UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934


AECOM TECHNOLOGY CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware

 

61-1088522

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

555 South Flower Street, Suite 3700
Los Angeles, California 90071

(Address of principal executive offices, including zip code)

(213) 593-8000

(Registrant’s telephone number, including area code)


Securities to be registered pursuant to Section 12(b) of the Act:  None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

 




TABLE OF CONTENTS

 

 

 

 

 

 

ITEM 1.

 

BUSINESS

 

 

ITEM 1A.

 

RISK FACTORS

 

 

ITEM 2.

 

FINANCIAL INFORMATION

 

 

ITEM 3.

 

PROPERTIES

 

 

ITEM 4.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

 

ITEM 5.

 

DIRECTORS AND EXECUTIVE OFFICERS

 

 

ITEM 6.

 

EXECUTIVE COMPENSATION

 

 

ITEM 7.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

 

ITEM 8.

 

LEGAL PROCEEDINGS

 

 

ITEM 9.

 

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

 

ITEM 10.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

 

ITEM 11.

 

DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

 

 

ITEM 12.

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

 

ITEM 13.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

ITEM 14.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

ITEM 15.

 

FINANCIAL STATEMENTS AND EXHIBITS

 

 

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This registration statement contains statements which, to the extent that they do not recite historical fact, constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934.  The words “believe,” “expect,” “estimate,” “may,” “will,” “could,” “plan” or “continue” and similar expressions are intended to identify forward-looking statements.  Such forward-looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward-looking statements made by us or on our behalf.  These risks and uncertainties include, but are not limited to:

·         our dependence on long-term government contracts, which are subject to the government’s budgetary approval process;

·         the possibility that our government contracts may be terminated by the government;

·         our ability to successfully manage our joint ventures;

·         the risk of employee misconduct or our failure to comply with laws and regulations;

·         our ability to successfully execute our mergers and acquisitions strategy, including the integration of new companies into our business;

·         our ability to attract and retain key technical and management personnel;

·         our ability to complete our backlog of uncompleted projects as currently projected;

·         competitive pressures and trends in our industry;

·         our liquidity and capital resources; and

·         other factors identified throughout this registration statement.

In addition, this registration statement contains industry data related to our business and the markets in which we operate.  This data includes projections that are based on a number of assumptions.  If these assumptions turn out to be incorrect, actual results could differ from the projections.

We caution you that forward-looking statements are only predictions and that actual events or results may differ materially.  In evaluating these statements, you should specifically consider the various factors that could cause actual events or results to differ materially from those indicated by the forward-looking statements, including the factors that we discuss in the section entitled “Risk Factors.”




 

ITEM 1.  BUSINESS

In this registration statement, we use the terms “AECOM,” “the Company,” “we,” “us” and “our” to refer to AECOM Technology Corporation and its consolidated subsidiaries.

Overview

We are a leading global provider of professional technical and management support services for government and commercial clients around the world.  We provide our services through our global network of approximately 28,000 employees in over 60 countries to a broad range of end markets, including the transportation, facilities and environmental markets.  We are one of the largest U.S.-based engineering design firms based on 2005 revenue according to Engineering News-Record (ENR), and we are ranked the largest “pure” design firm by ENR.  We provide our services in major geographic markets across the world, including North America, Europe, Asia/Pacific, the Middle East and Latin America.

From October 1, 2001 to September 30, 2006, our revenue grew from approximately $1.7 billion to approximately $3.4 billion, reflecting a compound annual growth rate (CAGR) of 18.3%.  In that same period, our diluted earnings per share increased from $0.86 to $1.48, reflecting a CAGR of 14.7%.  As of September 30, 2006, we had a total backlog of approximately $2.5 billion compared to approximately $2.0 billion at September 30, 2005, representing a 25.0% increase.

We offer our broad range of services through our two business segments: Professional Technical Services and Management Support Services.

Professional Technical Services (PTS).  Our PTS segment delivers planning, engineering, consulting, architecture and program and construction management services to institutional, commercial and government clients worldwide in major end markets such as the transportation, facilities and environmental markets.  The transportation market includes transit and rail, highways and bridges, airports, ports and harbors.  The facilities market includes governmental, institutional, commercial and industrial facilities.  The environmental market includes water supply and wastewater infrastructure, water resources, and environmental management.  We also provide services for projects in the mining, power and energy end markets.

For example, we are providing master planning services for the 2012 London Summer Olympic Games, program management services through a joint venture for the Second Avenue subway line in New York City and engineering and environmental management services to support global energy infrastructure development for a number of large petroleum companies.  Our PTS segment contributed approximately $2.8 billion, or approximately 82.4% of our revenue, in the fiscal year ended September 30, 2006.

Management Support Services (MSS).  Our MSS segment provides infrastructure management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the United States Government.  These services include life support systems, security, utilities, business processes and vehicle and facility maintenance.  For example, we manage more than 6,000 employees in Kuwait that provide logistics, security, communications and information technology services for the U.S. Army Central Command-Kuwait.  We also provide operations and maintenance services for the U.S. Army’s Fort Polk Joint Readiness Training Center in Louisiana.  Our MSS segment contributed approximately $0.6 billion, or approximately 17.6% of our revenue, in the fiscal year ended September 30, 2006.

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Our Market Opportunity

The markets for professional technical services and management support services include the markets for planning, design, consulting, project and program management and construction management services.  These services are provided to support the management and development of built and natural environments around the world.

According to ENR, the top 500 design firms in the United States ranked by revenue generated revenue of approximately $59.8 billion in 2005, which was an 11.8% increase over 2004.  Of this $59.8 billion in revenue, the largest two categories were general building and transportation, representing $22.9 billion and $20.3 billion, respectively.  Water and wastewater combined represented an additional $13.4 billion in 2005 revenues.  According to ENR, based on 2005 revenue, we were the #1 firm in transportation, #1 in general buildings, #2 in wastewater and #4 in water supply.

The principal client base for firms providing professional technical services and management support services includes local, state and national governments, public and private institutions and private sector businesses.  This client base is becoming increasingly reliant on professional technical services or management support services that are either not readily available from internal resources or are not among their core competencies.  For example, we expect continued growth in our PTS end markets due to factors such as population growth, increasing regulatory requirements, the need to upgrade and improve the world’s infrastructure, the trend towards outsourcing of services, economic development, increased globalization, competition and technological advancement.  Further, we believe the aging of governmental workforces, along with military operations and force realignments, will enhance the demand for outsourcing in the government services area for firms with experience in security, logistics and overseas operations.    We believe that the underlying fundamentals of our end markets are strong and firms that integrate global presence with a full breadth of technical capabilities will be best positioned to capitalize on the demand for services in these markets.

Our Competitive Strengths

We believe we have the experience, personnel, technical expertise, management and administrative infrastructure to lead our clients through their most complicated and critical technical undertakings.  We use our knowledge of global end markets and technical expertise across our operations to provide the professional technical advice and services needed by our clients.

We have strong and long-standing client relationships

While we continue to aggressively pursue new clients, we have developed strong and long-term relationships with a number of large corporations and government entities worldwide.  We believe that these types of long-term relationships allow us to better understand and be more responsive to our clients’ needs and better manage our risks.  This also leads to repeat business opportunities and opportunities to expand the scope of our value-added services with existing clients.  For example, several of our operating companies have been providing services for over 30 years to clients such as the Illinois State Tollway Authority, U.S. Navy, Massachusetts Water Resources Authority and the Port Authorities of New York and New Jersey.

We benefit from our experienced management team and employees

We have a talented, dedicated and experienced work force, strategically located across the globe, led by an experienced executive management team.  Our Chief Executive Officer and members of our operating board, which consists of leaders throughout our company, have an average of more than 20

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years of experience with their AECOM companies, and more than 25 years in our industry.  Our long-standing practice is to provide employee incentives, such as stock ownership, that are designed to optimize performance and to ensure our ability to attract and retain a quality work force.

We have a successful history of mergers and acquisitions

In accordance with our long-term strategic plan, we have completed a number of mergers and acquisitions to supplement our organic growth, and we expect to continue to add firms with complementary service lines, end market expertise and/or broader geographic reach, as well as firms that fill in certain niche specialties and/or effectively add needed professional staff.  By adding to our existing professional technical services capabilities and expanding into new geographic areas, we continue to position ourselves as a leading full service provider of professional technical and management support services to our clients in most major areas of development in the world.

The following is a brief summary of some of our key mergers and acquisitions since 2000:

·                  Metcalf and Eddy.  In April 2000, we added Metcalf and Eddy, a Massachusetts-based firm founded in 1907, which provided us with a global brand for our water and wastewater businesses.

·                  Maunsell Group.  In April 2000, we added the Maunsell Group, a global engineering firm founded in 1970, which provided us with a strong presence in the engineering markets in the United Kingdom, Hong Kong/China and Australia.

·                  Oscar Faber Ltd.  In October 2001, we added Oscar Faber, a U.K.-based building services, environmental and transportation planning firm founded in 1921, which we then merged with Maunsell to create Faber Maunsell, further expanding our presence in the United Kingdom.

·                  UMA Group.  In September 2004, we added UMA Group, Ltd., a Canada-based engineering firm founded in 1912, which expanded our presence in the North American market.

·                  ENSR Corporation.  In September 2005, we added ENSR Corporation, a Massachusetts-based global environmental management firm founded in 1968, which strengthened our position in the energy infrastructure and environmental management markets and increased the number of multi-national corporations we serve.

·                  EDAW.  In December 2005, we added EDAW, Inc., a California-based global urban planning and landscape architectural firm founded in 1939, which increased our planning and design capabilities in the U.S., Europe, Middle East and Asia/Pacific.

·                  Cansult Limited.  In September 2006, we added Cansult Limited, a Canada-based engineering firm founded in 1961 that operates predominantly in the Middle East.  Cansult’s operations, combined with our existing operations in the Middle East, make us one of the largest engineering firms in the region.

·                  Hayes, Seay, Mattern & Mattern.  In January 2007, we added Hayes, Seay, Mattern & Mattern, a Virginia-based facilities, environmental and civil engineering firm founded in 1947.  This addition broadened our presence in the Mid-Atlantic and Southeast regions of the United States and expanded our U.S. presence in areas such as facilities and water resources.

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We combine global reach with local presence

We have a global network of approximately 28,000 employees with projects in over 60 countries. Our clients benefit from a firm that combines intimate local knowledge and expertise with the size, presence and leverage of one of the world’s largest engineering and design services companies.  As of September 30, 2006, approximately 62% of our employees were located outside the United States.  We operate through a number of wholly-owned subsidiaries that have the advantage of competing under several internationally known brand names in our end markets, while maintaining the recognition that they are part of AECOM, a global company.

We have leadership positions in strong, growing markets

Based on ENR’s rankings of firms by 2005 revenue, we are highly ranked in a number of key engineering and consulting services sectors, including transportation (#1), general building (#1), wastewater (#2) and water supply (#4).  We also have a leadership position in many other specialty technical areas.  We believe the growing trend for outsourcing of professional technical services complements our capabilities, size and experience in providing these services and positions us to continue to strengthen our business.

We are diversified across service lines, end markets and geographies

We are a leader in offering a broad array of professional technical services and management support services to our clients around the world, with depth of end market and service line experience and expertise in many disciplines.  In the fiscal year ended September 30, 2006, excluding the U.S. federal government, no single customer accounted for more than 10% of our total revenue.  The U.S. federal government, including the Department of Defense, Department of Energy and the Department of Homeland Security, accounted for approximately 28% of our total revenue in the fiscal year ended September 30, 2006.  The U.S. federal government accounted for approximately 12% of the revenue of our PTS segment and almost all of the revenue of our MSS segment for the fiscal year ended September 30, 2006.  In addition, the gross profit from our 25 largest projects, as measured by gross profit, has historically represented less than 20% of our total gross profit.  We believe this diversification enables us to take advantage of changing business, technological and economic conditions worldwide, and allows us to better manage our business through market cycles.  We believe this has been a key factor in our growth since our inception.

Our Strategy

Our strategy is to advance our leadership position in each end market, technical service line and geographic area in which we operate, focusing on the following key objectives:

Expand our long-standing client relationships and provide our clients with a broad spectrum of technical services

Our business model emphasizes the development of long-term relationships with our clients.  We have long-standing relationships with a number of large corporations, public and private institutions and governmental agencies worldwide.  Many of those relationships go back several decades with our predecessor entity or operating companies.  We will continue to focus on our commitment to client satisfaction to strengthen and expand these relationships.

By integrating and providing a broad range of services, we believe we deliver maximum value to our clients at competitive costs.  Also, by coordinating and consolidating our knowledge base, we believe we

4




 

have the ability to export our leading edge technical skills to any region in the world in which our clients may need them.  This advances our strategy of providing a full-service solution for our clients’ needs.

Continue to expand into new geographies, technical services and end markets

Our historic growth and financial performance has resulted in part from disciplined diversification by geography, technical services and end markets.  We plan to continue this strategic focus by continuing to broaden our service offerings and by further penetrating key geographic regions and end markets around the world.  For example, we intend to increase our presence in such growing geographic markets as the U.S., China, the U.K., Australia, Canada, the Middle East and developing regions such as Eastern Europe.  We intend to continue to focus on our traditional transportation, facilities and environmental end markets and to develop a greater presence in such end markets as power, energy and government services.

A key part of this strategy will be to continue to attract other successful companies who can see their strategic and professional futures strengthened by joining AECOM.  This approach has served us well as we have strengthened and diversified our leadership positions both geographically, technically and across end markets.  For example, our recent addition of Cansult Limited bolstered our presence in the Middle East, especially in serving large private clients in that region.  Our mergers and acquisitions approach is designed to enable our new partners to continue to focus on their core businesses while their growth accelerates through a combination of the benefits of their joining a global platform and our continued investment.

Strengthen and Support Human Capital

Our experienced employees and management are our most valued resources.  Attracting and retaining key personnel is critically important to our business, and we will continue to focus on providing our personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits.  Over the past five years, we have substantially increased our employee base.  This increase comes from organic growth as well as growth from mergers and acquisitions.  Our employee population has grown from approximately 12,700 employees as of September 30, 2001 to approximately 28,000 as of the date of this registration statement.  In 2006, we expanded a firm-wide employee engagement program to put increased focus and resources on this important strategic area.  The program includes elements designed to foster professional and career development and advance leadership development, promote succession planning and firmly link employee engagement with our business objectives.  We believe that our employee programs align the interests of our personnel with those of our clients and stockholders.

Our History

We were formed in 1985 as Ashland Technology Corporation, a Delaware corporation and a wholly owned subsidiary of Ashland Inc., an oil and gas refining and distribution company.  Many of the companies that comprise AECOM have operating histories going back more than 50 years.  Since our becoming an independent company in 1990, we have grown by a combination of organic growth and strategic mergers and niche acquisitions from approximately 3,300 employees and approximately $300 million in revenues to approximately 28,000 employees and approximately $3.4 billion in revenues for the fiscal year ended September 30, 2006.  We provide our services across the world using internationally and locally known brand names where we believe strategically appropriate.

Our Business Segments

The following table sets forth the revenues attributable to our business segments for the periods indicated(1):

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Year Ended September 30,
(in thousands)

 

 

 

2004

 

2005

 

2006

 

 

 

 

 

 

 

 

 

Professional Technical Services (PTS)

 

$

1,777,718

 

$

2,082,618

 

$

2,772,833

 

Management Support Services (MSS)

 

232,143

 

309,053

 

647,188

 

Total

 

$

2,009,861

 

$

2,391,671

 

$

3,420,021

 


(1)  For a reconciliation to the consolidated statements of income, see note 19 to the notes to our consolidated financial statements contained elsewhere in this registration statement.

Our Professional Technical Services Segment (PTS)

Our PTS segment is comprised of a broad array of services, generally provided on a fee-for-service basis.  These services include planning, design, consulting, program management and construction management for industrial, commercial, institutional and government clients worldwide.  For each of these services, our technical expertise includes civil, structural, process, mechanical, geotechnical systems and electrical engineering, architecture, landscape and interior design, urban and regional planning, project economics, and environmental, health and safety work.

With our technical and management expertise, we are able to provide our clients with the full spectrum of services they may require. For example, within our environmental management service offerings, we provide regulatory compliance planning and management, environmental modeling, environmental impact assessment and environmental permitting for major capital/infrastructure projects.  In addition, we provide specialized services in areas such as environmental toxicology, health and safety risk assessment, sanitary engineering, air quality analysis, water resources protection and development, remediation consulting, brownfield reclamation and sustainable land use development programs.

Our services may be sequenced over multiple phases.  For example, in the area of program management and construction management services, these services may begin with a small consulting or planning contract, and may later develop into an overall management role for the project or a series of projects, which we refer to as a program.  Program and construction management contracts typically employ a staff of 10 to more than 100 and, in many cases, operate as an outsourcing arrangement with our staff located at the project site.  For example, since 1990, we have been managing the renovation work at the Pentagon for the U.S. Department of Defense, and we currently have approximately 100 staff members located on-site.  Another example of our program and construction management services would be our services related to the development of educational facilities for K-12 school districts and/or community colleges.  We are performing these types of assignments throughout the U.S., including the cities of Dallas, Los Angeles and Houston.

We provide the services in our PTS segment both directly and through joint venture or similar partner arrangements to a broad range of diverse end markets, including:

Transportation.  We serve several key transportation sectors, including:

·                  Transit and Rail.  Projects include light rail, heavy rail (including high speed, commuter and freight) and multimodal transit projects. For example, we are providing services for the PATH permanent World Trade Center Terminal and the Second Avenue Subway (8.5-mile rail route and 16 stations) in New York City, and the Ma On Shan Rail (7-mile elevated railway) in Hong Kong.

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·                  Marine, Ports and Harbors.  Projects include wharf facilities and container port facilities for private and public port operators. Examples of these facilities include container facilities in Hong Kong, the Ports of Los Angeles, Long Beach, New York and New Jersey and waterfront transshipment facilities for oil and liquid natural gas.

·                  Highways, Bridges and Tunnels.  Projects include interstate, primary and secondary urban and rural highway systems and bridge projects. For example, we are working on the SH-130 Toll Road (49-mile “greenfield” highway project) in Austin, Texas, the Sydney Orbital Bypass (39 kilometer highway) in Sydney, Australia and the Sutong cable-stayed bridge (1088 meter span) crossing the Yangtze River in China.

·                  Aviation.  Projects include landside terminal and airside facilities and runways as well as taxiways.  For example, we have provided services to a number of major U.S. airports, including O’Hare International in Chicago; Los Angeles International; John F. Kennedy and La Guardia in New York City; Reagan National and Dulles International in Washington, D.C. and Miami International.  We also have provided services to airports in Hong Kong, London, Cyprus and Qatar.

Facilities.

·                  Government.  Projects include our services for the Department of Homeland Security, including the Federal Emergency Management Agency and agencies of the Department of Defense.  We also provide architectural and engineering services for several national laboratories, including the laboratories at Hanford, Washington and Los Alamos, New Mexico.

·                  Industrial.  Projects include industrial facilities for a variety of niche end markets including manufacturing, distribution, aviation, aerospace, communications, media, pharmaceuticals, renewable energy, chemical, and food and beverage facilities.  For example, we have provided engineering and construction support services to Pfizer Inc. at its Portage, Michigan manufacturing facility.

·                  Urban Master Planning/Design.  Projects include design services, landscape architecture, general policy consulting and environmental planning projects for a variety of government, institutional and private sector clients.  For example, we have provided planning and consulting services for the Olympic Games sites in Atlanta, Sydney, Beijing, Salt Lake City and London.  We are providing strategic planning and master planning services for new cities and major mixed use developments in China, Southeast Asia, the Middle East, the U.K. and the U.S.

·                  Commercial and Leisure Facilities.  Projects include corporate headquarters, high-rise office towers, historic buildings, leisure and entertainment facilities and corporate campuses.  For example, we provided electronic security programming and installation services for the renovation of Soldier Field in Chicago, construction management for the renovation of Dodger Stadium in Los Angeles, and building services, engineering, architectural lighting, advanced modeling, infrastructure and utilities engineering and advanced security for the headquarters of the British Broadcasting Company in London.

·                  Institutional.  Projects include engineering services for college and university campuses, including the new Kennedy-King College in Chicago, Illinois.  We also have undertaken

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assignments for Oxford University in the U.K., Pomona College and Loyola Marymount University in California, and various private hospitals throughout the U.S.

Environmental

·                  Water and Wastewater.  Projects include treatment facilities as well as supply, distribution and collection systems, stormwater management, desalinization, and other water re-use technologies for metropolitan governments.  We have provided services to the Metropolitan Water Reclamation District of Greater Chicago’s Calumet and Stickney wastewater treatment plants, two of the largest such plants in the world.  Currently we are working with New York City on the Bowery Bay facility reconstruction, and have had a major role in Hong Kong’s Harbor Area Treatment Scheme for Victoria Harbor.

·                  Environmental Management.  Projects include remediation, waste handling, testing and monitoring of environmental conditions and environmental construction management for private sector clients.  For example, we have provided permitting services for pipeline projects for major energy companies and environmental remediation, restoration of damaged wetlands, and services associated with reduction of greenhouse gas emissions for large multinational corporations.

·                  Water Resources.  Projects include regional-scale floodplain mapping and analysis for public agencies, along with the analysis and development of protected groundwater resources for companies in the bottled water industry.

Our Management Support Services Segment

Through our MSS segment, we offer infrastructure management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the United States Government.

We provide a wide array of services in our MSS segment, both directly and through joint venture or similar partner arrangements, including:

Installation Operations. Projects include Department of Defense and Department of Energy installations where we provide comprehensive services for the operation and maintenance of complex government installations, including military bases, test ranges and equipment. We have undertaken assignments in this category in the Middle East and the U.S.  We also provide services for the operations and maintenance of the Department of Energy’s Nevada Test Site.

Logistics.  Projects include logistics support services for a number of Department of Defense agencies and defense prime contractors focused on developing and managing integrated supply and distribution networks.  We oversee warehousing, packaging, delivery and traffic management for the distribution of government equipment and materials.

Training.  Projects include training applications in live, virtual and simulation training environments. We have conducted training at the U.S. Army’s Center for Security Training in Maryland for law enforcement and military personnel. We have also supported the training of international police officers and peacekeepers for deployment in various locations around the world in the areas of maintaining electronics and communications equipment.

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Systems Support.  Projects cover a diverse set of operational and support systems for the maintenance, operation and modernization of Department of Defense and Department of Energy installations. Our services in this area range from information technology and communications to life cycle optimization and engineering, including environmental management services.  Through our joint venture operations at the Nevada Test Site and the Combat Support Services operation in Kuwait, our teams are responsible for facility and infrastructure support for critical missions of the U.S. Government in its nonproliferation efforts, emergency response readiness, and force support and sustainment.  Enterprise network operations and information systems support, including remote location engineering and operation in classified environments, are also areas of specialized services we provide.

Technical Personnel Placement.  Projects include the placement of personnel in key functional areas of military and other government agencies, as these entities continue to outsource critical services to commercial entities.  We provide systems, processes and personnel in support of the Department of Justice’s management of forfeited assets recovered by law enforcement agencies.  We also support the Department of State in its enforcement programs by recruiting, training and supporting police officers for international and homeland security missions.

Field Services.  Projects include maintaining, modifying and overhauling ground vehicles, armored carriers and associated support equipment both within and outside of the United States under contracts with the Department of Defense. We also maintain and repair telecommunications systems for military and civilian entities.  The ability to deploy highly mobile field response teams to locations across the world to supplement mission support and equipment readiness is a critical requirement in this service area.

Our Clients

Our clients consist primarily of national governments, state, regional and local governments, public and private institutions and major corporations. The following table sets forth our total revenues attributable to these categories of clients for each of the periods indicated:

 

 

Year Ended September 30,
(dollars in thousands)

 

 

 

2004

 

%

 

2005

 

%

 

2006

 

%

 

U.S. Federal Government

 

 

 

 

 

 

 

 

 

 

 

 

 

PTS

 

$

153,302

 

8

%

$

215,951

 

9

%

319,675

 

9

%

MSS

 

232,143

 

11

%

309,052

 

13

%

641,764

 

19

%

U.S. State and Local Governments

 

801,680

 

40

%

788,463

 

33

%

848,530

 

25

%

Non-U.S. Governments

 

333,083

 

17

%

475,991

 

20

%

355,835

 

10

%

Subtotal Governments

 

1,520,208

 

76

%

1,789,457

 

75

%

2,165,804

 

63

%

Private Entities (worldwide)

 

491,768

 

24

%

605,883

 

25

%

1,255,688

 

37

%

Total

 

$

2,011,976

 

100

%

$

2,395,340

 

100

%

$

3,421,492

 

100

%

 

Other than the U.S. Government, no single client accounted for 10% or more of our revenues in any of the past five fiscal years.  The work attributed to the U.S. Government for the fiscal year ended September 30, 2006 includes our work for the Department of Defense, Department of Energy and the Department of Homeland Security.  The diversity of our client base is illustrated by the fact that for the fiscal year ended September 30, 2006, our 25 largest projects, as measured by gross profit, accounted for less than 15% of our consolidated gross profit.

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Contracts

The price provisions of the contracts we undertake can be grouped into two broad categories: cost-reimbursable contracts and fixed-price contracts.  The majority of our contracts fall under the relatively lower risk category of cost-reimbursable contracts.

Cost-Reimbursable Contracts

Cost-reimbursable contracts consist of two similar contract types, cost-plus and time and material.

Cost Plus.  Cost plus is the predominant contracting method used by U.S. federal, state and local governments.  These contracts provide for reimbursement of actual costs and overhead incurred by us, plus a predetermined fee.  Under some cost-plus contracts, our fee may be based on quality, schedule and other performance factors.

Time and Material.  Time and material is common for smaller scale engineering and consulting services.  Under these types of contracts, we negotiate hourly billing rates and charge our clients based upon actual hours expended on a project; unlike cost-plus, however, there is no predetermined fee.  In addition, any direct project expenditures are passed through to the client and are reimbursed.  These contracts may have a fixed price element in the form of not-to-exceed or guaranteed maximum price provisions.

For the fiscal year ended September 30, 2006, cost-reimbursable contracts represented approximately 68% of our total revenues, with cost-plus contracts constituting approximately 50% and time and material contracts constituting approximately 18% of our total revenues.

Fixed-Price Contracts

Fixed-price contracts are the predominant contracting method outside of the United States.  There are typically two types of fixed-price contracts.  The first and more common type, lump-sum, involves performing all of the work under the contract for a specified lump-sum fee.  Lump-sum contracts are typically subject to price adjustments if the scope of the project changes or unforeseen conditions arise.  The second type, fixed-unit price, involves performing an estimated number of units of work at an agreed price per unit, with the total payment under the contract determined by the actual number of units performed.

Many of our lump-sum contracts are negotiated and arise in the design of projects with a specified scope.  Lump-sum contracts often arise in the area of construction management.  Construction management services can be in the form of general administrative oversight (in which we do not assume responsibility for construction means and methods and is on a cost-reimbursable basis), or on a fixed price, “at risk” basis.  We perform a limited amount of construction management “at risk.”    Under construction management at risk, we are typically responsible for the design of the facility with the contract price negotiated after we have secured specific bids from various subcontractors and added a contingency and fee.  This process is often referred to as “design-build.”

Some of our fixed-price contracts require us to provide performance bonds or parent company guarantees to assure our clients that their project will be completed in accordance with the terms of our contracts.  In such cases, we typically require our primary subcontractors to provide similar bonds and guarantees or be adequately insured, and we pass the terms and conditions set forth in our agreement to our subcontractors.  We typically mitigate the risks of fixed-price contracts by contracting to complete the projects based on our design as opposed to a third party’s design, by not self-performing the construction,

10




 

by not guaranteeing new or untested processes or technologies and by working only with experienced subcontractors with sufficient bonding capacity.  When public agencies seek a design-build approach for major infrastructure projects, we may act as a fixed-price design subcontractor to the general construction contractor and do not assume overall project or construction risk.

For the fiscal year ended September 30, 2006, fixed price contracts represented approximately 32% of our total revenue.  Of this amount, less than 10% of our contracts have exposure to construction cost overruns.  Of the remaining approximately 22%, there may be risks associated with our professional fees if we not able to perform our professional services for the amount of the fixed fee.  However, we attempt to mitigate these risks as described above.

Please see “Critical Accounting Policies” under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this registration statement for descriptions of our revenue recognition and claims recognition policies.

Joint Ventures

Some of our larger contracts may operate under joint ventures or other arrangements under which we team with other reputable companies, typically companies with which we have worked with for many years. This is often done where the scale of the project dictates such an arrangement or when we want to strengthen either our market position or our technical skills.

Backlog

At September 30, 2006, our gross revenue backlog was approximately $2.5 billion, an increase of $0.5 billion, or 25.0%, from $2.0 billion at September 30, 2005.  Of this $2.5 billion, we estimate that approximately $1.8 billion will be completed by September 30, 2007.  Approximately $2.3 billion of our total backlog at September 30, 2006 is attributable to our PTS segment, while the remaining $0.2 billion is attributable to our MSS segment.  No assurance can be given that we will ultimately realize our full backlog.

Most of our government contracts are multi-year contracts for which funding is appropriated on an annual basis.  In the case of these government contracts, our backlog includes only those amounts that have been funded and authorized and therefore does not reflect amounts we may receive over the term of the contracts.  In the case of non-government contracts, our backlog includes future revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client.  For contracts with a not-to-exceed maximum amount, we include revenue from such contracts in backlog to the extent of the remaining estimated amount.  We calculate backlog without regard to possible project reductions or expansions or potential cancellations until such changes or cancellations occur.

Backlog is expressed in terms of gross revenue and therefore may include significant estimated amounts of third party, or pass-through costs to subcontractors and other parties.  Moreover, our backlog for the period beyond 12 months may be subject to variations from year to year as existing contracts are completed, delayed or renewed or new contracts are awarded, delayed or cancelled.  As a result, we believe that year-to-year comparisons of the portion of backlog expected to be performed more than one year in the future are difficult to interpret and not necessarily indicative of future revenues or profitability. Because backlog is not a defined accounting term, our computation of backlog may not necessarily be comparable to that of our peers.

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Competition

The professional technical and management support services markets we serve are highly fragmented and we compete with a large number of regional, national and international companies.  Certain of these competitors have greater financial and other resources than we do.  Others are smaller and more specialized, and concentrate their resources in particular areas of expertise.  The extent of our competition varies according to the particular markets and geographic area.  The degree and type of competition we face is also influenced by the type and scope of a particular project.  Our clients make competitive determinations based upon experience, reputation and ability to provide the relevant services in a timely, safe and cost-efficient manner.

Seasonality

The fourth quarter of our fiscal year (July 1 to September 30) is typically our strongest quarter.  The U.S. federal government tends to authorize more work during the period preceding the end of its fiscal year, September 30.  In addition, many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during the fiscal first quarter when new funding budgets become available.  Within the U.S., as well as other parts of the world, we generally benefit from milder weather conditions in our fiscal fourth quarter, which allows for more productivity from our field inspection and other on-site civil services.  Our construction and project management services also typically expand during the high construction season of the summer months.

Insurance and Risk Management

We maintain insurance covering professional liability and claims involving bodily injury and property damage.  We consider our present limits of coverage, deductibles, and reserves to be adequate. Wherever possible, we endeavor to eliminate or reduce the risk of loss on a project through the use of quality assurance/control, risk management, workplace safety and similar methods.  A majority of our operating subsidiaries are quality certified under ISO 9001:2000 or an equivalent standard, and we plan to continue to obtain certification where applicable.  ISO 9001:2000 refers to international quality standards developed by the International Organization for Standardization, or ISO.

Risk management is an integral part of our project pricing for fixed price contracts and our project execution process.  Our Office of Risk Management reviews and oversees the risk profile of our operations.  The Office of Risk Management also participates in evaluating risk through internal risk analyses in which our corporate management reviews higher-risk projects, contracts or other business decisions that require corporate approval.

Regulation

We are regulated in a number of fields in which we operate.  In the United States, we deal with numerous U.S. Government agencies and entities, including branches of the U.S. military, the Department of Defense, the Department of Energy, intelligence agencies and the Nuclear Regulatory Commission. When working with these and other U.S. Government agencies and entities, we must comply with laws and regulations relating to the formation, administration and performance of contracts. These laws and regulations, among other things:

·                  require certification and disclosure of all cost or pricing data in connection with various contract negotiations;

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·                  impose procurement regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-based U.S. Government contracts; and

·                  restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

Internationally, we are subject to various government laws and regulations (including the U.S. Foreign Corrupt Practices Act and similar non-U.S. laws and regulations), local government regulations and procurement policies and practices and varying currency, political and economic risks.

To help ensure compliance with these laws and regulations, all of our employees are required to complete tailored ethics and other compliance training relevant to their position and our operations.

Personnel

Our principal asset is our employees.  A large percentage of our employees have technical and professional backgrounds and bachelor and advanced degrees. We believe that we attract and retain talented employees by offering them the opportunity to work on highly visible and technically challenging projects in a stable work environment.  The tables below identify our personnel by segment and geographic region.

Personnel by Segment

 

As of September 30,

 

 

 

2004

 

2005

 

2006

 

Professional Technical Services

 

13,000

 

16,300

 

19,000

 

Management Support Services

 

4,700

 

5,700

 

8,300

 

Total

 

17,700

 

22,000

 

27,300

 

 

Personnel by Geographic Region

 

As of September 30,

 

 

 

2004

 

2005

 

2006

 

Americas

 

8,500

 

10,100

 

10,400

 

Europe

 

1,900

 

2,700

 

3,100

 

Middle East

 

3,600

 

5,200

 

8,800

 

Asia/Pacific

 

3,700

 

4,000

 

5,000

 

Total

 

17,700

 

22,000

 

27,300

 

 

Personnel by Segment and Geographic Region

 

As of September 30, 2006

 

 

 

Total

 

PTS

 

MSS

 

Americas

 

10,400

 

9,600

 

800

 

Europe

 

3,100

 

3,100

 

 

Middle East

 

8,800

 

1,300

 

7,500

 

Asia/Pacific

 

5,000

 

5,000

 

 

Total

 

27,300

 

19,000

 

8,300

 

 

We have a number of personnel with “Top Secret” or “Q” security clearances.  Some of our contracts with the United States Government relate to projects that have elements that are classified for national

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security reasons. Although most of our contracts are not themselves classified, persons with high security clearances are often required to perform portions of the contracts.

A portion of our employees are employed on a project by project basis to meet our contractual obligations, generally in connection with government projects in our MSS segment.  Approximately 200 of our employees are covered by collective bargaining agreements.  We believe our employee relations are good.

Geographic Information

For geographic information, please refer to footnote 19 of our consolidated financial statements found elsewhere in this registration statement.

Available Information

We have filed with the Securities and Exchange Commission (SEC) this registration statement on Form 10 under the Securities Exchange Act of 1934.  A copy of this registration statement, the exhibits and schedules hereto and any other document we file with the SEC may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 and copies of all or any part of the registration statement may be obtained from this office upon the payment of the fees prescribed by the SEC.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Our filings with the SEC are available to the public from the SEC’s website at www.sec.gov.

Copies of the information identified above may be obtained without charge from us by writing to AECOM Technology Corporation, 555 South Flower Street, Suite 3700, Los Angeles, California 90071, Attention:  Corporate Secretary.  Our telephone number at that address is (213) 593-8000 and our website address is www.aecom.com.  The content of our website is not part of this registration statement.

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ITEM 1A.  RISK FACTORS

Risks Relating to Our Business and Industry

We depend on long-term government contracts, some of which are funded on an annual basis.  If appropriations are not made in subsequent years of a multiple-year contract, we may not be able to realize all of our anticipated revenues and profits from that project.

The substantial majority of our revenues are derived from contracts with agencies and departments of national, state and local governments. During the fiscal years ended September 30, 2004, 2005 and 2006, approximately 76%, 75% and 63%, respectively, of our revenues were derived from contracts with government entities.

Most government contracts are subject to the government’s budgetary approval process.  Legislatures typically appropriate funds for a given program on a year-by-year basis, even though contract performance may take more than one year. As a result, at the beginning of a program, the related contract is only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent fiscal year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by, among other things, the state of the economy, competing priorities for appropriation, the timing and amount of tax receipts and the overall level of government expenditures. If appropriations are not made in subsequent years on our government contracts, then we will not realize all of our potential revenue and profit from that contract. In addition, slowdowns in tax receipts of our government clients could have a corresponding impact on our revenue and cash flow.

A significant portion of historical funding for state and local transportation projects has come from the U.S. Federal Government through its “SAFETEA-LU” infrastructure funding program and predecessor programs.  This $286 billion program covers federal fiscal years 2004-2009.  Approximately 79% of the SAFETEA-LU funding is for highway programs, 18.5% is for transit programs and 2.5% is for other programs such as motor carrier safety, national highway traffic safety and research.  A key uncertainty in the outlook for federal transportation funding in the U.S. is the future viability of the Highway Trust Fund.  The Highway Account within the Highway Trust Fund could have a negative balance as soon as 2009, based on the Department of Treasury projections of receipts and Department of Transportation projections of outlays.  This raises concerns about whether funding for federal highway programs authorized by SAFETEA-LU will be met in future years.

We depend on government contracts that may be terminated, which may affect our ability to recognize all of our potential revenues and profits from the project.

Most government contracts are subject to termination by the government either at its convenience or upon the default of the contractor.  If the government terminates a contract at its convenience, then we typically are able to recover only costs incurred or committed, settlement expenses and profit on work completed prior to termination, which could prevent us from recognizing all of our potential revenues and profits from that contract.  If the government terminates the contract due to our default, we could be liable for excess costs incurred by the government in obtaining services from another source.

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Our contracts with governmental agencies are subject to audit, which could result in adjustments to reimbursable contract costs or, if we are charged with wrongdoing, possible temporary or permanent suspension from participating in government programs.

Our books and records are subject to audit by the various governmental agencies we serve and their representatives. These audits can result in adjustments to the amount of contract costs we believe are reimbursable by the agencies and the amount of our overhead costs allocated to the agencies.  In addition, if as a result of an audit, one of our subsidiaries is charged with wrongdoing or a government agency determines that a subsidiary is otherwise no longer eligible for contracts of that agency or governmental entity, that subsidiary, and possibly our company as a whole, could be temporarily suspended or, in the event of convictions or civil judgments, could be prohibited from bidding on and receiving future government contracts for a period of time.  Furthermore, as a U.S. Government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not, the results of which could have a material adverse effect on our operations.

Our business and operating results could be adversely affected by losses under fixed-price contracts.

Fixed-price contracts require us to either perform all work under the contract for a specified lump-sum or to perform an estimated number of units of work at an agreed price per unit, with the total payment determined by the actual number of units performed.  In the fiscal year ended September 30, 2006, approximately one-third of our revenues were recognized under fixed price contracts.  Fixed-price contracts expose us to a number of risks not inherent in cost-plus and time and material contracts, including underestimation of costs, ambiguities in specifications, unforeseen costs or difficulties, problems with new technologies, delays beyond our control, failures of subcontractors to perform and economic or other changes that may occur during the contract period.  Losses under fixed-price construction contracts could be substantial and have a material adverse effect on our business.

We conduct a portion of our operations through joint ventures. As a result, we may have limited control over decisions of joint venture entities.

We conduct a portion of our operations through joint ventures or similar partner arrangements, where control may be shared with unaffiliated third parties.  As with most joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or disputes.  We also cannot control the actions of our joint venture partners, and we typically have joint and several liability with our joint venture partners under the applicable contracts for joint venture projects.  These factors could potentially materially and adversely affect the business and operations of a joint venture and, in turn, our business and operations.

Operating through joint ventures in which we are minority holders results in us having limited control over many decisions made with respect to projects and internal controls relating to projects.  These joint ventures may not be subject to the same requirements regarding internal controls and internal control reporting that we follow.  As a result, internal control problems may arise with respect to the joint ventures, which could have a material adverse effect on our financial condition and results of operation.

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Employee misconduct, including security breaches, or our failure to comply with laws or regulations applicable to our business could cause us to lose customers or lose our ability to contract with government agencies.

As a government contractor, misconduct, fraud or other improper activities by our employees or our failure to comply with laws or regulations could have a significant negative impact on our business and reputation.  Such misconduct could include the failure to comply with federal procurement regulations, regulations regarding the protection of classified information, legislation regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, and any other applicable laws or regulations.  Our failure to comply with applicable laws or regulations or misconduct by any of our employees could subject us to fines and penalties, loss of security clearance, cancellation of contracts and suspension or debarment from contracting with government agencies, any of which may adversely affect our business.

Our defined benefit plans currently have significant deficits which could grow in the future.

We have defined benefit pension plans for certain of our employees in the United States, United Kingdom and Australia.  At September 30, 2006, our defined benefit pension plans had an aggregate deficit (the excess of projected benefit obligations over the fair value of plan assets) of $117.2 million.  At September 30, 2006, the excess of accumulated benefit obligations over the fair value of plan assets was $84.8 million.  For further description, see Note 9 to the Notes to Consolidated Financial Statements.  In the future, our pension deficits may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors.  If we are forced to make up all or a portion of the deficit for unfunded benefit plans, our profits could be materially and adversely affected.

Our operations worldwide expose us to legal, political and economic risks in different countries as well as currency exchange rate fluctuations.

During fiscal year ending September 30, 2006, revenues attributable to our services provided outside of the United States were approximately 44% of our total revenue.  We expect the percentage of revenues attributable to our non-U.S. operations to increase further due to our strategic focus in areas such as Eastern Europe, China and the Middle East.  There are risks inherent in doing business internationally, including:

·                  currency exchange rate fluctuations, devaluations and other conversion restrictions;

·                  imposition of governmental controls and changes in laws, regulations or policies;

·                  political and economic instability;

·                  changes in U.S. and other national government trade policies affecting the markets for our services;

·                  changes in regulatory practices, tariffs and taxes; and

·                  potential non-compliance with a wide variety of laws and regulations, including the U.S. Foreign Corrupt Practice Act and similar non-U.S. laws and regulations.

Any of these factors could have a material adverse effect on our business, results of operations or financial condition.

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We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs to us.

Some of our services are performed in high-risk locations, such as Iraq and Afghanistan, where the country or location is suffering from political, social or economic problems, or war or civil unrest.  In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel.  Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and we may suffer the loss of key employees and contractors, which could adversely affect our business.

Failure to successfully execute our mergers and acquisitions strategy may inhibit our growth.

We have grown in part as a result of our mergers and acquisitions over the last several years, and we expect continued growth in the form of additional acquisitions and expansion into new markets.  There can be no assurance that suitable mergers and acquisitions or investment opportunities will continue to be identified or that any of these transactions can be consummated on favorable terms or at all.  Any future mergers and acquisitions will involve various inherent risks, such as:

·                  our ability to assess accurately the value, strengths, weaknesses, liabilities and potential profitability of acquisition candidates;

·                  the potential loss of key personnel of an acquired business;

·                  increased burdens on our staff and on our administrative, internal control and operating systems, which may hinder our legal and regulatory compliance activities;

·                  post-acquisition challenges in integrating the business into our own; and

·                  post-acquisition deterioration in an acquired business that could result in goodwill impairment charges.

Furthermore, during the mergers and acquisitions process and thereafter, our management may need to assume significant mergers and acquisitions related responsibilities, which may cause them to divert their attention from our existing operations.  If our management is unable to successfully integrate acquired companies or implement our growth strategy, our operating results could be harmed.  Moreover, there can be no assurance that we will continue to successfully expand or that growth or expansion will result in profitability.

Our ability to grow and to compete in our industry will be harmed if we do not retain the continued services of our key technical and management personnel and identify, hire and retain additional qualified personnel.

There is strong competition for qualified technical and management personnel in the sectors in which we compete.  We may not be able to continue to attract and retain qualified technical and management personnel, such as engineers, architects and project managers, who are necessary for the development of our business or to replace qualified personnel.  We expect the growth we experience to place increased demands on our resources and to likely require the addition of technical and management personnel and the development of additional expertise by existing personnel.  Also, some of our personnel hold security clearances required to obtain government projects; if we were to lose some or all of these personnel, they would be difficult to replace.  Loss of the services of, or failure to recruit, key technical and management personnel could limit our ability to complete existing projects successfully and to compete for new projects.

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Our industry is highly competitive and we may be unable to compete effectively, which could result in reduced revenue, profitability and loss of market share.

We are engaged in a highly competitive business.  The extent of competition varies with the types of services provided and the locations of the projects.  Generally, we compete on the bases of technical and management capability, personnel qualifications and availability, geographic presence, experience and price.  Increased competition may result in our inability to win bids for future projects and loss of revenue, profitability and market share.

Our services expose us to significant risks of liability and our insurance policies may not provide adequate coverage.

Our services involve significant risks of professional and other liabilities that may substantially exceed the fees that we derive from our services.  In addition, we sometimes contractually assume liability under indemnification agreements.  We cannot predict the magnitude of potential liabilities from the operation of our business.

We currently maintain comprehensive general liability, umbrella/excess and professional liability insurance policies.  Our professional liability policies cover only claims made during the term of the policy.  Additionally, our insurance policies may not protect us against potential liability due to various exclusions in the policies and self-insured retention amounts.  Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse affect on our business.

Our backlog of uncompleted projects under contract is subject to unexpected adjustments and cancellations and thus, may not accurately reflect future revenues and profits.

At September 30, 2006, our backlog of uncompleted projects under contract was approximately $2.5 billion.  We cannot guarantee that the revenues attributed to uncompleted projects under contract will be realized or, if realized, will result in profits.  Many projects may remain in our backlog for an extended period of time because of the size or long-term nature of the contract.  In addition, from time to time projects are delayed, scaled back or cancelled.  These types of backlog reductions adversely affect the revenues and profits that we ultimately receive from contracts reflected in our backlog.

We have submitted claims to clients for work we performed beyond the scope of some of our contracts. If these clients do not approve these claims, our results of operations could be adversely impacted.

We typically have pending claimssubmitted under some of our contracts for payment of work performed beyond the initial contractual requirements for which we have already recorded revenues.  In general, we cannot guarantee that such claims will be approved in whole, in part or at all.  If these claims are not approved, our results of operations could be adversely impacted.

In conducting our business, we depend on other contractors and subcontractors. If these parties fail to satisfy their obligations to us or other parties, or if we are unable to maintain these relationships, our revenues, profitability and growth prospects could be adversely affected.

We depend on contractors and subcontractors in conducting our business.  There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, or our failure to extend existing task orders or issue new task orders under a subcontract.  In addition, if any of our subcontractors

19




 

fail to deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services, our ability to fulfill our obligations as a prime contractor may be jeopardized.

We also rely on relationships with other contractors when we act as their subcontractor or joint venture partner.  Our future revenues and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts or joint venture relationships with us, or if a government agency terminates or reduces these other contractors’ programs, does not award them new contracts or refuses to pay under a contract.

We could incur increased costs as a result of being a U.S. public reporting company.

As a public reporting company with securities registered under the Securities Exchange Act of 1934, we could incur significant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act of 2002, as well as rules promulgated by the U.S. Securities and Exchange Commission thereunder, require us to adopt corporate governance practices applicable to U.S. public companies.  We expect that these rules and regulations may increase our legal and financial compliance costs.

Risks Relating to Our Common Stock

There is no public market for our shares.

There is no public market for our shares of common stock.  While we are registering our common stock under Section 12(g) of the Securities Exchange Act of 1934 and we will become subject to the public reporting and other requirements thereunder, our shares of common stock are not listed on any securities exchange.

Our bylaws contain restrictions on the transfer of our common stock.

A substantial portion of our common stock is held by our employees, and our bylaws contain restrictions on the transfer of our common stock.  In general, holders of our common stock may not transfer, assign, contribute, gift or otherwise dispose of any of the shares except to us upon the holder’s termination of employment with us, and as part of an annual liquidity election, which is subject to our determination that we have sufficient liquidity to undertake the repurchases.  Further, our bylaws provide for certain exceptions for transfer of our common stock, including transfers to family trusts, individual retirement accounts and family members.  Unless amended, these bylaw restrictions on transfer would terminate if we were to effect an underwritten public offering of our securities registered pursuant to the Securities Act of 1933.  See “Description of Registrant’s Securities — Transfer Restrictions.”

Our charter documents contain provisions that may delay, defer or prevent a change of control.

Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders.  These provisions include the following:

·                  division of our Board of Directors into three classes, with each class serving a staggered three-year term;

·                  removal of directors for cause only;

·                  ability of the Board of Directors to authorize the issuance of preferred stock in series without stockholder approval;

·                  supermajority requirements to approve specified business combinations;

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·                  vesting of exclusive authority in the Board of Directors to determine the size of the board (subject to limited exceptions) and to fill vacancies; and

·                  advance notice requirements for stockholder proposals and nominations for election to the Board of Directors.

We do not expect to pay any dividends for the foreseeable future.

We do not anticipate paying any dividends to our stockholders for the foreseeable future.  Our Class F and Class G convertible preferred stock are entitled to participate in any dividends to common stockholders on an “as converted” to common stock basis.  Our credit facilities also restrict our ability to pay dividends.  Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant.

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ITEM 2.  FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes, which are included elsewhere in this registration statement. We derived the consolidated statement of income data for the years ended September 30, 2004, 2005 and 2006 and the consolidated balance sheet data at September 30, 2005and 2006 from our audited consolidated financial statements contained elsewhere in this registration statement. We derived the consolidated statement of income data for the years ended September 30, 2002 and 2003 and the consolidated balance sheet data as of September 30, 2002, 2003 and 2004 from our audited consolidated financial statements not included in this registration statement.  Historical results are not necessarily indicative of future results.

 

 

Year Ended September 30,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

 

 

(In thousands, except per share data)

 

Consolidated Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

1,746,973

 

$

1,914,472

 

$

2,011,975

 

$

2,395,340

 

$

3,421,492

 

Cost of revenues

 

1,269,033

 

1,380,776

 

1,443,419

 

1,717,863

 

2,515,684

 

Gross profit

 

477,940

 

533,696

 

568,556

 

677,477

 

905,808

 

Equity in earnings of joint ventures

 

1,431

 

2,082

 

2,517

 

2,352

 

6,554

 

General and administrative expenses

 

430,404

 

467,247

 

484,446

 

581,529

 

808,953

 

Income from operations

 

48,967

 

68,531

 

86,627

 

98,300

 

103,409

 

Minority interest share of earnings

 

2,785

 

3,110

 

3,239

 

8,453

 

13,924

 

Interest expense, net

 

11,724

 

9,528

 

6,968

 

7,054

 

10,576

 

Income before income tax expense

 

34,458

 

55,893

 

76,420

 

82,793

 

78,909

 

Income taxes expense

 

11,371

 

19,003

 

25,984

 

28,979

 

25,223

 

Net income

 

$

23,087

 

$

36,890

 

$

50,436

 

$

53,814

 

$

53,686

 

Net income allocation:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

$

75

 

$

1,590

 

$

5,443

 

$

5,506

 

$

2,205

 

Net income available for common stockholders

 

23,012

 

35,300

 

44,993

 

48,308

 

51,481

 

 

 

$

23,087

 

$

36,890

 

$

50,436

 

$

53,814

 

$

53,686

 

Earnings per share available for common stockholders(1)

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.89

 

$

1.34

 

$

1.71

 

$

1.86

 

$

1.88

 

Diluted

 

$

0.86

 

$

1.29

 

$

1.57

 

$

1.68

 

$

1.48

 

Shares used in per share calculations(1):

 

 

 

 

 

 

 

 

 

 

 

Basic

 

25,815

 

26,429

 

26,300

 

25,940

 

27,428

 

Diluted

 

27,001

 

28,589

 

32,127

 

31,989

 

36,329

 

 

 

 

Year Ended September 30,

 

Consolidated Balance Sheet Data:

 

2002

 

2003

 

2004

 

2005

 

2006

 

Cash and cash equivalents, excluding cash in consolidated joint ventures(2)

 

$

26,324

 

$

113,582

 

$

108,878

 

$

27,474

 

$

118,427

 

Working capital

 

112,701

 

213,179

 

225,121

 

170,643

 

201,323

 

Total assets

 

964,925

 

1,055,979

 

1,114,955

 

1,424,924

 

1,825,774

 

Total long-term debt excluding current portion

 

171,404

 

122,106

 

105,182

 

216,183

 

122,790

 

Redeemable common and preferred stock and common stock units

 

127,321

 

257,005

 

257,073

 

300,523

 

515,046

 

Stockholders’ equity

 

142,990

 

102,271

 

146,932

 

120,633

 

163,715

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Number of full time and part time employees

 

15,500

 

16,800

 

17,700

 

22,000

 

27,300

 


(1)          In calculating per share data, the weighted average number of shares includes shares of common stock and common stock units outstanding during the relevant periods.

(2)          Cash and cash equivalents, excluding cash in consolidated joint ventures is a non-GAAP financial measure.  The most comparable GAAP measure would be cash and cash equivalents, which is reflected on our audited balance sheets for the respective periods.

22




MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated financial statements and the related notes and other financial information included in this registration statement.  In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this registration statement, particularly in “Risk Factors.”

Unless otherwise noted, references to years are for fiscal years ending September 30 and not calendar years.  For example, we refer to the fiscal year ended September 30, 2006 as “fiscal 2006.”  We are currently in fiscal 2007.

Overview

Business Summary

We are a leading global provider of professional technical and management support services for government and commercial clients around the world.  We have built leading positions in a number of sectors and strategic geographic markets through a global network of operating offices and approximately 28,000 employees and staff employed in the field on a project-by-project basis.  Our business focuses primarily on providing fee-based professional and technical services. As a professional services company, we are labor and not capital intensive. We derive income from our ability to generate revenues and collect cash from our clients through the billing of our employees’ time and our ability to manage our costs. We operate our business through two segments: Professional Technical Services and Management Support Services.

Our revenues are driven by our ability to attract qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts, renew existing client agreements and provide outstanding services. Moreover, as a professional services company, the quality of the work generated by our employees is integral to our revenue generation.

Our costs are driven primarily by the compensation we pay to our employees, including fringe benefits, the cost of hiring subcontractors and other project-related expenses, and sales, general and administrative overhead costs.

Components of Income and Expense

Our management analyzes the results of our operations using financial reports that differ from our financial statements using two measures that are not in accordance with generally accepted accounting principles in the United States (GAAP). One is net service revenues, which is a measure of work performed by our employees and is obtained by subtracting “other direct costs” (i.e. payments to subcontractors and other “pass-through” costs) from our total revenues. In addition, compensation expense associated with stock matches, which would be included in both cost of net service revenues and general and administrative expenses under GAAP, is segregated as shown below because it is considered a function of the level of stock purchased by employees and not a cost of work performed. These changes have the effect of showing gross profit that is generally higher than it would have been under GAAP.

23




 

Other Financial Data(1):

 

2002

 

2003

 

2004

 

2005

 

2006

 

Total revenues

 

$

1,746,973

 

$

1,914,472

 

$

2,011,975

 

$

2,395,340

 

$

3,421,492

 

Other direct costs

 

670,966

 

724,094

 

775,722

 

932,797

 

1,521,775

 

Net service revenues

 

1,076,007

 

1,190,378

 

1,236,253

 

1,462,543

 

1,899,717

 

Cost of net service revenues

 

593,323

 

654,663

 

666,361

 

782,688

 

982,973

 

Gross profit

 

482,684

 

535,715

 

569,892

 

679,855

 

916,744

 

Equity in earnings of joint ventures

 

1,431

 

2,082

 

2,517

 

2,352

 

6,554

 

Total general and administrative expenses

 

424,297

 

466,534

 

483,977

 

580,693

 

805,110

 

Stock matches

 

10,851

 

2,732

 

1,805

 

3,214

 

14,779

 

Income from operations

 

$

48,967

 

$

68,531

 

$

86,627

 

$

98,300

 

$

103,409

 


(1)             For a reconciliation to the consolidated statements of income, see Note 19 to the notes to our consolidated financial statements contained elsewhere in this registration statement.

Total Revenues

We recognize revenues using the percentage-of-completion method. Under this method, revenue is recorded generally on the basis of the ratio of direct labor dollars incurred to the estimated total direct labor dollars. We review our progress on each contract periodically and losses, if any, are recognized as soon as we determine that the contract will result in a loss.

Other Direct Costs

On many projects we are responsible for other direct costs or pass-through costs that may include third party field labor, subcontracts, or the procurement of materials and equipment. We account for the reimbursement of these expenses as revenues as these costs are incurred.  On projects where the client elects to pay these costs directly, however, pass-through costs are not reflected in our revenues or expenses. Thus, other direct costs can fluctuate significantly.  We generally do not earn profits from pass-through costs that are not associated with the level of effort expended by us on these pass-through costs for supervision, accounting services and similar activities, and in the cases where we do earn profits, the amount is insignificant. Profits on projects that contain pass-through costs are earned for services performed by our employees and are billed by us as professional services.

Net Service Revenues

Net service revenues reflect revenues recognized for services performed by our employees on projects and exclude other direct costs that are passed through to the client. Net service revenues and gross margin (gross profit as a percentage of net service revenues) are non-GAAP measures and may not be comparable to similarly titled items reported by other companies. We believe that net service revenues are a more reflective measure of our business because total revenues include significant amounts of other direct or pass-through costs.

24




Cost of Net Service Revenues

Cost of net service revenues reflect the direct cost of our own personnel (including fringe benefits and overhead expense) associated with net service revenue.

Equity in Earnings of Joint Ventures

Equity in earnings of joint ventures includes our portion of fees added by joint ventures in which we participate to client billings for services performed by joint venture partners and earnings from investments in non-controlled joint ventures where the joint venture employs its own employees.

General and Administrative Expenses

General and administrative expenses include all corporate overhead expenses, including personnel, occupancy, administrative, performance earnings plan accruals, taxes, benefits and other operating expenses, and prior to fiscal 2002, amortization expense of goodwill acquired through acquisitions. In fiscal 2002, we discontinued amortizing goodwill and commenced testing our goodwill for impairment in accordance with the Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).  To date, we have not incurred any expense related to goodwill impairment.  Should we determine, however, that our goodwill is impaired, the related expense would be a component of our general and administrative expense.  For companies acquired after fiscal 2002, the amortization expense related to identifiable intangibles with finite lives is included in our general and administrative expense.

Stock Matches

We have employee benefit plans that provide for stock matches on employee purchases of our common stock and common stock units.  The standard matching percentage for fiscal years 2004, 2005 and 2006 was 18%.  Our strategy has been to encourage employee ownership of company stock by providing certain new employees or employees of newly acquired companies with a one-time higher match percentage.  Because it is difficult to predict the amount of stock purchased by these new employees, our stock match expense may vary from period to period and tends to be a function of the level of our mergers and acquisitions activity.  Stock matches, primarily those for our Retirement & Savings Plan in the United States and corresponding stock purchase plans outside the U.S., are contributed in the form of common stock and contributed to our Non-Qualified Stock Purchase Plan in the U.S. in common stock units.  As discussed above in “Components of Income and Expense,” management believes that segregating contributions to our Retirement & Savings Plan and stock matches is appropriate in analyzing results of operations.  However, contributions to our Retirement & Savings Plan and stock matches are non-GAAP measures and segregating them from compensation included in cost of revenues and general and administrative expenses may not provide an accurate comparison to similarly titled captions reported by other companies.

Seasonality

We experience seasonal trends in our business.  Our revenues are typically lower in the first quarter of our fiscal year, primarily due to lower utilization rates attributable to holidays recognized around the world.  Our revenues are typically higher in the last half of the year.  Many U.S. state governments with fiscal years ending on June 30 tend to accelerate spending during their first quarter, when new funding becomes available.  In addition, we find that the U.S Federal government tends to authorize more work during the period preceding the end of its fiscal year, September 30.  Further, our construction and

25




management services also typically expand during the high construction season of the summer months.  For these reasons coupled with the number and significance of client contracts commenced and completed during a period as well as the time of expenses incurred for corporate initiatives, it is not unusual for us to experience seasonal changes or fluctuations in our quarterly operating results.

Mergers and Acquisitions

One of our key strategies is to focus on both organic growth and mergers and acquisitions of technical niche and regional companies that complement our business sectors and/or expand our geographic presence.

In fiscal year 2004, we consummated the following two acquisitions:

·                  Planning and Development Collaborative International, Inc. (PADCO).  In April 2004, we acquired 100% of the capital stock of PADCO, which provides services to the U.S. Agency for International Development and other multi-lateral aid and development agencies.  The consideration consisted of cash and our common stock.

·                  UMA Group Ltd (UMA).  In September 2004, we acquired 100% of the capital stock of UMA, a Vancouver, B.C.-based engineering firm.  The consideration consisted of cash and exchangeable stock of a subsidiary.

In fiscal year 2005, we consummated seven mergers and acquisitions, including:

·                  W.E. Bassett (Bassett).  In October 2004, we acquired 100% of the capital stock of Bassett, an Australian building engineering firm. This consideration consisted of cash and our common stock.

·                  Bullen Consultants Limited (Bullen).  In March 2005, we acquired 100% of the capital stock of Bullen, a U.K.-based transportation and environmental engineering firm.  The consideration consisted of cash and our common stock.

·                  Tiger Acquisition Corp. (ENSR).  In September 2005, we acquired 100% of the capital stock of Tiger Acquisition Corp., parent company of ENSR International, a U.S.-based environmental management firm.  The consideration was valued at $135.0 million and consisted of cash.

In fiscal year 2006, we consummated four mergers and acquisitions, including:

·                  EDAW, Inc. (EDAW).  In December 2005, we acquired 100% of the capital stock of EDAW, a San Francisco-based global urban-development and planning firm.  The consideration was valued at $70.0 million and consisted of cash and our common stock.

·                  Cansult Limited (Cansult Maunsell).  In September 2006, we acquired 100% of the capital stock of Cansult Maunsell, an Ontario, Canada-based consulting firm that operates predominantly in the Middle East.  The consideration consisted of cash.

The purchase prices in certain of these mergers and acquisitions are subject to purchase allocation adjustments based upon the final determination of the acquired firm’s tangible and intangible net asset values as of their respective closing dates. All of our mergers and acquisitions have been accounted for as

26




purchases and the results of operations of the acquired companies have been included in our consolidated results since the dates of the merger and/or acquisition.

Critical Accounting Policies

Our financial statements are presented in accordance with GAAP. Highlighted below are the accounting policies that management considers significant to understanding the operations of our business.

Revenue Recognition

Contract revenues are recognized on the percentage-of-completion method, measured generally by the ratio of direct labor dollars incurred to date to the total estimated direct labor dollars at completion. We include other direct costs (for example, third party field labor, subcontractors, or the procurement of materials or equipment) in contract revenues when the costs of these items are incurred and we are responsible for the ultimate acceptability of such costs. We consider the percentage-of-completion method to be the best available measure of progress on these contracts. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to estimated costs and revenues and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

In the ordinary course of business, and at a minimum on a quarterly basis, we prepare updated estimates of the total forecasted contract revenue, cost and profit or loss. The cumulative effect of revisions in estimates of the total forecasted revenue and costs during the course of the work, including unapproved change orders and claims, is reflected in the accounting period in which the facts that caused the revision become known to us. The financial impact of these revisions to any one contract is a function of both the amount of the revision and the percentage of completion of the contract.

Claims Recognition

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 as to both scope and price or other causes of unanticipated additional costs. We record claims in accordance with paragraph 65 of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position provides that recognition of amounts related to claims as additional contract revenue is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by management’s determination of the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded 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.

27




Unbilled Accounts Receivable and Billings in Excess of Costs on Uncompleted Contracts

Unbilled accounts receivable represents the excess of contract costs and profits (or contract revenue) recognized to date using the percentage-of-completion accounting method over billings to date.  Unbilled work results when:

·                  the appropriate contract revenue amount has been recognized in accordance with the percentage-of-completion accounting method, but a portion of the revenue recorded cannot be billed currently due to the billing terms defined in the contract or the billing system does not accommodate billing until after the close of the accounting period in which the revenue is earned; and/or

·                  costs, recorded at estimated realizable value, related to claims are incurred.

Billings in excess of costs on uncompleted contracts represent the excess of billings to date, as allowed under the terms of a contract, over the amount of contract costs and profits (or contract revenue) recognized to date using the percentage-of-completion accounting method on certain contracts.

Investments in Unconsolidated Joint Ventures

We establish arrangements with other service providers to provide architecture, engineering, program management, construction management and operations and maintenance services through joint ventures.  These joint ventures, the combination of two or more partners, are generally formed for a specific project.  Management of the joint venture is controlled by the joint venture executive committee which is typically comprised of a representative of each joint venture partner with equal voting rights, irrespective of the ownership percentage, which is generally based on the percentage split of work to be performed by each joint venture partner.  The executive committee provides management oversight and assigns work efforts to the joint venture partners.  In accordance with the FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities” (FIN 46R) joint ventures in which we are not the primary beneficiary are accounted for using the equity method.  Services performed by us and billed to the joint ventures with respect to work done by us for third party customers are recorded as our revenues in the period such services are rendered.  In certain joint ventures, a fee is added to the respective billings from us and the other joint venture partners on the amounts billed to 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.

Under these arrangements, if one partner is financially unable to complete its share of the contract, the other partners will be required to complete those activities.  Our policy is to enter into joint venture arrangements with partners who are financially sound and who carry appropriate levels of surety bonds for a project to adequately assure completion of their assignment.  We have from time to time deviated from this policy at the request of our clients.  In all instances, we attempt to structure our operating agreements among the joint venture partners to minimize risk.

Income Taxes

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 operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

28




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.  Whether a deferred tax asset may be realized requires considerable judgment by us.  In considering the need for a valuation allowance, we consider the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry-forwards, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would not normally be taken by management, in the absence of the desire to realize the deferred tax asset.  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.

We review the need for a valuation allowance annually.  If we determine we will not realize all or part of our net deferred tax asset in the future, we will record an additional valuation allowance. Conversely, if 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 Foreign Earnings. The results of foreign operations are consolidated by us for financial reporting; however, earnings from investments in foreign operations are included in domestic taxable income only when actually or constructively received. No deferred taxes have been provided on the undistributed earnings of foreign operations because we plan to permanently reinvest these earnings overseas. If we were to repatriate these earnings additional taxes would be due at that time.  However, these additional taxes may be offset in part by the use of foreign tax credits.

Goodwill

At September 30, 2006, we had recorded goodwill in the amount of approximately $466.5 million.  SFAS 142 requires that we test our goodwill, at least annually, for potential impairment.  The process of testing goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates, including assumptions about our strategic plans with regard to our operations as well as the interpretation of current economic indicators and market valuations.  To the extent economic conditions that would impact the future operations of our reporting units change, our goodwill may be deemed to be impaired and an impairment charge could result in a material adverse effect on our financial position or results of operations.

Under SFAS No. 141, “Business Combinations” (SFAS 141) and the SEC’s interpretations thereof, we must ascribe value to identifiable intangible assets other than goodwill in our purchase allocations for acquired companies.  These assets include but are not limited to backlog, customer lists and trade names.  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.

Accrued Professional Liability Costs

We 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 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.

29




Results of Operations

Fiscal year ended September 30, 2006 compared to the fiscal year ended September 30, 2005

Consolidated Results

 

Fiscal Year Ended

 

Change

 

 

 

September 30,
2005

 

September 30,
2006

 

 

%

 

 

 

($ in thousands)

 

Revenues

 

$

2,395,340

 

$

3,421,492

 

$

1,026,152

 

42.8

%

Other direct costs

 

932,797

 

1,521,775

 

588,978

 

63.1

 

Net service revenues

 

1,462,543

 

1,899,717

 

437,174

 

29.9

 

Cost of net service revenues

 

785,066

 

993,909

 

208,843

 

26.6

 

Gross profit

 

677,477

 

905,808

 

228,331

 

33.7

 

Equity in earnings of joint ventures

 

2,352

 

6,554

 

4,202

 

178.7

 

General and administrative expenses

 

581,529

 

808,953

 

227,424

 

39.1

 

Income from operations

 

98,300

 

103,409

 

5,109

 

5.2

 

Minority interest in share of earnings

 

8,453

 

13,924

 

5,471

 

64.7

 

Interest expense—net

 

7,054

 

10,576

 

3,522

 

49.9

 

Income before income tax expense

 

82,793

 

78,909

 

(3,884

)

(4.7

)

Income tax expense

 

28,979

 

25,223

 

(3,756

)

(13.0

)

Net income

 

$

53,814

 

$

53,686

 

$

(128

)

(0.2

)%

 

The following table presents the percentage relationship of certain items to net service revenues:

 

Fiscal Year Ended

 

 

 

September 30,
2005

 

September 30,
2006

 

Net service revenues

 

100.0

%

100.0

%

Cost of net service revenues

 

53.7

 

52.3

 

Gross profit

 

46.3

 

47.7

 

Equity in earnings of joint ventures

 

0.2

 

0.3

 

General and administrative expenses

 

39.8

 

42.6

 

Income from operations

 

6.7

 

5.4

 

Minority interest in share of earnings

 

0.5

 

0.6

 

Interest expense—net

 

0.5

 

0.6

 

Income before income tax expense

 

5.7

 

4.2

 

Income tax expense

 

2.0

 

1.4

 

Net income

 

3.7

%

2.8

%

 

For fiscal 2006, revenues were $3.4 billion, an increase of $1.0 billion, or 42.8%, over fiscal 2005. Excluding revenues from operations acquired in their first twelve months, or acquisitive revenue of $414.4 million, organic revenues were $3.0 billion in fiscal 2006, an increase of $611.8 million, or 25.5%, over fiscal 2005.  Revenues increased among most of our sectors and geographic markets.  In particular, there was very strong growth in our Management Support Services (MSS) segment due to increased revenues in several existing and new contract awards.  For fiscal 2006, net service revenues were $1.9 billion, an increase of $437.2 million, or 29.9%, over fiscal 2005. Excluding acquisitive net service revenues of $281.9 million, organic net service revenues were $1.6 billion in fiscal 2006, an increase of $155.3 million, or 10.6%, over fiscal 2005.  The difference between the organic growth rates of our revenues and net services revenues is primarily attributable to the level of subcontracted costs and other direct costs which can vary significantly from period to period depending on contract requirements and contract mix.  These pass-through costs typically do not generate significant margins and it is not unusual for us to experience changes in our revenues without experiencing corresponding changes in our gross margins and income from operations.

For fiscal 2006, cost of net service revenues was $993.9 million, an increase of $208.8 million, or 26.6%, over fiscal 2005.  Excluding acquisitive cost of net service revenues, organic cost of net service

30




revenues was $865.7 million in fiscal 2006, an increase of $128.2 million, or 10.3%, over fiscal 2005. The cost of net service revenues across our business segments was generally in line with the changes in net service revenues for our business segments.

Gross profit was $905.8 million in fiscal 2006, an increase of $228.3 million, or 33.7% over fiscal 2005.  Excluding acquisitive gross profit of $153.6 million, organic gross profit was $752.2 million, an increase of $74.7 million, or 11.0% over fiscal 2005.  As a percentage of net service revenue, gross profit was 46.3% and 47.7% in fiscal 2005 and 2006, respectively.  The increase in fiscal 2006 was primarily attributable to higher margins that were added through mergers and acquisitions in the past year in addition to margin improvements in our foreign operations.

Equity in earnings of joint ventures was $6.5 million in fiscal 2006, an increase of $4.2 million over fiscal 2005 resulting from growth in our joint venture activities.

General and administrative expenses were $809.0 million in fiscal 2006, up $227.4 million, or 39.1%, over fiscal 2005.  Included in general and administrative expense is amortization expense of acquired intangibles.  This amortization expense was $14.5 million in fiscal 2006, up $11.5 million, or 377.1%, over fiscal 2005 as a result of recent mergers and acquisitions.  Excluding total acquisitive related general and administrative expense of $141.0, organic general and administrative expenses were $668.0 million in fiscal 2006, an increase of $86.5 million, or 14.9%, over fiscal 2005.  Included in organic general and administrative expense is approximately $4.0 million in expense related to our Sarbanes-Oxley Act of 2002 (SOX) compliance efforts.

As a percentage of net service revenues, general and administrative expenses increased from 39.8% in fiscal 2005 to 42.6% in fiscal 2006.  This overall increase in our general and administrative expense as a percentage of net service revenue was primarily attributable to the following factors:

·                  higher amortization expense of acquired intangible assets;

·                  further expense related to the deployment of our enterprise resource planning system; and

·                  expenses related to our SOX compliance efforts.

An overall increase in our business activity, both organic and acquisitive, higher gross profit, offset by higher general and administrative expenses, resulted in income from operations of $103.4 million in fiscal 2006, an increase of $5.1 million, or 5.2%, from $98.3 million in fiscal 2005.

Interest expense, net of $3.5 million of interest income, increased to $10.6 million in fiscal 2006, compared to $7.1 million in fiscal 2005.  This increase is primarily attributable to higher borrowings utilized to fund mergers and acquisitions, partially offset by strong cash flow from operations, excess proceeds from the sale of our Class F and Class G convertible stock and a $1.1 million gain on the termination of our interest-rate swap contracts.  At September 30, 2006, borrowings under our Amended and Restated Credit Agreement, our Term Credit Agreement and senior notes outstanding totaled $133.8 million, as compared to $229.7 million at September 30, 2005.

Income tax expense was $25.2 million in fiscal 2006, compared to $29.0 million in fiscal 2005. The effective tax rate was 32.0% in fiscal 2006, as compared to 35.0% in fiscal 2005.  The decrease in the effective tax rate was primarily attributable to the favorable resolution of certain contingencies relating to audits that were unresolved at September 30, 2005.

The factors described above resulted in net income of $53.7 million in fiscal 2006, as compared to net income of $53.8 million in fiscal 2005.

31




Basic earnings per share, or EPS, increased by two cents, or 1.1%, to $1.88 per share in fiscal 2006 from $1.86 per share in fiscal 2005.  Diluted EPS, as a result of higher weighted average diluted shares outstanding primarily due to the issuance of our Class F and Class G convertible preferred stock partially offset by the redemption of our Class D preferred stock, decreased by 20 cents, or 11.9%, to $1.48 per share in fiscal 2006 from $1.68 per share in fiscal 2005.

Professional Technical Services

 

Fiscal Year Ended

 

Change

 

 

 

September 30,
2005

 

September 30,
2006

 

$

 

%

 

 

 

($ in thousands)

 

Revenues

 

$

2,082,618

 

$

2,772,833

 

$

690,215

 

33.1

%

 

 

 

 

 

 

 

 

 

 

Net service revenues

 

$

1,415,450

 

$

1,787,078

 

$

371,628

 

26.3

%

Cost of net service revenues

 

753,231

 

914,773

 

161,542

 

21.4

%

Gross profit

 

$

662,219

 

$

872,305

 

$

210,086

 

31.7

%

 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Fiscal Year Ended

 

 

 

September 30,
2005

 

September 30,
2006

 

Net service revenues

 

100.0

%

100.0

%

Cost of net service revenues

 

53.2

 

51.2

 

Gross profit

 

46.8

%

48.8

%

 

Total revenues in the Professional Technical Services (PTS) segment were $2.8 billion in fiscal 2006, an increase of $690.2 million, or 33.1%, over fiscal 2005. Excluding acquisitive revenues of $414.4 million, PTS’ organic revenues of $2.4 billion increased $275.9 million, or 13.2% over fiscal 2005.  PTS experienced organic growth throughout most of its business areas, with the exception of U.S. transportation operations due to temporary delays on certain large transportation projects.  Net service revenues for PTS were $1.8 billion in fiscal 2006, an increase of $371.6 million, or 26.3%, over fiscal 2005.  Excluding acquisitive net service revenue of $281.9 million, PTS’ organic net service revenue increased $89.7 million, or 6.3%, over fiscal 2005. Net service revenues increased at a lower rate as compared to gross revenues due to higher pass-through costs to subcontractors included in total revenues.

Cost of completing net service revenues for PTS was $914.8 million in fiscal 2006, an increase of $161.5 million, or 21.4%, over fiscal 2005.  Excluding acquisitive cost of net service revenues of $128.2 million, PTS’ organic cost of net service revenues was $786.6 million in fiscal 2006, an increase of $33.4 million, or 4.4%, over fiscal 2005.

Gross profit for PTS was $872.3 million in fiscal 2006, an increase of $210.1 million, or 31.7% over fiscal 2005.  Excluding acquisitive gross profit of $153.6 million, PTS’ organic gross profit was $718.7 million in fiscal 2006, an increase of $56.5 million, or 8.5%, over fiscal 2005.  As a percentage of net service revenue, gross profit was 48.8% of net service revenue in fiscal 2006, as compared to 46.8% in fiscal 2005.  These changes were attributable to the factors described above.

Equity in earnings of joint ventures for PTS was $3.0 million in fiscal 2006, an increase of $0.6 million over fiscal 2005.

32




Management Support Services

 

Fiscal Year Ended

 

Change

 

 

 

September 30,
2005

 

September 30,
2006

 

 

%

 

 

 

($ in thousands)

 

Revenues

 

$

309,053

 

$

647,188

 

$

338,135

 

109.4

%

 

 

 

 

 

 

 

 

 

 

Net service revenues

 

$

42,977

 

$

89,794

 

$

46,817

 

108.9

%

Cost of net service revenues

 

29,010

 

50,921

 

21,911

 

75.5

%

Gross profit

 

$

13,967

 

$

38,873

 

$

24,906

 

178.8

%

 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Fiscal Year Ended

 

 

 

September 30,
2005

 

September 30,
2006

 

Net service revenues

 

100.0

%

100.0

%

Cost of net service revenues

 

67.5

 

56.7

 

Gross profit

 

32.5

%

43.3

%

 

Total revenues in the MSS segment were $647.2 million in fiscal 2006, an increase of $338.1 million, or 109.4%, over fiscal 2005.  The increase in revenues was 100% organic and was primarily attributable to the continuing high level of military activities in the Middle East, resulting in demand for maintenance and operations of installations as well as modification work on military vehicles and systems.  The volume of task order awards under our indefinite delivery/indefinite quantity contracts also increased.  These task orders focus on establishing facilities, general support and maintenance for U.S. military pre-positioned stocks, logistics, equipment and fleet management.  Net service revenues for MSS were $89.8 million in fiscal 2006, an increase of $46.8 million, or 108.9% over fiscal 2005.  Net service revenues increased at a slower rate than gross revenues due to a higher amount of pass-through costs that are included in gross revenues.

Cost of net service revenues for MSS was $50.9 million in fiscal 2006, an increase of $21.9 million, or 75.5% over fiscal 2005.  This increase was due to higher indirect expenses associated with the increase in business volume and employee-related expenses.

Gross profit for MSS was $38.9 million in fiscal 2006, an increase of $24.9 million, or 178.8% over fiscal 2005.  As a percentage of net service revenue, gross profit was 43.3% in fiscal 2006 as compared to 32.5% in fiscal 2005.

Equity in earnings of joint ventures for MSS was $4.9 million in fiscal 2006, an increase of $4.9 million over fiscal 2005.  The increase was primarily attributable to earnings from recently formed unconsolidated joint ventures.  MSS serves in key positions with the joint ventures that provide peacekeeping services, administrative support for civilian agencies and response training for law enforcement and military personnel.  In addition, the award of the management and operations contract of the U.S. Government’s Nevada Test Site to the limited liability company which we serve in a key partner role provided earnings contribution through contract award fee performance.  Due to our minority interest in this joint venture, the earnings are not reflected in MSS’ revenues.

For a reconciliation of segment results to consolidated results, see footnote number 19 in the Notes to Consolidated Financial Statements contained elsewhere in this registration statement.

33




Fiscal year ended September 30, 2005 compared to the fiscal year ended September 30, 2004

Consolidated Results

 

Fiscal Year Ended

 

Change

 

 

 

September 30,
2004

 

September 30,
2005

 

$

 

%

 

 

 

($ in thousands)

 

Revenues

 

$     2,011,975

 

$     2,395,340

 

$        383,365

 

19.1

%

Other direct costs

 

775,722

 

932,797

 

157,075

 

20.2

 

Net service revenues

 

1,236,253

 

1,462,543

 

226,290

 

18.3

 

Cost of net service revenues

 

667,697

 

785,066

 

117,369

 

17.6

 

Gross profit

 

568,556

 

677,477

 

108,921

 

19.2

 

Equity in earnings of joint ventures

 

2,517

 

2,352

 

(165

)

(6.6

)

General and administrative expenses

 

484,446

 

581,529

 

97,083

 

20.0

 

Income from operations

 

86,627

 

98,300

 

11,673

 

13.5

 

Minority interest in share of earnings

 

3,239

 

8,453

 

5,214

 

161.0

 

Interest expense—net

 

6,968

 

7,054

 

86

 

1.2

 

Income before income tax expense

 

76,420

 

82,793

 

6,373

 

8.3

 

Income tax expense

 

25,984

 

28,979

 

2,995

 

11.5

 

Net income

 

$          50,436

 

$          53,814

 

$            3,378

 

6.7

%

 

The following table presents the percentage relationship of certain items to net service revenues:

 

Fiscal Year Ended

 

 

 

September 30,
2004

 

September 30,
2005

 

Net service revenues

 

100.0

%

100.0

%

Cost of net service revenues

 

54.0

 

53.7

 

Gross profit

 

46.0

 

46.3

 

Equity in earnings of joint ventures

 

0.2

 

0.2

 

General and administrative expenses

 

39.2

 

39.8

 

Income from operations

 

7.0

 

6.7

 

Minority interest in share of earnings

 

0.4

 

0.5

 

Interest expense—net

 

0.6

 

0.5

 

Income before income tax expense

 

6.4

 

6.2

 

Income tax expense

 

2.1

 

2.0

 

Net income

 

4.1

%

3.7

%

 

For fiscal 2005, revenues were $2.4 billion, an increase of $383.4 million, or 19.1%, over fiscal 2004.  Excluding acquisitive revenues of $210.2 million, organic revenues were $2.2 billion in fiscal 2005, an increase of $195.3 million, or 9.8% over fiscal 2004.  For fiscal 2005, net service revenues were $1.5 billion, an increase of $226.3 million, or 18.3%, over fiscal 2004.  Excluding acquisitive net service revenues of $147.6 million, organic net service revenues were $1.3 billion in fiscal 2005, an increase of $90.5 million, or 7.4%, over fiscal 2004.

Cost of net service revenues was $785.1 million in fiscal 2005, an increase of $117.4 million, or 17.6%, over fiscal 2004.  Excluding acquisitive cost of net service revenues of $77.0 million, the organic cost of net service revenues was $708.1 million in fiscal 2005, an increase of $47.6 million, or 7.2%, over fiscal 2004.  The cost of net service revenues across our business segments was generally in line with the changes in net service revenues for each business segment.

Gross profit was $677.5 million in fiscal 2005, an increase of $108.9 million, or 19.2% over fiscal 2004.  Excluding acquisitive gross profit of $73.0 million, organic gross profit was $604.5 million, an increase of $35.9 million, or 6.3% over fiscal 2004.  As a percentage of net service revenue, gross profit was 46.0% and 46.3% in fiscal 2004 and 2005, respectively.  The slight increase in fiscal 2005 was primarily attributable to improvements in margins in our operations outside of the U.S.

34




Equity in earnings of joint ventures was $2.3 million in fiscal 2005, a decrease of $0.2 million over fiscal 2004.

General and administrative expenses were $581.5 million in fiscal 2005 up $97.1 million, or 20.0%, from $484.4 million in fiscal 2004.  Included in general and administrative expense is amortization expense of acquired intangibles and other assets.  This amortization expense was $4.7 million in fiscal 2005, up $3.2 million, or 223.4%, over fiscal 2004.  Excluding acquisitive general and administrative expense of $63.9 million, organic general and administrative expenses were $517.6 million in fiscal 2005, an increase of $33.2 million, or 6.8%, over fiscal 2004.

As a percentage of net service revenue, general and administrative expenses increased from 39.2% in fiscal 2004 to 39.8% in fiscal 2005.  This increase was due in part to increased expenditures for new corporate initiatives, including transition costs associated with implementing a company-wide enterprise resource planning (ERP) platform.  Higher gross profit, offset by higher general and administrative expenses, resulted in income from operations of $98.3 million in fiscal 2005, an increase of $11.7 million, or 13.5%, from $86.6 million of income from operations in fiscal 2004.

Interest expense, net of $2.1 million interest income, increased slightly to $7.1 million in fiscal 2005, compared to $7.0 million in fiscal 2004.  Borrowings under our credit agreement and senior notes outstanding totaled $229.7 million at September 30, 2005 as compared to $108.3 million at September 30, 2004.  The difference in our borrowings is primarily attributable to borrowings under our credit facility to finance an acquisition in September 2005.

Income tax expense was $29.0 million in fiscal 2005, compared to $26.0 million in fiscal 2004. The effective tax rate was 35% in fiscal 2005 and 34% in fiscal 2004.   During fiscal 2005, we worked with the Internal Revenue Service to conclude audits for fiscal/tax years 1990-2004 which resulted in no material impact to net income.

The factors described above resulted in net income of $53.8 million in fiscal 2005, compared to net income of $50.4 million in fiscal 2004.

Basic earnings per share, or EPS, increased by 15 cents, or 8.9%, to $1.86 per share in fiscal 2005 from $1.71 per share in fiscal 2004. Diluted EPS increased by 11 cents, or 7.2%, to $1.68 per share in fiscal 2005 from $1.57 per share in fiscal 2004.

Professional Technical Services

 

Fiscal Year Ended

 

Change

 

 

 

September 30,
2004

 

September 30,
2005

 

 

%

 

 

 

($ in thousands)

 

Revenues

 

$     1,777,718

 

$     2,082,618

 

$        304,900

 

17.2

%

 

 

 

 

 

 

 

 

 

 

Net service revenues

 

$     1,198,354

 

$     1,415,450

 

$        217,096

 

18.1

%

Cost of net service revenues

 

636,962

 

753,231

 

116,269

 

18.3

%

Gross profit

 

$        561,392

 

$        662,219

 

$        100,827

 

18.0

%

 

35




The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Fiscal Year Ended

 

 

 

September 30,
2004

 

September 30,
2005

 

Net service revenues

 

100.0

%

100.0

%

Cost of net service revenues

 

53.2

 

53.2

 

Gross profit

 

46.8

%

46.8

%

 

Total revenues in the PTS Segment were $2.1 billion in fiscal 2005, an increase of $304.9 million, or 17.2%, over fiscal 2004. Excluding acquisitive revenues of $210.2 million, PTS’s organic revenues increased $94.8 million, or 5.3% over fiscal 2004.  PTS experienced organic growth throughout most of its business areas, offset by decreases in state and local government spending due to continuing budget deficits.  Net service revenues for PTS was $1.4 billion in fiscal 2005, an increase of $217.1 million, or 18.1%, over fiscal 2004.  Excluding acquisitive net service revenues of $147.6 million, PTS’ organic net service revenue increased $69.5 million, or 5.8% over fiscal 2004.  Net service revenues increased at a higher rate as compared to gross revenues due to the inclusion of lower pass-through costs to subcontractors included in gross revenues.

Cost of net service revenues for PTS was $753.2 million in fiscal 2005, an increase of $116.3 million, or 18.3%, over fiscal 2004. Excluding the acquisitive cost of net service revenues of $74.6 million, the organic cost of net service revenues for PTS was $678.6 million in fiscal 2005, an increase of $41.6 million, or 6.5%, over fiscal 2004.

Gross profit for PTS was $662.2 million in fiscal 2005, an increase of $100.8 million, or 18.0% over fiscal 2004.  Excluding acquisitive gross profit of $73.0 million, PTS’ organic gross profit increased $27.8 million, or 5.0%, over fiscal 2004.  As a percentage of net service revenue, gross profit was 46.8% in fiscal 2005 and fiscal 2004.

Equity in earnings of joint ventures for PTS was $2.4 million in fiscal 2005, a decrease of $0.2 million, or 6.6%, over fiscal 2004.

Management Support Services

 

Fiscal Year Ended

 

Change

 

 

 

September 30,
2004

 

September 30,
2005

 

 

%

 

 

 

($ in thousands)

 

Revenues

 

$        232,143

 

$        309,053

 

$          76,910

 

33.1

%

 

 

 

 

 

 

 

 

 

 

Net service revenues

 

$          35,782

 

$          42,977

 

$            7,195

 

20.1

%

Cost of net service revenues

 

29,399

 

29,010

 

(389

)

(1.3

)%

Gross profit

 

$            6,383

 

$          13,967

 

$            7,584

 

118.7

%

 

The following table presents the percentage relationship of certain items to revenue, net of subcontractor costs:

 

Fiscal Year Ended

 

 

 

September 30,
2004

 

September 30,
2005

 

Net service revenues

 

100.0

%

100.0

%

Cost of net service revenues

 

82.2

 

67.5

 

Gross profit

 

17.8

%

32.5

%

 

36




Total revenues in the MSS segment were $309.1 million in fiscal 2005, an increase of $76.9 million, or 33.1%, over fiscal 2004.  The increase in U.S. Government client revenues was 100.0% organic and resulted from increased revenues in operations and maintenance services for the U.S. military that was associated with the continued high level of activities in the Middle East in addition to increased revenues from our U.S. installation operation services.  Net service revenues for MSS were $43.0 million in fiscal 2005, an increase of $7.2 million, or 20.1%, over fiscal 2004.

Cost of net service revenues for MSS was $29.0 million in fiscal 2005, a decrease of $0.4 million, or 1.3% over fiscal 2004.  This decrease in costs was primarily attributable to an increase in higher margin contracts for support service.  The support contracts generally carry higher margins than operation and maintenance and field-based services contracts.  Gross profit for MSS was $14.0 million in fiscal 2005, an increase of $7.6 million, or 118.7%, over fiscal 2004.  As a percentage of net service revenue, gross profit was 32.5% in fiscal 2005 as compared to 17.8% in fiscal 2004.

For a reconciliation of segment results to consolidated results, see footnote number 19 in the Notes to Consolidated Financial Statements contained elsewhere in this registration statement.

Liquidity and Capital Resources

Cash Flows

We have historically relied on cash flow from operations, proceeds from sales of stock (both to employees and to institutional investors) and borrowings under various debt facilities to satisfy our working capital and merger and acquisition and share repurchase requirements.  In the future, we may need to raise additional funds through public and/or additional private debt or equity financings in order to take advantage of business opportunities, including more rapid organic expansion and mergers and acquisitions.

At September 30, 2006, cash and cash equivalents, other than cash in consolidated joint ventures, were $118.4 million, an increase of $91.0 million, or 331.8% from September 30, 2005.  This increase resulted from higher cash flow from operations and the proceeds from the sale of our Class F and Class G convertible preferred stock.  Cash and cash equivalents, other than cash in consolidated joint ventures, is a non-GAAP measure.  For a reconciliation of this measure to cash and cash equivalents, see “Components of Income and Expense” above.

Net cash generated by operating activities was $121.3 million for the year ended September 30, 2006, an increase of $74.7 million from the net cash generated by operating activities of $46.6 million for the year ended September 30, 2005.  The increase was primarily attributable to a more efficient use of working capital as well as higher earnings before non-cash expenses.

Net cash used in investing activities was $71.8 million for the year ended September 30, 2006, a decrease of $65.2 million from the net cash used by investing activities of $137.0 million in the year ended September 30, 2005.  For the year ended September 30, 2006, net cash used for business combinations was $53.3 million as compared to $158.9 million used in business combinations for the prior fiscal year.  We continue to invest in our initiative to re-design our business processes and to implement a global enterprise resource planning (ERP) system.  In fiscal 2006, we capitalized $6.7 million in costs associated with our ERP system, as compared to $10.8 million in fiscal 2005.  For the year ended September 30, 2006, proceeds from the sale of property and equipment totaled $21.3 million as compared to $0.8 million in the prior fiscal year.  This increase was primarily related to the sale of an office building in Orange, California.

37




Net cash provided by financing activities was $23.8 million for the year ended September 30, 2006, as compared to net cash provided by financing activities of $84.1 million in the year ended September 30, 2005.  In fiscal 2006, net cash provided by financing activities was largely the result of proceeds from the sale of our stock, notably the Class F and Class G convertible preferred stock, offset by the redemption of our Class C convertible preferred stock and related warrants and net repayments of borrowings under our credit agreements.

Working Capital

Working capital increased $30.7 million, or 18.0%, from $170.6 million at September 30, 2005 to $201.3 million at September 30, 2006 largely as a result of merger and acquisition activity as well as strong revenue growth.  Net accounts receivable, which includes billed and unbilled costs and fees, net of billings in excess of costs on uncompleted contracts, increased $188.9 million, or 32.5% to $769.9 million at September 30, 2006 from $581.5 million at September 30, 2005.  For the same period, annual revenues increased at a notably higher level of $1.0 billion, or 43.1%, from $2.4 billion to $3.4 billion.

Because our revenues depend 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 we receive payment (in some cases in the form of advances) from our customer.

Borrowings and Lines of Credit

At September 30, 2006 and September 30, 2005, our long-term obligations consisted of the following:

 

 

September 30, 2005

 

September 30, 2006

 

 

 

(in thousands)

 

Amended and Restated Credit Agreement

 

$              130,000

 

$                       —

 

Senior Notes

 

99,714

 

68,810

 

Term Credit Agreement

 

 

65,000

 

Bank Overdraft Facilities

 

4,165

 

2,716

 

Other Debt

 

2,843

 

929

 

Total long-term obligations

 

236,722

 

137,455

 

Less: Current portion of long-term obligations

 

(20,539

)

(14,665

)

Long-term obligations, less current portion

 

$              216,183

 

$              122,790

 

 

Amended and Restated Credit Agreement

We have an unsecured senior credit agreement with a syndicate of banks to support our working capital and acquisition needs.  On September 22, 2006, this facility was extended to March 31, 2011.  As of September 30, 2006, the facility provided a revolving line of credit in the amount of $300.0 million which includes a sub-limit for standby letters of credit of $50.0 million. We may borrow, at our option, at either (a) a base rate (the greater of the Federal Funds rate plus 0.50% or the bank’s reference rate) plus a margin which ranges from 0.00% to 0.25%, or (b) an offshore, or LIBOR, rate plus a margin which ranges from 0.75% to 1.75%, depending on our leverage ratio.  In addition to these borrowing rates, there is a commitment fee which ranges from 0.175% to 0.375% on any unused commitment.  Borrowings under the credit facility are limited by certain financial covenants, which include leverage restrictions, fixed charge coverage and net worth maintenance.  At September 30, 2005 and September 30, 2006, borrowings under the credit facility totaled $130.0 million and $0.0, respectively.  At September 30, 2005 and September 30, 2006, outstanding standby letters of credit totaled $21.1 million and $23.1 million,

38




respectively.  At September 30, 2006, we had $276.9 million available for borrowing under the credit facility.

Senior Notes

October 2006 Notes:  On September 7, 2001, we issued $21.0 million of 6.47% senior notes due October 7, 2006.  The October 2006 Notes were paid in full on September 29, 2006.  The October 2006 Notes were unsecured and had an average life of four years.  The annual principal payments of $7.0 million began October 7, 2004. The first principal and last principal payments due on the 2006 Notes were prepaid.

June 2008 Notes:  On June 9, 1998, we issued $60.0 million of 6.93% senior notes due June 9, 2008. The June 2008 Notes are unsecured and have an average life of seven years.  The annual principal payments of $8.6 million began June 9, 2002.

October 2008 Notes:  On September 9, 2002, we issued $25.0 million of 6.23% senior notes due October 15, 2008.  The October 2008 Notes are unsecured and have an average life of five years.  The annual principal payments of $8.3 million were scheduled to begin October 15, 2006; however, we elected to pre-pay the first principal payment in September 2006.

April 2012 Notes:  On April 14, 2000, we issued $35.0 million of 8.38% senior notes due April 14, 2012.  The April 2012 Notes are unsecured and have an average life of 10 years.  The annual principal payments of $7.0 million are scheduled to begin April 14, 2008.

All of the senior notes require interest to be paid either quarterly or semi-annually in arrears and are subject to certain financial covenants. Proceeds from the October 2006 Notes, the June 2008 Notes and the October 2008 Notes were used to repay revolving credit debt while proceeds of the April 2012 Notes were used to fund business acquisitions.

Term Credit Agreement

On September 22, 2006, certain of our wholly-owned subsidiaries closed an unsecured term credit agreement with a syndicate of banks to facilitate dividend repatriations under favorable tax terms.  The term credit agreement provides for a $65.0 million, five-year term loan among four subsidiary borrowers and one subsidiary guarantor.  In order to obtain more favorable pricing and other terms, we also provided a parent company guarantee.  The terms and conditions of this agreement are substantially similar to those contained in our senior unsecured credit facility.  Principal payments are scheduled to begin June 30, 2007, or earlier at the borrowers’ discretion.  At September 30, 2006, borrowings under this term credit agreement totaled $65.0 million.

Other Debt

We also have three non-U.S. credit facilities used to cover periodic overdrafts and to issue letters of credit in the aggregate amount of $41.0 million.

Further, we have outstanding promissory notes of $0.9 million to former shareholders of Oscar Faber, predecessor to Faber Maunsell.  These promissory notes have maturities ranging from January 2006 to April 2010.

39




In addition, we assumed mortgage debt obligations in the amount of $1.4 million when we purchased our joint venture partner’s interests as co-owner of an Orange, California facility.  This debt was repaid in full upon our sale of the facility in May 2006.

Preferred Stock

In February 2006, we closed a $235.0 million private placement of our Class F and Class G convertible preferred stock.  In connection with the private placement, we redeemed all outstanding shares of our Class D convertible preferred stock and repurchased associated warrants to purchase common stock.  Approximately $114.7 million of the $231.2 million in net proceeds was used to repay indebtedness under our senior credit facility and approximately $116.5 million was used to redeem the Class D preferred and associated warrants.  The terms of the Class D convertible preferred stock contained a 7% annual dividend whereas the terms of the Class F and Class G do not require annual dividend payments.

The Class F and Class G convertible preferred stock is redeemable on the earlier of February 9, 2012 or the date on which we sell substantially all of our assets and has other rights, privileges and preferences.  See “Description of Capital Stock, Certificate of Incorporation and Bylaws” for a summary of the terms of the Class F and Class G convertible preferred stock.

Commitments and Contingencies

Other than normal property and equipment additions and replacements, expenditures to further the implementation of our ERP system, commitments under our incentive compensation programs, repurchases of shares of our common stock, 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 any additional businesses in the future or embark on other capital-intensive initiatives, additional working capital may be required.

In July 2006, we entered into an agreement to acquire an interest in Shanghai Tunnel Engineering Co., Ltd., or STEC.  STEC is a Shanghai, China-based design, engineering and construction firm which specializes in transportation design.  The agreement is subject to Chinese government regulatory approval and other conditions.  If we receive regulatory approval and satisfy all closing conditions, the purchase would be valued at 239.5 million Chinese renminbi, or approximately $30.7 million, based upon indicative exchange rates as of the date of this registration statement.  As of the date of this registration statement, we have not funded the STEC investment.

As of September 30, 2006, there was approximately $43.6 million outstanding under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for contract performance guarantees. In addition, in some instances we guarantee that a project, when complete, will achieve specified performance standards. 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.

At September 30, 2006, our defined benefit pension plans had an aggregate deficit (where the projected benefit obligation exceeded the fair value of plan assets) of $117.2 million.  At that same time, the excess of projected benefit obligations over fair value of plan assets was $84.8 million.  See Note 9 to the Notes to Consolidated Financial Statements contained elsewhere in this registration statement.  In the future, such pension under-funding may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors.

40




We believe that our cash generated from operations and amounts that we expect to be available for borrowing under credit facilities will be sufficient to meet our capital requirements, including our commitments and contingencies, for the foreseeable future.

Contractual Commitments

The following summarizes our contractual obligations and commercial commitments as of September 30, 2006:

Contractual Obligations and Commitments

 

Total

 

Less than
One Year

 

One to Three
Years

 

Three to Five
Years

 

More than
Five Years

 

 

 

(in thousands)

 

Long-term debt (including interest)

 

$     137,455

 

$       14,665

 

$       56,290

 

$       59,500

 

$         7,000

 

Operating leases

 

446,631

 

87,163

 

131,976

 

90,089

 

137,403

 

Capital leases

 

1,620

 

1,215

 

405

 

 

 

Interest

 

14,283

 

5,679

 

6,258

 

2,346

 

 

Pension obligations(1)

 

214,006

 

14,396

 

36,770

 

40,010

 

122,830

 

Total Contractual Obligations and Commitments

 

$     813,995

 

$     123,118

 

$     231,699

 

$     191,945

 

$     267,233

 


(1)             Retirement and retirement plan related obligations noted under the heading “More than Five Years” are presented for the years 2012-2016.

Quarterly Results of Operations

The following table shows, for the periods indicated, unaudited selected quarterly financial data from our consolidated statements of income modified to display the effect of the two non-GAAP measures our management uses to analyze our results of operations (see “Components of Income and Expense” contained earlier in this discussion). We believe this data includes all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of operations for these periods.  The unaudited selected quarterly financial data below should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this registration statement.  Our operating results in any one quarter are not necessarily indicative of the results that may be expected for any future period.

Fiscal Year 2005:

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands, except per share data)

 

Revenue

 

$     531,064

 

$     579,507

 

$     624,931

 

$     659,838

 

Other direct costs

 

205,983

 

214,702

 

247,920

 

264,192

 

Net service revenue

 

325,081

 

364,805

 

377,011

 

395,646

 

Cost of revenue

 

174,599

 

197,316

 

203,061

 

207,716

 

Gross profit (excluding stock matches)

 

150,482

 

167,489

 

173,950

 

187,934

 

Equity in earnings of joint ventures

 

763

 

223

 

130

 

1,236

 

General and administrative expenses

 

129,839

 

146,619

 

149,399

 

154,836

 

Stock matches

 

967

 

292

 

614

 

1,341

 

Income from operations

 

20,439

 

20,801

 

24,067

 

32,993

 

Minority interest in share of earnings

 

1,465

 

2,504

 

2,329

 

2,155

 

Interest expense, net

 

1,763

 

2,286

 

1,366

 

1,639

 

Income before income tax expense

 

11,211

 

16,011

 

20,372

 

29,199

 

Income tax expense

 

6,023

 

5,604

 

7,130

 

10,222

 

Net income

 

$       11,188

 

$       10,407

 

$       13,242

 

$       18,977

 

Basic earnings per share

 

$           0.37

 

$           0.36

 

$           0.46

 

$           0.67

 

Diluted earnings per share

 

$           0.34

 

$           0.34

 

$           0.42

 

$           0.59

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

26,835

 

24,822

 

25,846

 

26,259

 

Diluted

 

32,585

 

30,709

 

31,764

 

32,174

 

 

41




 

Fiscal Year 2006:

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

 

 

(in thousands, except per share data)

 

Revenue

 

$     746,797

 

$     858,930

 

$     911,486

 

$     904,279

 

Other direct costs

 

331,450

 

369,089

 

417,057

 

404,179

 

Net service revenue

 

415,347

 

489,841

 

494,429

 

500,100

 

Cost of revenue

 

214,288

 

257,139

 

258,767

 

252,779

 

Gross profit (excluding stock matches)

 

201,059

 

232,702

 

235,662

 

247,321

 

Equity in earnings of joint ventures

 

1,670

 

893

 

1,554

 

2,437

 

General and administrative expenses

 

176,624

 

203,546

 

208,371

 

216,569

 

Stock matches

 

1,379

 

4,971

 

3,726

 

4,703

 

Income from operations

 

24,726

 

25,078

 

25,119

 

28,486

 

Minority interest in share of earnings

 

1,951

 

3,530

 

3,022

 

5,421

 

Interest expense, net

 

3,723

 

4,067

 

2,528

 

258

 

Income before income tax expense

 

19,052

 

17,481

 

19,569

 

22,807

 

Income tax expense

 

6,097

 

5,594

 

6,262

 

7,270

 

Net income

 

$       12,955

 

$       11,887

 

$       13,307

 

$       15,537

 

Basic earnings per share

 

$           0.43

 

$           0.42

 

$           0.47

 

$           0.55

 

Diluted earnings per share

 

$           0.40

 

$           0.34

 

0.36

 

$           0.40

 

Weighted average shares used in calculations:

 

 

 

 

 

 

 

 

 

Basic

 

26,644

 

26,838

 

27,881

 

28,350

 

Diluted

 

32,612

 

35,153

 

36,941

 

39,018

 

 

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other post-retirement plans in their financial statements. We will be subject to the disclosure and recognition provisions of SFAS 158 in fiscal years beginning October 1, 2006 and 2007, respectively. We are currently evaluating the impact of the provisions of SFAS 158 on our results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of SFAS 157 will be effective for us in our fiscal year beginning October 1, 2008. We are currently evaluating the impact of the provisions of SFAS 157.

In June 2006, the FASB issued FASB Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements. FIN 48 prescribes that a company should use a “more-likely-than-not” recognition threshold based on the technical merits of the tax position taken. Additionally, FIN 48 provides guidance on recognition or de-recognition of interest and penalties, changes in judgment in interim periods, and disclosures of uncertain tax positions.  FIN 48 became effective for us in our fiscal year beginning October 1, 2006.  We are currently in the process of determining the effect of the adoption of FIN 48 on our results of operations and financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154), which applies to all voluntary changes in accounting principles, as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized in net income as a cumulative effect of changing to the new accounting principle.  SFAS

42




154 now requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to do so.  SFAS 154 became effective for us in our fiscal year beginning October 1, 2006.  We currently do not anticipate any voluntary changes in accounting principle or errors that would require such retroactive application.

In April 2006, the FASB issued FASB Staff Position No. FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (FSP FIN 46(R)-6), which addresses how a reporting enterprise should determine the variability to be considered in applying FIN No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” or FIN 46(R). The variability that is considered in applying FIN 46(R) affects the determination of (a) whether the entity is a variable interest entity, (b) which interests are variable interests in the entity and (c) which party, if any, is the primary beneficiary of the variable interest entity. That variability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. FSP FIN 46(R)-6 provides additional guidance to consider for determining variability. FSP FIN 46(R)-6 is effective for us beginning the first day of our fiscal quarter beginning July 1, 2006. We are currently evaluating the impact of the provisions of FSP FIN 46(R)-6 on our results of operations and financial position.

Financial Market Risks

We are exposed to market risk, primarily related to foreign currency exchange rates and interest rate exposure of our debt obligations that bear interest based on floating rates.  We actively monitor these exposures.  To reduce our exposure to market risk, we have entered into derivative financial instruments such as forward contracts or interest rate hedge contracts. Our objective is to reduce, where we deem appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign exchange rates and interest rates. It is our policy and practice to use derivative financial instruments only to the extent necessary to manage our exposures. We do not use derivative financial instruments for speculative purposes.  We currently have no material derivative instruments outstanding.

Foreign Exchange Rate

We are exposed to foreign currency exchange rate risk resulting from our operations outside of the United States.  We do not comprehensively hedge our exposure to currency rate changes; however, we limit exposure to foreign currency fluctuations in most of our contracts through provisions that require client payments to be in currencies corresponding to the currency in which costs are incurred.  As a result, we typically do not need to hedge foreign currency cash flows for contract work performed.  The functional currency of all significant foreign operations is the local currency.

Interest Rates

Our senior revolving credit facility and certain other debt obligations are subject to variable rate interest which could be adversely affected by an increase in interest rates.  As of September 30, 2005, we had $130 million outstanding in borrowings under our credit facility.  Interest on amounts borrowed under the credit facility is subject to adjustment based on certain levels of financial performance.  For borrowings at offshore rates, the applicable margin added can range from 0.75% to 1.75%. For fiscal 2006, our weighted average borrowings on our senior credit facility were $132.8 million.  If short term floating interest rates were to increase or decrease by 1%, our annual interest expense could have increased or decreased by $1.3 million.  We invest our cash in money market securities or other high quality, short-term securities that are subject to minimal credit and market risk.

We have selectively managed our floating interest rate exposure through the use of derivative instruments.  In October 2005, we entered into two floating-to-fixed interest rate hedge contracts.  From

43




the inception through our voluntary early termination, the interest rate hedges were effective.  Upon our termination of these contracts in our fourth quarter of fiscal 2006, we received a net cash settlement of approximately $1.1 million.

Subsequent Events

In January 2007, we acquired 100% of the capital stock of Hayes, Seay, Mattern & Mattern, Inc. (HSMM), a Virginia-based engineering and architectural firm which provides professional technical services for buildings, infrastructure development and environmental restoration.  The consideration consisted of cash and is subject to a purchase price allocation adjustment based upon the final determination of HSMM’s tangible and intangible net asset value at closing.

We have entered into a letter of intent to acquire 100% of the capital stock of RETEC, Inc., a Massachusetts-based environmental consulting and engineering firm.  We expect the transaction to close in the second quarter of fiscal 2007.

We are in the process of the termination and repayment of all outstanding loans previously made to our directors and senior officers under our Senior Executive Equity Investment Plan (SEEIP).  SEEIP loans were made by us to encourage our senior officers to hold AECOM stock by providing loans to fund the purchases of the stock.  We expect that all SEEIP loans will be terminated and repaid prior to February 15, 2007.  At September 30, 2006, there were SEEIP loans outstanding with an aggregate principal amount of approximately $29.7 million.

In December 2006, we sold our equity investment in a U.K.-based company for approximately 7.5 million GBP, or approximately $14.7 million.

44




ITEM 3.  PROPERTIES

Our corporate offices are located in approximately 72,000 square feet of space at 555 and 515 South Flower Street, Los Angeles, California.  Our other offices consist of an aggregate of approximately 3.8 million square feet worldwide.  We also maintain smaller administrative or project offices. Virtually all of our offices are leased.  See Note 11 of the notes to our consolidated financial statements for information regarding our lease obligations.  We believe our current properties are adequate for our business operations and are not currently underutilized.  We may add additional facilities from time to time in the future as the need arises.

ITEM 4.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of our voting stock, which consists of common stock, convertible preferred stock, Class C preferred stock, Class F preferred stock and Class G preferred stock, as of December 1, 2006 with respect to:

·               each person or group of affiliated persons known by us to own beneficially more than 5% of the outstanding shares of each class of stock;

·               each of our directors;

·               each Named Executive Officer listed in the Summary Compensation Table in Item 6 of this Registration Statement; and

·               all directors and executive officers as a group.

Except as otherwise indicated in the footnotes to the table, each stockholder has sole voting and investment power with respect to the shares beneficially owned by such stockholder.  Unless otherwise noted, the address for each stockholder is AECOM Technology Corporation, 555 South Flower Street, Suite 3700, Los Angeles, California 90071.

 

 

Common Stock

 

Convertible
Preferred Stock 
(1)

 

Class C Preferred
Stock 
(2)

 

Class F Preferred
Stock 
(3)

 

Class G Preferred
Stock 
(3)

 

Percent
of Total
Voting
Power

 

 

 

Shares

 

%

 

Shares

 

%

 

Shares

 

%

 

Shares

 

%

 

Shares

 

%

 

 

 

5% or more stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Trust Company N.A. (4)

 

11,452,354

 

34.90

%

54,713

 

100

%

56.524

 

100

%

 

 

 

 

 

 

 

 

30.27

%

Halifax EES Trustees International (5)
P.O. Box 827
Queensway House
Hilgrove Street St.
Helier Jersey JE4 OUB

 

3,660,231

 

11.15

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.52

%

CalPERS/PCG Corporate
Partners LLC (6)
1200 Prospect, Ste. 200
La Jolla, CA 92037

 

 

 

 

 

 

 

 

 

 

 

 

 

7,000

 

14.89

%

7,000

 

14.89

%

3.63

%

GSO Capital Partners LP (7)
280 Park Avenue
11
th Floor East Tower
New York, NY 10017

 

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

85.11

%

 

 

 

 

10.37

%

J.H Whitney VI, L.P. (8)
130 Main Street
New Canaan, CT 06901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

85.11

%

10.37

%

 

45




 

 

 

Common Stock

 

Convertible
Preferred Stock(1)

 

Class C Preferred
Stock(2)

 

Class F Preferred
Stock(3)

 

Class G Preferred
Stock (3)

 

Percent
of Total
Voting
Power

 

 

 

Shares

 

%

 

Shares

 

%

 

Shares

 

%

 

Shares

 

%

 

Shares

 

%

 

 

 

Directors and Named Executive Officers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John M. Dionisio (9)

 

450,639

 

1.37

%

 

 

1.292

 

2.29

%

 

 

 

 

1.50

%

Richard G. Newman (10)

 

1,299,631

 

3.96

%

 

 

5.123

 

9.06

%

 

 

 

 

4.63

%

James R. Royer (11)

 

336,052

 

1.02

%

 

 

1.626

 

2.88

%

 

 

 

 

1.29

%

Michael S. Burke (12)

 

51,172

 

*

 

 

 

0.110

 

*

 

 

 

 

 

*

 

Francis S.Y. Bong (13)

 

777,304

 

2.37

%

 

 

 

 

 

 

 

 

2.02

%

Glenn R. Robson (14)

 

96,196

 

*

 

 

 

0.275

 

*

 

 

 

 

 

*

 

H. Frederick Christie (15)

 

32,600

 

*

 

 

 

0.240

 

*

 

 

 

 

 

*

 

James H. Fordyce (16)

 

 

 

 

 

 

 

 

 

40,000

 

85.11

%

10.37

%

S. Malcolm Gillis (17)

 

20,980

 

*

 

 

 

0.159

 

*

 

 

 

 

 

*

 

Linda Griego (18)

 

10,000

 

*

 

 

 

0.037

 

*

 

 

 

 

 

*

 

Robert J. Lowe (19)

 

32,600

 

*

 

 

 

0.272

 

*

 

 

 

 

 

*

 

William G. Ouchi (20)

 

43,000

 

*

 

 

 

0.045

 

*

 

 

 

 

 

*

 

William P. Rutledge (21)

 

25,884

 

*

 

 

 

0.268

 

*

 

 

 

 

 

*

 

Lee D. Stern

 

 

 

 

 

 

 

 

 

 

 

 

All directors and executive officers as a group (16 persons) (22)

 

3,984,467

 

12.14

%