|
)
|
|
(0.7
|
)
|
Acquisition and integration expenses
|
|
|
(0.2
|
)
|
|
(1.2
|
)
|
Gain (loss) on disposal activities
|
|
|
0.0
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3.6
|
|
|
2.2
|
|
Other income
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1.2
|
)
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
2.4
|
|
|
0.7
|
|
Income tax expense (benefit)
|
|
|
0.1
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.3
|
|
|
0.9
|
|
Noncontrolling interests in income of consolidated subsidiaries, net of tax
|
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
Net income attributable to AECOM
|
|
|
1.9
|
%
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Table of Contents
Our revenue for the year ended September 30, 2017 increased $792.6 million, or 4.6%, to $18,203.4 million as compared to
$17,410.8 million for the year ended September 30, 2016.
The
increase in revenue for the year ended September 30, 2017 was primarily attributable to an increase in our CS segment of $924.5 million, partially offset by a decrease
in our DCS segment of $89.0 million and a decrease in our MS segment of $42.9 million, as discussed further below.
In
the course of providing our services, we routinely subcontract for services and incur other direct costs on behalf of our clients. These costs are passed through to clients and, in
accordance with industry practice and GAAP, are included in our revenue and cost of revenue. Because subcontractor and other direct costs can change significantly from project to project and period to
period, changes in revenue may not be indicative of business trends. Subcontractor and other direct costs for the years ended September 30, 2017 and 2016 were $9.2 billion and
$8.4 billion, respectively. Subcontractor costs
and other direct costs as a percentage of revenue, increased to 51% during the year ended September 30, 2017 from 48% during the year ended September 30, 2016 due to increased building
construction in our CS segment, as discussed below.
Our gross profit for the year ended September 30, 2017 increased $40.9 million, or 6.4%, to $683.7 million as compared to
$642.8 million for the year ended September 30, 2016. For the year ended September 30, 2017, gross profit, as a percentage of revenue, increased to 3.8% from 3.7% in the year
ended September 30, 2016.
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 on
October 17, 2014. Revenue and the related income from operations related to the margin fair value liability recognized during the year ended September 30, 2017 was $6.3 million,
compared with $37.2 million during the year ended September 30, 2016. This amount was offset by a decrease in amortization of intangible assets of $83.6 million during the year
ended September 30, 2017, compared with $183.3 million during the year ended September 30, 2016.
Gross
profit changes were also due to the reasons noted in DCS, CS and MS Reportable Segments below.
Our equity in earnings of joint ventures for the year ended September 30, 2017 was $141.6 million as compared to
$104.0 million in the year ended September 30, 2016.
The
increase in earnings of joint ventures for the year ended September 30, 2017 was primarily due to the sale of ACAP's 50% equity interest in Provost Square I LLC for
$133 million, which resulted in a gain of $52 million in our fiscal 2017 third quarter, partially offset by decreased earnings from a United Kingdom nuclear cleanup joint venture for
which our work was substantially completed in the second quarter of fiscal 2016.
Our general and administrative expenses for the year ended September 30, 2017 increased $18.3 million, or 15.9%, to
$133.4 million as compared to $115.1 million for the year ended September 30, 2016. As a percentage of revenue, general and administrative expenses increased to 0.8% for the year
ended September 30, 2017 from 0.7% for the year ended September 30, 2016.
54
Table of Contents
The
increase in our general and administrative expenses was primarily due to increased personnel costs.
Acquisition and integration expenses, resulting from business acquisitions, were comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended
September 30,
|
|
|
|
2017
|
|
2016
|
|
Severance and personnel costs
|
|
$
|
32.0
|
|
$
|
23.4
|
|
Professional services, real estate-related, and other expenses
|
|
|
6.7
|
|
|
190.2
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38.7
|
|
$
|
213.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
cost savings and acquisition and integration expenses associated with the URS integration are complete.
Gain on disposal activities in the accompanying statements of operations for the year ended September 30, 2017 was $0.6 million
compared to loss on disposal activities of $42.6 million for the year ended September 30, 2016. Losses recorded in fiscal 2016 related to the disposition of non-core energy-related
businesses, equipment and other assets that did not repeat in fiscal 2017.
Our other income for the year ended September 30, 2017 decreased $1.5 million to $6.7 million as compared to
$8.2 million for the year ended September 30, 2016.
Other
income is primarily comprised of interest income.
Our interest expense for the year ended September 30, 2017 was $231.3 million as compared to $258.1 million for the year
ended September 30, 2016.
The
decrease in interest expense for the year ended September 30, 2017 was primarily due to the write-off of capitalized debt issuance costs related to the amendment of our credit
agreement in September 2016 and a reduction in our debt balance.
Our income tax expense for the year ended September 30, 2017 was $7.7 million compared to income tax benefit of
$37.9 million for the year ended September 30, 2016. The effective tax rate was 1.8% and (30.2)% for the years ended September 30, 2017 and 2016, respectively.
The
increase in income tax expense for the year ended September 30, 2017 compared to the prior year is due primarily to the tax impact of an increase in overall pre-tax income of
$303.6 million, the retroactive extension of the federal research credit in the first quarter of 2016, and the tax impacts from changes in the mix of geographical income. In addition, valuation
allowance releases and other benefits recorded each year contributed to the decrease in the overall tax expense in both years. As described further below, three one-time benefits totaling
$106.3 million were recognized during 2017 including the release of valuation allowances, indefinitely reinvesting a portion of our non-U.S. undistributed earnings that U.S. tax had
55
Table of Contents
previously
been provided for, and foreign tax credits expected to be realized in the foreseeable future. In addition, two one-time benefits totaling $36.2 million related to valuation
allowances were released during 2016.
In
the fourth quarter of 2017, we executed international restructuring transactions that resulted in a distribution of current year earnings and profits and the associated foreign tax
credits. The distribution resulted in the recognition of a benefit of $25.2 million related to excess foreign tax credits expected to be realized in the foreseeable future. These current year
earnings had previously been forecasted to qualify for the indefinite reinvestment exception. Our change in assertion for these investments is a one-time event and does not impact our past or future
assertions regarding intent and ability to reinvest indefinitely.
In
the third quarter of 2017, we recapitalized one of our European subsidiaries which resulted in us indefinitely reinvesting a portion of our non-U.S. undistributed earnings that U.S.
tax had previously been provided for and released the associated $21.2 million deferred tax liability. These non-U.S. earnings are now intended to be reinvested indefinitely outside of the U.S
to meet the current and future cash needs of our European operations.
In
the second quarter of 2017, valuation allowances in the amount of $59.9 million in the United Kingdom were released due to sufficient positive evidence. We evaluated the
positive evidence against any negative evidence and determined that it is more likely than not that the deferred tax assets will be realized. This positive evidence includes an improvement in
earnings, the use of net operating losses on a taxable basis, and better management of pension liabilities due to positive effects of pension asset management and stabilization of interest rates.
In
the third quarter of 2016, valuation allowances in the amount of $23.3 million in the United Kingdom were released due to sufficient positive evidence. We evaluated the
positive evidence against any negative evidence and determined the valuation allowances were no longer necessary. This positive evidence includes reaching a position of cumulative income over a
three-year period and the use of net operating losses on a taxable basis. In addition, our United Kingdom affiliate has strong projected earnings in the United Kingdom.
Also
in the third quarter of 2016, our Australian affiliate made an election in Australia to combine the tax results of the URS Australia business with the AECOM Australia business. This
election resulted in the ability to utilize the URS Australia businesses' deferred tax assets against the combined future earnings of the Australian group and accordingly, the valuation allowance of
$12.9 million was released.
On
December 18, 2015, President Obama signed
The Protecting Americans from Tax Hikes Act
into law. This legislation extended
various temporary tax provisions expiring on December 31, 2015, including the permanent extension of the United States federal research credit. We recognized a discrete net benefit in the first
quarter of 2016 for $10.1 million attributable to the retroactive impact of the extended provisions.
Some
operations in Canada continue to have losses and the associated valuation allowances could be reduced if and when our current and forecast profits trend turns and sufficient
evidence exists to support the release of the related valuation allowance (approximately $26 million).
We
regularly integrate and consolidate our business operations and legal entity structure and such internal initiatives could impact the assessment of uncertain tax positions, indefinite
reinvestment assertions and the realizability of deferred tax assets.
The factors described above resulted in the net income attributable to AECOM of $339.4 million for the year ended September 30,
2017, as compared to the net income attributable to AECOM of $96.1 million for the year ended September 30, 2016.
56
Table of Contents
Results of Operations by Reportable Segment
Design and Consulting Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
7,566.8
|
|
$
|
7,655.8
|
|
$
|
(89.0
|
)
|
|
(1.2
|
)%
|
Cost of revenue
|
|
|
7,172.0
|
|
|
7,273.3
|
|
|
(101.3
|
)
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
394.8
|
|
$
|
382.5
|
|
$
|
12.3
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
94.8
|
|
|
95.0
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5.2
|
%
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for our DCS segment for the year ended September 30, 2017 decreased $89.0 million, or 1.2%, to $7,566.8 million as
compared to $7,655.8 million for the year ended September 30, 2016.
The
decrease in revenue for the year ended September 30, 2017 was primarily attributable to decreases in the Americas of $110 million and a negative foreign currency impact
of $70 million mostly due to the strengthening of the U.S. dollar against the British pound. These decreases were offset by an increase in the Asia Pacific (APAC) region of $100 million.
Gross profit for our DCS segment for the year ended September 30, 2017 increased $12.3 million, or 3.2%, to $394.8 million
as compared to $382.5 million for the year ended September 30, 2016. As a percentage of revenue, gross profit increased to 5.2% of revenue for the year ended September 30, 2017
from 5.0% in the year ended September 30, 2016.
The
increase in gross profit and gross profit as a percentage of revenue for the year ended September 30, 2017 was primarily due to decreased intangible amortization expense, net
of the margin fair value adjustment, of $47 million, primarily from URS, partially offset by decreased project performance in the Europe, Middle East and Africa (EMEA) region.
Construction Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
7,295.6
|
|
$
|
6,371.1
|
|
$
|
924.5
|
|
|
14.5
|
%
|
Cost of revenue
|
|
|
7,202.7
|
|
|
6,345.7
|
|
|
857.0
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
92.9
|
|
$
|
25.4
|
|
$
|
67.5
|
|
|
265.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Table of Contents
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
98.7
|
|
|
99.6
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1.3
|
%
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for our CS segment for the year ended September 30, 2017 increased $924.5 million, or 14.5%, to $7,295.6 million as
compared to $6,371.1 million for the year ended September 30, 2016.
The
increase in revenue for the year ended September 30, 2017 was primarily attributable to approximately $700 million in increased revenue due to the construction of
sports arenas in the Americas and the construction of residential high-rise buildings in the city of New York. Additionally, the increase was due to the inclusion of approximately $220 million
of revenue from an entity acquired at the end of fiscal 2016.
Gross profit for our CS segment for the year ended September 30, 2017 increased $67.5 million, or 265.7%, to $92.9 million
as compared to $25.4 million for the year ended September 30, 2016. As a percentage of revenue, gross profit increased to 1.3% of revenue for the year ended September 30, 2017
from 0.4% in the year ended September 30, 2016.
The
increase in gross profit and gross profit as a percentage of revenue for the year ended September 30, 2017 was primarily due to increased profitability in our building
construction businesses due to the increases in revenue noted above. The increase was also due to improved profitability in our oil and gas business.
Management Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Revenue
|
|
$
|
3,341.0
|
|
$
|
3,383.9
|
|
$
|
(42.9
|
)
|
|
(1.3
|
)%
|
Cost of revenue
|
|
|
3,145.0
|
|
|
3,149.0
|
|
|
(4.0
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
196.0
|
|
$
|
234.9
|
|
$
|
(38.9
|
)
|
|
(16.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the percentage relationship of statement of operations items to revenue:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of revenue
|
|
|
94.1
|
|
|
93.1
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5.9
|
%
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Table of Contents
Revenue for our MS segment for the year ended September 30, 2017 decreased $42.9 million, or 1.3%, to $3,341.0 million as
compared to $3,383.9 million for the year ended September 30, 2016.
The
decrease in revenue for the year ended September 30, 2017 was primarily due to the expected accelerated recovery of a pension related entitlement from the federal government
of approximately $50 million recorded in the year ended September 30, 2016, which did not repeat in 2017.
Gross profit for our MS segment for the year ended September 30, 2017 decreased $38.9 million, or 16.6%, to $196.0 million
as compared to $234.9 million for the year ended September 30, 2016. As a percentage of revenue, gross profit decreased to 5.9% of revenue for the year ended September 30, 2017
from 6.9% in the year ended September 30, 2016.
The
decrease in gross profit and gross profit as a percentage of revenue for the year ended September 30, 2017 was primarily due to favorable adjustments from the prior year that
did not repeat in the current year. These adjustments included the expected accelerated recovery of a pension related entitlement from the federal government of approximately $50 million and
favorable adjustments from an acquisition related environmental legal matter and a pension curtailment gain totaling approximately $17 million, net of noncontrolling interests
($20 million impact to gross profit). These decreases were partially offset by a benefit recorded in the three months ended December 31, 2016 of $35 million from the favorable
settlement of a federal lawsuit, net of legal fees.
AECOM Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
Change
|
|
|
|
September 30,
2017
|
|
September 30,
2016
|
|
|
|
$
|
|
%
|
|
|
|
($ in millions)
|
|
Equity in earnings of joint ventures
|
|
$
|
57.7
|
|
$
|
|
|
$
|
57.7
|
|
|
0.0
|
%
|
General and administrative expenses
|
|
|
(8.7
|
)
|
|
(6.0
|
)
|
|
(2.7
|
)
|
|
45.0
|
%
|
During
the three months ended June 30, 2017, AECOM Capital completed a transaction to sell its 50% equity interest in Provost Square I LLC, an unconsolidated joint venture
which invested in a real estate development in New Jersey, for $133 million, which resulted in net cash proceeds of $77 million and a gain of $52 million in fiscal 2017.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operations, borrowings under our credit facilities, and access to financial markets. Our
principal uses of cash are operating expenses, capital expenditures, working capital requirements, acquisitions, and repayment of debt. We believe our anticipated sources of liquidity including
operating cash flows, existing cash and cash equivalents, borrowing capacity under our revolving credit facility and our ability to issue debt or equity, if required, will be sufficient to meet our
projected cash requirements for at least the next 12 months. We sold non-core oil and gas assets in fiscal 2018 and we expect to sell additional non-core oil and gas assets in the next twelve
months. We expect to incur approximately $80 to $90 million in restructuring costs in the first half of fiscal year 2019, and we also expect to evaluate our geographic exposure as part of a
proposed plan to exit more than 30 countries, subject to applicable laws, to improve profitability and reduce our risk profile.
59
Table of Contents
Generally,
we do not provide for U.S. taxes or foreign withholding taxes on gross book-tax basis differences in our non-U.S. subsidiaries because such basis differences are able to and
intended to be reinvested indefinitely. At September 30, 2018, we have not determined whether we will continue to indefinitely reinvest the earnings of some foreign subsidiaries and therefore
we will continue to account for these undistributed earnings based on our existing accounting under ASC 740 and not accrue additional tax outside of the one-time transition tax required under the
Tax Cuts and Jobs
Act
that was enacted on December 22, 2017. Determination of the amount of any unrecognized deferred income tax liability on
this temporary difference is not practicable because of the complexities of the hypothetical calculation. Based on the available sources of cash flows discussed above, we anticipate we will continue
to have the ability to permanently reinvest these remaining amounts.
At
September 30, 2018, cash and cash equivalents were $886.7 million, an increase of $84.3 million, or 10.5%, from $802.4 million at September 30,
2017. The increase in cash and cash equivalents was primarily attributable to cash provided by operating activities and net borrowings under our credit agreements, partially offset by an early
redemption of the 2014 5.75% Senior Notes due 2022 including a prepayment premium, capital expenditures net of proceeds from disposals, net distributions to noncontrolling interest, and repurchases of
common stock.
Net
cash provided by operating activities was $774.6 million for the year ended September 30, 2018, an increase from $696.7 million for the year ended
September 30, 2017. The increase was primarily attributable to the timing of receipts and payments of working capital, which include accounts receivable, accounts payable, accrued expenses, and
billings in excess of costs on uncompleted contracts.
The sale of trade receivables to financial institutions during the year ended September 30, 2018 provided a net benefit of $39.1 million as compared to a net favorable impact of
$0.3 million during the year ended September 30, 2017. We expect to continue to sell trade receivables in the future as long as the terms continue to remain favorable to us.
Net
cash used in investing activities was $59.1 million for the year ended September 30, 2018 as compared to $202.7 million for the year ended September 30,
2017. This decrease in cash used was primarily attributable to a decrease in payments for business acquisitions of $103.1 million and an increase in net return on investments from
unconsolidated joint ventures of $39.0 million.
Net
cash used in financing activities was $624.9 million for the year ended September 30, 2018 as compared to $386.5 million for the year ended September 30,
2017. This change was primarily attributable to the repurchase of common stock under an accelerated stock repurchase agreement entered into in August 2018 for $150.0 million, an increase in net
distributions made to noncontrolling interests of $30.7 million and an increase in net repayments of debt of $48.2 million which includes net repayments under credit agreements and
redemption and issuance of unsecured senior notes.
Working capital, or current assets less current liabilities, decreased $106.2 million, or 9.6%, to $997.6 million at
September 30, 2018 from $1,103.8 million at September 30, 2017. Net accounts receivable, which includes billed and unbilled costs and fees, net of billings in excess of costs on
uncompleted contracts, increased $312.5 million, or 7.4%, to $4,537.4 million at September 30, 2018 from $4,224.9 million at September 30, 2017.
Days
Sales Outstanding (DSO), which includes accounts receivable, net of billings in excess of costs on uncompleted contracts, and excludes the effects of recent acquisitions, was
78 days at September 30, 2018 compared to 77 days at September 30, 2017.
In
Note 4, Accounts ReceivableNet, in the notes to our consolidated financial statements, a comparative analysis of the various components of accounts receivable is
provided. Except for claims, substantially all unbilled receivables are expected to be billed and collected within twelve months.
60
Table of Contents
Unbilled
receivables related to claims are recorded only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such
cases, revenue is recorded only to the extent that contract costs relating to the claim have been incurred. Award fees in unbilled receivables are accrued only when there is sufficient information to
assess contract performance. On contracts that represent higher than normal risk or technical difficulty, award fees are generally deferred until an award fee letter is received.
Because
our revenue depends to a great extent on billable labor hours, most of our charges are invoiced following the end of the month in which the hours were worked, the majority
usually within 15 days. Other direct costs are normally billed along with labor hours. However, as opposed to salary costs, which are generally paid on either a bi-weekly or monthly basis,
other direct costs are generally not paid until payment is received (in some cases, in the form of advances) from the customers.
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
(in millions)
|
|
2014 Credit Agreement
|
|
$
|
1,433.8
|
|
$
|
908.7
|
|
2014 Senior Notes
|
|
|
800.0
|
|
|
1,600.0
|
|
2017 Senior Notes
|
|
|
1,000.0
|
|
|
1,000.0
|
|
URS Senior Notes
|
|
|
247.9
|
|
|
247.7
|
|
Other debt
|
|
|
191.8
|
|
|
140.0
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
3,673.5
|
|
|
3,896.4
|
|
Less: Current portion of debt and short-term borrowings
|
|
|
(143.1
|
)
|
|
(142.0
|
)
|
Less: Unamortized debt issuance costs
|
|
|
(46.7
|
)
|
|
(52.3
|
)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
3,483.7
|
|
$
|
3,702.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents, in millions, scheduled maturities of our debt as of September 30, 2018:
|
|
|
|
|
Fiscal Year
|
|
|
|
2019
|
|
$
|
143.1
|
|
2020
|
|
|
92.5
|
|
2021
|
|
|
341.5
|
|
2022
|
|
|
304.9
|
|
2023
|
|
|
458.8
|
|
Thereafter
|
|
|
2,332.7
|
|
|
|
|
|
|
Total
|
|
$
|
3,673.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We 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 of our subsidiaries
(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
61
Table of Contents
all
of our assets 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 conditions
specified in the Credit Agreement and Security Agreement.
The
Credit Agreement contains covenants that limit our ability and the ability of some of our 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 various 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
our 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 our 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 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 our 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 our ability to undertake 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 our revolving credit
facility from $1.05 billion to $1.35 billion and extend its term until March 13, 2023; (4) reduce our interest rate borrowing costs as follows: (a) the term loan B
facility, at our 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
our 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 our election, Base Rate plus 0.75% or Eurocurrency Rate plus 1.75%, and after the end of our fiscal quarter ended 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); (5) revise 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.
62
Table of Contents
Under
the Credit Agreement, we are subject to a maximum consolidated leverage ratio and minimum consolidated interest coverage ratio at the end of each fiscal quarter. Our Consolidated
Leverage Ratio was 3.9 at September 30, 2018. Our Consolidated Interest Coverage Ratio was 4.6 at September 30, 2018. As of September 30, 2018, we were in compliance with the
covenants of the Credit Agreement.
At
September 30, 2018 and 2017, outstanding standby letters of credit totaled $28.7 million and $58.1 million, respectively, under our revolving credit facilities.
As of September 30, 2018 and 2017, we had $1,321.3 million and $991.9 million, respectively, available under our revolving credit facility.
On October 6, 2014, we completed a private placement offering of $800,000,000 aggregate principal amount of the unsecured 5.750% Senior
Notes due 2022 (2022 Notes) and $800,000,000 aggregate principal amount of the unsecured 5.875% Senior Notes due 2024 (the 2024 Notes and, together with the 2022 Notes, the 2014 Senior Notes). On
November 2, 2015, we completed an exchange offer to exchange the unregistered 2014 Senior Notes for registered notes, as well as all related guarantees. On March 16, 2018, we 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 March 16, 2018 redemption resulted in a
$34.5 million prepayment premium, which was included in interest expense.
As
of September 30, 2018, the estimated fair value of the 2024 Notes was approximately $844.0 million. The fair value of the 2024 Notes as of September 30, 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, we 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
notices thereunder and provisions related to bankruptcy events. The indenture also contains customary negative covenants.
We
were in compliance with the covenants relating to the 2024 Notes as of September 30, 2018.
On February 21, 2017, we completed a private placement offering of $1,000,000,000 aggregate principal amount of our unsecured 5.125%
Senior Notes due 2027 (the 2017 Senior Notes) and used the 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 our Credit Agreement. On June 30, 2017, we completed an exchange offer to exchange
the unregistered 2017 Senior Notes for registered notes, as well as related guarantees.
As
of September 30, 2018, the estimated fair value of the 2017 Senior Notes was approximately $965.0 million. The fair value of the 2017 Senior Notes as of
September 30, 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 will be payable on the 2017 Senior Notes at a rate of 5.125% per annum. Interest on the 2017 Senior Notes will be payable semi-annually on March 15
and September 15 of each year, commencing on September 15, 2017. The 2017 Senior Notes will mature on March 15, 2027.
63
Table of Contents
At any time and from time to time prior to December 15, 2026, we 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, we 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, we 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 notices thereunder and provisions related to bankruptcy events. The indenture also contains customary negative covenants.
We
were in compliance with the covenants relating to the 2017 Senior Notes as of September 30, 2018.
In connection with the URS acquisition, we assumed the 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, we 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 some former URS domestic subsidiary guarantors.
As
of September 30, 2018, the estimated fair value of the 2022 URS Senior Notes was approximately $251.0 million. The carrying value of the 2022 URS Senior Notes on our
Consolidated Balance Sheets as of September 30, 2018 was $247.9 million. The fair value of the 2022 URS Senior Notes as of September 30, 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 September 30, 2018, we were in compliance with the covenants relating to the 2022 URS Senior Notes.
Other debt consists primarily of obligations under capital leases and loans, and unsecured credit facilities. Our unsecured credit facilities
are primarily used for standby letters of credit issued in connection with general and professional liability insurance programs and for contract performance guarantees. At September 30, 2018
and 2017, these outstanding standby letters of credit totaled $486.4 million and $445.7 million, respectively. As of September 30, 2018, we had $480.3 million available
under these unsecured credit facilities.
Our average effective interest rate on our total debt, including the effects of the interest rate swap agreements, during the years ended
September 30, 2018, 2017 and 2016 was 4.6%, 4.6% and 4.4%, respectively.
64
Table of Contents
Interest
expense in the consolidated statements of operations for the year ended September 30, 2018 included a prepayment premium of $34.5 million to redeem the 2022 Notes.
Additionally, amortization of deferred debt issuance costs for the year ended September 30, 2018 and 2017 was $18.1 million and $17.5 million, respectively.
We enter into various joint venture arrangements to provide architectural, engineering, program management, construction management and
operations and maintenance services. The ownership percentage of these joint ventures is typically representative of the work to be performed or the amount of risk assumed by each joint venture
partner. Some of these joint ventures
are considered variable interest. We have consolidated all joint ventures for which we have control. For all others, our portion of the earnings is recorded in equity in earnings of joint ventures.
See Note 6 in the notes to our consolidated financial statements.
Other
than normal property and equipment additions and replacements, expenditures to further the implementation of our various information technology systems, commitments under our
incentive compensation programs, amounts we may expend to repurchase stock under our stock repurchase program and acquisitions from time to time, we currently do not have any significant capital
expenditures or outlays planned except as described below. However, if we acquire additional businesses in the future or if we embark on other capital-intensive initiatives, additional working capital
may be required.
Under
our secured revolving credit facility and other facilities discussed in Other Debt above, as of September 30, 2018, there was approximately $515.1 million outstanding
under standby letters of credit primarily issued in connection with general and professional liability insurance programs and for contract performance guarantees. For those projects for which we have
issued a performance guarantee, if the project subsequently fails to meet guaranteed performance standards, we may either incur significant additional costs or be held responsible for the costs
incurred by the client to achieve the required performance standards.
We
recognized on our balance sheet the funded status of our pension benefit plans, measured as the difference between the fair value of plan assets and the projected benefit obligation.
At September 30, 2018, our defined benefit pension plans had an aggregate deficit (the excess of projected benefit obligations over the fair value of plan assets) of approximately
$400.5 million. The total amounts of employer contributions paid for the year ended September 30, 2018 were $11.6 million for U.S. plans and $27.8 million for non-U.S.
plans. Funding requirements for each plan are determined based on the local laws of the country where such plan resides. In some countries, the funding requirements are mandatory while in other
countries, they are discretionary. There is a required minimum contribution for one of our domestic plans; however, we may make additional discretionary contributions. In the future, such pension
funding may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors. In addition, we have collective bargaining agreements with unions
that require us to contribute to various third party multiemployer pension plans that we do not control or manage. For the year ended September 30, 2018, we contributed $49.8 million to
multiemployer pension plans.
We record amounts representing our probable estimated liabilities relating to claims, guarantees, litigation, audits and investigations. We rely
in part on qualified actuaries to assist us in determining the level of reserves to establish for insurance-related claims that are known and have been asserted against us, and for insurance-related
claims that are believed to have been incurred
based on actuarial analysis, but have not yet been reported to our claims administrators as of the respective balance sheet dates. We include any adjustments to such insurance reserves in our
consolidated results of operations. Our
65
Table of Contents
reasonably
possible loss disclosures are presented on a gross basis prior to the consideration of insurance recoveries. We do not record gain contingencies until they are realized. In the ordinary
course of business, we may not be aware that we or our 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, we 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 our 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 some circumstances such as for warranties. We may
also guarantee that a project, when complete, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, we 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
September 30, 2018 and 2017, we were contingently liable in the amount of approximately $515.1 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, we enter 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, we provide guarantees of contractual obligations, including guarantees for completion of projects, repayment
of debt, environmental indemnity obligations and other lender required guarantees.
Our
investment adviser jointly manages, sponsors and owns equity interest in the AECOM-Canyon Equity Fund, L.P. (the "Fund"), in which we have an ongoing capital commitment to
fund investments. At September 30, 2018, we have capital commitments of $35 million to the Fund over the next 10 years.
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.
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
66
Table of Contents
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. Deconstruction and
decommissioning activities are completed and site restoration activities are underway. WGI Ohio increased its receivable during the quarter ended June 30, 2018.
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 our results of operations.
One of our 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 1, 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 cross-complaint against URS Corporation and AECOM 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. On May 4, 2018, the design build contractor dismissed its claims
for negligent interference. On May 24, 2018, URS Corporation filed an $11.9 million second amended complaint in Superior Court against the design build contractor for its failure to pay
for services performed under the design agreement. URS Corporation and AECOM cannot provide assurances that URS Corporation will be successful in the recovery of the amounts owed to it under the
design agreement or in their defense against the amounts alleged under the cross-complaint that they believe are without merit and that they intend 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 factual 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 discovery stage of litigation.
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 our 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 or other resolution.
67
Table of Contents
Advatech, LLC, a joint venture 60% owned by AECOM Energy & Construction, Inc., executed a fixed-cost engineering,
procurement and construction contract for a flue-gas-desulfurization system at a coal-fired power plant owned by Illinois Power Generating Company, a wholly-owned subsidiary of Dynegy, Inc.
(Genco). On September 2, 2016, Genco terminated Advatech's contract for convenience and Advatech subsequently submitted its final contractual invoice of approximately $81 million.
Advatech filed and perfected a mechanics lien on the Genco power plant property on October 17, 2016. On December 9, 2016, Genco filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas and its plan of reorganization was approved by the Bankruptcy Court on January 25, 2017
(the Bankruptcy Plan). Advatech's contractual invoice and mechanics lien were not extinguished per the terms of the Bankruptcy Plan and remain outstanding claims. On March 15, 2017, Advatech
filed a demand for arbitration and on July 21, 2017 submitted a Statement of Claim seeking reimbursement of approximately $81 million for Genco's breach of contract and failure to
reimburse Advatech for all of the cost of work performed under the contract.
Advatech
intends to vigorously prosecute this matter and seeks to collect all claimed amounts under the terms of the contract; however, Advatech cannot provide assurance that it will be
successful in these efforts. The resolution of this matter and any potential range of loss in excess of any current accrual cannot be reasonably determined or estimated at this time, primarily because
the matter has not been fully arbitrated and presents unique regulatory, bankruptcy and contractual interpretation issues.
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commercial commitments as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commitments
|
|
Total
|
|
Less than
One Year
|
|
One to
Three Years
|
|
Three to
Five Years
|
|
More than
Five Years
|
|
|
|
(in millions)
|
|
Debt
|
|
$
|
3,673.5
|
|
|
$
|
143.1
|
|
|
|
$
|
434.0
|
|
|
|
$
|
763.7
|
|
|
|
$
|
2,332.7
|
|
|
Interest on debt
|
|
1,162.3
|
|
|
200.6
|
|
|
|
385.0
|
|
|
|
317.5
|
|
|
|
259.2
|
|
|
Operating leases
|
|
1,312.0
|
|
|
253.3
|
|
|
|
377.3
|
|
|
|
247.8
|
|
|
|
433.6
|
|
|
Pension funding obligations(1)
|
|
41.5
|
|
|
41.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations and commitments
|
|
$
|
6,189.3
|
|
|
$
|
638.5
|
|
|
|
$
|
1,196.3
|
|
|
|
$
|
1,329.0
|
|
|
|
$
|
3,025.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents
expected fiscal 2019 contributions to fund our defined benefit pension and other postretirement plans. Contributions beyond one year have not been
included as amounts are not determinable.
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. Our evaluation of the impact of the new guidance on our consolidated financial statements, including the expected impact on our business processes, systems, and
controls, and potential differences in the timing or method of revenue recognition for our contracts, is substantially complete. We adopted the new standard on October 1, 2018, using the
modified retrospective method, which requires recognizing the net cumulative effects of adoption as an adjustment to retained earnings. Based on our current evaluation, we believe the impacts of
adoption will
68
Table of Contents
be
combining contracts that were previously segmented into a single performance obligation. However, we do not anticipate that adoption will have a material impact on our financial results and
estimate the adjustment to retained earnings due to adoption will not be material.
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 our 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 some practical expedients. We are currently evaluating the impact that the new guidance will have on
our 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. We adopted the new guidance on
October 1, 2017; and the adoption of this guidance did not have a material impact on our 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. We adopted the new guidance on October 1, 2017; and the adoption of this guidance did not have a material impact on our consolidated
financial statements.
In
June 2016, the FASB issued a new credit loss standard that changes the impairment model for most financial assets and some 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 our fiscal year starting October 1, 2020. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In
August 2016, the FASB issued new accounting guidance clarifying how entities should classify 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 our fiscal
year beginning October 1, 2018 and early adoption is permitted. We do not expect that the new guidance will have a material impact on our 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. We adopted the new guidance on October 1, 2017 and the adoption
of this guidance did not have a material impact on our consolidated financial statements.
In
January 2017, the FASB issued new accounting guidance that changes the definition of a business to assist companies with evaluating when a set of transferred assets and activities is
a business. This guidance requires the buyer to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of assets. We
elected to adopt this guidance on July 1, 2018, and the adoption of this guidance did not have a material impact on our 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
69
Table of Contents
of
goodwill allocated to the reporting unit. We early adopted the new guidance on January 1, 2018 and the adoption of this guidance did not have a material impact on our consolidated financial
statements.
In
March 2017, the FASB issued new guidance on how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the
income statement. Under the new guidance, employers will present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs.
The new guidance was effective for us on October 1, 2018. Adoption of the new guidance did not have a material impact on our 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. We early adopted the guidance on
January 1, 2018 and the adoption of this guidance did not have a material impact on our consolidated financial statements.
In
October 2017, the FASB issued additional guidance regarding accounting for intercompany transfers of assets other than inventory. The new guidance will require companies to account
for the income tax consequences of intercompany transfers of assets other than inventory in the period the transfer occurs. We adopted this guidance on October 1, 2018, and estimate the
adoption of this guidance will not have a material impact on our consolidated financial statements.
Off-Balance Sheet Arrangements
We enter into various joint venture arrangements to provide architectural, engineering, program management, construction management and
operations and maintenance services. The ownership percentage of these joint ventures is typically representative of the work to be performed or the amount of risk assumed by each joint venture
partner. Some of these joint ventures are considered variable interest entities. We have consolidated all joint ventures for which we have control. For all others, our portion of the earnings are
recorded in equity in earnings of joint ventures. See Note 6 in the notes to our consolidated financial statements. We do not believe that we have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that would be material to investors.