AECOM (ACM) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 AECOM earnings conference call.

My name is Janada, and I will be your operator for today.

(Operator Instructions.)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Paul Cyril, Senior Vice President, Investor Relations.

Please proceed.

Thank you, Janada.

And welcome, everyone, to AECOM's third quarter 2010 earnings conference call.

Please go to slide two.

As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we see it today, and, as such, does include risks and uncertainties.

As you know, our actual results might differ materially from those projected in these forward-looking statements.

Please refer to our press release or slide two of the earnings presentation and our reports filed on the Securities and Exchange Commission for more information about the risk factors that could cause actual results to differ materially.

As we begin our call, let me remind you of some of the important information about our earnings that are posted on the investor website, investors.aecom.com.

First, we posted our earnings release and updated financial statements on the site for anyone who still needs access.

Third, a replay of today's call will be posted there at around noon time Eastern, and will remain there for approximately two weeks.

Please go to slide three.

And lastly, since we are using some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted on our website, as well.

Presenting today will be John M.

Dionisio, President and Chief Executive Officer; and Michael S.

Burke, Executive Vice President and Chief Financial Officer.

John will begin on slide five.

John, please go ahead.

Thank you, Paul.

Good morning, everyone, and thanks for joining us today.

As you know, we have announced three acquisitions since our last earnings call.

We would like to discuss each of these in some detail today.

Therefore, our presentation will be slightly longer than previous calls.

I'm going to begin with an update of our overall business strategy, our recent acquisitions, and our markets, and some highlights.

Then Mike Burke will take us through the third quarter financial results and our outlook for the remainder of our fiscal year 2010.

AECOM has been working hard throughout the recession to leverage our diversified business model and global platform to advance our market position.

These efforts have enabled AECOM to win new work and deliver above average revenue and backlog growth over the past 18 months.

Overall, we feel our team has done a good job of growing our business and profitably, while continuing to navigate through the down-cycle.

The performance of our key markets, however, have been and remain a bit uneven.

But as we are seeing several positive growth indicators, in the third quarter we saw an upturn in organic growth and a 4% increase in backlog.

What we believe is important and reflective of our future growth opportunities is that we are not waiting for market conditions to improve.

Rather, we are aggressively looking to identify changing market conditions, demands in customer requirements that will drive spending, and new opportunities.

Over the past 18 months, we have aligned our global resources accordingly, in order to capitalize on our best and most promising opportunities.

Our recent acquisitions, which I'll talk about in detail in a few moments, demonstrates this well.

We believe this is an opportune time to make investments in markets whose near and long-term prospects remain robust.

Now, let's turn to the specifics of what we are doing.

Please turn to slide six.

AECOM remains committed to our strategy of diversification and balanced growth.

This strategy has served AECOM well for many years, and especially during this recession.

We are capitalizing on today's attractive M&A target markets to acquire strong, strategic, well-run companies that advance our growth and diversification.

For example, our recently announced acquisition of Tishman Construction and agreement to acquire Davis Langdon will expand our construction services offering.

This will provide AECOM the capability to meet a growing customer demand for turnkey, integrated solutions.

Our pending acquisition of McNeil Technologies, which is expected to close this quarter, will expand AECOM's capabilities in the high-growth U.S.

intelligence market.

McNeil is a key addition in bolstering and expanding our government services market and expertise.

All three acquisitions advance our strategy of moving towards higher margins services, geographic growth, and construction services.

Please turn to slide seven.

I'd like to spend a minute on each acquisition, to discuss the short- and long-term opportunities they provide to AECOM.

We announced this morning that we have entered into a definitive agreement to acquire Davis Langdon for $324 million.

Davis Langdon, headquartered in the U.K., is a global leader in cost and project management, with 50% of its revenue generated outside of the United States and the U.K., with operations in Continental Europe, Middle East, Australia, and South Africa.

Davis Langdon provides services to the commercial and government sectors.

Its services are aimed at driving efficiency into the construction process, and it has a recognized brand around the world.

Davis Langdon has 2,800 employees and has revenues of $430 million in 2009.

This transaction is expected to close in October 2010.

The acquisition of Davis Langdon accomplishes three strategic initiatives.

It adds to our growing portfolio of higher margin project management/construction management services and cost management services.

It enhances AECOM's ability to meet growing customer demand with turnkey integrated services, and it bolsters AECOM's geographic presence in growth markets in Africa, Australia, Europe, and the Middle East.

The next slide shows a few of Davis Langdon's key projects.

Now let's go to slide nine.

In mid-July, AECOM acquired Tishman Construction for $245 million.

Tishman is a premier construction management services firm, with operations in the United States and the UAE.

With a 112-year history, Tishman has a well-established reputation and brand resulting from work on many iconic projects, including the World -- the original World Trade Center buildings in New York, and now the new towers being planned and built for Ground Zero.

They were the construction managers on the FDA headquarters, and were recently awarded a construction management contract for the Vietnam War Museum to be built next to the Vietnam Memorial on the Mall in Washington, D.C.

AECOM and Tishman have a long history of collaboration, and we are currently joint venture partners on the Department of Homeland Security's new $10 billion headquarters in Washington, D.C.

AECOM and Tishman also share clients in Abu Dhabi.

And we will leverage our combined capabilities on projects we are delivering in Libya, the Middle East, China, and the U.K.

Tishman Construction has 900 employees, and had revenues of $1 billion in 2009.

Our acquisition of Tishman accomplished three key items.

It strengthens AECOM's capabilities in construction management services.

It satisfies our customers' demand for integrated service offerings.

And it increases our higher margin services business.

We are also pleased to welcome Dan Tishman as Vice Chairman of AECOM and as a member of our Board of Directors.

Dan will lead our worldwide construction services offerings of the combined entities.

The next slide shows a few Tishman key projects.

Please turn to slide 11.

McNeil.

We announced last night that AECOM has entered into a definitive agreement to acquire McNeil Technologies for $355 million.

Headquartered in Springfield, Virginia, McNeil provides mission-critical services to the U.S.

Department of Defense, the Department of Homeland Security, the intelligence community, and other federal agencies.

McNeil has 1,500 employees, of which 1,100 have U.S.

Government security clearances.

It had revenues of $245 million in 2009.

We expect the transaction to close this quarter.

This acquisition advances our strategy of positioning AECOM to participate in high-growth, high-margin, U.S.

Government markets focused on intelligence, cyber security, and IT.

The next slide shows a few of McNeil's key projects.

Please turn to slide 13.

Taken together, these three most recent acquisitions and the addition of INOCSA in May are expected to add approximately $1.7 billion of revenue and 5800 employees to the AECOM family.

Strategically, they further diversify our business and position us in new, high-growth markets and services.

They also advance our capital structure closer to our long-term targets, which Mike will cover later in the presentation.

Looking ahead, we will continue to target acquisitions which will further diversify our business and position AECOM for continued growth.

Please turn to the next slide.

I would like to spend a few minutes talking about our markets.

I will begin with Asia, which accounted for 8% of our net service revenue in the third quarter.

Asia, which includes China, Hong Kong, India, and Southeast Asia, has grown over 20% this year, and we expect strong organic growth in this market through 2011.

Infrastructure spending in Asia is strong, driven by strong GDP growth and long-term urbanization trends.

In Hong Kong, we are seeing some good opportunities in both transportation and water.

And in Southeast Asia, we are seeing opportunities in mining and transportation.

India will continue to be an area of opportunity for AECOM.

Growth in this market will be fueled by critically needed transportation infrastructure and housing to accommodate populations migrating to urban areas.

Along the 2700 km Delhi to Mumbai industrial corridor, India plans to build 24 satellite industrial cities, each of which will house 5 million people.

AECOM was recently awarded a contract to do the master plan for two of the six awarded cities to-date.

M&A is also an important part of our growth strategy in India.

Next, Australia.

Australia is having another solid year of growth in 2010.

The strength of the Asia economy and demand for natural resources has increased activity in the oil and gas, mining, ports, and transportation market sectors.

We expect this activity to continue through 2011.

Strategically, we're looking at Europe in three sub-markets.

First is the U.K.

Conditions have not changed much since our last call, and we expect the cuts in public spending to limit near-term growth opportunities in the public sector.

In the private sector, however, we expect to see more opportunities as market conditions begin to improve.

Our Western European strategy leverages our recent acquisition of INOCSA, which helps position AECOM across several end markets beyond Spain.

We also will leverage their high-speed rail capabilities globally.

Our Eastern Europe market has grown 20% year-over-year.

Key countries in this market include Russia and the other countries in the Commonwealth of Independent States, where strong GDP and significant natural resource investments are driving the market.

The Middle East markets are mixed, but continue to be a key growth market for AECOM.

Excluding Dubai, our PTS business in the Middle East grew 10% year-over-year organically.

We are positioned in several markets, including Qatar, Saudi Arabia, and Abu Dhabi.

Through the first three quarters of the year, our Abu Dhabi business has grown over 25%.

We have a number of strong, ongoing projects in the region.

And the combined offering with Davis Langdon and Tishman will help accelerate growth of the business.

Looking ahead, our pipeline of new projects is strong.

The top 20 Middle East prospective projects include work in a variety of end markets ranging from transportation to sports facilities, and total nearly $0.5 billion in potential fees.

Canada, which represents 12% of our net service revenue, remains strong, driven by strong infrastructure spending.

CapEx and building permits are on the rise, and the outlook calls for a strong increase in construction spending.

We expect the infrastructure segment in Canada to continue to perform well, supported by an active PPP market, the mining market, and other large projects with long-term funding sources.

I think it's fair to say that the United States, which represents 49% of our net service revenue in the quarter, looks much like a microcosm of the global markets.

Year-over-year, our net revenue has grown 1% organically; however, there is a lot of variation within that.

There are some markets that are performing well, like transportation and the U.S.

government, and others that remain more challenged.

Conversion of wins to backlog has improved, but has not returned to pre-recession levels.

Our MSS business in the United States remains strong.

We have a significant year-over-year growth in our activities within the U.S.

Air Force, and we are well-positioned in the growing cyber intelligence market with the addition of McNeil.

Our PTS business in the United States is divided into three principal end markets, environment, facilities, and transportation.

I will discuss the funding backdrop of each, which is the most informative way to understand the growth drivers.

The environmental end market breaks down into two parts, the water market and the environmental management market.

Both have been significantly impacted by the economic conditions and, overall, have declined year-over-year.

Our environmental management business is approximately 60% privately funded and 40% federally funded.

Federal activity remains strong, but the private market has been impacted by lower CapEx by major multinational companies.

On our last call, we said we thought the environmental market would be one of the first to show signs of recovery; and that appears to be the case.

The book-to-burn in our U.S.

environmental business has been greater than one for the last two quarters, and our pipeline of projects is more robust than it was at the beginning of the year.

Turning to the water market.

The principal reason for decline in the water market is the limited ways projects are funded.

Water programs are typically funded by state and local user fees, which have been under pressure due to the recession and the slowdown in residential construction.

As a result, we have shifted our focus to large urban areas where programs' funding continues in order to meet conditions under federal consent decrees.

The facilities end market is approximately 40% private and 60% public.

Private markets, over the past two years, have been challenged.

However, we are seeing funding coming into the markets, and new opportunities are increasing as the market outlook brightens.

On the public sector side, the majority of the work is for federal government, which has remained robust over the past 24 months.

PPP and alternative delivery are a growing source of funds across our end markets.

PPP are efficient means of getting infrastructure projects completed in the current economic environment.

AECOM was recently selected to provide design services for the new courthouse in Long Beach, California, which will be financed through public-private partnerships.

This development is in -- has been the result of recently passed legislation in California that enables us to use PPP monies across the entire state.

Due to the complex nature of PPP projects, competition is usually limited to those very large companies.

Our U.S.

transportation business, which includes highways and bridges, transit and rail, aviation, and ports and harbors, grew year-over-year.

Transportation projects are funded by a wide range of sources, including stimulus funds, the federal transportation bill, bond issues, tax measures, as well as PPP.

Over the past 24 months, the funding mix for transportation has shifted from state and local governments to alternative sources, as municipalities have found new ways to finance infrastructure projects.

Build America Bonds, for one, have become a more important source of transportation project funding.

As we have said previously, the U.S.

stimulus funds have been slow to make their way to projects.

We estimate that only 40% of the stimulus funds have been outlaid to states up to this date.

And while we have won approximately $1 billion of stimulus-related projects, most of these funds have gone to existing projects, backfilling the shortfall in state and local funding.

We continue to expect, however, to benefit from U.S.

stimulus spending, since many of the projects fall directly in our key end markets.

Please turn to slide 15.

As we have said many times before, diversification is the foundation of AECOM's business model; diversification in terms of geographies, end markets, services, clients, and funding sources.

As you can see here, at the end of the third quarter, our business is highly diversified, by any measure.

Looking ahead, we leverage our diversified platform to focus on our best near-term growth opportunities, as we continue to navigate through challenging economic times and uneven market conditions.

At this time, I would like to turn the call over to Mike, who will review our third quarter results and our 2010 outlook.

Mike, please go ahead.

Thank you, John.

Please turn to slide 16.

Our third quarter gross revenue increased 6% over last year's third quarter to $1.6 billion.

Our net service revenue was up 9% to $1.1 billion.

Our third quarter's growth was driven by strength in our Asia, Australia, Canadian, and U.S.

transportation markets, and contributions from our recent acquisitions.

That growth was partially offset by continued slower performance in the U.K.

and parts of our private sector business.

Organic net service revenue growth at constant currency was 2% year-over-year.

This is a 5 percentage point improvement over the second quarter.

The improvement was driven by higher growth in both the PTS and MSS segments.

Net income was $65 million, up 30% year-over-year.

Diluted earnings per share were $0.56, up 24% year-over-year.

Please turn to slide 17.

Our PTS segment accounted for 82% of our third quarter gross revenue.

Net service revenue in our PTS segment increased 8% from last year, to $965 million.

Organic growth at constant currency grew 1% over last year.

This was a 4 percentage point improvement over last quarter, driven by growth in Asia-Pacific, which again grew double digits.

Operating income in the PTS segment increased 34% over last year to $108 million, driven by strong operating margin improvement of 222 basis points over last year.

The performance of our Management Support Services segment, which accounted for 18% of our revenue in the third quarter, continued to be strong.

Revenue for the quarter was $297 million, up 4% over last year.

This growth reflects higher levels of activity in the Middle East including Afghanistan.

Operating income of $13 million decreased slightly over last year, due to a $0.5 million reserve that we booked in Q3, awaiting resolution of an award fee on a U.S.

government contract.

Please note that we typically are conservative in such matters, and our past track record is good at ultimately reaching a favorable resolution.

Please turn to the next slide.

In the third quarter, our EBITDA margin increased 13 basis points over last year, and we are up 33 basis points on a year-to-date basis.

Please note that the year-to-date improvement includes employee severance charges that we incurred in the first quarter.

One of the contributors to our long-term margin improvement has been consolidation of our global portfolio of leased office space.

In fiscal year 2010, we have consolidated over 100 sites, taking advantage of the softness in a number of real estate markets and positioning us for lower real estate costs for an extended period of time.

Looking ahead, we believe that we will continue to capture benefits from our scale, cost containment, and contribution from our higher margin businesses like the program management and construction management businesses.

Please turn to the next slide.

At the end of the third quarter, our balance sheet remained strong, with $294 million in cash and cash equivalents, and $189 million of debt.

At the end of the quarter, we had $439 million in unused capacity under our $600 million credit facility.

Cash flow for the quarter was $130 million.

As we have said for some time, we typically have stronger cash flow in the second half of the year.

And this year is no different.

As we noted last quarter, we reached an agreement to issue $250 million of debt in the third quarter, and we drew down those funds in July for the Tishman acquisition, which was acquired for $215 million in cash and $30 million in stock.

The McNeil acquisition will be funded all in cash, while the Davis Langdon acquisition will be funded with approximately 80% cash and 20% stock.

We expect the financing for the cash portion of the two additional acquisitions will be comprised of a combination of bank term loans and revolver debt.

Our cost of borrowing for all three acquisitions is expected to be in the low 4% range.

On a pro forma basis, we expect our net debt to EBITDA ratio to be approximately 1.4, after funding these three transactions.

Please turn to slide 20.

New business wins in the third quarter totaled $1.3 billion.

Wins in our PTS segment rebounded nicely from the second quarter, up $250 million.

Awards in the MSS segment were lower than last quarter, down $400 million.

But our pipeline of opportunities remains very strong, with nearly $7 billion of proposals in evaluation in the MSS segment alone.

We closed the quarter with backlog of $9.7 billion, a 4% increase over last year and down 2% from last quarter.

The sequential decline was principally driven by our MSS segment, which, as you know, tends to have uneven awards.

Overall, this is not a concern, because our backlog tends to be uneven quarter-to-quarter due to seasonality and timing of awards, but the trajectory of organic growth and our overall performance is positive and provides a strong base going forward.

While we are not seeing a strong recovery in our private sector market, we are seeing many positive signs in increased activity, signaling that the bottom is behind us.

Note that our current backlog does not reflect potential awards from various large IDIQ contracting vehicles.

As we have noted previously, we are expecting decisions on some programs soon, which should add significantly to our wins and backlog for the year.

Please turn to the next slide.

Now I'd like to update you on our outlook for fiscal 2010.

Based on our strong Q3 results, we are reaffirming our guidance range for earnings per share of $1.97 to $2.05 for fiscal 2010.

The midpoint of this guidance implies an 18% year-over-year growth in earnings per share.

This guidance assumes $21.3 million in amortization expense related to acquired intangible assets, $11 million of interest expense, a diluted share count of 115.4 million shares, and a tax rate of 27%.

Our outlook for FY '10 includes the recently announced acquisitions, and we expect these acquisitions to be neutral to EPS in FY '11.

With that, let's go ahead and open the call for your questions.

Thank you very much.

(Operator Instructions.)

And your first question comes from the line of Vance Edelson with Morgan Stanley.

Please proceed.

Hi.

Thanks a lot for taking the questions.

Good job in the quarter.

Thanks, Vance.

Yes.

You mentioned that the U.K.

remains weak, partially due to cuts in public sector funding.

Any structural differences that you can point to that would explain why the U.S.

remains considerably stronger?

Is it just a better economy here, or do we make better use of bond issuance and other forms of alternative funding?

Anything you can point to along those lines?

Well, in the U.K., the new administration, new Prime Minister, has come out with a program of deferring public infrastructure spending.

And that's the key driver.

Where here in the United States, it's -- I guess, the philosophy here is all about jobs, and the way to increase jobs is through public spending of infrastructure projects.

So clearly, it's a difference, I think, philosophical difference between the U.K.

and the United States on how to handle the recovery from the recession.

Okay.

Got it.

And then sticking with the geographic type questions, could you provide an update on expanding the Latin America presence?

Where are we in the process?

How will things look different a year or so down the road?

Okay.

Right now, I think we have about 300 people in Brazil.

All together, in Latin America, we may have about 500 people.

We're in discussions and looking at potential M&A opportunities.

And I would say, a year from now, I would hope to be able to report that we were able to acquire one or two firms there, to give us a better foothold in Latin America.

Okay.

Thanks for that, John.

And Mike, I may have missed it.

But looking forward towards additional M&As, the bias to use cash on hand or stock or raising more debt, how do you think about that?

Yes.

Given the price of our stock, I'd much rather be using debt than stock right now.

We -- depending on the nature of the transaction, oftentimes we'd like to get the sellers to take a small portion of stock, just to bind them into our organization a little more tightly.

But right now, the -- if you look at our balance sheet, we disclosed in the presentation the pro forma adjustments, which would imply that we are still going to go to the market to raise a little more debt.

As you know, we raised $250 million of private placement debt last month.

We will be going back to the market, to the syndicated bank term loan market, for approximately $400 million to fund the closure of the deals we announced last night and this morning.

And the rest of that will come off our revolver.

And all of that together puts us at a net debt to EBITDA ratio well south of 1.5 times.

Got it.

All right.

Thanks, guys.

Sure.

Thank you.

Thank you, Vance.

Your next question comes from the line of Steven Fisher with UBS.

Please proceed.

Good morning.

Steve.

You have a number of these good size acquisitions coming into the fold concurrently.

How challenging do you think it's going to be to integrate these all at once?

And what are you doing to ensure the smooth integration?

We an -- as we were preparing for this call, we anticipated that question.

Glad I didn't disappoint.

No, you didn't.

No.

I thought it was like a softball.

That was great.

Thank you.

Over the past five years, we've -- Steve, we've brought on about 30 firms, so we have a good track record in understanding what are the key success factors in terms of integration.

And one of them that has always been our philosophy is let's drive for top line growth, and not go into a company and try to cut out all of the overhead costs on day one.

And over a period of time, it'll all come together.

So that's been our philosophy.

I mean, the last big firm that we've integrated with was Earth Tech.

Earth Tech, which was in similar geographies and similar clients and they had over -- considerable overlap, we were able to integrate them.

And now I could say, like 24 months later, they're totally integrated and it's been very successful.

As we look at the four firms that we just integrate -- we just purchased, INOCSA, Tishman, Davis Langdon, and McNeil, they are a little bit different.

One, if you look at Davis Langdon, that's in -- primarily in the global space, U.K., Australia, the Middle East, and a new location for us, which is South Africa.

They are very complementary in each of the spaces.

We hadn't done the type of work that they were do -- that they do, scheduling, cost estimating, what they used to call quantity surveying.

So our people have worked together.

And over the past six to seven months, since we were seriously negotiating, we were working out ways of how we could work together.

So we see that as a win-win for us.

It's probably going to add a lot of good leadership into our organization.

If you look at Tishman, we've worked with Tishman for the last 15 years.

I know Dan very well.

And there is -- what we have -- they bring to the table this construction management that -- from the contractors' side, so it gets us very close to the construction side, without doing -- self-performing construction.

We are going to reverse-merge our construction services capabilities to form this construction services group.

Right now, it's relatively seamless.

So that should work well.

And then what we'll do is take this construction services group and expand it globally, outside of the United States.

And as we -- as I mentioned in my talk, Davis Langdon, Tishman, and AECOM are working together in Abu Dhabi.

And we can see leveraging that capability in South Africa, in Libya, India, and Asia.

I look at INOCSA.

INOCSA is headquartered in Spain.

They gave us a presence in Western Europe.

They're a transportation company.

Their primary expertise is -- the reason we bought them was high-speed rail.

So we're going to -- there is no one in their space, so it's going to be relatively easy to integrate them with our European business, to expand outside of Spain.

And they're in locations outside of Spain.

And we've already begun working with them here in the United States.

So that integration will go as we feel -- it's going well.

I mean, they're with us only two months.

And the last is McNeil, which will be dovetailed from day one into our construction -- excuse me -- our government services group, which are -- which is -- as you know, is our MSS group, Management Support Services.

About a year ago, we bought SSI, that was very strong in the intelligence community.

McNeil is a very strong player in the intelligence community, working for all the major agencies in the federal government.

And that is going to be a very -- a very smooth transition.

As a matter of fact, the -- Al Konvicka, who runs our construction services piece, AGS as we call it, he has worked with the people from McNeil in a previous life in another company.

So there is a good working relationship that already exists.

So overall, when you look at it from each of the pieces and how they fit in, I think the integration is going to go very, very well.

Okay.

Well, then maybe I'll try a little harder one now.

Okay.

I think you've kept --

I'll throw that to Mike then.

I think you've kept a pretty tight discipline on the multiples you've paid for acquisitions here, not really straying beyond, say, seven times EBIDTA.

And it would seem like, in order to come into that level with McNeil, the margins would have to be north of 20%.

So is that what the margins are in that business, or have you had to push the multiples up a bit to get some better growth?

Yes, Steve.

That's a good question.

As we've stated all along, our M&A transactions typically fall in a fairly tight range of five to seven times EBITDA, depending on historical growth, the projected growth.

And this deal was no different.

McNeil has enjoyed a 17% compound growth rate in revenue over the past six years, and an even greater growth in their EBITDA over that same period of time.

Additionally, their margins are much greater than our typical MSS margins, and more in line -- in fact, above our normal PTS margins.

But more importantly, when we look forward, they are focused on the intel and cyber warfare markets, which are expected to grow at a north of 8% rate going forward.

So when we look at historical growth, we look at profitability growth, we look at margins, and we look at the expected growth of the markets in which they play, all of these attributes cause that deal to be priced at the high end of our typical range, but not outside that range that we talked about.

Okay.

And then just a quick housekeeping.

I think you mentioned, Mike, some of the organic growth.

But could you just give us what the PTS and MSS organic growth on NSR FX was in the quarter?

So let me take that a couple ways.

PTS organic NSR growth of 4%.

That's gross.

PTS revenue net -- organic revenue net of currency is a little over 1%.

No.

I'm sorry.

Almost -- about 1%.

1%.

Okay.

And what was that for MSS?

MSS organic growth was 13.2% on NSR.

Okay.

And there's no FX there.

Good.

That's right.

That's all U.S.

dollars.

Yes.

Okay.

Thank you.

Sure.

Thank you.

And both of those numbers, Steve, as I mentioned earlier, are an improvement over what we saw last quarter.

So the trend line is moving in the right direction on that.

Your next question comes from the line of Andrew Kaplowitz with Barclays Capital.

Please proceed.

Good morning, guys.

Good morning.

How are you?

Good.

So John or Mike, like you answered Steve with McNeil, I guess what I'm curious about is what you're thinking in terms of growth rates for Davis Langdon and Tishman over the next couple years.

Obviously, some of their markets have been down.

When do we expect those markets to inflect, and what are you looking for over the next couple of years?

Well, we don't -- I don't want to start giving guidance for next year, but I'll give you a general feeling.

We believe that we have seen the bottom of the private markets.

If we look at the early indicators of activity in private markets, both outside the U.S.

as well as here in the U.S., it seems like there's an increase in activity that's getting ready to have product on the market a few years down the road.

So the early planning is starting to pick up quite a bit.

So are we expecting that to rebound next quarter dramatically?

No.

But we do think we've seen the bottom, and the activity is picking up for the private sector markets.

And if you look at both Davis Langdon and Tishman, they have a majority of their work in the private sector.

But they also have -- both of them have significant amounts in the public sector.

And that is an area of opportunity for us as we bring the organizations together.

We have a much heavier preponderance of public sector work, where we can bring the Tishman expertise and the Davis Langdon expertise into the public sector, as well as they can bring us into the private sector.

That's helpful, Mike.

So again, Mike or John, as we flip the calendar for the state and local budgets this year, over the summer, have you seen any changes?

I know that you're getting good revenue sources from bonds and other sources, but have you seen any changes as the state and local governments have changed their budgets into the fiscal '11 budget?

No.

I mean, we really haven't.

I mean, the good news is there is the stimulus program that keeps coming in.

They still haven't passed the reauthorization bill, but we're -- it's getting funded at current levels.

And I said, the opportunities for public-private partnerships.

The state and local governments are still having a difficult time.

Okay.

Thanks, John.

And then just a final one.

On the margins in PTS, I mean, the trend has been very good.

Mike, you mentioned sort of savings on real estate costs.

But the margins continue to go up.

So the question is are these margins that we've seen in 3Q sustainable?

Can we still have sort of positive inflection in PTS?

And how much is this change in mix helping, too, toward more program management?

Well, it's a combination of a lot of different things, Steve.

It's -- I'm sorry, Andy.

It's a combination of a lot of different things.

First of all, the service mix is helping.

We've been saying for quite some time that our strategy has been to move into the higher margin construction management, program management, project management type activities.

And that is certainly helping.

Secondly, I think we still have a lot of room for cost takeout within our organization.

As John mentioned, it's not the first thing we focus on in our M&A activity; but certainly, we do come around to it after we spend our initial time focused on revenue synergies.

But there's still a lot of opportunity in the real estate space.

Real estate is the second biggest expense on our P&L.

And as we're going through and renegotiating our leases around the globe and consolidating our space, we still think there's more improvement there.

I don't want to get too far ahead of ourselves here.

And so we're still maintaining our guidance that we think there's 20 basis point room for improvement in our net EBITDA margins for the foreseeable future.

That's helpful.

Thanks, guys.

Thank you.

Your next question comes from the line of Avi Fisher with BMO Capital Markets.

Please proceed.

Hi.

Good morning.

Avi Fisher from BMO.

Hi, Avi.

How are you?

Great.

Just some -- actually, I have this data here.

Can you disclose how much backlog was acquired in the quarter, how much of your backlog, your contracted backlog at the end of 3Q, was acquired?

In the quarter, the -- about $100 million on the INOCSA transaction --

Roughly $100 million in PTS segment contracted backlog was acquired?

That's right.

Okay.

And can you disclose how much backlog you're acquiring, so that for 4Q -- or what you're acquiring through these three acquisitions, or at least the ones that have closed or will close in 4Q?

Yes.

Well, since only -- the only one that's closed is Tishman.

The other two haven't closed.

What I can say -- and of course, they'll be subject to fine tuning at the close.

But collectively or in the aggregate, those deals will have about 1.3 times revenue in backlog when we acquire them.

So in backlog.

And do they have the similar backlog burn rates as your PTS segment?

They vary.

If you take -- they're across the board.

If you look at Davis Langdon, it's more of a high-end consulting business that tends to be quicker book-to-burn.

If you look at the construction business, tend to be longer term construction cycles.

And then McNeil tends to be multiyear government contracts.

So they're across the board from short book-to-burn to longer.

Okay.

And speaking of McNeil's government contracts, it looks like one of their major contracting vehicles expires at the end of 2011.

Is that a significant -- is that one of the biggest parts of their backlog, and how can you replace that backlog?

I'm not sure if you're -- which piece of it you're referring to.

The GLS JV?

Is that --

Yes.

Yes.

That one does expire.

We've factored that into the pricing of the transaction and have structured the deal accordingly.

Okay.

MSS awarded backlog from last quarter.

I remember it was a big, big jump in awarded backlog.

It does not appear to be rolling into contracted backlog, at least as fast as I had thought.

I think, last quarter, you said there were two big contracts you expected to rebid.

Is there -- are we still waiting on those contracts?

Were they awarded to someone else?

And why is it taking a little bit longer than expected?

Yes.

There's -- as you know, the size of those deals are fairly large and can swing those results.

The big one is the KBOS contract that, frankly, we expected that would have been done by now.

But we're getting real close on that.

So once that one flips over, you'll see a spike up in those numbers.

And finally -- and I mean, I think the prior question sort of alluded to this.

But can you accelerate your EBITDA margin growth targets -- expansion targets, given these new acquisitions?

We hope to.

Yes.

As I mentioned, one of the drivers of these acquisitions was they're in a higher margin business.

This is now for the PTS, for INOCSA, Tishman, and Davis Langdon.

They are in a higher margin business than the rest of AECOM.

So as we go forward and we expand more in the marketplaces they're in, we expect to be increasing our gross margins.

I guess, just to clarify that point.

My understanding is that construction management, on a gross revenue basis, is a lower margin, but higher on a net revenue basis.

Is that correct?

Yes.

Correct.

Okay, all right.

Thanks for my questions.

Your next question comes from the line of Joseph Foresi with Janney Montgomery.

Please proceed.

Hi, guys.

I was just -- my first question here is just on guidance.

It seems like, if you back into it to get to the high end of that guidance range, it's about a $0.58 quarter next quarter.

Any particular reason why you decided to stick with that particular range?

It seems pretty easy.

What can we think about next quarter as maybe being the puts and takes there?

Yes.

I'm chuckling, Joe, as you say it seems pretty easy.

The high end of that range is a 21% growth in earnings per share for the full year, following on the previous year that was 20%-plus growth in EPS.

So I guess I take exception to the word easy.

But listen, we started off the year with a range in EPS of $1.90 to $2.00.

We have increased that up to $1.97 to $2.05.

It's a tough market out there, and we're continuing to fight as hard as we can in that market.

We are seeing a lot of positive signs.

We saw organic growth move in the right direction.

And we feel pretty good about that range, and we don't want to get too far ahead of ourselves here.

But I wouldn't characterize the high end of that range as easy.

I think it's been a pretty tough market out there.

But we feel pretty good about that range, and don't want to get too far ahead of ourselves.

Sure.

But I guess there's nothing in particular in the quarter, as far as margin contraction, that you could point to that you foresee coming forward due to the acquisitions?

No.

No.

We don't see any bad news on the horizon on that front.

And these deals, overall, will be neutral to EPS in the first year.

So we don't see a contraction due to the deals.

Okay.

And then I think, typically or historically, you've done about 50% of your growth through acquisitions and 50% organically.

Is that a percentage that you expect to hold, going forward?

And was I accurate with that percentage?

Yes.

We've used that -- we've used that as a guide in the past.

We like to keep to that.

With these acquisitions, now we have to push to expand our markets with the strategy that we had in buying them.

So yes.

We just don't want to be buying EBIT.

I mean, we're looking to grow our EBIT at the same pace as we grow our acquisitions.

Okay.

And then a final question from me.

I think these are three kind of decent size acquisitions in a very short period of time.

Maybe you could just talk a little bit about the timing of them.

Had valuations come to an area where you felt like an agreement could be reached?

Had you been working on them 12 months ago, and now is the time that you could finally get them done?

Maybe you could just talk about just the timing versus what we're seeing in the market.

Well, we've been looking at these deals for quite some time.

Tishman, we started discussions with Dan maybe ten years ago.

So I mean, and just kept -- and it turned out, maybe about a year ago, we started to get into some serious discussions.

And we looked at different opportunities of strategic alliances or acquisitions.

And so it takes time then.

I mean, one of the reasons why, I think, we are -- we have been successful in our acquisitions and our integration is that we really take time to understand the fabric of the companies that we're looking to buy.

So it just took whatever time -- the natural way of doing things, it just took several months, a year, close to a year.

Davis Langdon, the same thing.

I mean, we were speaking to them over a year ago.

We had -- we work with them in several places.

And there were a lot of issues that -- when I say issues, a lot of things, legal issues and business issues, that we needed to work out to make sure that everyone was very happy and didn't have any false expectations.

McNeil was a little bit faster, because it was through -- it was, basically, an auction.

And so that went a little bit faster.

And so it -- they -- acquisitions have their own life, I mean, in terms of the time it takes to complete the deals.

And it's not necessarily based on size.

Sometimes a smaller acquisition could take longer than a bigger acquisition.

I don't know if that answers your question.

Yes.

And I guess, just as a follow-up, there was no real -- there was no change in valuations that, all of a sudden, opened up a window for you to get these done?

Is that --

No.

It's based on life cycle.

Yes.

Okay, great.

Thank you.

Your next question comes from the line of Justin Hauke with Robert W.

Baird.

Please proceed.

Hi, guys.

Thanks for taking my call.

Thanks for calling in.

Just, if I could just pick at one point, it would be just the backlog.

And I guess, I mean, if you X out how much was acquired in the quarter, I mean, it looks like the PTS backlog was down about 4% organically sequentially.

And just given your positive commentary and the fact that things seem to have stabilized, I guess, if you could just maybe help characterize where the weakness still is that's been kind of dragging on the backlog now for two quarters.

See, I don't see it as dragging on the backlog.

I think that the delta you're seeing is the typical lumpiness of how wins are converted into backlog and contracted backlog, right now, we're negotiating on a major add-on to a contract outside of the United States.

And that was supposed to be signed maybe a month ago.

And if it was signed a month ago, it would have been in the backlog.

We will sign it probably within the next couple of weeks, and that'll push the backlog back up.

I think what you need to do in looking at -- how I look at it -- I mean, this is how I look at it.

Because it's not just trying to convince you that the backlog is strong.

It's important for us in the business, running the business, to make sure that we're comfortable with the backlog we're seeing.

And that, despite the tough market that we have, that we're very pleased and our backlog continues to move forward in a positive direction.

And yes.

Okay.

This quarter, we had a little bit more organic growth, and the backlog went down.

But if we had some of the -- if the timing was such that some wins that came in after June 30th -- that would have driven the backlog up.

So I think the way I -- well, the way I look at it is over a longer period of time.

I look at it over a longer period of time and -- because over the 12-month period, you really get what the trend will be.

Because you're always going to have dips and -- dips and highs in the way it gets recorded.

The good news is that, with the backlog that we reported for the third quarter, we're still very confident that this is going to fuel a strong FY '11.

That's how I look at it.

Okay, okay.

So that's fair, I guess.

So it sounds like it's mostly lumpiness.

And I guess, assuming that some of the things that could have fallen in this quarter fall in 4Q instead, I guess, it would seem like, organically, excluding what you're pulling in, backlog should be moving upward from here.

Yes.

And then, I guess, just my final question is back on the M&A again.

Are we going to kind of pause for a second?

There'll be a little bit of digesting of these couple deals that you've done?

Or are there additional deals that are kind of at the due diligence stage that you expect, over the next 6 to 12 months, we could have some -- another -- additional midsize-type acquisitions that come through?

We are not in the due diligence phase of any opportunity.

But there are op -- excuse me.

There is one.

There's a small energy opportunity that we're in the process of due diligence.

And with that, there are others that we're looking at.

And over the course of the next 12 months, there might be another one or two.

Great.

Thank you very much.

Great quarter.

Thank you.

Your next question comes from the line of John Rogers with D.A.

Davidson.

Please proceed.

Hi.

Good morning.

Good morning, John.

Just to follow up for a second on your guidance -- and I won't call it easy, but the range that you've got implied for the fourth quarter is pretty wide for your business.

And any comments on that?

John, to be honest, I think you guys all have us at a consensus at $2.04.

Uh-huh.

And to the extent we change that spread, I suspect that consensus might go up even further.

And we feel comfortable in that range.

And I think I've expressed as much comfort already throughout this call as I will.

But there's -- I don't think there's a need to narrow it, to cause people to further extend their projections.

Okay.

Fair enough.

I just -- I mean, it just seems like your business is a little bit more reliable than that range would suggest.

Yes.

Secondly, you talked about the benefits in real estate.

But Mike or John, what about labor costs?

What are you seeing there?

And more importantly, what are you seeing in terms of multipliers that you're being able to apply to that?

Labor costs, depending on the markets you're in, have been relatively stable, except for maybe Australia, where we've seen some labor inflation.

So labor is relatively stable in most parts of the world right now.

And multipliers -- John, as you know, with 70% of our business being cost-plus work, the multipliers in that business, for the same type of business -- I'm not talking about --

Yes.

-- a change in mix.

But for the same type of business, the multipliers have been relatively constant for 40 years.

So in the major part of our business, you don't see that much multiplier movement.

In the private sector business over the past year where it's been a little slow, your margins are much tighter there in tough times.

But we expect that that will change, now that we're starting to see signs of recovery in that market.

Okay.

And as you develop this greater global enterprise, is there opportunities to move more work around?

Or do clients still want work to be done locally and --

No.

We're seeing a trend that move -- work would be able to be moved around, especially in the global arena.

Okay?

It's not as -- and as the funding sources start to change.

If it's a public-private partnership, there's not the demand of, say, doing it in a -- in one location.

We could share it between our other centers of excellence around the world.

Okay.

Thank you.

Okay.

(Operator Instructions.)

And your next question comes from the line of John Emrich with Ironworks Capital.

Please proceed.

Hello, John?

Mr.

Emrich, your line is open.

Operator, unless you have anybody else in the queue, I -- we can wrap it up.

Yes.

At this time, we have no further questions.

I would now like to turn the call back over to John Dionisio for any closing remarks.

Okay.

Thank you.

Well, I want to thank everyone for taking the time to join our earnings call today.

We were a little bit long on the presentation time, and we appreciate you bearing with us.

But we thought it was important that we describe to you what our M&As were and how they would fit into the organization, and also give you an idea of what the funding sources are in each of our markets.

So hopefully, you came away with getting a good, clear picture of the strength of AECOM and its business going forward.

So with that, I'd say thank you very much, and we'll see you in a few months.

Bye now.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.