UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

 

OR

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                         

 


 

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 Number)

 

555 South Flower Street, Suite 3700

Los Angeles, California  90071

(Address of principal executive office and zip code)

 

(213) 593-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes o    No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o   Accelerated filer  o    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

   Yes o    No  x

As of May 4, 2007, 57,460,002 shares of the registrant’s common stock were outstanding.

 




AECOM TECHNOLOGY CORPORATION
INDEX

 

 

 

 

 

 

PART I.

 

 

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Income (unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

 

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

 

 

PART II.

 

 

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 4.

 

Submission of Matters to a vote of Security Holders

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2




PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

AECOM Technology Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share data)

 

 

September 30,
2006

 

March 31,
2007

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

118,427

 

$

84,472

 

Cash in consolidated joint ventures

 

9,393

 

31,742

 

Short-term investments

 

50

 

50

 

Total cash and cash equivalents

 

127,870

 

116,264

 

 

 

 

 

 

 

Accounts receivable—net

 

913,178

 

1,040,079

 

Prepaid expenses and other current assets

 

52,827

 

56,665

 

TOTAL CURRENT ASSETS

 

1,093,875

 

1,213,008

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Equipment, furniture and fixtures

 

85,201

 

109,214

 

Leasehold improvements

 

31,539

 

38,147

 

Total

 

116,740

 

147,361

 

Accumulated depreciation and amortization

 

(26,417

)

(38,276

)

PROPERTY AND EQUIPMENT—NET

 

90,323

 

109,085

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

98,449

 

110,178

 

DEFERRED LOAN COSTS

 

1,444

 

1,404

 

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

 

19,943

 

20,589

 

GOODWILL

 

466,508

 

534,575

 

INTANGIBLE AND OTHER ASSETS—NET

 

18,168

 

44,068

 

OTHER NON-CURRENT ASSETS

 

37,064

 

43,289

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,825,774

 

$

2,076,196

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term debt

 

$

2,716

 

$

9,725

 

Accounts payable

 

265,192

 

264,930

 

Accrued expenses and other current liabilities

 

365,548

 

413,323

 

Billings in excess of costs on uncompleted contracts

 

143,283

 

200,891

 

Income taxes payable

 

35,646

 

40,977

 

Deferred tax liability—net

 

12,824

 

11,551

 

Share purchase liability

 

55,394

 

56,634

 

Current portion of long-term obligations

 

11,949

 

23,533

 

TOTAL CURRENT LIABILITIES

 

892,552

 

1,021,564

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

112,970

 

115,160

 

LONG-TERM OBLIGATIONS

 

122,790

 

153,118

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST

 

18,701

 

16,904

 

REDEEMABLE COMMON AND PREFERRED STOCK AND STOCK UNITS

 

771,207

 

832,624

 

NOTES RECEIVABLE FROM STOCKHOLDERS

 

(36,552

)

 

REDEEMABLE PREFERRED STOCK, Class F—47,000 authorized, issued and outstanding as of September 30, 2006 and March 31, 2007, $2,500 liquidation preference value per share

 

117,500

 

117,500

 

REDEEMABLE PREFERRED STOCK, Class G—47,000 authorized, issued and outstanding as of September 30, 2006 and March 31, 2007, $2,500 liquidation preference value per share

 

117,500

 

117,500

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT:

 

 

 

 

 

Additional paid-in capital

 

(254,225

)

(289,790

)

Accumulated other comprehensive loss

 

(36,669

)

(29,495

)

Retained earnings

 

 

21,111

 

TOTAL STOCKHOLDERS’ DEFICIT

 

(290,894

)

(298,174

)

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

1,825,774

 

$

2,076,196

 

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

3




AECOM Technology Corporation
Condensed Consolidated Statements of Income
(unaudited—in thousands, except per share data)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
 2006

 

March 31,
 2007

 

March 31,
 2006

 

March 31,
 2007

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

858,930

 

$

1,083,709

 

$

1,605,727

 

$

2,022,258

 

Cost of revenue

 

629,907

 

799,838

 

1,176,665

 

1,489,968

 

Gross profit

 

229,023

 

283,871

 

429,062

 

532,290

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures

 

893

 

2,219

 

2,563

 

3,636

 

General and administrative expenses

 

204,838

 

248,146

 

381,821

 

467,974

 

Income from operations

 

25,078

 

37,944

 

49,804

 

67,952

 

 

 

 

 

 

 

 

 

 

 

Minority interest in share of earnings

 

3,530

 

3,648

 

5,481

 

5,234

 

Gain on the sale of equity investment

 

 

 

 

11,286

 

Interest expense — net

 

4,067

 

2,228

 

7,790

 

3,303

 

Income before income tax expense

 

17,481

 

32,068

 

36,533

 

70,701

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

5,594

 

10,870

 

11,691

 

23,983

 

Net income

 

$

11,887

 

$

21,198

 

$

24,842

 

$

46,718

 

 

 

 

 

 

 

 

 

 

 

Net income allocation:

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

$

663

 

$

87

 

$

2,047

 

$

116

 

Net income available for common stockholders

 

11,224

 

21,111

 

22,795

 

46,602

 

Net income

 

$

11,887

 

$

21,198

 

$

24,842

 

$

46,718

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.37

 

$

0.43

 

$

0.82

 

Diluted

 

$

0.17

 

$

0.27

 

$

0.37

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

53,676

 

56,331

 

53,482

 

56,965

 

Diluted

 

70,306

 

77,964

 

67,765

 

78,500

 

 

Condensed Consolidated Statements of Comprehensive Income
(unaudited—in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
 2006

 

March 31,
 2007

 

March 31,
 2006

 

March 31,
 2007

 

Net income

 

$

11,887

 

$

21,198

 

$

24,842

 

$

46,718

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

2,509

 

4,199

 

786

 

7,174

 

Other comprehensive income

 

2,509

 

4,199

 

786

 

7,174

 

Comprehensive income

 

$

14,396

 

$

25,397

 

$

25,628

 

$

53,892

 

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

4




AECOM Technology Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited—in thousands)

 

 

Six Months Ended
March 31,

 

 

 

2006

 

2007

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

24,842

 

$

46,718

 

Adjustments to reconcile net income to net cash (used in)/provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

17,982

 

18,972

 

Equity in earnings of unconsolidated joint ventures

 

(2,563

)

(3,636

)

Distribution of earnings from unconsolidated joint ventures

 

4,809

 

4,068

 

Stock match and other non-cash stock compensation

 

6,350

 

13,143

 

Write-off of deferred financing costs

 

2,100

 

 

Interest income on notes from stockholders

 

(1,036

)

(754

)

Foreign currency translation

 

2,360

 

1,490

 

Gain on sale of equity investment

 

 

(11,286

)

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

 

 

 

 

 

Accounts receivable

 

(101,821

)

(75,211

)

Prepaid expenses and other assets

 

2,099

 

(11,869

)

Accounts payable

 

49,103

 

(11,395

)

Accrued expenses and other current liabilities

 

(4,730

)

31,928

 

Billings in excess of costs on uncompleted contracts

 

(2,116

)

51,903

 

Income taxes payable

 

(3,291

)

(171

)

Other long-term obligations

 

4,279

 

(170

)

Net cash (used in)/provided by operating activities

 

(1,633

)

53,730

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Payments for business acquisitions, net of cash acquired

 

(34,089

)

(125,797

)

Proceeds from the sale of equity investment

 

 

14,683

 

Net investments in unconsolidated joint ventures

 

687

 

712

 

Payments for capital expenditures

 

(13,210

)

(18,642

)

Proceeds on sale of property and equipment

 

416

 

 

Net cash used in investing activities

 

(46,196

)

(129,044

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowings under credit agreements

 

142,014

 

51,858

 

Repayments of borrowings under other long-term obligations

 

(175,316

)

(8,500

)

Proceeds from issuance of common stock and preferred stock

 

31,132

 

42,157

 

Proceeds from issuance of stock upon exercise of stock options

 

4,646

 

2,933

 

Net proceeds from the issuance of Class F and Class G preferred stock

 

232,120

 

 

Repurchase of Class D preferred stock

 

(116,486

)

 

Repayment of notes receivable from stockholders

 

1,039

 

22,663

 

Payments to repurchase common stock and common stock units

 

(47,056

)

(48,455

)

Payments of dividends on convertible preferred stock

 

(1,900

)

 

Net cash provided by financing activities

 

70,193

 

62,656

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(383

)

1,052

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

21,981

 

(11,606

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

54,352

 

127,870

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

76,333

 

$

116,264

 

 

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited)

5




AECOM Technology Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.   Basis of Presentation

The accompanying condensed consolidated balance sheet as of March 31, 2007, the condensed consolidated statements of income for the three and six months ended March 31, 2006 and 2007, and the condensed consolidated statements of cash flows for the six months ended March 31, 2006 and 2007 of AECOM Technology Corporation, or the Company, are unaudited, and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Amendment No. 3 to Form S-1 as filed with the Securities and Exchange Commission on May 7, 2007 for the fiscal year ended September 30, 2006. Certain prior year amounts have been reclassified to conform to the current year presentation.

The results of operations for the three and six months ended March 31, 2007 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2007.

All share and per share amounts reflect, on a retroactive basis, the 2-for-1 stock split effected in the form of a 100% stock dividend wherein one additional share of stock was issued effective May 4, 2007 for each share outstanding as of the record date of May 4, 2007.

2.   Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents, including cash in consolidated joint ventures, totaled $127.9 million and $116.3 million as of September 30, 2006 and March 31, 2007, respectively.

3.   Accounts Receivable—Net

Net accounts receivable consisted of the following as of September 30, 2006 and March 31, 2007:

 

September 30,
2006

 

March 31,
2007

 

 

 

(in thousands)

 

Billed

 

$

543,606

 

$

600,120

 

Unbilled

 

372,034

 

439,435

 

Contract retentions

 

38,921

 

46,568

 

Total accounts receivable—gross

 

954,561

 

1,086,123

 

Allowance for doubtful accounts

 

(41,383

)

(46,044

)

Total accounts receivable—net

 

$

913,178

 

$

1,040,079

 

Billings in excess of costs on uncompleted contracts

 

$

143,283

 

$

200,891

 

 

Billed accounts receivable represent amounts billed to clients that have yet to be collected. Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the fiscal period end. Substantially all unbilled receivables as of September 30, 2006 and March 31, 2007 are expected to be billed and collected within twelve months. Contract retentions represent amounts invoiced to clients; however payments have been withheld pending the completion of certain milestones, other contractual conditions or upon the completion of the project. These retention agreements vary from project to project and could be outstanding several months or years.

Allowances for doubtful accounts have been determined through specific identification of amounts determined to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss is determined to be probable based on current and historical events and circumstances.

Other than the U.S. government, no single client accounted for more than 10% of the Company’s accounts receivable as of September 30, 2006 or March 31, 2007.

6




4.   Goodwill and Acquired Intangible Assets

The changes in the carrying value of goodwill by reporting unit for the six months ended March 31, 2007 were as follows:

 

 

September 30,
2006

 

Post-
Acquisition
Adjustments

 

Acquired

 

March 31,
2007

 

 

 

(in thousands)

 

Professional Technical Services

 

$

457,575

 

$

1,239

 

$

67,328

 

$

526,142

 

Management Support Services

 

8,933

 

(500

)

 

8,433

 

Total

 

$

466,508

 

$

739

 

$

67,328

 

$

534,575

 

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of September 30, 2006 and March 31, 2007 included in intangible and other assets—net in the accompanying condensed consolidated balance sheets, were as follows:

 

 

September 30, 2006

 

March 31, 2007

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Gross
Amount

 

Accumulated
Amortization

 

 

 

(in thousands)

 

Backlog

 

$

16,687

 

$

15,254

 

$

34,916

 

$

20,125

 

Customer Relationships

 

18,179

 

2,180

 

31,228

 

3,410

 

Trade-Names

 

899

 

163

 

1,762

 

303

 

Total

 

$

35,765

 

$

17,597

 

$

67,906

 

$

23,838

 

 

At the time of acquisition, the Company estimates the amount of the identifiable intangible assets aquired based upon historical valuations and the facts and circumstances available at the time.  The Company concludes the value of the identifiable intangible assets during the purchase allocation period, which does not extend beyond 12 months from the date of acquisition.  However, based upon the date of acquision, the purchase allocation period may cross into subsequent fiscal periods.

The following table presents estimated amortization expense for the remainder of fiscal 2007 and for the succeeding years:

 

(in thousands)

 

2007

 

$

11,068

 

2008

 

8,952

 

2009

 

3,481

 

2010

 

3,471

 

2011

 

3,328

 

Thereafter

 

13,768

 

Total

 

$

44,068

 

 

5.   Disclosures About Pension Benefit Obligations

The Company’s pension cost for the three and six months ended March 31, 2006 and 2007 includes the following components (in thousands):

U.S. Plans

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Service costs

 

$

765

 

$

651

 

$

1,530

 

$

1,302

 

Interest cost on projected benefit obligation

 

1,678

 

1,876

 

3,356

 

3,752

 

Expected return on plan assets

 

(1,621

)

(1,719

)

(3,242

)

(3,438

)

Amortization of prior service costs

 

(290

)

(289

)

(580

)

(578

)

Amortization of net loss

 

1,433

 

982

 

2,866

 

1,964

 

Net periodic benefit cost

 

$

1,965

 

$

1,501

 

$

3,930

 

$

3,002

 

 

7




 

Non-U.S. Plans

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2006

 

2007

 

2006

 

2007

 

Service costs

 

$

1,316

 

$

1,245

 

$

2,632

 

$

2,463

 

Interest cost on projected benefit obligation

 

3,812

 

4,378

 

7,624

 

8,660

 

Expected return on plan assets

 

(3,427

)

(4,047

)

(6,854

)

(8,007

)

Amortization of prior service costs

 

(220

)

(428

)

(440

)

(525

)

Amortization of net gain

 

1,459

 

970

 

2,918

 

1,919

 

Curtailment gain recognized

 

 

(2,646

)

 

(2,646

)

Net periodic benefit cost

 

$

2,940

 

$

(528

)

$

5,880

 

$

1,864

 

 

The total amounts of employer contributions paid for the three and six months ended March 31, 2007 were $0.0 and $0.1 million, respectively, for U.S. subsidiaries and $3.9 and $7.7 million, respectively for non-U.S. subsidiaries. The expected remaining scheduled annual employer contributions for fiscal year September 30, 2007 are $3.2 million for U.S. subsidiaries and $7.6 million for non-U.S. subsidiaries.

6.   Reportable Segments

The Company’s management has organized the Company’s operations into two reportable segments: Professional Technical Services and Management Support Services. This segmentation corresponds to how the Company manages its business as well as the underlying characteristics of its markets.

Management internally analyzes the results of the Company’s segments and operations using the non-GAAP measure of revenue, net of other direct costs which is a measure of work performed by the Company. All inter-company balances and transactions are eliminated in consolidation.

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

Reportable Segments:

 

Professional
Technical
Services

 

Management
Support
Services

 

Total

 

 

 

(in thousands)

 

 Three Months Ended March 31, 2006:

 

 

 

 

 

 

 

Revenue

 

$

707,357

 

$

151,168

 

$

858,525

 

Revenue, net of other direct costs

 

455,424

 

32,683

 

488,107

 

Gross profit

 

219,761

 

10,741

 

230,502

 

Gross profit as a % of revenue

 

31.1

%

7.1

%

26.8

%

Gross profit as a % of revenue, net of other direct costs

 

48.3

%

32.9

%

47.2

%

Equity in earnings of joint ventures

 

656

 

236

 

892

 

General and administrative expenses

 

191,153

 

4,196

 

195,349

 

Segment income from operations

 

29,264

 

6,781

 

36,045

 

Three Months Ended March 31, 2007:

 

 

 

 

 

 

 

Revenue

 

$

841,019

 

$

240,491

 

$

1,081,510

 

Revenue, net of other direct costs

 

558,978

 

28,624

 

587,602

 

Gross profit

 

273,193

 

12,842

 

286,035

 

Gross profit as a % of revenue

 

32.5

%

5.3

%

26.4

%

Gross profit as a % of revenue, net of other direct costs

 

48.9

%

44.9

%

48.7

%

Equity in earnings of joint ventures

 

622

 

1,538

 

2,160

 

General and administrative expenses

 

232,264

 

6,035

 

238,299

 

Segment income from operations

 

41,551

 

8,345

 

49,896

 

Segment assets

 

1,875,898

 

125,420

 

2,001,318

 

 

8




 

Reportable Segments:

 

Professional
Technical
Services

 

Management
Support
Services

 

Total

 

 

 

(in thousands)

 

Six Months Ended March 31, 2006:

 

 

 

 

 

 

 

Revenue

 

$

1,319,621

 

$

285,647

 

$

1,605,268

 

Revenue, net of other direct costs

 

855,024

 

46,257

 

901,281

 

Gross profit

 

411,892

 

17,361

 

429,253

 

Gross profit as a % of revenue

 

31.2

%

6.1

%

26.7

%

Gross profit as a % of revenue, net of other direct costs

 

48.2

%

37.5

%

47.6

%

Equity in earnings of joint ventures

 

1,405

 

1,157

 

2,562

 

General and administrative expenses

 

359,546

 

8,310

 

367,856

 

Segment income from operations

 

53,751

 

10,208

 

63,959

 

Six Months Ended March 31, 2007:

 

 

 

 

 

 

 

Revenue

 

$

1,594,564

 

$

425,171

 

$

2,019,735

 

Revenue, net of other direct costs

 

1,041,760

 

48,710

 

1,090,470

 

Gross profit

 

513,229

 

20,959

 

534,188

 

Gross profit as a % of revenue

 

32.2

%

4.9

%

26.4

%

Gross profit as a % of revenue, net of other direct costs

 

49.3

%

43.0

%

49.0

%

Equity in earnings of joint ventures

 

1,014

 

3,740

 

4,754

 

General and administrative expenses

 

435,943

 

11,806

 

447,749

 

Segment income from operations

 

78,300

 

12,893

 

91,193

 

Segment assets

 

1,875,898

 

125,420

 

2,001,318

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Reconciliations:

 

March 31,
2006

 

March 31,
2007

 

March 31,
2006

 

March 31,
2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Revenue from reportable segments

 

$

858,525

 

$

1,081,510

 

$

1,605,268

 

$

2,019,735

 

Other revenue

 

405

 

2,199

 

459

 

2,523

 

Total consolidated revenue

 

$

858,930

 

$

1,083,709

 

$

1,605,727

 

$

2,022,258

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

 

Gross profit from reportable segments

 

$

230,502

 

$

286,035

 

$

429,253

 

$

534,188

 

Other

 

(1,479

)

(2,164

)

(191

)

(1,898

)

Total consolidated gross profit

 

$

229,023

 

$

283,871

 

$

429,062

 

$

532,290

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures:

 

 

 

 

 

 

 

 

 

Equity in earnings of joint ventures from reportable Segments

 

$

892

 

$

2,160

 

$

2,562

 

$

4,754

 

Other equity in earnings of joint ventures

 

1

 

59

 

1

 

(1,118

)

Total consolidated equity in earnings of joint ventures

 

$

893

 

$

2,219

 

$

2,563

 

$

3,636

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

General and administrative expenses of reportable segments

 

$

195,349

 

$

238,299

 

$

367,856

 

$

447,749

 

Unallocated corporate general and administrative expense

 

9,489

 

9,847

 

13,965

 

20,225

 

Total consolidated general and administrative expense

 

$

204,838

 

$

248,146

 

$

381,821

 

$

467,974

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

Segment income from operations

 

$

36,045

 

$

49,896

 

$

63,959

 

$

91,193

 

Loss from operations not allocated to reportable segments

 

(10,967

)

(11,952

)

(14,156

)

(23,241

)

Total consolidated income from operations

 

$

25,078

 

$

37,944

 

$

49,804

 

$

67,952

 

 

9




 

Reconciliations (continued):

 

March 31,
2007

 

Segment assets:

 

 

 

Total assets of reportable segments

 

$

2,001,318

 

Other assets not allocated to reportable segments and eliminations

 

74,878

 

Total assets

 

$

2,076,196

 

 

7.   Recently Issued Accounting Pronouncements

In February 2007, Financial Accounting Standards Board, or FASB, issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (SFAS 159).  SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal year ending September 30, 2009.  The Company is currently evaluating the impact of the provisions of SFAS 159 on its results of operations and financial position.

In September 2006, the FASB, issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires employers to fully recognize the obligations associated with defined benefit pension plans in their financial statements. The Company will be required to recognize such obligations as of September 30, 2007.  Additionally, the Company will be required to measure such obligations as of the ned of its fiscal year, rather than up to three months earlier as had been previously permitted, effective in its fiscal year ending September 30, 2009.   The Company is currently evaluating the impact of the provisions of SFAS 158 on its results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal year ending September 30, 2009. The Company is currently evaluating the impact of the provisions of SFAS 157 on its results of operations and financial position.

In June 2006, the FASB issued FASB Interpretation FIN, No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements. FIN 48 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Additionally, FIN 48 provides guidance on recognition or de-recognition of interest and penalties, changes in judgment in interim periods, and disclosures of uncertain tax positions. FIN 48 becomes effective for the Company in fiscal year beginning October 1, 2007. The Company is in the process of determining the effect of the adoption of FIN 48 on its results of operations and financial position.

8.   Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R) that requires the Company to expense the value of employee stock options and similar awards. Under SFAS 123R, share-based payment (SBP) awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest.

SFAS 123R became effective for the Company on October 1, 2006. Upon adoption of SFAS 123R, the Company adopted the prospective transition method. Under this method, prior periods were not restated to reflect the impact of SFAS 123R. Under SFAS 123R, options and similar awards result in a cost that will be measured at fair value on the SBP awards’ grant dates, based on the estimated number of awards that are expected to vest. This statement requires that the Company recognize as compensation expense the fair value of all stock-based awards, including stock options, granted to employees and directors

10




in exchange for services over the requisite service period, which is typically the vesting period. SFAS 123R also requires that cash flows resulting from tax benefits realized from stock option exercises or stock vesting events in excess of tax benefits recognized from stock-based compensation expenses be classified as cash flows from financing activities instead of cash flows from operating activities for awards subject to SFAS 123R.

Prior to October 1, 2006, the Company accounted for employee stock-based compensation using the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under the intrinsic value method, no compensation expense was reflected in the statement of income for stock options granted to employees, as all stock options had an exercise price equal to the fair value of the underlying common stock on the date of grant.

Under the prospective transition method, the Company continues to account for options granted prior to October 1, 2006 under the provisions of APB Opinion No. 25. Since all stock options had an exercise price equal to the fair value of the underlying common stock on the date of grant, no compensation expense will be recognized for options granted prior to October 1, 2006 unless modifications are made to those options. Prior to the adoption of SFAS 123R, the fair value of stock options used to disclose pro forma net income and earnings per share disclosures was the estimated value using the minimum value method as allowed for non-public companies. The adoption of SFAS 123R did not have a cumulative effect on the Company’s results of operations, financial position, or cash flows.

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The expected term of awards granted represents the period of time the awards are expected to be outstanding. As the Company’s common stock is not publicly-traded, expected volatility is based on a historical volatility, for a period consistent with the expected option term, of publicly-traded peer companies. The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the option on the grant date. The Company uses historical data as a basis to estimate forfeitures.

The fair value of options granted during the three and six months ended March 31, 2007 was determined using the following weighted average assumptions:

 

Three
Months Ended
March 31, 2007

 

Six
Months Ended
March 31, 2007

 

Dividend yield

 

 

 

Expected volatility

 

25

%

25

%

Risk-free interest rate

 

4.60

%

4.58

%

Term (in years)

 

7

 

7

 

 

As a result of the adoption of SFAS 123R, the Company’s net income for the three and six months ended March 31, 2007 was $0.2 million and $0.3 million, respectively, lower than under the Company’s previous accounting method, as a result of recognizing as expense the fair value of stock options.

Stock option activity for the six months ended March 31, 2007 was as follows:

 

Shares of
stock under
options

 

Weighted
average
exercise price

 

Aggregate
intrinsic value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2006

 

8,928,640

 

$

8.42

 

$

75,213

 

Options granted

 

548,620

 

14.13

 

7,755

 

Options forfeited or expired

 

24,466

 

13.62

 

333

 

Options exercised

 

383,182

 

7.60

 

2,912

 

Outstanding at March 31, 2007

 

9,069,612

 

8.79

 

$

79,723

 

 

 

 

 

 

 

 

 

Vested and expected to vest in the future as of March 31, 2007

 

9,059,060

 

$

8.78

 

$

79,568

 

 

The weighted average grant-date fair value of stock options granted during the six months ended March 31, 2007 was $5.53.

11




9.   Earnings Per Share

Basic earnings per share, or EPS, excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding and dilutive potential common shares for the period. The Company includes as potential common shares the weighted average dilutive effects of outstanding stock options using the treasury stock method.

The following table sets forth the number of weighted average shares used to compute basic and diluted EPS:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2006

 

March 31,
2007

 

March 31,
2006

 

March 31,
2007

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

11,887

 

$

21,198

 

$

24,842

 

$

46,718

 

Preferred stock dividends

 

663

 

87

 

2,047

 

116

 

Net income available for common stockholders

 

$

11,224

 

$

21,111

 

$

22,795

 

$

46,602

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average shares

 

53,676

 

56,331

 

53,482

 

56,965

 

 

 

 

 

 

 

 

 

 

 

Numerator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

11,887

 

$

21,198

 

$

24,842

 

$

46,718

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

53,676

 

56,331

 

53,482

 

56,965

 

Potential common shares:

 

 

 

 

 

 

 

 

 

Preferred stock, Class D

 

3,701

 

 

6,331

 

 

Preferred stock, Class F and G

 

10,215

 

18,747

 

5,107

 

18,747

 

Stock options

 

2,150

 

2,462

 

2,176

 

2,348

 

Preferred stock, other

 

369

 

395

 

390

 

391

 

Stock matches

 

33

 

19

 

29

 

36

 

Stock units

 

16

 

10

 

14

 

13

 

Stock warrants

 

146

 

 

236

 

 

Denominator for diluted earnings per share

 

70,306

 

77,964

 

67,765

 

78,500

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

$

0.37

 

$

0.43

 

$

0.82

 

Diluted

 

$

0.17

 

$

0.27

 

$

0.37

 

$

0.60

 

 

For the three and six months ended March 31, 2006 and 2007, no options were excluded from the calculation or were considered anti-dilutive.

10.   Stock Plans

During the six months ended March 31, 2007, the Company’s Global Stock Program, or GSP, sold to the Company 1.6 million shares for $21.4 million as compared to 1.7 million for $20.0 million during the six months ended March 31, 2006. During the six months ended March 31, 2007, the Company’s Stock Purchase Plan, or SPP, sold to the Company 0.7 million shares for $10.0 million as compared to 0.6 million shares for $8.3 million during the six months ended March 31, 2006. During the six months ended March 31, 2007, direct shareholders sold to the Company 1.2 million shares for $16.1 million as compared to 1.3 million shares for $17.6 million during the six months ended March 31, 2006.

11.   Commitments and Contingencies

The Company is subject to certain claims and lawsuits typically filed against the engineering and consulting profession, alleging primarily professional errors or omissions. The Company carries professional liability insurance against such claims, subject to certain deductibles and policy limits. From time to time the Company establishes reserves for litigation that is

12




considered a probable loss.  In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the financial position of the Company.

At March 31, 2007, the Company was contingently liable in the amount of approximately $47.9 million under standby letters of credit issued primarily in connection with general and professional liability insurance programs and for payment and performance guarantees relating to domestic and overseas contracts. In addition, in some instances the Company guarantees that a project, when complete, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, the Company may either incur significant additional costs or be held responsible for the costs incurred by the client to achieve the required performance standards.

Under joint venture arrangements, if a partner is financially unable to complete its share of the contract, the other partner(s) will be required to complete those activities. The Company generally only enters into joint venture arrangements with partners who are reputable, financially sound and who carry appropriate levels of surety bonds for the project in order to adequately assure completion of their assignments. The Company is a partner in certain joint ventures where the joint venture has contracted with subconsultants for certain specialized professional services. The joint venture, or the Company to the extent that the joint venture partner(s) are unable to fulfill their responsibilities, is liable to the third-party customer for performance of the sub-consultant and would be liable to the sub-consultant if the third-party customer failed to make payments due the joint venture for sub-consultant services.

12.   Subsequent Event

The Company’s board of directors approved a two-for-one stock split, effected as a 100-percent dividend on the Company’s common stock, effective May 4, 2007. All share and per share amounts presented have been adjusted accordingly, on a retroactive basis, to reflect this stock dividend.

On May 7, 2007, the Company filed Amendment No. 3 to its registration statement on Form S-1 for the initial public offering of its common stock.  The amendment contained, among other things, financial information for the fiscal period ended March 31, 2007, information on the proposed offering, an indicative price range and the intended use of proceeds from the proposed offering, including repayment of certain existing debt obligations described in this Quarterly Report.

13




Item 2.  Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Forward-Looking Statements

This Quarterly Report contains certain forward-looking statements, including the plans and objectives of management for our business, operations and economic performance.  These forward-looking statements generally can be identified by the context of the statement or the use of forward-looking terminology, such as “believes,” “estimates,” “anticipates,” “intends,” “expects,” “plans,” “is confident that” or words of similar meaning, with reference to us or our management.  Similarly, statements that describe our future operating performance, financial results, financial position, plans, objectives, strategies or goals are forward-looking statements.  Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward-looking statements are subject to various factors, risks and uncertainties, many of which are beyond our control, including, but not limited to, our dependence on long-term government contracts, which are subject to uncertainties concerning the 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, our liquidity and capital resources and changes in regulation or legislation that could affect us.  Accordingly, actual results could differ materially from those contemplated by any forward-looking statement.  In addition to the other risks and uncertainties mentioned in connection with certain forward-looking statements throughout this Quarterly Report, attention is directed to “Part II, Item 1A — Risk Factors” in this Quarterly Report and the disclosure under the captions “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Amendment No. 3 to our previously filed Form S-1 for a discussion of the factors, risks and uncertainties that could affect our future results.

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 more than 30,000 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 revenue 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 revenue is 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 30% to 32%, 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 revenue typically includes 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 summary, our revenue is 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 and general and administrative overhead costs.

14




Components of Income and Expense

Our management analyzes the results of our operations using two financial measures that are not in accordance with generally accepted accounting principles in the United States (GAAP):  revenue, net of other direct costs and cost of revenue, net of other direct costs.

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,

 

Six Months
 Ended
March 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

2006

 

2007

 

 

 

(in millions)

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,747

 

$

1,915

 

$

2,012

 

$

2,395

 

$

3,421

 

$

1,606

 

$

2,022

 

Other direct costs

 

671

 

725

 

776

 

933

 

1,521

 

701

 

929

 

Revenue, net of other direct costs

 

1,076

 

1,190

 

1,236

 

1,462

 

1,900

 

905

 

1,093

 

Cost of revenue, net of other direct costs

 

598

 

656

 

667

 

785

 

994

 

476

 

561

 

Gross profit

 

478

 

534

 

569

 

677

 

906

 

429

 

532

 

Equity in earnings of joint ventures

 

1

 

2

 

3

 

2

 

7

 

3

 

4

 

Amortization expense of acquired intangible assets

 

 

 

 

3

 

15

 

6

 

6

 

Other general and administrative expenses

 

430

 

467

 

485

 

578

 

795

 

376

 

462

 

General and administrative expenses

 

430

 

467

 

485

 

581

 

810

 

382

 

468

 

Income from operations

 

$

49

 

$

69

 

$

87

 

$

98

 

$

103

 

$

50

 

$

68

 

Reconciliation of Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other direct costs

 

$

671

 

$

725

 

$

776

 

$

933

 

$

1,521

 

$

701

 

$

929

 

Cost of revenue, net of other direct costs

 

598

 

656

 

667

 

785

 

994

 

476

 

561

 

Cost of revenue

 

$

1,269

 

$

1,381

 

$

1,443

 

$

1,718

 

$

2,515

 

$

1,177

 

$

1,490

 

 

Results of Operations

Consolidated Results

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

Change

 

March 31,

 

March 31,

 

Change

 

 

 

2006

 

2007

 

$

 

%

 

2006

 

2007

 

$

 

%

 

 

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

858,930

 

$

1,083,709

 

$

224,779

 

26.2

%

$

1,605,727

 

$

2,022,258

 

$

416,531

 

25.9

%

Other direct costs

 

369,089

 

494,225

 

125,136

 

33.9

 

700,538

 

929,642

 

229,104

 

32.7

 

Revenue, net of other direct costs

 

489,841

 

589,484

 

99,643

 

20.3

 

905,189

 

1,092,616

 

187,427

 

20.7

 

Cost of revenue, net of other direct costs

 

260,818

 

305,613

 

44,795

 

17.2

 

476,127

 

560,326

 

84,199

 

17.7

 

Gross profit

 

229,023

 

283,871

 

54,848

 

23.9

 

429,062

 

532,290

 

103,228

 

24.1

 

Equity in earnings of joint ventures

 

893

 

2,219

 

1,326

 

148.5

 

2,563

 

3,636

 

1,073

 

41.9

 

General and administrative expense

 

204,838

 

248,146

 

43,308

 

21.1

 

381,821

 

467,974

 

86,153

 

22.6

 

Income from operations

 

25,078

 

37,944

 

12,866

 

51.3

 

49,804

 

67,952

 

18,148

 

36.4

 

Minority interest in share of earnings

 

3,530

 

3,648

 

118

 

3.3

 

5,481

 

5,234

 

(247

)

(4.5

)

Gain on sale of equity investment

 

 

 

 

 

 

11,286

 

11,286

 

 

Interest expense — net

 

4,067

 

2,228

 

(1,839

)

(45.2

)

7,790

 

3,303

 

(4,487

)

(57.6

)

Income before income tax expense

 

17,481

 

32,068

 

14,587

 

83.4

 

36,533

 

70,701

 

34,168

 

93.5

 

Income tax expense

 

5,594

 

10,870

 

5,276

 

94.3

 

11,691

 

23,983

 

12,292

 

105.1

 

Net income

 

$

11,887

 

$

21,198

 

$

9,311

 

78.3

%

$

24,842

 

$

46,718

 

$

21,876

 

88.1

%

 

15




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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2006

 

March 31,
2007

 

March 31,
2006

 

March 31,
2007

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

53.3

 

51.8

 

52.6

 

51.3

 

Gross profit

 

46.7

 

48.2

 

47.4

 

48.7

 

Equity in earnings of joint ventures

 

0.2

 

0.3

 

0.3

 

0.3

 

General and administrative expense

 

41.8

 

42.1

 

42.2

 

42.8

 

Income from operations

 

5.1

 

6.4

 

5.5

 

6.2

 

Minority interest in share of earnings

 

0.7

 

0.6

 

0.6

 

0.5

 

Gain on sale of equity investment

 

0.0

 

0.0

 

0.0

 

1.0

 

Interest expense — net

 

0.8

 

0.4

 

0.9

 

0.2

 

Income before income tax expense

 

3.6

 

5.4

 

4.0

 

6.5

 

Income tax expense

 

1.2

 

1.8

 

1.3

 

2.2

 

Net income

 

2.4

%

3.6

%

2.7

%

4.3

%

 

Revenue

For the three months ended March 31, 2007, revenue increased $224.8 million, or 26.2%, to $1.1 billion as compared to $858.9 million for the three months ended March 31, 2006. Of this increase, $59.6 million, or 26.5% was provided by companies acquired in the past twelve months. Excluding revenue provided by companies acquired in the past 12 months, revenue increased $165.2 million, or 19.2%. This increase was primarily attributable to increased government and private sector spending for infrastructure development in Australia and Canada as a result of continued economic growth in these regions; growth in our building and transportation business in the United Kingdom and significant growth in our combat support and global maintenance and supply services for the Department of Defense.

For the six months ended March 31, 2007, revenue increased $416.5 million, or 25.9%, to $2.0 billion as compared to $1.6 billion for the six months ended March 31, 2006. Of this increase, $110.4 million, or 26.5% was provided by companies acquired in the past twelve months. Excluding revenue provided by companies acquired in the past 12 months, revenue increased $306.2 million, or 19.1%. This increase was primarily attributable to the factors mentioned above.

Revenue, Net of Other Direct Costs

For the three months ended March 31, 2007, revenue, net of other direct costs increased $99.6 million, or 20.3%, to $589.5 million as compared to $489.8 million for the three months ended March 31, 2006. Of this increase, $49.5 million, or 49.6% was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by companies acquired in the past 12 months, revenue, net of other direct costs increased $50.2 million, or 10.3%. This increase was primarily attributable to continued economic growth factors noted above.

For the six months ended March 31, 2007, revenue, net of other direct costs increased $187.4 million, or 20.7%, to $1.1 billion as compared to $905.2 million for the six months ended March 31, 2006. Of this increase, $87.0 million, or 46.4% was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by companies acquired in the past 12 months, revenue, net of other direct costs increased $100.4 million, or 11.1%. This increase was primarily attributable to the factors mentioned above.

Cost of Revenue, Net of Other Direct Costs

For the three months ended March 31, 2007, cost of revenue, net of other direct costs increased $44.8 million, or 17.2%, to $305.6 million as compared to $260.8 million for the three months ended March 31, 2006. Of this increase, $22.7 million, or 50.7% was incurred by companies acquired in the past 12 months. Excluding cost of revenue, net of other direct costs associated with companies acquired in the past twelve months, cost of revenue, net of other direct costs increased $22.1 million, or 8.5%. Included in cost of revenue, net of other direct costs is stock match expense of $2.3 million and $3.7 million for the three months ended March 31, 2007 and 2006, respectively. Most of our cost of revenue, net of other direct costs is employee and employee related costs. As we realize increases in our revenue, net of other direct costs, we will realize corresponding increases in our headcount and employee and related costs. To the extent we increase our billable hours without increasing our headcount, our margins should improve. For the three months ended March 31, 2007, cost of revenue, net of other direct costs, as a percentage of revenue, net of other direct costs, was 51.8% as compared to 53.3% for the three months ended March 31, 2006.

For the six months ended March 31, 2007, cost of revenue, net of other direct costs increased $84.2 million, or 17.7%, to $560.3 million as compared to $476.1 million for the six months ended March 31, 2006. Of this increase, $41.5 million, or

16




49.3% was incurred by companies acquired in the past 12 months. Excluding cost of revenue, net of other direct costs associated with companies acquired in the past twelve months, cost of revenue, net of other direct costs increased $42.7 million, or 9.0%. Included in cost of revenue, net of other direct costs is stock match expense of $5.2 million and $4.7 million for the six months ended March 31, 2007  and March 31, 2006, respectively. For the six months ended March 31, 2007, cost of revenue, net of other direct costs, as a percentage of revenue, net of other direct costs, was 51.3% as compared to 52.6% for the six months ended March 31, 2006.

Gross Profit

For the three months ended March 31, 2007, gross profit increased $54.8 million, or 23.9%, to $283.9 million as compared to $229.0 million for the three months ended March 31, 2006. Of this increase, gross profit provided by companies acquired in the past 12 months was $26.9 million, or 48.9%. Excluding gross profit provided by companies acquired in the past 12 months, gross profit increased $28.0 million, or 12.2%. 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 March 31, 2007, gross profit, as a percentage of revenue, net of other direct costs, was 48.2% as compared to 46.7% for the three months ended March 31, 2006.

For the six months ended March 31, 2007, gross profit increased $103.2 million, or 24.1%, to $532.3 million as compared to $429.1 million for the six months ended March 31, 2006. Of this increase, gross profit provided by companies acquired in the past 12 months was $45.5 million, or 44.1%. Excluding gross profit provided by companies acquired in the past 12 months, gross profit increased $57.7 million, or 13.5%. This increase was primarily attributable to the factors mentioned above. For the six months ended March 31, 2007, gross profit, as a percentage of revenue, net of other direct costs, was 48.7% as compared to 47.4% for the six months ended March 31, 2006.

Equity in Earnings of Joint Ventures

For the three months ended March 31, 2007, equity in earnings of joint ventures increased $1.3 million, or 148.5%, to $2.2 million as compared to $0.9 million for the three months ended March 31, 2006 as a result of higher activities in non-consolidated/non-controlled joint ventures.

For the six months ended March 31, 2007, equity in earnings of joint ventures increased $1.0 million, or 41.9%, to $3.6 million as compared to $2.6 million for the six months ended March 31, 2006.

General and Administrative Expenses

For the three months ended March 31, 2007, general and administrative expenses increased $43.3 million, or 21.1%, to $248.1 million as compared to $204.8 million for the three months ended March 31, 2006. For the three months ended March 31, 2007, general and administrative expenses, as a percentage of revenue, net of other direct costs was 42.1% as compared to 41.8% for the three months ended March 31, 2006. The increase was primarily attributable to growth in revenue 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. Included in general and administrative expenses is amortization expense of acquired intangible assets of $5.6 million and $3.7 million for the three months ended March 31, 2007 and 2006, respectively. Included in general and administrative expenses is stock match expense of $0.7 million and $1.3 million for the three months ended March 31, 2007 and 2006, respectively.

For the six months ended March 31, 2007, general and administrative expenses increased $86.2 million, or 22.6%, to $468.0 million as compared to $381.8 million for the six months ended March 31, 2006. For the six months ended March 31, 2007, general and administrative expenses, as a percentage of revenue, net of other direct costs was 42.8% as compared to 42.2% for the six months ended March 31, 2006. The increase was primarily attributable to the factors mentioned above. Included in general and administrative expenses is amortization expense of acquired intangible assets of $6.3 million and $7.0 million for the six months ended March 31, 2007 and 2006, respectively.  Included in general and administrative expenses is stock match expense of $1.7 million and $1.7 million for the six months ended March 31, 2007 and 2006, respectively.

Gain on Sale of Equity Investment

In the six months ended March 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 March 31, 2007, net interest expense decreased $1.8 million, or 45.2%, to $2.2 million as compared to $4.1 million for the three months ended March 31, 2006. This decrease was primarily attributable to lower borrowings in the three months ended March 31, 2007 as compared to the prior year. In three months ended March 31, 2006, 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, offset by repayment of such debt with the net proceeds from the issuance of our Class F and Class G redeemable preferred stock.

17




 

For the six months ended March 31, 2007, net interest expense decreased $4.5 million, or 57.6%, to $3.3 million as compared to $7.8 million for the six months ended March 31, 2006. This decrease was primarily attributable to factors described above.

Income Tax Expense

For the three months ended March 31, 2007, income tax expense increased $5.3 million, or 94.3%, to $10.9 million as compared to $5.6 million for the three months ended March 31, 2006. For the six months ended March 31, 2007, income tax expense increased $12.3 million, or 105.1%, to $24.0 million as compared to $11.7 million for the six months ended March 31, 2006.  The effective tax rate for the three and six months ending March 31, 2007 was 33.9% as compared to 32.0% for the three and six months ended March 31, 2006.

Net Income

The factors described above resulted in net income of $21.2 million for the three months ended March 31, 2007 as compared to net income of $11.9 for the three months ended March 31, 2006 and $46.7 million for the six months ended March 31, 2007 as compared to net income of $24.8 million for the six months ended March 31, 2006.

Results of Operations by Reportable Segment:

Professional Technical Services

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

Change

 

March 31,

 

March 31,

 

Change

 

 

 

2006

 

2007

 

$

 

%

 

2006

 

2007

 

$

 

%

 

 

 

($ in thousands)

 

Revenue

 

$

707,357

 

$

841,019

 

$

133,662

 

 

18.9

%

 

$

1,319,621

 

$

1,594,564

 

$

274,943

 

 

20.8

%

 

Other direct costs

 

251,933

 

282,041

 

30,108

 

 

12.0

 

 

464,597

 

552,804

 

88,207

 

 

19.0

 

 

Revenue, net of other direct costs

 

455,424

 

558,978

 

103,554

 

 

22.7

 

 

855,024

 

1,041,760

 

186,736

 

 

21.8

 

 

Cost of revenue, net of other direct costs

 

235,663

 

285,785

 

50,122

 

 

21.3

 

 

443,132

 

528,531

 

85,399

 

 

19.3

 

 

Gross profit

 

$

219,761

 

$

273,193

 

$

53,432

 

 

24.3

%

 

$

411,892

 

$

513,229

 

$

101,337

 

 

24.6

%

 

 

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

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,
2006

 

March 31,
2007

 

March 31,
2006

 

March 31,
2007

 

Revenue, net of other direct costs

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenue, net of other direct costs

 

51.7

 

51.1

 

51.8

 

50.7

 

Gross profit

 

48.3

%

48.9

%

48.2

%

49.3

%

 

Revenue

For the three months ended March 31, 2007, PTS’ revenue increased $133.7 million, or 18.9%, to $841.1 million as compared to $707.4 million for the three months ended March 31, 2006. Of this increase, $59.6 million, or 44.6% was provided by companies acquired in the past twelve months. Excluding revenue provided by companies acquired in the past 12 months, PTS’ revenue increased $74.0 million, or 10.5%. This increase was primarily attributable to increased government and private sector spending for infrastructure development in Australia and Canada as a result of continued economic growth and growth in our building and transportation business in the U.K.

For the six months ended March 31, 2007, PTS’ revenue increased $274.9 million, or 20.8%, to $1.6 billion as compared to $1.3 billion for the six months ended March 31, 2006. Of this increase, $110.4 million, or 40.1% was provided by companies acquired in the past twelve months. Excluding revenue provided by companies acquired in the past 12 months, PTS’ revenue increased $164.6 million, or 12.5%. This increase was primarily attributable to the factors mentioned above.

18




 

Revenue, Net of Other Direct Costs

For the three months ended March 31, 2007, PTS’ revenue, net of other direct costs increased $103.6 million, or 22.7%, to $559.0 million as compared to $455.4 million for the three months ended March 31, 2006. Of this increase, $49.5 million, or 47.7% was provided by companies acquired in the past twelve months. Excluding revenue, net of other direct costs provided by companies acquired in the past 12 months, PTS’ revenue, net of other direct increased $54.1 million, or 11.9%. This increase was primarily attributable to the factors mentioned above.

For the six months ended March 31, 2007, PTS’ revenue, net of other direct costs increased $186.7 million, or 21.8%, to $1.0 billion as compa