AECOM (ACM) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the third quarter fiscal 2011 AECOM earnings conference call.

At this time, all participants are in listen-only mode.

We will conduct the question-and-answer session at the end of this conference.

(Operator Instructions).

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

I would now like to turn the call over to Mr.

Paul Cyril, Senior Vice President of Investor Relations.

Please proceed, sir.

Thank you.

Please turn to Slide 2.

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 2 here in this presentation and to our reports filed with the Securities and Exchange Commission for more information on risk -- specific 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.

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

A replay of today's call we posted there at about one pm Eastern Time and will remain there for approximately one month.

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, Chief Executive Officer and President; and Michael S.

Burke, Chief Financial Officer and Executive Vice President.

John, please go ahead.

Thank you, Paul.

Good morning, everyone.

And thank you for joining our call today.

I'll begin with a brief recap of our recent highlights.

And then our CFO, Mike Burke, will discuss our third-quarter financial performance and our outlook for the remainder of fiscal year 2011.

Following Mike's comments, I will provide an update on our markets and business trends.

Joining us on the call today are Steve Kadenacy, who becomes CFO; and Jane Chmielinski, who becomes our Chief Operating Officer, both on October 1st.

As a reminder Mike Burke transitions from CFO to president on October 1, as well.

As we get started, I'd like to provide some perspective on AECOM's historical strategy, and our future objectives.

Ten years ago, we embarked on a geographic and end-market expansion program that has transformed AECOM into a global professional technical services firm.

A further dimension of our growth has been an expansion in our service offerings into the commercial and public sectors.

We have grown through a combination of organic investments and strategic acquisitions.

As a result, AECOM now operates in over 125 countries including many high-growth emerging and natural resource-rich economies

These strategic actions are producing meaningful benefits today, especially in light of recent economic developments across the globe.

Our solid third-quarter results are a prime example of this.

We posted 11% earnings growth, won a record $2.7 billion in new work, and grew our backlog organically by 18% year-over-year, the largest increase in over two years.

Most recently AECOM was named the number one international design firm in Asia, as well as the number one design firm in the United States, by Engineering News-Record.

In addition we completed a strategic acquisition in India of Spectral Services, which significantly expands our platform in a rapidly growing market.

The strong diversified base we have created supports our vision to grow our international business to 65% of our mix over the next five years.

To further discuss our performance in the third quarter, I'd like to turn the call over to our CFO, Mike Burke.

Mike please go ahead.

Thank you, John.

Let's first discuss several key performance indicators in the quarter.

Our third quarter gross revenue increased 25% over last year's third quarter to $2 billion.

And net service revenue was up 24% to $1.3 billion, more importantly organic net service revenue increased by 4.5% year-over-year in the quarter.

Our third quarter's growth is driven by continued strength in Asia, Australia, the Middle East, Environmental Management and Energy and Power.

That growth was partially offset by continued weaker performance in Western Europe, particularly in the U.K.

Operating income rose 19% year-over-year to a $110 million, while net income increased 14% to $74 million.

This resulted in diluted earnings per share of $0.62, which is up 11% year-over-year.

During the quarter, we strengthened our book of business as organic backlog grew by 18% year-over-year and rose 4% sequentially.

Please turn to Slide 6.

Our PTS segment accounted for 87% of our third quarter revenue.

Net service revenue in our PTS segment increased 21% from last year to $1.2 billion; organic net service revenue in this segment increased by 4% year-over-year.

Operating income in the PTS segment increased 6% year-over-year to a $115 million.

Our management support services segment accounted for 13% of our third quarter revenue.

This segment is undergoing a transition from contracts with significant sub-contractor and pass-through costs to projects with more self-performed work and higher net service revenue content.

As a result, gross revenue for the quarter was down 8% year-over-year, while net service revenue increased 48%.

In total, segment operating income increased 48% over last year to $19 million and operating margins improved by 260 basis points year-over-year and by 28 basis points sequentially.

This quarter's significant margin performance underscores the success of our strategy of moving into high value-added government services through our security and intelligence acquisitions over the past two years.

Going forward, we're well-positioned to capitalize our numerous opportunities in the MSS segment both domestically and abroad.

Please turn to the next slide.

In the third quarter our EBITDA margin was 10.36% representing an increase of 39 basis points year-over-year.

As we have previously stated, over the next four years we aim to further improve our EBITDA margin to at least 12% of net service revenue.

Two key drivers of our margin expansion will be a shift to higher margin services and continued improvement in project delivery.

In addition, we'll realize operational efficiencies over time as our acquired businesses integrate into the AECOM platform.

For example, co-location at single metropolitan offices has permitted more effective use of our real estate.

Over the past two years, we have reduced approximately 700,000 square feet and generated $32 million in savings.

Please turn to the next slide.

At the end of the third quarter, our balance sheet remains strong with $381 million in cash and cash equivalents; and $1.2 billion of debt.

We recently increased our revolving credit facility from $600 million to $1 billion and extended the term by five years.

We negotiated even more favorable pricing than last year when we came to market with our term loan.

We believe this demonstrates the credit market's confidence in our financial strength and business model.

It also gives us additional liquidity, and increased financial flexibility to execute our growth strategy.

On a pro-forma basis, we had $743 million in unused capacity under the new credit facility.

Our current leverage ratio is 1.7 times net debt EBITDA well within our targeted range of 1.5 to 2 times EBITDA.

Now turning to working capital, one of our top operating priorities.

On the DSO front, we delivered positive results in the PTS segment, which comprises 87% of our revenue.

PTS DSOs improved by three days sequentially, and are now at their lowest level in seven quarters.

Overall DSOs, however, rose one day to 93 due entirely to an increase in MSS receivables.

This increase was due to the close-out of a $3.6-billion, 11-year contract in the MSS segment, and we are awaiting final payment on invoices totaling $140 million.

We feel confident about this receivable, as it is with a low-risk client and equates to just a 4% holdback, which is typical for U.S.

Government contracts.

Excluding this lone close-out, our overall DSOs would have improved by five days sequentially, and would have been the lowest in four quarters, a more accurate reflection of our MSS business.

We've already received good news after the quarter's close, as we collected $12 million on the close-out contract and expect an additional $20 million shortly.

Looking ahead as we drive our DSOs back to pre-recession levels, we expect our free cash flow to consistently exceed net income.

This year we expect our free cash flow excluding items related to our deferred compensation plan termination to approximate net income.

However, this is dependent upon the collection of the significant government receivable we just discussed.

Please turn to the next slide.

New business wins in the third quarter totaled $2.7 billion equating to a book to burn ratio of 1.3.

We closed the quarter with backlog of $16 billion a 66% increase over last year.

Our organic backlog increased by 18% year-over-year and by 4% sequentially.

As we've previously stated, our backlog does not include IDIQ contracts or unconsolidated joint ventures.

IDIQs are taking on greater relevance today as the U.S.

government increasingly turns to these contracting vehicles for procuring work.

For instance, during the third quarter, AECOM joint ventures were awarded participation on two $10 billion IDIQs, one with the Department of State and the other with the Department of Defense.

Factoring in all our IDIQs, we estimate an additional opportunity of $12 billion for AECOM over the life of these contracting vehicles.

In addition, there's approximately $3 billion in backlog equivalent and option years at our unconsolidated joint ventures, which we expect to ultimately recognize as equity earnings.

The combination of backlog and IDIQ opportunity amounts to a book of business in excess of $31 billion.

All-in-all, our current book of business is solid and provides us with improved visibility and increased confidence in our long-term strategy.

Please turn to the next slide.

Now I'd like to update you on our outlook for the remainder of fiscal 2011.

Our strong third-quarter results particularly with our organic growth and backlog improving would normally give us a high level of confidence in our prior guidance range.

However considering the ongoing challenges in Western Europe, we are evaluating several restructuring scenarios that could impact our fourth-quarter results by approximately $0.05 per share.

We have carefully analyzed our European business, particularly in the UK and concluded that the economic recovery is more sluggish than previously anticipated.

Therefore, we are considering taking actions to reduce our cost structure.

As a result, we now expect our FY '11 EPS to be in the range of $2.30 to $2.35.

The midpoint of this guidance implies 13% year-over-year growth in earnings per share on a GAAP basis.

This guidance assumes $38 million of amortization expenses related to acquired intangible assets, depreciation of $76 million, interest expense of $41 million, a diluted share count of $119 million shares and a tax rate of 27%.

Looking forward, we are confident in our long-term annual EPS projections of 15%.

With that, I'd now like to turn the call back to John who will provide additional detail on our third-quarter performance and outlook.

John, please go ahead.

Thank you Mike, please turn to Slide 11.

At the beginning of the third quarter, our international business accounted for 58% of our net service revenue.

AECOM's markets continue to be driven by long-term structural changes such as urbanization, population growth and climate change, which are fueling $3 trillion in annual investments in energy, minerals and civil and social infrastructure.

With these trends in mind, let me spend a few minutes discussing each of our markets.

Asia Pacific which now accounts for about one quarter of our business reported strong organic growth in excess of 20% again this quarter.

Our business in Asia is being driven primarily by economic and population growth in China that is now spreading to second and third tier cities.

This is driving significant new opportunities for AECOM in master planning, urban transit, mining and facilities.

We're also winning significant business in some of the region's other markets such as Singapore, Malaysia and Thailand, particularly in transportation and social infrastructure.

As an example, just this week AECOM was selected out of 22 competitors for the River of Life master planning project in Kuala Lumpur, which has an estimated construction value of $337 million.

In India, the structural growth drivers are similar to those we saw in China ten years ago.

The government's infrastructure plan calls for doubling its infrastructure investment to $1 trillion over the next five years.

In particular, growth opportunities in health and education infrastructure align well with our recent Spectral Services acquisition.

We view India as well as the rest of Asia Pacific as key contributors to AECOM's international expansion.

And we will continue to seek out future opportunities to build our position in this market.

The natural resources industry is expanding rapidly due to strong demand from China and India for iron ore, coal, copper and LNG.

This demand is being met by resource-rich markets such as Australia, Canada, Latin America and Africa.

AECOM's integrated service capabilities and geographic breadth are showcased in the mining industry, where we can deploy resources from our global environment, water and transportation business as we recently have done on projects in Africa and Canada.

By way of example, our Australian mining business grew by more than 30% year-to-date and we are bidding on several new projects.

Australia is also making significant civil infrastructure investments, which are creating new opportunities for AECOM.

Last month, we won a major rail design project in New South Wales, which will involve the longest rail tunnel ever constructed in Sydney, Australia.

In addition, as we integrate recent acquisitions we are already recording key cross-selling wins by leveraging our new construction services capabilities.

Moving on to the Middle East, global demand for energy is driving strong economic growth in the region.

In turn, this is prompting local infrastructure investments that address the changing demographic trends.

Our latest acquisitions extend our service offerings into cost and construction management, and have added nearly 25% to our PTS net service revenue in the region.

The recent political developments have had a positive impact on infrastructure developments.

Countries such as Qatar, Saudi Arabia, Egypt and U.A.E.

have dramatically increased their investments in infrastructure such as roads, rail, water, schools and hospitals to create job opportunities and improve the quality of life.

Also, we see attractive opportunities across all of our end-markets in the Middle East.

As you heard earlier, Western Europe remains an extremely challenging market.

And in conjunction with the potential restructuring plan, we are carefully managing our business and resources there to optimize profitability in FY '12 and beyond.

However, we see significant opportunities in the emerging Eastern European economies, especially in the oil and gas, and infrastructure markets in Russia, Romania and Azerbaijan.

Our platform in the region, which we acquired two years ago, is already producing positive results, and we continue to invest in this market.

In the third quarter we recorded facilities wins in the automotive, telecommunications and leisure industries in addition to important transportation wins in the region.

Latin America and Africa are two of AECOM's newest markets, which present significant growth opportunities for our business.

In addition to the targeted investments we have made, we continue to focus on future opportunities to capitalize on this growth.

We will realize a return on our investments in FY '12.

Similar to Latin America and Africa, Canada is also experiencing significant natural resource investments.

AECOM is involved in numerous planning and environmental and facilities projects that support the country's mining industries.

And in addition, the Canadian government remains committed to infrastructure development and the P3 funding model.

During the third quarter we booked several key wins including mining projects in multiple provinces and a major bridge assignment in Alberta.

Now turning to the United States, which continues to be a meaningful contributor to AECOM's growth.

Despite the economy in the third quarter, we won over $1 billion in new awards in the United States, taking our year-to-date total to over $3 billion in wins.

Third quarter bookings were strong in all of our end-markets.

The private sector is starting to make some significant investments, and our latest acquisitions have positioned us well to participate in these opportunities.

For example, private sector facilities wins nearly tripled from April through June of this year, fueled by the demand from high growth technology, media and entertainment companies.

In addition, the United States energy sector was strong across all segments, and we continue to expand our capabilities in this growing end-market.

Most recently, we made a strategic investment in a small oil and gas engineering firm based in Houston, which has already led to cross-selling wins on two mid-stream terminal projects.

At the state and local level, we see civil infrastructure spending being driven by user fees, dedicated funding sources and investments by major cities.

Our strategy in the current economic climate is to focus on larger cities with available funds, and this approach is proving to be successful.

For instance, we are currently engaged on three of the largest infrastructure projects in San Francisco.

The Central Subway, the water systems improvement program and the sewer systems improvement program.

In addition the measure R tax in Los Angeles is driving 6% growth in the Los Angeles MTA 2012 budget, and is supporting nine AECOM projects with fees totaling approximately $120 million.

We also expect to see a substantial increase in P3 investments over the next two to three years, with opportunities spanning social infrastructure, transportation and energy.

In the third quarter we saw a considerable increase in P3 activity.

Recent examples include AECOM's appointment as sponsor's technical advisor on the $1.4 billion brownfield road P3 project in Puerto Rico and as the government's technical advisor in Washington State on potential transportation P3s.

As more of these large projects come to market AECOM is well-positioned with its integrated delivery platform, which spans financing to construction.

On the federal government side, the Department of Transportation recently announced $1.6 billion in New Start funding, which benefits three major AECOM projects.

At the Department of Defense, the recently unveiled unified cyber security strategy reinforces our strategic investments and recent acquisitions in this area.

In summary, we see significant opportunities across our U.S.

end-markets.

Please turn to slide 12.

Overall, our third quarter performance was solid.

We've recorded $2.7 billion in new wins, grew organically and improved our earnings.

We've benefited from strength in emerging and natural resource-rich markets and from a pickup in private sector spending.

We've further diversified our global platform though the acquisition of Spectral Services in India.

This quarter marks the third consecutive quarter of organic year-over-year backlog growth.

As I noted in the beginning, AECOM's seamless ability to penetrate global markets and deliver integrated service offerings, particularly in the natural resource sector provides a solid foundation for our future success.

Our book of business combined with our strong position in high growth international markets underpins our optimism for the future and gives us confidence in our ability to deliver on our long-term earnings growth target of 15% per year.

With that I would like to open the call for your questions.

Operator, please open the call.

(Operator Instructions).

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

Hi, good morning.

Just first clarification, what was the currency impact on that 4% PTS organic NSR growth?

The currency impact was about 4%, Steve, and you know, one of the things that is important to point out there is you know we continue to benefit from the strategic decisions that we've made years ago to make significant investments in some of these high growth countries and natural resource-rich countries, and not only those economies doing well but their foreign currency is doing well also, so we continue to benefit from those strategic investments we made years ago.

Okay, so overall we're looking basically about flat.

So I guess the question is when you add it all up, I am just wondering, if you're seeing more headwinds or tailwinds to that, I guess flat organic revenue growth going forward?

You know, I would say we're seeing tailwinds, which is evidenced by our backlog growth.

You know you -- if you're looking at the wins, you heard John mention the $2.7 billion of wins.

You saw the backlog increased by 18% organically 66% year-over-year and that's the best indicator of a tailwind for the future.

And I know you're not quite at the point of giving 2012 guidance but now you have indicated that the bookings in the quarter and give you confidence in 15% long-term growth, and since you pointed out a specific quarterly benefit.

I mean how should we interpret what long-term means?

Does that include 2012?

Long term is -- as it's commonly known in that industry, as you know it's a five-year term.

And that's what we've always indicated as our long-term projections.

But we're not ready to give guidance on '12 at this point.

Okay.

And then just a question on the MSS side, I mean how sustainable do you think the pace of bookings are that you achieved in the quarter?

And Jacobs has talked about some pricing pressure on the public side.

I mean with the big MSS backlog growth, can you just comment on what the margins going into backlog look like compared to what you're reporting now?

Well, our margins continue to be better than our historical margins and that is predominantly due to the shift in our service offering mix that we've been talking about.

Historically, we were primarily a DoD provider on big outsourcing contracts that do have lower margins.

And as you know over the past two years we've made significant acquisitions in the intelligence space, the cyber warfare space in Homeland Security and the margins in that business are much greater than our historical margins on the DoD side.

Okay.

And then you know, the potential for sustainability of this nice pace of bookings there?

We still feel -- we still feel very good about it.

We've seen the market being up in so many different places, one place that reflects our changing guidance to the one place that we have concern.

It's not improving -- probably will not improve another 12 months to 18 months is the U.K.

and Western Europe.

Okay, great, thanks a lot.

Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Yes.

Good morning guys.

Just a question, post this whole brouhaha with the government shut down and the news coming out of, I guess, a lot of defense prime contractors are talking about pressure on the margins going forward.

How do you guys think about the sustainability and profitability of your federal business in the U.S.

and if you got any particular insight, having gone through this process over the past couple of weeks if you -- if you're hearing any more details from your sources in D.C.

on the state level?

Thank you?

First, I think it's important to note that the act that we just passed reduces the growth rate of future discretionary spending.

However the growth rate remains positive.

So that's a confusion, it's a reduction in growth rate, but still they are spending -- they will be spending more next year than they did last year.

We don't believe looking at our book of business and looking at our clients on the federal side and the types of work that -- there is any immediate or material impact on our business.

What has been positive for us though in terms of the rhetoric that we see coming out of Washington over the last couple of days, the president, vice president, members of Congress, is they're still -- now they're going to focus on improving infrastructure because that's one way of creating jobs.

The MSS work we do for the federal government overseas in Afghanistan, Iraq, Kuwait is not subject to any of the caps.

So we feel confident about that.

Our work in Afghanistan will continue to be strong over the next couple of years.

Next, I think we look at the government has expressed strong interest in redirecting its defense budgets to cyber and intelligence versus hardware.

And with the recent acquisitions over the past 12 months, we've made significant investments in building up our capabilities in the securities side of the business.

We would also -- I mean we're looking at -- you asked about the states, we tried going into the highway bill, the reauthorization bill.

I think it will be another continuing resolution, which again in that marketplace, and we've been in that for last couple of years of continuing resolutions.

We continue to win significant amount of work.

The United States year-to-date in the highway and bridge market and the transportation market we won $1 billion.

And when you add that in all of North America, we won $1.2 billion worth in transportation.

In this new resolution, what Boxer is proposing or Mica is the infrastructure bank, which would raise funds from I think about $120 million a year to $1 billion a year, and that would be dedicated to P3 programs, which would leverage that $1 billion into $60 billion over the six years.

And also, what we've seen -- as I have been saying on these calls for some time, there is still a significant need in transportation infrastructure in the United States.

And what we've been seeing over the past year and really it has ratcheted up over the past six months, is the number of P3 opportunities that are coming to market.

As I mentioned in my discussion we just -- we won a P3 job in Puerto Rico, we are advising the State of Washington on P3.

We are looking at more funds going into the P3 market.

And also the states are now looking as they finance things -- they are looking to finance their projects not through sales tax but look through dedicated funds, tolls and as I mentioned P3 sources.

So we -- you know, I read the paper, I listen, as you do, and you know, I am still -- I am positive because I am positive in terms of what I am seeing here in the United States.

That all being said, our business, 58% of our business, is international, which is very, very strong.

And the United States market remains robust despite what you hear in the papers.

And what about margin pressure?

Margin pressure has existed for --

You know, it's continuing, and we've seen margin pressures since 2007 in certain markets.

We have been able to address that by internally making some cost controls and cost efficiencies.

So, but we do see margin pressure.

But again, if you look at our EBITDA margins, they have continued to grow.

So we've done that through a combination of things, looking at different procurements in terms of types of work going into more PM/CM work from the traditional highway work, also looking at the mix of business, more work outside of the United States.

But again, the proof of the pudding is what our EBITDA margins have been in -- you saw the slide and they have continued to increase over the past several years.

One additional comment, Andrew, is that our project margins increased this quarter for the first time in a while.

And so the project margins are the best indicator of short-term pricing and over the past quarter it has actually improved.

Thank you very much.

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

Good morning guys, just a follow-up on Steve's question about the organic growth.

The bookings for several quarters actually have been up pretty strongly.

I think you guys would agree, but the revenue growth maybe quite hasn't followed suit.

So I'm just wondering you booked these projects -- and we know with the government projects especially, they tend to book them and maybe they don't start for a while.

So are you seeing sort of more delays like that or is that actually getting better?

I think it's probably -- firstly, it's not getting better.

And if anything it's about the same as it was and it might be drawing out.

One of the reasons is, there's a larger percentage of backlog which are in large projects, large projects which we take longer to negotiate and then start up.

But there are other projects that start right away, our work in Jeddah for instance.

It started immediately, major program that we're doing there.

I mean -- so it's a mixed bag.

I think what you'll see is with the backlog that we've developed in FY '11 and which will kind of continue to go through the fourth quarter, you'll see the strong results that we will have in FY '12.

They will result in stronger results in FY '12.

Okay John, I mean kind of joking, I mean you have more cash than some of these government customers probably.

So you know -- like when you look at the cash situation and I know Mike mentioned that you're hoping to get the cash, in the fourth quarter.

But what are the chances that DSOs really don't respond for the company because these governments just, you know, don't have enough cash to pay you very quickly.

Is it possible to continue to see some pressure on DSOs in this environment?

I'll let Mike answer.

We are expecting for the -- an improvement in DSOs.

And our performance over the past few quarters has been a significant improvement except for the one contract with the U.S.

federal government.

When I look at the overall PTS DSOs we have been bringing it down to quarter-after-quarter here.

We're not at pre-recession levels yet, but we're getting into that ballpark.

And so when I carve out the one contract, our MSS days have improved and our PTS days have improved.

So I'm not expecting DSOs to go backwards.

I'm expecting them to improve and especially when we collect that one receivable.

And when you look at some of the areas that we had some concerns with during 2008-2009, for instance some place in the Middle East, they have improved.

I mean the cash is coming in.

In North America, we had a very, very good quarter in terms of collecting cash.

So it seems like the tide has turned, and there is more confidence in the marketplace as we've seen.

More confidence in the -- with the clients that we deal with both on the public side as well as on the private side.

Ok that's great.

And John or Mike, maybe you can give us an update on, you know, you made four or five larger acquisitions last year.

How they are all doing?

And then maybe dovetail that with on how you think about the U.S.

nonresidential construction, in something like a Tishman, are you seeing any signs of recovery there?

Yes, I can start with the nonresidential construction and our construction services group.

We're seeing that the market is really bouncing back.

Tishman has won some very nice work and also we're seeing that some projects that had been put on hold are now back online.

One of them that we mentioned I think a few quarters ago was Revel Casino Hotel in Atlantic City.

Here in New York, there are some opportunities that are developing which were not on the radar at all six, seven months ago.

And new developments here in Manhattan.

We're also winning work on the West Coast.

So from the private commercial space, we're seeing the activity increasing.

When you look at -- if you look at the acquisitions we did in the security side, they are doing very, very well.

It basically is a function of looking at our M&As.

And basically all the integrations have gone very well.

So it's not about integration.

It's a matter of where those acquisitions were located in the markets that they were in.

You know, in the acquisitions that we did with the Davis Langdon, which had facilities -- which had locations in the U.K., Middle East, Australia and Africa, well as you can imagine, Australia and the Middle East are doing very well.

United States is doing better than we have expected.

The U.K.

is not doing well.

They are hurting.

And of course it's not -- it's a function of the market.

Africa, they provided us a foothold in South Africa and we're seeing great potential there.

So overall, the markets -- Savant that we bought a few years ago, their focus areas are in Russia and Eastern Europe, they were -- at the beginning of the year, they were sluggish, but now they've bounced back.

So again, the mergers and the acquisitions we did, we're still very happy about doing them.

And we're glad we did them.

They situate us in key strategic markets and geographies.

And they are performing in line with the economic trends within the locations they are in and the end markets they are serving.

Thanks guys, I appreciate the color.

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

Hi good morning.

Regarding the acquisitions, how much goodwill do you have in Europe?

I don't know that number off the top of my head.

We have obviously our goodwill on our balance sheet is about $2 billion of acquisitions that have been done over many, many years.

So I don't know the specific number off the top of my head just in Europe.

Does the reorganization $0.05 include any goodwill write-downs there?

No, we do not have a goodwill impairment.

The $0.05 is entirely related to restructuring charges.

And how are you going to go about doing the restructuring?

Is it all sort of headcount or --?

It's a combination of things.

We're looking at our cost structure.

So some piece that will be staff reassigned and relocations.

And another piece will be in leases and physical plants.

Okay.

Mike, without a balance sheet it was a little bit difficult for me to follow your comments on -- kind of pro forma DSOs.

How much receivables were you talking about in the MSS business from the Federal government that you were awaiting?

The one contract that I am referring to is a $140 million.

Okay.

And that's a $140 million receivable.

I saw -- I heard you talked about you have collected some already and were awaiting another amount, but that didn't calculate to $140 million.

So I was a little confused.

We have $140 million receivable on one contract.

On that contract, we received a $12 million payment after the close of our quarter.

We have $20 million that's in processing that we expect to be here literally within days since we track where they are in the processing cycle.

That's $32 million of the $142 million.

Obviously the remaining $108 million is what we expect to collect in the next couple of months.

And in general, how have your efforts to improve collections been going?

They have been going very well.

If you take Q3 of FY'10 for instance, in the PTS segment we've gone from 90 days to 86 days.

So if you look at the biggest part of our business, 87% of our business is in the PTS sector.

We've reduced our DSOs by four days year-over-year and given the challenging market conditions we're pretty happy about that.

We still have -- we still have more room for improvement to get back to pre-recession levels, but, overall in the PTS segment we feel good, on the MSS segment exclusive of one contract we feel good.

Of that four day improvement, how much of that was from the Libya write-down?

How much of that was from the Libya.

I don't how to calculate that off the top of my head.

Okay, I guess we can -- I'll try to back into it just to get a sense of it.

Also, you talk about backlog with contracted backlog, which is a project in hand and awarded backlog, which is kind of a verbal agreement.

I like to focus on the contracted backlog number.

So I'm curious if you could disclose as you have disclosed in the past, organic contracted backlog in the two segments?

So, what I can tell you is that we acquire -- our overall acquired backlog was $4.7 billion at a year-over-year basis.

The contracted piece of that is $2.6 billion.

Okay, and how much of that was in PTS versus MSS?

$2.5 billion in PTS.

Okay, I can figure out the MSS side

$0.1 billion.

Got you.

Those were all the questions I have for now.

Thank you very much.

Great.

Thank you.

Your next question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

Good afternoon gentlemen and congratulations on a very good quarter.

Well, thank you.

A couple of questions, number one, you know if I look at your full year guidance outside of the $0.05 charge obviously implies a very powerful fourth quarter for your year.

Could you -- you know, as we look qualitatively to forecast out fiscal year '12 and I couple that with your very positive commentary in general around your end-market, is there anything in the fourth quarter we should assume as an anomaly that we should not project out as being the likely quarterly run rate going forward.

Yes, as nothing anomalous other than the seasonality that we have always had.

As you know, our slowest quarter is always our first quarter.

And last year around this time we were pointing out that generally the first quarter is only 20% of our total for the year.

And then it starts to accelerate through the year with the fourth quarter always being the strongest.

And we don't see that being any different this year than it has been in the past.

Got it.

Okay, that's very helpful.

And then obviously if you look at margins, a nice impressive jump-up, and looks like your business model is playing out as you've indicated.

As we look forward, we obviously, it seems like the mix et cetera is going to help you out.

Could you talk a bit about the amortization fall off from the large chunk of acquisitions you did the year before?

And how much that could potentially benefit your operating margins as well?

Well, this year the number is expected to be about $38 million, and the normal amortization curve drops off fairly steeply.

And so we would expect that amortization in FY '12, we're not giving FY '12 guidance yet, but we're in the mid $20 million range, I would think would be a good way to think about it.

Excellent.

Thank you.

And I guess, last question from me is, I concur from all the channel checks we've been doing, it seems like the PPP activity in the U.S.

is finally picking up.

Are there any implications for competitive dynamics in any of your businesses as we start to see more PPPs come through?

Is there a sort of difference in the sponsor quality as we start to see these PPPs come through?

For example, there are a couple of Spanish sponsors that apparently are running into some financial issues and some small projects in the Midwest.

And I'm just wondering if you have to do more due diligence than you did before?

Well, first of all, I want to thank you for the question, because it's a great question for us.

The reason being is, as more and more projects go to PPPs there is less competitors.

Not many companies can play in that space.

There maybe three, and if it was a traditional job there might be 15, people who would compete, companies that would compete.

So for us and companies like us, I mean it's an advantage because, as I've said, it give us a competitive advantage.

In terms of any of these P3 projects, I mean they do take longer, and they require a significant amount of due diligence.

And the good news also is we have a strong working relationship with many and most of and all of the Spanish contractors, and the foreign contractors that are coming into the United States.

We feel very comfortable in the space.

As you remember AECOM is a 25% owner of a company called Meridian, which invests in public private partnerships.

So we have been active in the PPP market for the last five to six years.

We have made investments in projects both in the United States and outside the United States.

So we are very pleased that the market is moving.

We want to address the needs that we have, but also the needs that we have in United States, but also is something that we feel that works well for us.

Great, thank you.

That is very helpful.

(Operator Instructions).

Your next question comes from the line David Wells with Thompson Research Group.

Hi, good morning everyone.

Good morning.

I guess, my first question is looking at the SG&A in the quarter, it came in lighter than we were anticipating.

Is this a reasonable run rate to think about going forward or were there some one-time things that helped pull that number down?

You know the SG&A number that you see on that sheet is just really a small portion of our overall SG&A.

We have most of our SG&A is up in cost of revenues.

And so there are allocation issues between those two and that's why we've focus on EBITDA margins to really tell you the true direction of the business because the SG&A that's included in cost of revenues is so much more significant than the numbers that we are required to show on the GAAP financial statement.

But there are no one-time anomalies in there that would be distorting that number.

Okay, that's helpful.

And then, I guess, lastly if I look at the incremental this quarter in the PTS business versus last year, the low-single-digits versus almost kind of a 40% type number?

I guess I am trying to understand the puts and takes as to what you dragged down the incremental this year, despite some pretty nice top-line growth.

I am sorry.

I didn't understand the question, the incremental what?

Incremental operating profit per dollar of revenue in the PTS business.

You're talking about the margin?

Correct.

So your net revenues improved from $965 million to $1.2 billion.

I'm trying to understand why we didn't see the same amount -- a strong amount of that float through on the operating income line.

Yes, so you're seeing two different things.

What we focus on is the EBITDA margins.

The operating income line includes the D&A for the acquisitions, right?

Okay.

So more than half of that change is due to the amortization related to the acquisitions, which tails off quickly.

So if you're looking at margins on an op income basis, it distorts it, versus looking at the true EBITDA margins on [NSR] which gives you a better flavor for the business.

But the predominant amount of that change is either the amortization related to acquired intangible assets or the European business.

That's helpful.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's event.

I'd like to turn the conference back over to management for closing remarks.

Thank you.

I want to thank everyone for participating on the call today and also for your good questions and interest and continued interest in AECOM.

I hope everyone has a great summer and we'll be speaking again in about three months.

Thank you very much.

Ladies and gentlemen, thank you so much for your participation in today's conference.

This does conclude the presentation and you may now disconnect.

Have a wonderful day.