UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


AMENDMENT NO. 1

TO

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

 

 

 

Page

 

ITEM 1.

 

BUSINESS

 

 

1

 

 

ITEM 1A.

 

RISK FACTORS

 

 

17

 

 

ITEM 2.

 

FINANCIAL INFORMATION

 

 

24

 

 

ITEM 3.

 

PROPERTIES

 

 

54

 

 

ITEM 4.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

 

54

 

 

ITEM 5.

 

DIRECTORS AND EXECUTIVE OFFICERS

 

 

57

 

 

ITEM 6.

 

EXECUTIVE COMPENSATION

 

 

63

 

 

ITEM 7.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

 

84

 

 

ITEM 8.

 

LEGAL PROCEEDINGS

 

 

85

 

 

ITEM 9.

 

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

 

 

85

 

 

ITEM 10.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

 

87

 

 

ITEM 11.

 

DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED

 

 

88

 

 

ITEM 12.

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

 

94

 

 

ITEM 13.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

94

 

 

ITEM 14.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

94

 

 

ITEM 15.

 

FINANCIAL STATEMENTS AND EXHIBITS

 

 

94

 

 

 

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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.”  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. Unless otherwise noted, references to years are for fiscal years. Our fiscal year consists of 52 or 53 weeks, ending on the Friday closest to September 30. Our fiscal quarters end on the Friday closest to December 31, March 31, June 30 and September 30. For clarity of presentation, we refer to all fiscal years and fiscal quarters in this registration statement as ending on September 30, December 31, March 31 or June 30, regardless of the actual date.

Overview

We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects including highways, airports, bridges, mass transit systems, government and commercial buildings and water and wastewater facilities. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government. Through our network of approximately 28,000 employees in over 60 countries, we provide our services to a number of end markets, with particular strength in the transportation, facilities and environmental markets. With over 60% of our employees operating outside the United States, we believe we are well positioned to grow both in the United States and internationally. According to Engineering News-Record’s (ENR) 2006 Design Survey, we are the largest general architectural and engineering design firm in the world, ranked by 2005 design revenue. In addition, we are ranked by ENR as the leading firm in numerous design end markets including transportation and general building.

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, consulting, architectural and engineering design, and program and construction management services to institutional, commercial and government clients worldwide in major end markets such as transportation, facilities, environmental management and power. 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 $2.8 billion, or 81% of our revenue, in fiscal 2006.

Management Support Services (MSS).   Our MSS segment provides facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. For example, we manage more than 6,000 employees in Kuwait who 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 $647 million, or 19% of our revenue, in fiscal 2006.

1




Our Market Opportunity

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 $60 billion in revenue, the largest two categories were general building and transportation, representing $23 billion and $20 billion, respectively. Water and wastewater combined represented an additional $13 billion in 2005 revenues. According to ENR, based on 2005 revenue, we were the #1 design firm in transportation, #1 in general building, #2 in wastewater and #4 in water supply.

We believe that the growth opportunities for these markets are significant, both in the United States and internationally, fueled by the increasing global spending on infrastructure among other factors.

Professional Technical Services

The U.S. Department of Commerce forecasts that increases in work associated with the nonresidential building, power and highway markets will contribute to the overall value of new construction contracts awarded in the United States, which are expected to increase slightly to $1.17 trillion in 2007. The U.S. Department of Commerce projects that this growth in nonresidential construction will counter expected major declines in the value of residential construction during 2007. We are positioned to benefit from this trend in that we are focused on government, commercial and industrial projects, with no material exposure to the residential housing market.

Transportation.   The transportation market is significant and growing, both domestically and internationally, and we expect this will continue in coming years. Transportation services include the design and construction management of a broad range of transportation infrastructure projects, including airports, seaports, bridges, tunnels, railway lines and highways. According to ENR, the top 500 engineering design firms earned $20.3 billion in revenue in 2005 as a result of transportation work. The U.S. Department of Commerce projected in late 2006 that the dollar value of domestic transportation construction projects would grow 11.9% during 2006 and that it will grow an additional 3% in 2007, to a value of $31 billion. The Department of Commerce also predicted that highway and street spending, which it categorizes separately from transportation, would increase 16% in 2006 and will rise another 7% in 2007 to reach $81.5 billion. Growth in domestic transportation spending is driven by such factors as the continuation of federal funding for SAFETEA-LU, a $286 billion highway funding bill. Growth is also driven by increased domestic spending on highway projects, the increased utilization of road, rail, airport and seaport facilities, combined with the obsolescence of many existing facilities. In addition, domestic growth is driven by significant increases in the use of aviation facilities. Domestic airline passenger traffic has returned to and surpassed the 65.4 million monthly travelers level achieved prior to September 2001. Healthier state budgets have also fueled infrastructure activity. California, for example, passed a $20 billion bond measure for transportation in 2006 that has the potential to increase spending in this area substantially in the coming years.

The increased momentum of public private partnerships, or PPP, has fueled alternative sources of funding for major transportation projects. These have included the sale of toll highways in Chicago and Indiana and the privatization of airports, including Chicago’s Midway Airport.

We expect growth in the U.S. transportation market will also be driven by clients seeking a broader range of services from engineering and construction firms. Clients are demanding an increased focus on program and construction management and are seeking a full range of services including project design, delivery, financing and procurement. We believe this trend will provide additional revenue for these firms.

The international transportation market also presents growth opportunities. International transportation growth is driven by both the need to upgrade existing facilities and the demand for new infrastructure, particularly in emerging markets. China, for example, annually constructs approximately 4,000 kilometers of highways and reported investing $12 billion in a rural road construction project

2




intended to connect all Chinese cities with a population over 200,000 and 95% of rural towns by 2010. Emerging markets are also investing heavily in aviation infrastructure. According to the U.S. Embassy in China, the country will build 108 new airports between 2004 and 2009, including what will be the world’s largest airport, the Beijing International Airport, that is scheduled to open in time for the Beijing Olympics and will cover more than 1 million square meters.

General building.   We expect this market will exhibit significant strength in the next several years. ENR reports that $22.9 billion in revenue was earned by the top-500 design firms in 2005 from general building. General building includes the construction of commercial buildings, office complexes, schools, hotels and correctional facilities. The U.S. Department of Commerce projected in late 2006 that commercial construction spending would increase 11% in 2006 and rise another 10% during 2007 to reach $90 billion, that education construction spending would rise 7% in 2006 and rise another 5% in 2007 to reach $88.3 billion, that office construction would rise 15.1% in 2006 and rise another 11.8% in 2007 to reach $61.4 billion and that lodging construction would rise 50% in 2006 and increase an additional 14.7% in 2007 to approach $22.6 billion. Demand for commercial construction is driven by several factors, including lower commercial vacancy rates, greater investor interest in office and other commercial properties, low domestic unemployment rates, and historically low interest rates.

In the United States, public demand for general building services is also driven by increased Federal, state and local government educational spending and continuing government expenditures in other facilities such as courthouses and correctional facilities. Growth in the latter is being driven by mandatory sentencing guidelines and other judicial trends resulting in longer incarceration periods for a greater number of offenders.

Internationally, strong global economic growth is fueling the demand for facilities design and construction. We believe we are well positioned to take advantage of international demand for such services. Over the next decade, over 400 new buildings more than 50 stories tall are expected to be built around the world in regions such as the Middle East and China, according to Emporis Buildings, an international database of building information. By 2015, half of the world’s new building construction is expected to take place in China. Even today, the American Forest and Paper Association estimates that construction represents about 16% of China’s GDP amid a national trend toward urbanization. We are well positioned globally to take advantage of these kinds of opportunities.

Water, Wastewater & Environmental Management.   There is significant global demand for water, wastewater and environmental services. This market is characterized by projects including water treatment facilities, water distribution systems, desalination plants, solid waste disposal systems, environmental impact studies, remediation of hazardous materials and pollution control. ENR reports that the water and wastewater market contributed $13.4 billion in 2005 revenue to the top-500 design firms. Growth in this area is driven by the domestic water and wastewater sectors, which we believe are growing at a rate between 8% and 10% annually. FMI Corp., a Denver-based industry management consultant, predicts that water supply construction spending will increase 9% and that sewer system spending will rise 10% in 2007.

Domestic growth in the water, wastewater and environmental markets is driven by government regulations, including the Clean Water Act and Clean Air Act, by a growing U.S. population, and by a shift of the U.S. population toward the Southeast and Southwest, where there are significant water supply challenges. In addition, a renewed focus on micro-contaminants and carcinogens has given rise to increased centralization and standardization efforts, including increased federal involvement in water quality regulation. Internationally, demand is driven by the need to repair and upgrade local water systems and increased global population and concomitant demand for water reuse and desalinization technologies. Urbanization and rapid economic growth resulting in higher standards of living in such developing countries as India and China will drive demand for water and wastewater infrastructure development in these regions. In addition, developing nations face significant environmental issues. Governments in

3




developing regions are likely to seek to address environmental concerns as they gain the economic means to improve the quality of life of their citizens. For example, according to the World Health Organization, seven of the ten of the most polluted cities in the world are located in China.

Urbanization.   While U.S. cities are relatively mature and historically have suffered from population flight to suburban and other outlying areas, that trend has reversed in recent years as “baby boomers” have returned to major urban areas. Outside the U.S., economic growth opportunities have caused an influx of people from rural to developing urban areas. In parts of Europe, government policy strongly encourages urban redevelopment. Urbanization creates significant opportunities for our PTS segment in all of our end markets as it creates increased demand in urban areas for transportation infrastructure, facilities and power systems, greater pressure on water/wastewater systems and increased environmental pollution that needs to be mitigated. It also creates demand for urban master planning and environmental assessments.

The table below highlights some of the trends in our PTS core markets and what those imply for future growth.

 

Growth Drivers

Market

 

 

 

Domestic

 

International

Transportation

 

·  Healthy state and local budgets

·  $286 billion of federal funding for SAFETEA-LU from 2006-2010

·  Increased utilization of aging transportation infrastructure

·  Introduction of public to private partnerships (PPP) to the United States

 

·  Emerging markets creating demand for greenfield transportation infrastructure and large scale improvement projects

·  Global trend towards PPP and other private sector spending on infrastructure

·  Increased foreign direct investment

General Building

 

·  Historically low interest rate environment driving significant spending

·  Demand for nonresidential building space continues to expand

·  Increased spending in hospital healthcare infrastructure as babyboomers age

·  Strong demand for nonresidential / commercial space

 

·  Healthy global economy

·  Continued population pressures in developing urban areas such as China, Russia and India

·  Urbanization trends fostering rapid residential construction spending

Water/ Wastewater/ Environmental

 

·  Increasing federal regulatory pressure
  Clean Water Act
  Clean Air Act

     

·  Global population growth

·  Increased focus on quality and safety

 

Management Support Services

We believe the market for our MSS segment is growing. MSS segment services include facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. The Center for Strategic and International Studies estimated that the domestic market for the kinds of facility-related services provided by our MSS segment was $36 billion in 2004, the most recent full year for which federal procurement data were available. Our MSS work is primarily for such federal government agencies as the Departments of Defense, Energy, Justice and Homeland Security. Growth in the MSS segment will likely be driven by a continued government outsourcing trend due in part to an aging government workforce and on-going military operations in the Mideast and elsewhere as well as military force realignments. We believe these trends

4




will enhance the demand for outsourcing in the government services area for firms with experience in security, logistics and overseas operations.

Our Competitive Strengths

We believe we have the experience, relationships, technical expertise and personnel to lead our clients through their most complicated and critical technical undertakings while also delivering the level of consistent, quality service necessary to maintain long term relationships and secure repeat engagements.

We have leadership positions in large, growing markets

We believe the growing trend for outsourcing of professional technical and support services complements our capabilities, size and experience in providing these services and positions us to continue to strengthen our business. 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, including:

Transportation

 

General Building

 

Environmental

 

 

Ranking

 

 

 

Ranking

 

 

 

Ranking

Mass Transit and Rail

 

1

 

Educational Facilities

 

1

 

Wastewater Treatment

 

2

Airports

 

1

 

Government Offices

 

1

 

Sanitary and Storm Sewers

 

2

Marine and Ports

 

1

 

Correctional Facilities

 

1

 

Sewerage and Solid Waste

 

2

Highways

 

1

 

Hotels/Convention Center

 

3

 

Water Supply

 

4

Bridges

 

2

 

Commercial Offices

 

4

 

Clean Air Compliance

 

4

 

We are diversified across service lines, end markets and geographies

We perform a broad spectrum of services for our clients, from planning and design to construction and project management and logistics. In fiscal 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 fiscal 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 fiscal 2006. In addition, our 25 largest projects by gross profit in fiscal 2006 accounted for only 14% of our consolidated 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 further believe we are well-positioned in geographic areas with favorable growth prospects such as China/Hong Kong and the United Arab Emirates, where we are among the largest engineering design firms. This diversification has been a key factor in our historical growth and positions us for future growth.

We combine global reach with local presence

We have a global network of approximately 28,000 employees with projects in over 60 countries. We combine intimate local market knowledge and relationships with the technical expertise, size, experience and resources of one of the world’s largest engineering and design services companies. We believe that our ability to share capabilities and best practices across the firm delivers significant value to our clients and enables us to win and efficiently execute projects worldwide. 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.

5




We have strong and long-standing client relationships

We have developed strong and long-term relationships with a number of large corporations and government entities worldwide. 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 Authority of New York and New Jersey. 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 their risks. These relationships also lead to repeat business opportunities and opportunities to expand the scope of the value-added services we provide to existing clients.

We have a successful history of executing and integrating acquisitions

We believe one of our core competencies is successfully identifying, executing and integrating acquisition opportunities. We have consummated more than 30 mergers and acquisitions since 1998 that have enabled us to expand our end markets, service offerings and geographic reach. This acquisition activity has provided us with access to new markets at lower risk and faster speed relative to our entering the markets as a new participant. We have targeted, and we will continue to target, firms that enable us to add backlog, long term client relationships and experienced executives who can provide leadership across our company. In addition, we derive our acquisition synergies through “cross selling” the capabilities of our newly acquired companies to our existing clients and our global capabilities to the clients of our newly acquired companies.

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.

6




We benefit from our experienced management team and employees

We have a talented, dedicated and experienced work force, located across the globe, led by an experienced executive management team. Our Chief Executive Officer and the 10 most senior members of our operating units have an average of more than 20 years of experience with AECOM and more than 25 years in our industry. We also have a large, experienced and skilled workforce. This human capital is essential in winning the most attractive work 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.

Our talented workforce is essential in allowing us to obtain quality projects. In turn, our success in winning desirable and challenging projects assists us to attract and retain highly qualified people.

Our Growth Strategy

We intend to grow our business by leveraging our competitive strengths and leadership positions in our core markets while opportunistically entering new markets and geographies. Key elements of our growth strategy include:

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

We have long-standing relationships with a number of large corporations, public and private institutions and governmental agencies worldwide. We will continue to focus on client satisfaction along with opportunities to sell a greater range of services to clients and deliver full-service solutions for their needs. For example, as we have grown our environmental business, we have provided environmental services for transportation and other infrastructure projects in which such services have in the past been subcontracted to third parties.

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 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.

Capitalize on growth opportunities in our core markets

We intend to leverage our leading positions in the transportation, facilities and environmental markets to continue to grow our market share. With our track record and our global resources, we believe we are well positioned to win projects in these markets. We believe that the need for infrastructure upgrades, environmental management and increased government spending and outsourcing of support services, among other things, will result in continued growth opportunities in our core markets.

Continue to pursue our merger and acquisition strategy

We intend to continue to attract other successful companies whose growth can be enhanced by joining us. This approach has served us well as we have strengthened and diversified our leadership positions both geographically, technically and across end markets. We believe that the trend towards consolidation in our industry will continue to produce attractive candidates that align with our merger and acquisition strategy. For example, we significantly strengthened our presence in the fast-growing market in the United Arab Emirates with the addition of Cansult Limited in September 2006.

Strengthen and support human capital

Our experienced employees and management are our most valued resources. Attracting and retaining key personnel has been and will remain critical to our success. We will continue to focus on providing our

7




personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits in order to strengthen and support our human capital base. 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 December 31, 2006. In 2006, we expanded our 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 Corporate History

We were formed in 1980 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 becoming independent of Ashland Inc. in 1990, we have grown by a combination of organic growth and strategic mergers and acquisitions from approximately 3,300 employees and $363 million in revenue in fiscal 1991, the first full fiscal year of operations, to approximately 28,000 employees and $3.4 billion in revenues for the fiscal 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):

 

 

Year Ended September 30,

 

Year Ended December 31,

 

 

 

2004

 

2005

 

2006

 

2005

 

2006

 

 

 

(in thousands)

 

(in thousands)

 

Professional Technical Services (PTS)

 

$

1,777,718

 

$

2,082,618

 

$

2,772,833

 

$

612,264

 

$

753,545

 

Management Support Services (MSS)

 

232,143

 

309,053

 

647,188

 

134,479

 

184,680

 

Total

 

$

2,009,861

 

$

2,391,671

 

$

3,420,021

 

$

746,743

 

$

938,225

 


(1)          For a reconciliation to the consolidated statements of income, see note 20 to the notes to our consolidated financial statements and note 6 to our condensed 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

8




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 engineering design services for the new World Trade Center Terminal for PATH 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.

·       Marine, Ports and Harbors.   Projects include wharf facilities and container port facilities for private and public port operators. For example, we are providing marine planning and engineering services for 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 program management 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 emergency response services for the Department of Homeland Security, including the Federal Emergency Management Agency and engineering and program management services for 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,

9




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 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 (MSS)

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 and Maintenance.   Projects include Department of Defense and Department of Energy installations where we provide comprehensive services for the operation and maintenance of

10




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 and Field Services.   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.

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.

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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,

 

 

 

2004

 

%

 

2005

 

%

 

2006

 

%

 

 

 

(dollars in thousands)

 

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)

 

491,767

 

24

%

605,883

 

25

%

1,255,688

 

37

%

Total

 

$

2,011,975

 

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 fiscal 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 fiscal 2006, our 25 largest projects, as measured by gross profit, accounted for less than 15% of our consolidated gross profit.

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 fiscal 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.

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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, 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 fiscal 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.

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 December 31, 2006, our gross revenue backlog was approximately $2.9 billion, an increase of $0.4 billion, or 15.0%, from $2.5 billion at December 31, 2005. Of this $2.9 billion, we estimate that approximately $2.0 billion will be completed by December 31, 2007. Approximately $2.5 billion of our total backlog at December 31, 2006 is attributable to our PTS segment, while the remaining $0.4 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

13




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.

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. We have a risk management group that reviews and oversees the risk profile of our operations. This group also participates in evaluating risk through internal risk analyses in which our

14




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;

·       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,

 

As of December 31,

 

 

 

2004

 

2005

 

2006

 

2006

 

Professional Technical Services

 

13,000

 

16,300

 

19,000

 

 

19,400

 

 

Management Support Services

 

4,700

 

5,700

 

8,300

 

 

9,100

 

 

Total

 

17,700

 

22,000

 

27,300

 

 

28,500

 

 

 

Personnel by Geographic Region

 

 

As of September 30,

 

As of December 31,

 

 

 

2004

 

2005

 

2006

 

2006

 

Americas

 

8,500

 

10,100

 

10,400

 

 

10,500

 

 

Europe

 

1,900

 

2,700

 

3,100

 

 

3,000

 

 

Middle East

 

3,600

 

5,200

 

8,800

 

 

9,700

 

 

Asia/Pacific

 

3,700

 

4,000

 

5,000

 

 

5,300

 

 

Total

 

17,700

 

22,000

 

27,300

 

 

28,500

 

 

 

15




Personnel by Segment and Geographic Region

 

 

As of September 30, 2006

 

As of December 31,
2006

 

 

 

PTS

 

MSS

 

Total

 

  PTS  

 

  MSS  

 

Americas

 

9,600

 

800

 

10,400

 

9,700

 

 

800

 

 

Europe

 

3,100

 

 

3,100

 

3,000

 

 

 

 

Middle East

 

1,300

 

7,500

 

8,800

 

1,400

 

 

8,300

 

 

Asia/Pacific

 

5,000

 

 

5,000

 

5,300

 

 

 

 

Total

 

19,000

 

8,300

 

27,300

 

19,400

 

 

9,100

 

 

 

We have a number of personnel with “Top Secret” or “Q” security clearances. Some of our contracts with the U.S. government relate to projects that have elements that are classified for national 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 20 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 only funded on an annual basis. If appropriations for funding 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.

A substantial majority of our revenues are derived from contracts with agencies and departments of national, state and local governments. During fiscal 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, changes in administration or control of legislatures and 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.

For instance, 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.

Governmental agencies may modify, curtail or terminate our contracts at any time prior to their completion and, if we do not replace them, we may suffer a decline in revenues.

Most government contracts maybe modified, curtailed or terminated 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.

A delay in the completion of the budget process of the U.S. government could delay procurement of our services and have an adverse effect on our future revenues.

In years when the U.S. government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a “continuing resolution” that authorizes agencies of the U.S. government to continue to operate, but does not authorize new spending initiatives. When the U.S. government operates under a continuing resolution, government agencies may delay the procurement of services, which could reduce our future revenues.

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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 one of our subsidiaries is charged with wrongdoing as a result of an audit, that subsidiary, and possibly our company as a whole, could be temporarily suspended or could be prohibited from bidding on and receiving future government contracts for a period of time. Furthermore, as a 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 harm our business.

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 fiscal 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 harm our results of operations.

We conduct a portion of our operations through joint venture entities, over which we may have limited control.

Approximately 24% of our fiscal 2006 revenue was derived from 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 harm the business and operations of a joint venture and, in turn, our business and operations.

Operating through joint ventures in which we are not the primary beneficiary, results in us having limited control over many decisions made with respect to projects and internal controls relating to projects. Approximately 7% of our fiscal 2006 revenue was derived from our unconsolidated joint ventures where we do not have control of the entities. 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.

Misconduct by our employees or consultants 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 consultants 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

18




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 or consultants 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 that could grow in the future and cause us to incur additional costs.

We have defined benefit pension plans for employees in the United States, United Kingdom and Australia. At September 30, 2006, our defined benefit pension plans with benefit obligations in excess of plan assets 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. 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 or elect 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 that could harm our business and financial results.

During fiscal 2006, revenues attributable to our services provided outside of the United States were approximately 47% of our total revenue. Approximately 27% of our total fiscal 2006 revenue was contracted in non-U.S. dollar denominations. We expect the percentage of revenues attributable to our non-U.S. operations to increase further as a result of our strategic focus in areas such as Eastern Europe, China and the Middle East. There are risks inherent in doing business internationally, including:

·       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;

·       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; and

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

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

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

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Failure to successfully execute our merger and acquisition 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. We cannot assure you 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 accurately assess 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 integration challenges; 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, we cannot assure you 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. Our planned growth may place increased demands on our resources and 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.

Additionally, in the past, we have promoted our employee ownership culture as a competitive advantage in recruiting and retaining employees. Although we intend to retain the essential elements of an employee ownership culture and do not intend to change our core values and operating philosophy, if our employees or recruits perceive that becoming a publicly-traded company will negatively impact our company culture, our ability to recruit and retain employees may be adversely impacted.

Our revenues and growth prospects may be harmed if we or our employees are unable to obtain the security clearances or other qualifications we and they need to perform services for our customers.

A number of government programs require contractors to have security clearances. Depending on the level of required clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain necessary security clearances, we may not be able to win new business, and our existing customers could terminate their contracts with us or decide not to renew them.

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To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue anticipated from the contract.

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

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 December 31, 2006, our backlog of uncompleted projects under contract was approximately $2.9 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 claims submitted 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 revenues may be reduced in future periods.

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 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.

21




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.

Systems and information technology interruption could adversely impact our ability to operate.

We rely heavily on computer, information and communications technology and related systems in order to properly operate. From time to time, we experience occasional system interruptions and delays. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of and protect our systems, systems operation could be interrupted or delayed. In addition, our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures, acts of war or terrorism, computer viruses, physical or electronic security breaches and similar events or disruptions. Any of these or other events could cause system interruption, delays and loss of critical data, could delay or prevent operations, and could adversely affect our operating results.

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 has been no prior public market for our shares and an active market may not develop or be maintained, which could limit your ability to sell shares of our common stock.

There has not been a public market for our shares of common stock. Although we are applying for listing on the New York Stock Exchange, an active public market for our shares may not develop or be sustained.

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.”

22




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;

·        two-thirds stockholder vote requirement to approve specified business combinations, which include a sale of substantially all of our assets;

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

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

·        prohibitions on our stockholders from acting by written consent and limitations on calling special meetings.

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.

23




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 is included in this registration statement. We derived the consolidated statement of income data for each of the three years ended September 30, 2006, 2005 and 2004 and the consolidated balance sheet data at September 30, 2006 and 2005 from our audited consolidated financial statements, which are included elsewhere in this registration statement. The data for the three months ended December 31, 2006 and 2005 have been derived from our unaudited consolidated financial statements included elsewhere in this registration statement. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. We derived the consolidated statement of income data for each of the years ended September 30, 2003 and 2002 and the consolidated balance sheet data as of September 30, 2004, 2003 and 2002 from our audited consolidated financial statements not included in this registration statement.

 

 

Year Ended September 30,

 

Three Months
Ended December 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2005

 

2006

 

 

 

(in millions, except share and per share data)

 

Consolidated Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,747

 

$

1,915

 

$

2,012

 

$

2,395

 

$

3,421

 

$

747

 

$

939

 

Cost of revenues

 

1,269

 

1,381

 

1,443

 

1,718

 

2,515

 

547

 

691

 

Gross profit

 

478

 

534

 

569

 

677

 

906

 

200

 

248

 

Equity in earnings of joint ventures

 

1

 

2

 

3

 

2

 

7

 

2

 

1

 

General and administrative expenses

 

430

 

467

 

485

 

581

 

810

 

177

 

219

 

Income from operations

 

49

 

69

 

87

 

98

 

103

 

25

 

30

 

Minority interest share of earnings

 

3

 

3

 

3

 

8

 

14

 

2

 

1

 

Gain on the sale of equity investment

 

 

 

 

 

 

 

11

 

Interest expense—net

 

12

 

10

 

8

 

7

 

10

 

4

 

1

 

Income before income tax expense

 

34

 

56

 

76

 

83

 

79

 

19

 

39

 

Income tax expense

 

11

 

19

 

26

 

29

 

25

 

6

 

13

 

Net income

 

$

23

 

$

37

 

$

50

 

$

54

 

$

54

 

$

13

 

$

26

 

Net income allocation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

$

 

$

2

 

$

5

 

$

6

 

$

2

 

$

1

 

$

 

Net income available for common stockholders

 

23

 

35

 

45

 

48

 

52

 

12

 

26

 

Net income

 

$

23

 

$

37

 

$

50

 

$

54

 

$

54

 

$

13

 

$

26

 

Earnings per share available for common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.89

 

$

1.34

 

$

1.71

 

$

1.86

 

$

1.88

 

$

0.43

 

$

0.89

 

Diluted

 

$

0.86

 

$

1.29

 

$

1.57

 

$

1.68

 

$

1.48

 

$

0.40

 

$

0.65

 

Weighted average shares outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

25,815

 

26,429

 

26,300

 

25,940

 

27,428

 

26,644

 

28,800

 

Diluted

 

27,001

 

28,589

 

32,127

 

31,989

 

36,329

 

32,612

 

39,518

 

 

24




 

 

 

Year Ended or as of September 30,

 

Three Months
Ended or as of
December 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2005

 

2006

 

 

 

(in millions, except employee data)

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

23

 

13

 

13

 

20

 

40

 

9

 

7

 

Amortization expense of acquired intangible assets

 

 

 

 

3

 

15

 

3

 

1

 

Capital expenditures

 

20

 

14

 

19

 

31

 

32

 

7

 

10

 

Backlog

 

1,710

 

1,660

 

1,620

 

2,000

 

2,500

 

2,480

 

2,851

 

Number of full-time and part-time employees

 

15,500

 

16,800

 

17,700

 

22,000

 

27,300

 

24,200

 

28,500

 

 

 

 

Year Ended September 30,

 

Three Months
Ended December 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2005

 

2006

 

 

 

(in millions)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28

 

$

120

 

$

121

 

$

54

 

$

128

 

$

67

 

$

138

 

Working capital

 

113

 

213

 

225

 

171

 

201

 

224

 

178

 

Total assets

 

965

 

1,056

 

1,115

 

1,425

 

1,826

 

1,585

 

1,879

 

Long-term debt excluding current portion

 

171

 

122

 

105

 

216

 

123

 

313

 

104

 

Redeemable preferred and common stock and stock units, net of notes receivable (restated)

 

378

 

472

 

501

 

586

 

735

 

593

 

779

 

Stockholders’ deficit (restated)

 

(108

)

(181

)

(159

)

(240

)

(291

)

(237

)

(324

)

 

25




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.”

Overview

We are a leading global provider of professional technical and management support services for commercial and government clients around the world. We provide our services in a broad range of end markets and strategic geographic markets through a global network of operating offices and approximately 28,000 employees and staff employed in the field on a project-by-project basis.

Our business focuses primarily on providing fee-based professional technical and support services and, as such, 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 (PTS) and Management Support Services (MSS).

Our PTS segment delivers planning, consulting, architecture and engineering design, and program and construction management services to institutional, commercial and government clients worldwide in major end markets such as transportation, facilities and environmental markets. PTS revenues are primarily derived from fees from services that we provide, as opposed to pass-through fees from subcontractors and other direct costs. As a percentage of PTS revenue, our other direct costs, including subcontractor and consultant costs, typically range from 30% to 38%. Our gross margin as a percentage of PTS revenue typically ranges from 44% to 48%, depending on the nature and scope of the underlying projects.

Our MSS segment provides facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government. MSS revenues typically include a significant amount of pass-through fees from subcontractor and other direct costs. As a percentage of MSS revenue, other direct costs, including subcontractor, consultants and material costs typically range from 85% to 87%. Our gross margin as a percentage of MSS revenue typically ranges from 3% to 5%, depending on the level of other direct costs required, which can vary significantly from period to period.

In total, our revenues are dependent on 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 three financial measures that are not in accordance with generally accepted accounting principles in the United States (GAAP).

26




The following table presents, for the periods indicated, a presentation of the non-GAAP financial measures reconciled to the closest GAAP measure:

 

 

Year Ended September 30,

 

Three Months
 Ended
December 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2005

 

2006

 

 

 

(in millions)

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,747

 

$

1,915

 

$

2,012

 

$

2,395

 

$

3,421

 

$

747

 

$

939

 

Other direct costs

 

671

 

725

 

776

 

933

 

1,521

 

332

 

436

 

Net service revenues

 

1,076

 

1,190

 

1,236

 

1,462

 

1,900

 

415

 

503

 

Stock match expense—direct

 

5

 

2

 

1

 

2

 

11

 

1

 

1

 

Other cost of net service revenues

 

593

 

654

 

666

 

783

 

983

 

214

 

254

 

Cost of net service revenues

 

598

 

656

 

667

 

785

 

994

 

215

 

255

 

Gross profit

 

478

 

534

 

569

 

677

 

906

 

200

 

248

 

Equity in earnings of joint ventures

 

1

 

2

 

3

 

2

 

7

 

2

 

1

 

Amortization expense of acquired intangible assets

 

 

 

 

3

 

15

 

3

 

1

 

Stock match expense—general and administrative

 

6

 

1

 

1

 

1

 

4

 

3

 

1

 

Other general and administrative expenses

 

424

 

466

 

484

 

577

 

791

 

171

 

217

 

General and administrative expenses

 

430

 

467

 

485

 

581

 

810

 

177

 

219

 

Income from operations

 

$

49

 

$

69

 

$

87

 

$

98

 

$

103

 

$

25

 

$

30

 

 

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. Our revenues are primarily derived from fee-based professional and technical services that our employees provide to our portfolio of clients as well as from other direct costs such as subcontractor and direct material purchases. Increases in fees or billable hours of our employees tends to have a more positive impact on our profitability than do increases in other direct costs. Contracts that are more heavily weighted on other direct costs tend to have lower profit margins.

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 with the exception when incremental costs are incurred relating to the level of effort expended by us on these pass-through costs for supervision, accounting services and similar activities. In the cases where we do mark-up costs and earn profits, the amount is typically insignificant.

Net Service Revenues

In the course of providing our services, we routinely incur “other direct costs” (i.e. payments to subcontractors and other “pass-through” costs). Generally, these other direct costs are passed through to our clients and are included in our revenues when it is our responsibility to procure or manage such costs under the contract. Because other direct costs can vary significantly from project to project and period to

27




period, changes in revenue may not be indicative of our business trends. Accordingly, in addition to revenues, we report net service revenues, and our discussion and analysis of financial condition and results of operations uses net services revenues as a point of reference. 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.

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.

Stock Match Expense

Our total cost of net service revenues, as well as in our general and administrative costs, includes an expense for company-provided stock matches. Our strategy as a privately-held company has been to encourage employee ownership of company stock by providing stock matches on certain purchases of our common stock and common stock units, as well as a means to raise capital as there has not been a public market to do so. To the extent that employees purchase stock and stock units directly or by designating previously earned retirement funds, we have provided a match on a portion of the stock purchased. In addition, in mergers and acquisitions, as well as key hires, we have from time to time, provided discretionary matches beyond the typical match. The standard matching percentage for fiscal years 2004, 2005 and 2006 was primarily 18%. Compensation expense associated with these stock matches, which is included in both cost of net service revenues and general and administrative expenses under GAAP, is segregated because it is considered a function of the level of stock purchased by employees and not a cost of work performed.

Because it is difficult to predict with any precision the amount of stock purchased by employees, our stock match expense can vary significantly from period to period and tends to be a function of the level of our mergers and acquisitions activity. We anticipate once there is a public market for our stock, to reduce the overall matches to employees, including those from obtained through mergers and acquisitions. As discussed above in “Components of Income and Expense,” management believes that segregating stock matches is appropriate in analyzing results of operations. Stock matches are non-GAAP measures and segregating them from compensation expense included in cost of revenues and general and administrative expenses may not provide an accurate comparison to similarly titled captions reported by other companies.

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 in client billings for services performed by joint venture partners and earnings from investments in non-controlled and non-consolidated 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 nor do we expect to in the future, recognize any expense related to goodwill impairment. Should we determine,

28




however, that our goodwill is impaired the related expense would be a component of our general and administrative expense.

Amortization Expense of Acquired Intangible Assets

Included in our general and administrative expense is amortization expense of acquired intangible assets. 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.

It is difficult to predict with any precision the amount of expense we may record relating to acquired intangible assets. As backlog is typically the shortest lived intangible asset in our business, we would expect to see higher amortization expense in the first 12 to 18 months after a merger or acquisition has been consummated. Amortization expense of acquired intangible assets is a non-GAAP measures and segregating them from general and administrative expense may not provide an accurate comparison to similarly titled captions reported by other companies. In order to assess true operational performance, we segregate from general and administrative expense, as well as income from operations, the periodic amortization expense related to acquired intangible assets. These changes would have the effect of showing income from operations higher than it would have been under GAAP in actual dollars, as well as a percent of total revenue.

Income Tax Expense

Income tax expense varies as a function of income before income tax expense and permanent non-tax deductible expenses such as amortization expense of acquired intangible assets, certain amounts of meals and entertainment expense, valuation allowance requirements and other permanent differences. We anticipate to continue our merger and acquisition strategy and as such, we anticipate that there will be variability in our effective tax rate from quarter to quarter and year to year, especially to the extent that our permanent differences increase or decrease.

Mergers and Acquisitions

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

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

·       PADCO. In April 2004, we acquired 100% of the capital stock of Planning and Development Collaborative International, Inc., 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 In September 2004, we acquired 100% of the capital stock of UMA Group Ltd., a Vancouver, B.C.-based engineering firm. The consideration consisted of cash and exchangeable stock of a subsidiary. The exchangeable stock of the subsidiary is exchangeable, on a share for share basis, for our common stock.

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

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

29




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

·       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 consisted of cash.

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

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

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

In fiscal year 2007, we consummated five mergers and acquisitions, including:

·       HSMM. In January 2007, we acquired 100% of the capital stock of Hayes, Seay, Mattern & Mattern, Inc., a Virginia-based engineering, architectural services for buildings, infrastructure development and environmental restoration firm. The consideration consisted of cash.

·       RETEC. In January 2007, we acquired 100% of the capital stock of Retec, Inc., a U.S.-based environmental management firm. 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 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.

30




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.

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

31




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.

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.

32




Accrued Professional Liability Costs

We carry professional liability insurance policies or self-insure for our initial layer of professional liability claims under our professional liability insurance policies and for a deductible for each claim even after exceeding the self-insured retention. We accrue for our portion of the estimated ultimate liability for the estimated potential incurred losses. We establish our estimate of loss for each potential claim in consultation with legal counsel handling the specific matters and 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.

Results of Operations

Three months ended December 31, 2006 compared to the three months ended December 31, 2005

Consolidated Results

 

 

Three Months Ended

 

Change

 

 

 

December 31,
2005

 

December 31,
2006

 

 

%

 

 

 

($ in thousands)

 

Revenues

 

 

$

746,797

 

 

 

$

938,549

 

 

$

191,752

 

25.7

%

Other direct costs

 

 

331,449

 

 

 

435,417

 

 

103,968

 

31.4

 

Net service revenues

 

 

415,348

 

 

 

503,132

 

 

87,784

 

21.1

 

Cost of net service revenues

 

 

215,309

 

 

 

254,713

 

 

39,404

 

18.3

 

Gross profit

 

 

200,039

 

 

 

248,419

 

 

48,380

 

24.2

 

Equity in earnings of joint ventures

 

 

1,670

 

 

 

1,417

 

 

(253

)

(15.1

)

General and administrative expenses

 

 

176,983

 

 

 

219,828

 

 

42,845

 

24.2

 

Income from operations

 

 

24,726

 

 

 

30,008

 

 

5,282

 

21.4

 

Minority interest in share of earnings

 

 

1,951

 

 

 

1,586

 

 

(365

)

(18.7

)

Gain on sale of equity investment

 

 

 

 

 

11,286

 

 

11,286

 

 

Interest expense—net

 

 

3,723

 

 

 

1,075

 

 

(2,648

)

(71.1

)

Income before income tax expense

 

 

19,052

 

 

 

38,633

 

 

19,581

 

102.8

 

Income tax expense

 

 

6,097

 

 

 

13,113

 

 

7,016

 

115.1

 

Net income

 

 

$

12,955

 

 

 

$

25,520

 

 

$

12,565

 

97.0

%

 

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

 

 

Three Months Ended

 

 

 

December 31,
2005

 

December 31,
2006

 

Net service revenues

 

 

100.0

%

 

 

100.0

%

 

Cost of net service revenues

 

 

51.8

 

 

 

50.6

 

 

Gross profit

 

 

48.2

 

 

 

49.4

 

 

Equity in earnings of joint ventures

 

 

0.4

 

 

 

0.3

 

 

General and administrative expenses

 

 

42.6

 

 

 

43.7

 

 

Income from operations

 

 

6.0

 

 

 

6.0

 

 

Minority interest in share of earnings

 

 

0.5

 

 

 

0.3

 

 

Gain on sale of equity investment

 

 

0.0

 

 

 

2.2

 

 

Interest expense—net

 

 

0.9

 

 

 

0.2

 

 

Income before income tax expense

 

 

4.6

 

 

 

7.7

 

 

Income tax expense

 

 

1.5

 

 

 

2.6

 

 

Net income

 

 

3.1

%

 

 

5.1

%

 

 

33




Revenues

For the three months ended December 31, 2006, revenues increased $191.8 million, or 25.7%, to $938.5 million as compared to $746.8 million for the three months ended December 31, 2005. Of this increase, $50.8 million, or 26.5% was provided by companies acquired in the past twelve months. Excluding revenues provided by companies acquired in the past 12 months, revenues increased $141.0 million, or 18.9%. This increase was primarily attributable to continued economic growth in Australia and Canada including increased government and private sector spending in infrastructure development; growth in our building and transportation business in the U.K. and significant growth in our combat support and global maintenance and supply services for the Department of Defense.

Net Service Revenues

For the three months ended December 31, 2006, net service revenues increased $87.8 million, or 21.1%, to $503.1 million as compared to $415.3 million for the three months ended December 31, 2005. Of this increase, $37.5 million, or 42.7% was provided by companies acquired in the past twelve months. Excluding net service revenues provided by companies acquired in the past 12 months, net service revenues increased $50.3 million, or 12.1%. This increase was primarily attributable to continued economic growth factors noted above and increases in our self-performed work for the above mentioned combat support and global maintenance and supply services for the Department of Defense.

Cost of Net Service Revenues

For the three months ended December 31, 2006, cost of net service revenues increased $39.4 million, or 18.3%, to $254.7 million as compared to $215.3 million for the three months ended December 31, 2005. Of this increase, $18.8 million, or 47.8% was incurred by companies acquired in the past 12 months. Excluding cost of net service revenues associated with companies acquired in the past twelve months, cost of net service revenues increased $20.6 million, or 9.6%. The preponderance of our cost of net service revenues is employee and employee related costs. As we realize increases in our net service revenues, we will realize corresponding increases in our headcount and employee and employee related costs. To the extent we increase our billable hours without increasing our headcount, our margins improve. For the three months ended December 31, 2006, cost of net service revenues, as a percentage of net services revenues, were 50.6% as compared to 51.8% for the three months ended December 31, 2005.

Gross Profit

For the three months ended December 31, 2006, gross profit increased $48.4 million, or 24.2%, to $248.4 million as compared to $200.0 million for the three months ended December 31, 2005. Of this increase, gross profit provided by companies acquired in the past 12 months was $18.6 million, or 38.5%. Excluding gross profit provided by companies acquired in the past 12 months, gross profit increased $29.8 million, or 14.9%. This increase was primarily attributable to higher gross profit margins in our environmental compliance projects as well as higher margins in certain combat support and global maintenance and supply services. For the three months ended December 31, 2006, gross profit, as a percentage of net service revenues, was 49.4% as compared to 48.2% for the three months ended December 31, 2005.

Equity in Earnings of Joint Ventures

For the three months ended December 31, 2006, equity in earnings of joint ventures decreased $0.3 million, or 15.1%, to $1.4 million as compared to $1.7 million for the three months ended December 31, 2005 resulting from lower activities in non-consolidated/non-controlled joint ventures.

General and Administrative Expense

For the three months ended December 31, 2006, general and administrative expense increased $42.8 million, or 24.2%, to $219.8 million as compared to $177.0 million for the three months ended December 31, 2005. For the three months ended December 31, 2006, general and administrative expenses,

34




as a percentage of net service revenues, were 43.7% as compared to 42.6% for the three months ended December 31, 2005. The increase was primarily attributable to growth in revenues noted above, increased headcount associated with acquired companies, continued investments throughout the organization to support strategic initiatives and expenses incurred related to our becoming a public reporting company, including Sarbanes-Oxley Act of 2002 (SOX) compliance efforts partially offset by a decrease of $2.5 million in amortization expense of acquired intangible assets.

Gain on Sale of Equity Investment

In the three months ended December 31, 2006, we sold our minority interest in an equity investment in the U.K. for 7.5 million GBP, or approximately $14.7 million. Related to this sale, we recorded a gain on the sale of $11.3 million.

Interest Expense - Net

For the three months ended December 31, 2006, net interest expense decreased $2.6 million, or 71.1%, to $1.1 million as compared to $3.7 million for the three months ended December 31, 2005. This decrease was primarily attributable to lower borrowings in the three months ended December 31, 2006 as compared to the prior year. In three months ended December 31, 2005, we had higher borrowings under our senior credit facility associated with acquisitions completed in the latter part of fiscal year 2005 and the first quarter of fiscal year 2006.

Income Tax Expense

For the three months ended December 31, 2006, income tax expense increased $7.0 million, or 115.1%, to $13.1 million as compared to $6.1 million for the three months ended December 31, 2005. The effective tax rate for the three months ending December 31, 2006 was 33.9% as compared to 32.0% for the three months ended December 31, 2005.

Net Income

The factors described above resulted in net income of $25.5 million for the three months ended December 31, 2006 as compared to net income of $13.0 for the three months ended December 31, 2005.

Results of Operations by Reportable Segment:

Professional Technical Services

 

 

Three Months Ended

 

Change

 

 

 

December 31, 2005

 

December 31, 2006

 

 

%

 

 

 

($ in thousands)

 

Revenues

 

$

612,264

 

 

$

753,545

 

 

$

141,281

 

23.1

%

Net service revenues

 

$

399,599

 

 

$

482,781

 

 

$

83,182

 

20.8

%

Cost of net service revenues

 

207,468

 

 

242,745

 

 

35,277

 

17.0

%

Gross profit

 

$

192,131

 

 

$

240,036

 

 

$

47,905

 

24.9

%

 

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

 

 

Three Months Ended

 

 

 

December 31,
2005

 

December 31,
 2006

 

Net service revenues

 

 

100.0

%

 

 

100.0

%

 

Cost of net service revenues

 

 

51.9

 

 

 

50.3

 

 

Gross profit

 

 

48.1

%

 

 

49.7

%

 

 

35




Revenues

For the three months ended December 31, 2006, PTS’ revenues increased $141.3 million, or 23.1%, to $753.5 million as compared to $612.3 million for the three months ended December 31, 2005. Of this increase, $50.8 million, or 35.9% was provided by companies acquired in the past twelve months. Excluding revenues provided by companies acquired in the past 12 months, PTS’ revenues increased $90.5 million, or 14.8%. This increase was primarily attributable to continued economic growth in Australia and Canada including increased government and private sector spending in infrastructure development and growth in our building and transportation business in the U.K.

Net Service Revenues

For the three months ended December 31, 2006, PTS’ net service revenues increased $83.2 million, or 20.8%, to $482.8 million as compared to $399.6 million for the three months ended December 31, 2005. Of this increase, $37.4 million, or 45.0% was provided by companies acquired in the past twelve months. Excluding net service revenues provided by companies acquired in the past 12 months, PTS’ net service revenues increased $45.7 million, or 11.4%. This increase was primarily attributable to the factors mentioned above.

Cost of Net Service Revenues

For the three months ended December 31, 2006, PTS’ cost of net service revenues increased $35.3 million, or 17.0%, to $242.7 million as compared to $207.5 million in the three months ended December 31, 2005. Of this increase, $18.8 million, or 53.3% was incurred by companies acquired in the past twelve months. Excluding cost of net service revenues incurred by companies acquired in the past twelve months, cost of net service revenues increased by $16.5 million, or 7.9%. This lower rate of growth as compared to net service revenues was primarily attributable to higher margins of acquired companies, in particular those with an environmental management practice and margin improvement in our Canadian and U.K. operations. For the three months ended December 31, 2006, cost of net service revenues, as a percentage of net service revenues, were 50.3% as compared to 51.9% for the three months ended December 31, 2005.

Gross Profit

For the three months ended December 31, 2006, PTS’ gross profit increased $47.9 million, or 24.9%, to $240.0 million as compared to $192.1 million for the three months ended December 31, 2005. Of this increase, $18.6 million, or 38.8% was provided by companies acquired in the past 12 months. Excluding gross profit provided by companies acquired in the past 12 months, gross profit increased $29.3 million, or 15.2%. The increases were primarily attributable to success fees associated with a project in Australia, margin improvements in our Canadian and U.K. operations as well as our U.S. transportation sector. For the three months ended December 31, 2006, gross profit, as a percentage of net service revenues, was 49.7% as compared to 48.1% for the three months ended December 31, 2005.

Equity in Earnings of Joint Ventures

For the three months ended December 31, 2006, equity in earnings of joint ventures decreased $0.4 million, or 47.5%, to $0.4 million as compared to $0.8 million for the three months ended December 31, 2005.

36




Management Support Services

 

 

Three Months Ended

 

Change

 

 

 

December 31,

 

December 31,

 

 

 

 

 

 

 

2005

 

2006

 

$

 

%

 

 

 

($ in thousands)

 

Revenues

 

 

$

134,479

 

 

 

$

184,680

 

 

$

50,201

 

37.3

%

Net service revenues

 

 

$

13,574

 

 

 

$

20,086

 

 

$

6,512

 

48.0

%

Cost of net service revenues

 

 

6,954

 

 

 

11,969

 

 

5,015

 

72.1

%

Gross profit

 

 

$

6,620

 

 

 

$

8,117

 

 

$

1,497

 

22.6

%

 

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

 

 

Three Months Ended

 

 

 

December 31,
2005

 

December 31,
 2006

 

Net service revenues

 

 

100.0

%

 

 

100.0

%

 

Cost of net service revenues

 

 

51.2

 

 

 

59.6

 

 

Gross profit

 

 

48.8

%

 

 

40.4

%

 

 

Revenues

For the three months ended December 31, 2006, MSS’ revenues increased $50.2 million, or 37.3%, to $184.7 million as compared to $134.5 million for the three months ended December 31, 2005, none of which was provided by companies acquired in the past 12 months. This increase was primarily attributable to significant growth in our self-performed work for combat support and global maintenance and supply services for the Department of Defense, offset by lower levels of other direct costs.

Net Service Revenues

For the three months ended December 31, 2006, MSS’ net service revenues increased $6.5 million, or 48.0%, to $20.1 million as compared to $13.6 million for the three months ended December 31, 2005. The remaining increase was primarily attributable to growth in our self-performed work for the above mentioned combat support and global maintenance and supply services for the Department of Defense.

Cost of Net Service Revenues

For the three months ended December 31, 2006, MSS’ cost of net service revenues increased $5.0 million, or 72.1%, to $12.0 million as compared to $7.0 million for the three months ended December 31, 2005. For the three months ended December 31, 2006, cost of net service revenues, as a percentage of net service revenues, were 59.6% as compared to 51.2% for the three months ended December 31, 2005.

Gross Profit

For the three months ended December 31, 2006, MSS’ gross profit increased $1.5 million, or 22.6%, to $8.1 million as compared to $6.6 million for the three months ended December 31, 2005. For the three months ended December 31, 2006, gross profit, as a percentage of net service revenues, was 40.4% as compared to 48.8% for the three months ended December 31, 2005. However, for the three months ended December 31, 2006, gross profit, as a percentage of revenues, was 4.4% as compared to 4.9% for the three months ended December 31, 2005. This decrease was primarily attributable to the completion of a higher margin project in the 2005 time period.

37




Equity in Earnings of Joint Ventures

For the three months ended December 31, 2006, MSS’ equity in earnings of joint ventures increased $1.3 million, or 144.4%, to $2.2 million as compared to $0.9 million for the three months ended December 31, 2005 primarily due to our participation in the Nevada Test Site project. Equity in earnings of joint ventures varies from period to period based upon the services performed for non-controlled and non-consolidated joint ventures.

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

%

 

 

Revenues

For fiscal 2006, revenues were $3.4 billion, an increase of $1.0 billion, or 42.8%, over fiscal 2005. Of this increase, $414.4 million was provided by companies acquired in the past 12 months. Excluding

38




revenues provided by companies acquired in the past 12 months, revenues increased $611.8 million, or 25.5% over fiscal 2005. Revenues increased among most of our sectors and geographic markets. In particular, there was strong growth in our MSS segment due to increased revenues in several existing and new contract awards.

Net Service Revenues

For fiscal 2006, net service revenues were $1.9 billion, an increase of $437.2 million, or 29.9%, over fiscal 2005. Of this increase, $281.9 million was provided by companies acquired in the past 12 months. Excluding net service revenues provided by companies acquired in the past 12 months, net service revenues increased $155.3 million, or 10.6% over fiscal 2005. The difference between the 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. In addition, as we realize variations in our billable hours or utilization rates, net service revenues will vary.

Cost of Net Service Revenues

For fiscal 2006, cost of net service revenues was $993.9 million, an increase of $208.8 million, or 26.6%, over fiscal 2005. Of this increase, $128.2 million was incurred by companies acquired in the past 12 months. Excluding cost of net service revenues incurred by companies acquired in the past 12 months, cost of net service revenues increased $80.6 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

Gross profit was $905.8 million in fiscal 2006, an increase of $228.3 million, or 33.7% over fiscal 2005. Of this increase, $153.7 was provided by companies acquired in the past 12 months. Excluding gross profit provided by companies acquired in the past 12 months, gross profit increased $74.6 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

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 Expense

General and administrative expenses were $809.0 million in fiscal 2006, up $227.4 million, or 39.1%, over fiscal 2005. As a percentage of net service revenues, general and administrative expenses increased from 39.8% in fiscal 2005 to 42.6% in fiscal 2006.

Included in general and administrative expense is amortization expense of acquired intangible assets. This amortization expense was $14.5 million in fiscal 2006, up $11.5 million, or 383.3%, over fiscal 2005 as a result of recent mergers and acquisitions. This expense will vary as we consummate mergers and acquisitions, however, we expect the amortization expense to be higher during the first 12 to 18 months following the acquisition due to the short-term nature of acquired backlog.

39




Also included in general and administrative expense is approximately $4.0 million in expense incurred related to our becoming a public reporting company, including our SOX compliance efforts. We expect to continue to incur material levels of expense for our SOX compliance efforts through fiscal 2007.

This overall increase in our general and administrative expense was largely the result of increased personnel, including personnel associated with acquired companies, the factors described above, increased costs to support growth and compliance efforts, as well as one-time expenses related to recent mergers and acquisitions of $5.5 million.

Income From Operations

An overall increase in our business activity, 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

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 average borrowings throughout the year to fund mergers and acquisitions, partially offset by strong cash flow from operations, $128.4 million in excess proceeds from the $235.0 million 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

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.

Net Income

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.

Results of Operations by Reportable Segment

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

%

 

40




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

%

 

 

Revenues

Revenues in the PTS segment were $2.8 billion in fiscal 2006, an increase of $690.2 million, or 33.1%, over fiscal 2005. Of this increase, $414.4 million was provided by companies acquired in the past 12 months. Excluding revenues provided by companies acquired in the past 12 months, revenues increased $275.8 million, or 13.2% over fiscal 2005. PTS experienced 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

Net service revenues for PTS were $1.8 billion in fiscal 2006, an increase of $371.6 million, or 26.3%, over fiscal 2005. Of this increase, $281.9 million was provided by companies acquired in the past 12 months. Excluding net service revenues provided by companies acquired in the past 12 months, net service revenues 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 Net Service Revenues

The cost of net service revenues for PTS was $914.8 million in fiscal 2006, an increase of $161.5 million, or 21.4%, over fiscal 2005. Of this increase, $128.2 million was incurred by companies acquired in the past 12 months. Excluding cost of net service revenues incurred by companies acquired in the past 12 months, cost of net service revenues increased $33.3 million, or 4.4%.

Gross Profit

Gross profit for PTS was $872.3 million in fiscal 2006, an increase of $210.1 million, or 31.7% over fiscal 2005. Of this increase, $153.7 million was provided by companies acquired in the past 12 months. Excluding gross profit provided by companies acquired in the past 12 months, gross profit increased $56.4 million, or 8.5%. 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

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

41




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

 

178.3

%

 

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

%

 

 

Revenues

Revenues in the MSS segment were $647.2 million in fiscal 2006, an increase of $338.1 million, or 109.4%, over fiscal 2005, none of which was provided by companies acquired in the past 12 months. The increase in revenues was primarily attributable to the continuing 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. We also realized a substantial increase in the value of our indefinite delivery/indefinite quantity contracts. The nature of our work task orders focus on establishing facilities, general support and maintenance for U.S. military pre-positioned stocks, logistics, equipment and fleet management.

Net Service Revenue

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 Revenue

The 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

Gross profit for MSS was $38.9 million in fiscal 2006, an increase of $24.9 million, or 178.3% 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.

42




Equity in Earnings of Joint Ventures

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. Due to our minority interest in this joint venture, the earnings are not reflected in MSS’ revenues. The joint ventures 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 for which we serve as a key partner provided earnings contribution through contract award fee performance.

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