AECOM This Annual Report on Form 10-K contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that are not limited to historical facts, but reflect the Company's current beliefs, expectations or intentions regarding future events. These statements include forward-looking statements with respect to the Company, including the Company's business, operations and strategy, and the engineering and construction industry. Statements that are not historical facts, without limitation, including statements that use terms such as "anticipates," "believes," "expects," "estimates," "intends," "may," "plans," "potential," "projects," and "will" and that relate to future impacts caused by the Covid-19 coronavirus pandemic and the related economic instability and market volatility, including the reaction of governments to the coronavirus, including any prolonged period of travel, commercial or other similar restrictions, the delay in commencement, or temporary or permanent halting of construction, infrastructure or other projects, requirements that we remove our employees or personnel from the field for their protection, and delays or reductions in planned initiatives by our governmental or commercial clients or potential clients; future revenues, expenditures and business trends; future reduction of our self-perform at-risk construction exposure; future accounting estimates; future contractual performance obligations; future conversions of backlog; future capital allocation priorities, including common stock repurchases, future trade receivables, future debt pay downs; future post-retirement expenses; future tax benefits and expenses; future compliance with regulations; future legal claims and insurance coverage; future effectiveness of our disclosure and internal controls over financial reporting; future costs savings; and other future economic and industry conditions, are forward-looking statements. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Annual Report should not be considered as a representation by us or any other person that our objectives or plans will be achieved. Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward-looking statements are subject to various factors, risks and uncertainties, many of which are beyond our control, including, but not limited to, our business is cyclical and vulnerable to economic downturns and client spending reductions; government shutdowns; long-term government contracts and subject to uncertainties related to government contract appropriations; governmental agencies may modify, curtail or terminate our contracts; government contracts are subject to audits and adjustments of contractual terms; losses under fixed-price contracts; limited control over operations run through our joint venture entities; liability for misconduct by our employees or consultants; failure to comply with laws or regulations applicable to our business; maintaining adequate surety and financial capacity; high leverage and potential inability to service our debt and guarantees; exposure to Brexit and tariffs; exposure to political and economic risks in different countries; currency exchange rate fluctuations; retaining and recruiting key technical and management personnel; legal claims; inadequate insurance coverage; environmental law compliance and inadequate nuclear indemnification; unexpected adjustments and cancellations related to our backlog; partners and third parties who may fail to satisfy their legal obligations; managing pension costs;AECOM Capital's real estate development; cybersecurity issues, IT outages and data privacy; risks associated with the benefits and costs of the Management Services transaction, including the risk that the expected benefits of the Management Services transaction or any contingent purchase price will not be realized within the expected time frame, in full or at all; the risk that costs of restructuring transactions and other costs incurred in connection with the Management Services transaction will exceed our estimates or otherwise adversely affect our business or operations; as well as other additional risks and factors discussed in this Annual Report on Form 10-K and any subsequent reports we file with theSEC . Accordingly, actual results could differ materially from those contemplated by any forward-looking statement. All subsequent written and oral forward-looking statements concerning the Company or other matters attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above. You are cautioned not to place undue reliance on these forward-looking statements, which speak only to the date they are made. The Company is under no obligation (and expressly disclaims any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise. Please review "Part I, Item 1A-Risk Factors" in this Annual Report for a discussion of the factors, risks and uncertainties that could affect our future results. Our fiscal year consists of 52 or 53 weeks, ending on the Friday closest toSeptember 30 . For clarity of presentation, we present all periods as if the year ended onSeptember 30 . We refer to the fiscal year endedSeptember 30, 2019 as "fiscal 2019" and the fiscal year endedSeptember 30, 2020 as "fiscal 2020." Fiscal years 2020, 2019, and 2018 each contained 53, 52, and 52 weeks, respectively, and ended onOctober 2 ,September 27 , andSeptember 28 , respectively. 37 Table of Contents Overview
We are a leading global provider of professional, technical and management support services for governments, businesses and organizations throughout the world. We provide planning, consulting, architectural and engineering design, construction management services, and investment and development services to commercial and government clients worldwide in major end markets such as transportation, facilities, environmental, energy, water and government markets. Our business focuses primarily on providing fee-based planning, consulting, architectural and engineering design services and, therefore, our business is labor intensive. We primarily derive income from our ability to generate revenue and collect cash from our clients through the billing of our employees' time spent on client projects and our ability to manage our costs.AECOM Capital primarily derives its income from real estate development sales and management fees. During the first quarter of fiscal 2020, we reorganized our operating and reporting structure to better align with our ongoing professional services business. This reorganization better reflected our continuing operations after the sale of our Management Services segment and planned disposal of our self-perform at-risk construction businesses, including our civil infrastructure, power, and oil & gas construction businesses. Our Management Services and self-perform at-risk construction businesses were part of our former Management Services segment and a substantial portion of our former Construction Services segment, respectively. These businesses are classified as discontinued operations in all periods presented. We report our continuing business through three segments:Americas , International, andAECOM Capital (ACAP). Such segments are organized by the differing specialized needs of the respective clients, and how we manage the business. We have aggregated various operating segments into our reportable segments based on their similar characteristics, including similar long-term financial performance, the nature of services provided, internal processes for delivering those services, and types of customers. OurAmericas segment delivers planning, consulting, architectural and engineering design, and construction management services to commercial and government clients inthe United States ,Canada , andLatin America in major end markets such as transportation, water, government, facilities, environmental, and energy. Our International segment delivers planning, consulting, and architectural and engineering design services to commercial and government clients inEurope , theMiddle East ,Africa , and theAsia-Pacific regions in major end markets such as transportation, water, government, facilities, environmental, and energy. Revenue for these two segments is primarily derived from fees for services we provide. Our ACAP segment primarily invests in and develops real estate projects. ACAP typically partners with investors and experienced developers as co-general partners. ACAP may, but is not required to, enter into contracts with our otherAECOM affiliates to provide design, engineering, construction management, development and operations, and maintenance services for ACAP funded projects. Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, integrate and maximize the value of our recent acquisitions, allocate our labor resources to profitable and high growth markets, secure new contracts, and renew existing client agreements. Demand for our services is cyclical and may be vulnerable to sudden economic downturns and reductions in government and private industry spending, which may result in clients delaying, curtailing or canceling proposed and existing projects. Moreover, as a professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation and profitability.
Our costs consist primarily of the compensation we pay to our employees, including salaries, fringe benefits, the costs of hiring subcontractors, other project-related expenses and sales, general and administrative costs.
TheU.S. federal government has proposed significant legislative and executive infrastructure initiatives that, if enacted, could have a positive impact to our infrastructure business. 38 Table of Contents Regarding our capital allocation policy, onNovember 13, 2020 , the Board approved an increase in our repurchase authorization to$1.0 billion , up from the approximately$305 million authorization in place immediately prior to such date. We intend to deploy future available cash towards stock repurchases consistent with our capital allocation policy.
In
We expect to exit the self-perform at-risk construction and non-core oil and gas markets. We are in the process of exiting more than 30 countries, subject to applicable laws, as part of our ongoing plan to improve profitability and reduce our risk profile, and we continue to evaluate our geographic exposure as part of such plan. We expect to incur restructuring costs of approximately$30 million to$50 million in fiscal 2021 primarily related to previously announced restructuring actions that are expected to deliver continued margin improvement and efficiencies. Total cash costs for these restructuring actions are expected to be approximately$30 million to$50 million .
Covid-19 Coronavirus Impacts
The impact of the coronavirus pandemic and measures to prevent its spread are affecting our businesses in a number of ways:
The coronavirus and accompanying economic effects are expected to reduce demand
? for our services and impact client spending in certain circumstances; however,
the uncertain nature of the coronavirus and its duration make it difficult for
us to predict and quantify such impact.
We have restricted non-essential business travel, required employees to work
? remotely where appropriate, reduced salaries or furloughed employees, reduced
non-essential spending and limited physical interactions with our clients.
? Non-essential construction and work on other client projects has been
temporarily halted in certain jurisdictions.
? Some contractual agreements are unable to be performed preventing us from
making or receiving payments.
? The coronavirus has made accessing the capital markets and engaging in business
and client development more difficult.
The coronavirus has made estimating the future performance of our business and
? mitigating the adverse financial impact of these developments on our business
operations more difficult.
? State and local budget shortfalls in the
pipeline of pursuits and the pace of award activity.
? Certain markets, such as the
experiencing project delays that have impacted our performance and results.
During the second half of fiscal 2020, we benefited from government subsidies
? of approximately
related to retaining employees.
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Acquisitions
The aggregate value of all consideration for our acquisitions consummated during
the year ended September 30, 2018 was $5.6 million . There were no acquisitions
consummated during the years ended September 30, 2020 and 2019.
All of our acquisitions have been accounted for as business combinations and the results of operations of the acquired companies have been included in our consolidated results since the dates of the acquisitions.
Components of Income and Expense
Year Ended September 30,
2020 2019 2018 2017 2016
(in millions)
Other Financial Data:
Revenue $ 13,240 $ 13,642 $ 13,878 $ 18,203 $ 17,411
Cost of revenue 12,530 13,030 13,399 17,519 16,768
Gross profit 710 612 479 684 643Equity in earnings of joint ventures 49 49 49 142 104 General and administrative expenses (190) (148) (135) (134) (115) Restructuring cost (188) (95) - - - Gain (loss) on disposal activities - 3 - 1 (43) Impairment of long-lived assets - (25) - - - Acquisition and integration expenses - - -
(39) (214)
Income from operations $ 381 $ 396 $ 393 $ 654 $ 375
Revenue
We generate revenue primarily by providing planning, consulting, architectural
and engineering design services to commercial and government clients around the
world. Our revenue consists of both services provided by our employees and
pass-through fees from subcontractors and other direct costs. We generally
recognize revenue over time as performance obligations are satisfied and control
over promised goods or services are transferred to our customers. We generally
measure progress to completion using an input measure of total costs incurred
divided by total costs expected to be incurred.
Cost of Revenue
Cost of revenue reflects the cost of our own personnel (including fringe benefits and overhead expense) associated with revenue.
Amortization Expense of Acquired Intangible Assets
Included in our cost of revenue is amortization of acquired intangible assets. We have ascribed value to identifiable intangible assets other than goodwill in our purchase price allocations for companies we have acquired. These assets include, but are not limited to, backlog and customer relationships. To the extent we ascribe value to identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of the assets. Such amortization expense, although non-cash in the period expensed, directly impacts our results of operations. It is difficult to predict with any precision the amount of expense we may record relating to acquired intangible assets.
Equity in Earnings of Joint Ventures
Equity in earnings of joint ventures includes our portion of fees charged by our
unconsolidated joint ventures to clients for services performed by us and other
joint venture partners along with earnings we receive from our return on
investments in unconsolidated joint ventures.
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General and Administrative Expenses
General and administrative expenses include corporate expenses, including personnel, occupancy, and administrative expenses.
Acquisition and Integration Expenses
Acquisition and integration expenses are comprised of transaction costs, professional fees, and personnel costs, including due diligence and integration activities, primarily related to business acquisitions.
Goodwill Impairment
See Critical Accounting Policies and Consolidated Results below.
Income Tax Expense (Benefit)
As a global enterprise, income tax expense/(benefit) and our effective tax rates can be affected by many factors, including changes in our worldwide mix of pre-tax losses/earnings, the effect of non-controlling interest in income of consolidated subsidiaries, the extent to which the earnings are indefinitely reinvested outside ofthe United States , our acquisition strategy, tax incentives and credits available to us, changes in judgment regarding the realizability of our deferred tax assets, changes in existing tax laws and our assessment of uncertain tax positions. Our tax returns are routinely audited by the taxing authorities and settlements of issues raised in these audits can also sometimes affect our effective tax rate.
Geographic Information
For geographic financial information, please refer to Note 4 and Note 19 in the notes to our consolidated financial statements found elsewhere in the Form 10-K.
Critical Accounting Policies
Our financial statements are presented in accordance with accounting principles generally accepted inthe United States (GAAP). Highlighted below are the accounting policies that management considers significant to understanding
the
operations of our business.
Revenue Recognition
Our accounting policies establish principles for recognizing revenue upon the
transfer of control of promised goods or services to customers. We generally
recognize revenues over time as performance obligations are satisfied. We
generally measure our progress to completion using an input measure of total
costs incurred divided by total costs expected to be incurred. In the course of
providing these services, we routinely subcontract for services and incur other
direct cost on behalf of our clients. These costs are passed through to clients,
and in accordance with accounting rules, are included in our revenue and cost of
revenue.
Revenue recognition and profit is dependent upon a number of factors, including
the accuracy of a variety of estimates made at the balance sheet date, such as
engineering progress, material quantities, the achievement of milestones,
penalty provisions, labor productivity and cost estimates. Additionally, we are
required to make estimates for the amount of consideration to be received,
including bonuses, awards, incentive fees, claims, unpriced change orders,
penalties and liquidated damages. Variable consideration is included in the
estimate of transaction price only to the extent that a significant reversal
would not be probable. We continuously monitor factors that may affect the
quality of our estimates, and material changes in estimates are disclosed
accordingly.
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Claims Recognition
Claims are amounts in excess of the agreed contract price (or amounts not
included in the original contract price) that we seek to collect from customers
or others for delays, errors in specifications and designs, contract
terminations, change orders in dispute or unapproved contracts as to both scope
and price or other causes of unanticipated additional costs. We record contract
revenue related to claims only if it is probable that the claim will result in
additional contract revenue and only to the extent that a significant reversal
would not be probable. The amounts recorded, if material, are disclosed in the
notes to the financial statements. Costs attributable to claims are treated as
costs of contract performance as incurred.
Government Contract Matters
Our federal government and certain state and local agency contracts are subject to, among other regulations, regulations issued under the Federal Acquisition Regulations (FAR). These regulations can limit the recovery of certain specified indirect costs on contracts and subject us to ongoing multiple audits by government agencies such as theDefense Contract Audit Agency (DCAA). In addition, most of our federal and state and local contracts are subject to termination at the discretion of the client. Audits by the DCAA and other agencies consist of reviews of our overhead rates, operating systems and cost proposals to ensure that we account for such costs in accordance with the Cost Accounting Standards of the FAR (CAS). If the DCAA determines we have not accounted for such costs consistent with CAS, the DCAA may disallow these costs. There can be no assurance that audits by the DCAA or other governmental agencies will not result in material cost disallowances in the future.
Allowance for Doubtful Accounts
We record accounts receivable net of an allowance for doubtful accounts. This allowance for doubtful accounts is estimated based on management's evaluation of the contracts involved and the financial condition of our clients. The factors we consider in our contract evaluations include, but are not limited to: ? Client type-federal or state and local government or commercial client;
? Historical contract performance;
? Historical collection and delinquency trends;
? Client credit worthiness; and
? General economic conditions.
Contract Assets and Contract Liabilities
Contract assets represent the contract revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end.
Contract liabilities represent the billings to date, as allowed under the terms of a contract, but not yet recognized as contract revenue using our revenue recognition policy.
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Investments in
We have noncontrolling interests in joint ventures accounted for under the equity method. Fees received for and the associated costs of services performed by us and billed to joint ventures with respect to work done by us for third-party customers are recorded as our revenues and costs in the period in which such services are rendered. In certain joint ventures, a fee is added to the respective billings from both us and the other joint venture partners on the amounts billed to the third-party customers. These fees result in earnings to the joint venture and are split with each of the joint venture partners and paid to the joint venture partners upon collection from the third-party customer. We record our allocated share of these fees as equity in earnings of joint ventures.
Additionally, our ACAP segment primarily invests in real estate projects.
Income Taxes
We provide for income taxes in accordance with principles contained in ASC Topic
740, Income Taxes. Under these principles, we recognize the amount of income tax
payable or refundable for the current year and deferred tax assets and
liabilities for the future tax consequences of events that have been recognized
in our financial statements or tax returns.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period when the new rate is
enacted. Deferred tax assets are evaluated for future realization and reduced by
a valuation allowance if it is more likely than not that a portion will not be
realized.
We measure and recognize the amount of tax benefit that should be recorded for
financial statement purposes for uncertain tax positions taken or expected to be
taken in a tax return. With respect to uncertain tax positions, we evaluate the
recognized tax benefits for recognition, measurement, derecognition,
classification, interest and penalties, interim period accounting and disclosure
requirements. Judgment is required in assessing the future tax consequences of
events that have been recognized in our financial statements or tax returns.
Valuation Allowance. Deferred income taxes are provided on the liability method
whereby deferred tax assets and liabilities are established for the difference
between the financial reporting and income tax basis of assets and liabilities,
as well as for tax attributes such as operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and tax rates on the date of enactment of such changes to
laws and tax rates.
Deferred tax assets are reduced by a valuation allowance when, in our opinion,
it is more likely than not that some portion or all of the deferred tax assets
may not be realized. The evaluation of the recoverability of the deferred tax
asset requires the Company to weigh all positive and negative evidence to reach
a conclusion that it is more likely than not that all or some portion of the
deferred tax assets will not be realized. The weight given to the evidence is
commensurate with the extent to which it can be objectively verified. Whether a
deferred tax asset may be realized requires considerable judgment by us. In
considering the need for a valuation allowance, we consider a number of factors
including the nature, frequency, and severity of cumulative financial reporting
losses in recent years, the future reversal of existing temporary differences,
predictability of future taxable income exclusive of reversing temporary
differences of the character necessary to realize the asset, relevant
carryforward periods, taxable income in carry-back years if carry-back is
permitted under tax law, and prudent and feasible tax planning strategies that
would be implemented, if necessary, to protect against the loss of the deferred
tax asset that would otherwise expire. Whether a deferred tax asset will
ultimately be realized is also dependent on varying factors, including, but not
limited to, changes in tax laws and audits by tax jurisdictions in which we
operate.
If future changes in judgment regarding the realizability of our deferred tax
assets lead us to determine that it is more likely than not that we will not
realize all or part of our deferred tax asset in the future, we will record an
additional valuation allowance. Conversely, if a valuation allowance exists and
we determine that the ultimate realizability of all or part of the net deferred
tax asset is more likely than not to be realized, then the amount of the
valuation allowance will be reduced. This adjustment will increase or decrease
income tax expense in the period of such determination.
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Undistributed Non-U.S. Earnings. The results of our operations outside ofthe United States are consolidated for financial reporting; however, earnings from investments in non-U.S. operations are included in domesticU.S. taxable income only when actually or constructively received. No deferred taxes have been provided on the undistributed gross book-tax basis differences of our non-U.S. operations of approximately$1.5 billion because we have the ability to and intend to permanently reinvest these basis differences overseas. If we were to repatriate these basis differences, additional taxes could be due at that time. We continually explore initiatives to better align our tax and legal entity structure with the footprint of our non-U.S. operations and we recognize the tax impact of these initiatives, including changes in assessment of its uncertain tax positions, indefinite reinvestment exception assertions and realizability of deferred tax assets, earliest in the period when management believes all necessary internal and external approvals associated with such initiatives have been obtained, or when the initiatives are materially complete.
Goodwill represents the excess of amounts paid over the fair value of net assets acquired from an acquisition. In order to determine the amount of goodwill resulting from an acquisition, we perform an assessment to determine the value of the acquired company's tangible and identifiable intangible assets and liabilities. In our assessment, we determine whether identifiable intangible assets exist, which typically include backlog and customer relationships. We test goodwill for impairment annually for each reporting unit in the fourth quarter of the fiscal year and between annual tests, if events occur or circumstances change which suggest that goodwill should be evaluated. Such events or circumstances include significant changes in legal factors and business climate, recent losses at a reporting unit, and industry trends, among other factors. A reporting unit is defined as an operating segment or one level below an operating segment. Our impairment tests are performed at the operating segment level as they represent our reporting units. During the impairment test, we estimate the fair value of the reporting unit using income and market approaches, and compare that amount to the carrying value of that reporting unit. In the event the fair value of the reporting unit is determined to be less than the carrying value, goodwill is impaired, and an impairment loss is recognized equal to the excess, limited to the total amount of goodwill allocated to the reporting unit.
The impairment evaluation process includes, among other things, making assumptions about variables such as revenue growth rates, profitability, discount rates, and industry market multiples, which are subject to a high degree of judgment.
Material assumptions used in the impairment analysis included the weighted average cost of capital (WACC) percent and terminal growth rates. For example, as ofSeptember 30, 2020 , a 1% increase in the WACC rate represents a$500 million decrease to the fair value of our reporting units. As ofSeptember 30, 2020 , a 1% decrease in the terminal growth rate represents a$200 million decrease to the fair value of our reporting units. 44
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Pension Benefit Obligations
A number of assumptions are necessary to determine our pension liabilities and net periodic costs. These liabilities and net periodic costs are sensitive to changes in those assumptions. The assumptions include discount rates, long-term rates of return on plan assets and inflation levels limited to theUnited Kingdom and are generally determined based on the current economic environment in each host country at the end of each respective annual reporting period. We evaluate the funded status of each of our retirement plans using these current assumptions and determine the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations and other factors. Based upon current assumptions, we expect to contribute$28.4 million to our international plans in fiscal 2021. Our required minimum contributions for ourU.S. qualified plans are not significant. In addition, we may make additional discretionary contributions. We currently expect to contribute$12.2 million to ourU.S. plans (including benefit payments to nonqualified plans and postretirement medical plans) in fiscal 2021. If the discount rate was reduced by 25 basis points, plan liabilities would increase by approximately$75.2 million . If the discount rate and return on plan assets were reduced by 25 basis points, plan expense would decrease by approximately$0.1 million and increase by approximately$3.0 million , respectively. If inflation increased by 25 basis points, plan liabilities in theUnited Kingdom would increase by approximately$35.0 million and plan expense would increase by approximately$1.9 million . At each measurement date, all assumptions are reviewed and adjusted as appropriate. With respect to establishing the return on assets assumption, we consider the long term capital market expectations for each asset class held as an investment by the various pension plans. In addition to expected returns for each asset class, we take into account standard deviation of returns and correlation between asset classes. This is necessary in order to generate a distribution of possible returns which reflects diversification of assets. Based on this information, a distribution of possible returns is generated based on the plan's target asset allocation. Capital market expectations for determining the long term rate of return on assets are based on forward-looking assumptions which reflect a 20-year view of the capital markets. In establishing those capital market assumptions and expectations, we rely on the assistance of our actuaries and our investment consultants. We and the plan trustees review whether changes to the various plans' target asset allocations are appropriate. A change in the plans' target asset allocations would likely result in a change in the expected return on asset assumptions. In assessing a plan's asset allocation strategy, we and the plan trustees consider factors such as the structure of the plan's liabilities, the plan's funded status, and the impact of the asset allocation to the volatility of the plan's funded status, so that the overall risk level resulting from our defined benefit plans is appropriate within our risk management strategy. BetweenSeptember 30, 2019 andSeptember 30, 2020 , the aggregate worldwide pension deficit increased from$366.1 million to$406.0 million due to decreased discount rates. If the various plans do not experience future investment gains to reduce this shortfall, the deficit will be reduced by additional contributions.
Accrued Professional Liability Costs
We carry professional liability insurance policies or self-insure for our initial layer of professional liability claims under our professional liability insurance policies and for a deductible for each claim even after exceeding the self-insured retention. We accrue for our portion of the estimated ultimate liability for the estimated potential incurred losses. We establish our estimate of loss for each potential claim in consultation with legal counsel handling the specific matters and based on historic trends taking into account recent events. We also use an outside actuarial firm to assist us in estimating our future claims exposure. It is possible that our estimate of loss may be revised based on the actual or revised estimate of liability of the claims.
Foreign Currency Translation
Our functional currency is theU.S. dollar. Results of operations for foreign entities are translated toU.S. dollars using the average exchange rates during the period. Assets and liabilities for foreign entities are translated using the exchange rates in effect as of the date of the balance sheet. Resulting translation adjustments are recorded as a foreign currency translation adjustment into other accumulated comprehensive income/(loss) in stockholders' equity. 45 Table of Contents
We limit exposure to foreign currency fluctuations in most of our contracts through provisions that require client payments in currencies corresponding to the currency in which costs are incurred. As a result of this natural hedge, we generally do not need to hedge foreign currency cash flows for contract work performed. However, we will use foreign exchange derivative financial instruments from time to time to mitigate foreign currency risk. The functional currency of all significant foreign operations is the respective local currency.
Fiscal year ended
September 30, 2019
Consolidated Results
Fiscal Year Ended Change
September 30, September 30,
2020 2019 $ %
($ in millions)
Revenue $ 13,240.0 $ 13,642.5 $ (402.5) (3.0) %
Cost of revenue 12,530.4 13,030.8 (500.4) (3.8)
Gross profit 709.6 611.7 97.9 16.0Equity in earnings of joint ventures 48.8 49.3 (0.5) (1.1) General and administrative expenses (188.6) (148.2) (40.4) 27.3 Restructuring cost (188.3) (95.4) (92.9) 97.3 Gain on disposal activities - 3.6 (3.6) (100.0) Impairment of long-lived assets - (24.9) 24.9 (100.0) Income from operations 381.5 396.1 (14.6) (3.7) Other income 11.1 14.6 (3.5) (24.0) Interest expense (160.0) (161.5) 1.5 (1.0) Income from continuing operations before income tax expense 232.6 249.2 (16.6) (6.6) Income tax expense from continuing operations 45.7 13.5 32.2 239.0 Net income from continuing operations 186.9 235.7 (48.8) (20.7) Net loss from discontinued operations (340.6) (419.7) 79.1 (18.8) Net loss (153.7) (184.0) 30.3 (16.4) Net income attributable to noncontrolling interests from continuing operations (16.5) (24.7) 8.2 (33.6) Net income attributable to noncontrolling interests from discontinued operations (16.2) (52.4) 36.2 (69.0) Net income attributable to noncontrolling interests (32.7) (77.1) 44.4 (57.7) Net income attributable toAECOM from continuing operations 170.4 211.0 (40.6) (19.2) Net loss attributable toAECOM from discontinued operations (356.8) (472.1) 115.3 (24.4) Net loss attributable to AECOM$ (186.4) $
(261.1)$ 74.7 (28.6) % 46 Table of Contents The following table presents the percentage relationship of statement of operations items to revenue: Fiscal Year Ended September 30, September 30, 2020 2019 Revenue 100.0 % 100.0 % Cost of revenue 94.6 95.5 Gross profit 5.4 4.5
Equity in earnings of joint ventures 0.4
0.4
General and administrative expenses (1.5)
(1.1)
Restructuring costs (1.4) (0.7)
Gain on disposal activities 0.0 0.0Impairment of long-lived assets 0.0
(0.2)
Income from operations 2.9 2.9
Other income 0.1 0.1
Interest expense (1.2) (1.2)
Income from continuing operations before income tax
expense 1.8 1.8
Income tax expense from continuing operations 0.4
0.1
Net income from continuing operations 1.4
1.7
Net loss from discontinued operations (2.6)
(3.0)
Net loss (1.2)
(1.3)
Net income attributable to noncontrolling interests from continuing operations
(0.1) (0.2)
Net income attributable to noncontrolling interests from discontinued operations
(0.1) (0.4)
Net income attributable to noncontrolling interests (0.2)
(0.6)
Net income attributable toAECOM from continuing operations 1.3
1.5
Net loss attributable toAECOM from discontinued operations (2.7)
(3.4)
Net loss attributable toAECOM (1.4) %
(1.9) %
Revenue
Our revenue for the year ended
The decrease in revenue for the year ended
In the course of providing our services, we routinely subcontract for services and incur other direct costs on behalf of our clients. These costs are passed through to clients and, in accordance with industry practice and GAAP, are included in our revenue and cost of revenue. Because subcontractor and other direct costs can change significantly from project to project and period to period, changes in revenue may not be indicative of business trends. Subcontractor and other direct costs for the years endedSeptember 30, 2020 and 2019 were$7.1 billion and$7.4 billion , respectively. Subcontractor costs and other direct costs as a percentage of revenue was 54% during the year endedSeptember 30, 2020 and the year endedSeptember 30, 2019 .
Gross Profit
Our gross profit for the year endedSeptember 30, 2020 increased$97.9 million , or 16.0%, to$709.6 million as compared to$611.7 million for the corresponding period last year. For the year endedSeptember 30, 2020 , gross profit, as a percentage of revenue, increased to 5.4% from 4.5% in the year endedSeptember 30, 2019 . 47 Table of Contents
Gross profit changes were due to the reasons noted in
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for the year endedSeptember 30, 2020 was$48.8 million as compared to$49.3 million in the corresponding period last year.
General and Administrative Expenses
Our general and administrative expenses for the year endedSeptember 30, 2020 increased$40.4 million , or 27.3%, to$188.6 million as compared to$148.2 million for the corresponding period last year. For the year endedSeptember 30, 2020 , general and administrative expenses increased to 1.5% from 1.1% for the year endedSeptember 30, 2019 .
The increase in general and administrative expenses was primarily due to the accelerated depreciation of a project management tool.
Restructuring Costs
In the first quarter of fiscal 2019, we commenced a restructuring plan to improve profitability. We incurred additional restructuring costs in fiscal 2020 primarily related to optimizing our cost structure and eliminating overhead costs as a result of the sale of the Management Services business and the exit of our self-perform at-risk construction business. During the year endedSeptember 30, 2020 , we incurred restructuring expenses of$188.3 million , primarily related to personnel costs. During the year endedSeptember 30, 2019 , we incurred restructuring expenses of$95.4 million .
Gain on Disposal Activities
Gain on disposal activities in the accompanying statements of operations for the year endedSeptember 30, 2019 was$3.6 million . The gain on disposal activities in the year endedSeptember 30, 2019 primarily relates to the sale of certain non-core assets as part of our plan to improve profitability and reduce our risk profile.
Impairment of Long-Lived Assets
Impairment of long-lived assets was$24.9 million for the year endedSeptember 30, 2019 . The impairment of long lived assets was primarily related to leasehold improvements that were no longer recoverable. The impairment loss did not repeat in fiscal year 2020. Other Income Our other income for the year endedSeptember 30, 2020 decreased$3.5 million to$11.1 million as compared to$14.6 million for the corresponding period last year.
Other income is primarily comprised of interest income.
Interest Expense
Our interest expense for the year ended
The decrease in interest expense for the year ended
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Income Tax Expense
Our income tax expense for the year ended September 30, 2020 was $45.8 million
compared to $13.5 million for the year ended September 30, 2019 . The increase in
tax expense for the year ended September 30, 2020 , compared to the corresponding
period last year, is due primarily to a decrease in benefit of $10.6 million
related to changes in valuation allowances and an increase in tax expense of
$8.2 million related to nondeductible costs, and an increase in tax expense
related to foreign rate differential of $6.3 million .
During fiscal 2020, management approved a tax planning strategy and we
restructured certain operations in Canada which resulted in the release of a
valuation allowance related to net operating losses and other deferred tax
assets in the amount of $31.7 million . We are now forecasting the utilization of
the net operating losses within the foreseeable future. The new positive
evidence was evaluated against any negative evidence to determine the valuation
allowance was no longer needed.
During fiscal 2019, a valuation allowance in the amount of $38.1 million related
to foreign tax credits was released due to sufficient positive evidence obtained
during the fiscal year. The positive evidence included the issuance of
regulations related to the Tax Act and forecasting the utilization of the
foreign tax credits within the foreseeable future.
We are currently under tax audit in several jurisdictions including the
We regularly integrate and consolidate our business operations and legal entity structure, and such internal initiatives could impact the assessment of uncertain tax positions, indefinite reinvestment assertions and the realizability of deferred tax assets.
Net Loss From Discontinued Operations
During the first quarter of fiscal 2020, management approved a plan to dispose via sale our Management Services business and our self-perform at-risk construction businesses. As a result of these strategic actions, the Management Services and self-perform at-risk construction businesses were classified as discontinued operations. That classification was applied retrospectively for all periods presented. Net loss from discontinued operations decreased$79.1 million to$340.6 million from$419.7 million for the years endedSeptember 30, 2020 and 2019, respectively. The decrease in net loss from discontinued operations for the year endedSeptember 30, 2020 was primarily due to a$161.9 million gain recorded on the disposal of our Management Services business. The gain was offset by impairment of goodwill of approximately$83.6 million related to the self-perform at-risk construction business, and a$247.2 million loss related to the remeasurement of the businesses within discontinued operations based on estimated fair values less costs to sell. Net loss from discontinued operations for the year endedSeptember 30, 2019 included a goodwill impairment of$588.0 million related to a reduction in estimated fair value of our at-risk construction businesses and a reduction in our self-perform at-risk construction exposure.
Net Loss Attributable to
The factors described above resulted in the net loss attributable toAECOM of$186.4 million for the year endedSeptember 30, 2020 , as compared to the net loss attributable toAECOM of$261.1 million for the year endedSeptember 30, 2019 . 49 Table of Contents
Results of Operations by Reportable Segment
Americas Fiscal Year Ended September 30, September 30, Change 2020 2019 $ % ( in millions) Revenue$ 10,131.5 $ 10,382.6 $ (251.1) (2.4) % Cost of revenue 9,551.0 9,871.1 (320.1) (3.2) Gross profit $ 580.5 $ 511.5$ 69.0 13.5 %
The following table presents the percentage relationship of statement of operations items to revenue:
Fiscal Year Ended
September 30, September 30,
2020 2019
Revenue 100.0 % 100.0 %
Cost of revenue 94.3 95.1
Gross profit 5.7 % 4.9 %
Revenue
Revenue for our Americas segment for the year ended September 30, 2020 decreased
$251.1 million , or 2.4%, to $10,131.5 million as compared to $10,382.6 million
for the corresponding period last year.
The decrease in revenue for the year ended
Gross Profit
Gross profit for our
The increase in gross profit and gross profit as a percentage of revenue for the year endedSeptember 30, 2020 were primarily due to reduced costs resulting from restructuring activities that commenced during the prior year. International Fiscal Year Ended September 30, September 30, Change 2020 2019 $ % (in millions) Revenue$ 3,101.7 $ 3,251.7 $ (150.0) (4.6) % Cost of revenue 2,979.5 3,159.8 (180.3) (5.7) Gross profit $ 122.2 $ 91.9$ 30.3 33.0 % 50 Table of Contents
The following table presents the percentage relationship of statement of operations items to revenue:
Fiscal Year Ended
September 30, September 30,
2020 2019
Revenue 100.0 % 100.0 %
Cost of revenue 96.1 97.2
Gross profit 3.9 % 2.8 %
Revenue
Revenue for our International segment for the year ended
The decrease in revenue for the year endedSeptember 30, 2020 was primarily attributable to declines in theUnited Kingdom andGreater China regions due to downtime caused by the impact of the coronavirus pandemic in those regions and theMiddle East was impacted by lower oil and gas prices.
Gross Profit
Gross profit for our International segment for the year endedSeptember 30, 2020 increased$30.3 million , or 33.0%, to$122.2 million as compared to$91.9 million for the corresponding period last year. As a percentage of revenue, gross profit increased to 3.9% of revenue for the year endedSeptember 30, 2020 from 2.8% in the corresponding period last year. The increase in gross profit and gross profit as a percentage of revenue for the year endedSeptember 30, 2020 was primarily due to reduced costs resulting from restructuring activities that commenced during the prior year.AECOM Capital Fiscal Year Ended September 30, September 30, Change 2020 2019 $ % (in millions) Revenue $ 6.8 $ 8.2$ (1.4) (17.1) %
Equity in earnings of joint ventures $ 14.7 $
17.7
* NM - Not Meaningful
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Fiscal year ended September 30, 2019 compared to the fiscal year ended September
30, 2018
Consolidated Results
Fiscal Year Ended Change
September 30, September 30,
2019 2018 $ %
($ in millions)
Revenue $ 13,642.5 $ 13,878.3 $ (235.8) (1.7) %
Cost of revenue 13,030.8 13,399.3 (368.5) (2.8)
Gross profit 611.7 479.0 132.7 27.7Equity in earnings of joint ventures 49.3 49.4 (0.1) (0.1) General and administrative expenses (148.2) (135.8) (12.4) 9.1 Restructuring cost (95.4) - (95.4) 0.0 Gain on disposal activities 3.6 - 3.6 0.0 Impairment of long-lived assets (24.9)
- (24.9) 0.0
Income from operations 396.1 392.6 3.5 0.9
Other income 14.6 20.6 (6.0) (29.4)
Interest expense (161.5) (201.0) 39.5 (19.7)
Income from continuing operations before
income tax expense (benefit) 249.2 212.2 37.0 17.4
Income tax expense (benefit) from
continuing operations 13.5 (3.5) 17.0 (486.3)
Net income from continuing operations 235.7 215.7 20.0 9.3
Net loss from discontinued operations (419.7) (18.6) (401.1) NM
Net (loss) income (184.0) 197.1 (381.1) (193.3)
Net income attributable to noncontrolling
interests from continuing operations (24.7) (20.2) (4.5) 22.3
Net income attributable to noncontrolling
interests from discontinued operations (52.4) (40.4) (12.0) 29.4
Net income attributable to noncontrolling
interests (77.1) (60.6) (16.5) 27.0
Net income attributable to AECOM from
continuing operations 211.0 195.5 15.5 7.9
Net loss attributable to AECOM from
discontinued operations (472.1)
(59.0) (413.1) 699.5
Net (loss) income attributable to
*NM - Not Meaningful
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The following table presents the percentage relationship of statement of
operations items to revenue:
Fiscal Year Ended
September 30, September 30,
2019 2018
Revenue 100.0 % 100.0 %
Cost of revenue 95.5 96.5
Gross profit 4.5 3.5Equity in earnings of joint ventures 0.4
0.4
General and administrative expenses (1.1)
(1.1)
Restructuring costs (0.7) 0.0
Gain on disposal activities 0.0 0.0Impairment of long-lived assets (0.2)
0.0
Income from operations 2.9 2.8
Other income 0.1 0.1
Interest expense (1.2) (1.4)
Income from continuing operations before income tax
expense (benefit) 1.8 1.5
Income tax expense (benefit) from continuing operations 0.1
(0.1)
Net income from continuing operations 1.7
1.6
Net loss from discontinued operations (3.0)
(0.2)
Net (loss) income (1.3)
1.4
Net income attributable to noncontrolling interests from continuing operations
(0.2) (0.1)
Net income attributable to noncontrolling interests from discontinued operations
(0.4) (0.3)
Net income attributable to noncontrolling interests (0.6)
(0.4)
Net income attributable toAECOM from continuing operations 1.5
1.5
Net loss attributable toAECOM from discontinued operations (3.4)
(0.5)
Net (loss) income attributable toAECOM (1.9) %
1.0 %
Revenue
Our revenue for the year endedSeptember 30, 2019 decreased$235.8 million , or 1.7%, to$13,642.5 million as compared to$13,878.3 million for the year endedSeptember 30, 2018 .
The decrease in revenue for the year ended
In the course of providing our services, we routinely subcontract for services and incur other direct costs on behalf of our clients. These costs are passed through to clients and, in accordance with industry practice and GAAP, are included in our revenue and cost of revenue. Because subcontractor and other direct costs can change significantly from project to project and period to period, changes in revenue may not be indicative of business trends. Subcontractor and other direct costs for the years endedSeptember 30, 2019 and 2018 were$7.4 billion and$7.7 billion , respectively. Subcontractor costs and other direct costs as a percentage of revenue decreased to 54% during the year endedSeptember 30, 2019 compared with 56% during the year ended September
30, 2018. Gross Profit Our gross profit for the year endedSeptember 30, 2019 increased$132.7 million , or 27.7%, to$611.7 million as compared to$479.0 million for the year endedSeptember 30, 2018 . For the year endedSeptember 30, 2019 , gross profit, as a percentage of revenue, increased to 4.5% from 3.5% in the year endedSeptember 30, 2018 . 53 Table of Contents
Gross profit changes were due to the reasons noted in the
Equity in Earnings of Joint Ventures
Our equity in earnings of joint ventures for the year endedSeptember 30, 2019 was$49.3 million as compared to$49.4 million in the year endedSeptember 30, 2018 .
General and Administrative Expenses
Our general and administrative expenses for the year endedSeptember 30, 2019 increased$12.4 million , or 9.1%, to$148.2 million as compared to$135.8 million for the year endedSeptember 30, 2018 . For the year endedSeptember 30, 2019 , general and administrative expenses remained at 1.1% for the years endedSeptember 30, 2019 and 2018.
Restructuring Costs
In the first quarter of fiscal 2019, we commenced a restructuring plan to improve profitability. During the year endedSeptember 30, 2019 , we incurred restructuring expenses of$95.4 million . We expect to achieve approximately$225 million of annual cost savings, which is expected to contribute to$150 million of cost savings in fiscal 2020.
Gain on Disposal Activities
Gain on disposal activities in the accompanying statements of operations for the year endedSeptember 30, 2019 was$3.6 million for the year endedSeptember 30, 2018 . The gain on disposal activities primarily relates to incremental gains on the sale of specific non-core oil and gas assets inNorth America from our CS segment previously classified as assets held for sale.
Impairment of Long-Lived Assets
Impairment of long-lived assets was
Other Income
Our other income for the year ended
Other income is primarily comprised of interest income. The decrease in other income for the year endedSeptember 30, 2019 was primarily due to a$9.1 million gain realized in the year endedSeptember 30, 2018 from a foreign exchange forward contract entered into as part of the refinance of our Credit Agreement inMarch 2018 , as discussed below in "Liquidity and Capital Resources - Debt - 2014 Credit Agreement." Interest Expense
Our interest expense for the year ended
The decrease in interest expense for the year endedSeptember 30, 2019 was primarily due to a$34.5 million prepayment premium paid on our$800 million unsecured 5.750% Senior Notes due 2022 that was incurred during the year endedSeptember 30, 2018 and did not repeat in 2019. 54 Table of Contents Income Tax Expense (Benefit) Our income tax expense for the year endedSeptember 30, 2019 was$13.5 million compared to a benefit of$3.5 million for the year endedSeptember 30, 2018 . The increase in tax expense for the year endedSeptember 30, 2019 , compared to the year endedSeptember 30, 2018 , is due primarily to one-time items that occurred during the fiscal year endedSeptember 30, 2018 , including valuation allowance increases of$37.8 million , a$12.5 million net tax expense related to one-timeU.S. federal tax law changes, a tax benefit of$26.0 million related to changes in uncertain tax positions primarily in theU.S. andCanada , and a tax benefit of$27.7 million related to an audit settlement in theU.S. The tax impact of these items was partially offset by a tax benefit of$26.5 million that occurred in fiscal 2019 related to changes in valuation allowances including the release of a valuation allowance in the amount of$38.1 million due to sufficient positive evidence obtained during fiscal 2019. During fiscal 2018, we recorded a$38.1 million valuation allowance related to foreign tax credits as a result ofU.S. federal tax law changes. In fiscal 2019, we released this valuation allowance due to sufficient positive evidence obtained during the quarter. The positive evidence included the issuance of regulations related to the Tax Act during the quarter and forecasting the utilization of the foreign tax credits within the foreseeable future. During fiscal 2018, we effectively settled aU.S. federal income tax examination for URS pre-acquisition tax years 2012, 2013 and 2014 and recorded a benefit of$27.7 million related to various adjustments, in addition to the favorable settlement of R&D credits of$19.9 million recorded in fiscal 2018. During fiscal 2018,President Trump signed The Tax Cuts and Jobs Act (Tax Act) into law. The Tax Act reduced ourU.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on accumulated earnings of foreign subsidiaries, created new taxes on certain foreign sourced earnings, and eliminated or reduced certain deductions. In fiscal 2018, we remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future, which is generally 21%. The amount recorded related to the remeasurement of our deferred tax balance was a$38.9 million tax expense. In addition, we released the deferred tax liability and recorded a tax benefit related to certain foreign subsidiaries for which the undistributed earnings are not intended to be reinvested indefinitely for$79.8 million and accrued$53.4 million of tax expense on these earnings as part of the one-time transition tax.
We are currently under tax audit in several jurisdictions including the
We regularly integrate and consolidate our business operations and legal entity structure, and such internal initiatives could impact the assessment of uncertain tax positions, indefinite reinvestment assertions and the realizability of deferred tax assets.
Net Loss From Discontinued Operations
Net loss from discontinued operations increased$401.1 million to$419.7 million compared to$18.6 million for the years endedSeptember 30, 2019 and 2018, respectively. The increase in net loss from discontinued operations for the year endedSeptember 30, 2019 was primarily related to goodwill impairment of$588.0 million recognized due to a reduction in the estimated fair value of our at-risk construction business and a reduction in our self-perform at-risk construction exposure.
Net (Loss) Income Attributable to
The factors described above resulted in the net loss attributable toAECOM of$261.1 million for the year endedSeptember 30, 2019 , as compared to the net income attributable toAECOM of$136.5 million for the year ended September
30,
2018.
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Results of Operations by Reportable Segment
Americas Fiscal Year Ended September 30, September 30, Change 2019 2018 $ % ( in millions) Revenue$ 10,382.6 $ 10,512.3 $ (129.7) (1.2) % Cost of revenue 9,871.1 10,108.5 (237.4) (2.3) Gross profit $ 511.5 $ 403.8$ 107.7 26.7 %
The following table presents the percentage relationship of statement of operations items to revenue:
Fiscal Year Ended
September 30, September 30,
2019 2018
Revenue 100.0 % 100.0 %
Cost of revenue 95.1 96.2
Gross profit 4.9 % 3.8 %
Revenue
Revenue for our Americas segment for the year ended September 30, 2019 decreased
$129.7 million , or 1.2%, to $10,382.6 million as compared to $10,512.3 million
for the year ended September 30, 2018 .
The decrease in revenue for the year ended September 30, 2019 was primarily
attributable to decreased construction management of airports in the U.S. and
residential high-rise buildings in New York City of approximately $340 million ,
partially offset by an increase in design consulting services, largely due to
increased work performed on a residential housing storm disaster relief program.
Gross Profit
Gross profit for our
The increases in gross profit and gross profit as a percentage of revenue for the year endedSeptember 30, 2019 were primarily due to reduced costs resulting from restructuring activities taken earlier in fiscal 2019. International Fiscal Year Ended September 30, September 30, Change 2019 2018 $ % (in millions) Revenue$ 3,251.7 $ 3,366.0 $ (114.3) (3.4) % Cost of revenue 3,159.8 3,290.8 (131.0) (4.0) Gross profit $ 91.9 $ 75.2$ 16.7 22.2 % 56 Table of Contents
The following table presents the percentage relationship of statement of operations items to revenue:
Fiscal Year Ended
September 30, September 30,
2019 2018
Revenue 100.0 % 100.0 %
Cost of revenue 97.2 97.8
Gross profit 2.8 % 2.2 %
Revenue
Revenue for our International segment for the year ended
Gross Profit
Gross profit for our International segment for the year endedSeptember 30, 2019 increased$16.7 million , or 22.2%, to$91.9 million as compared to$75.2 million for the year endedSeptember 30, 2018 . As a percentage of revenue, gross profit increased to 2.8% of revenue for the year endedSeptember 30, 2019 from 2.2% in the year endedSeptember 30, 2018 .AECOM Capital Fiscal Year Ended September 30, September 30, Change 2019 2018 $ % (in millions) Revenue $ 8.2 $ -$ 8.2 NM %
Equity in earnings of joint ventures $ 17.7 $ 15.3$ 2.4 15.7 General and administrative expenses$ (5.0) $ (11.2) $ 6.3 (55.4) % * NM - Not Meaningful
Equity in earnings of joint ventures included a gain on the sale of a property.
Liquidity and Capital Resources
Cash Flows
Our principal sources of liquidity are cash flows from operations, borrowings under our credit facilities, and access to financial markets. Our principal uses of cash are operating expenses, capital expenditures, working capital requirements, acquisitions, repurchases of common stock, and repayment of debt. We believe our anticipated sources of liquidity including operating cash flows, existing cash and cash equivalents, borrowing capacity under our revolving credit facility and our ability to issue debt or equity, if required, will be sufficient to meet our projected cash requirements for at least the next twelve months. We expect to spend approximately$30 million to$50 million in restructuring costs in fiscal 2021 associated with previously announced restructuring actions that are expected to deliver continued margin improvement and efficiencies. Generally, we do not provide forU.S. taxes or foreign withholding taxes on gross book-tax basis differences in our non-U.S. subsidiaries because such basis differences are able to and intended to be reinvested indefinitely. AtSeptember 30, 2020 , we have determined that we will continue to indefinitely reinvest the earnings of some foreign subsidiaries and therefore we will continue to account for these undistributed earnings based on our existing accounting under ASC 740 and not accrue additional tax outside of the one-time transition tax required under the Tax Cuts and Jobs Act that was enacted onDecember 22, 2017 . Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation. Based on the available sources of cash flows discussed above, we anticipate we will continue to have the ability to permanently reinvest these remaining amounts. 57
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AtSeptember 30, 2020 , cash and cash equivalents were$1,708.3 million , an increase of$882.7 million , or 92.9%, from$885.6 million atSeptember 30, 2019 . The increase in cash and cash equivalents was primarily attributable to positive cash flows from operating activities and proceeds from the sale of our Management Services business, partially offset by repurchases of common stock and repayments of our credit agreement. Net cash provided by operating activities was$329.6 million for the year endedSeptember 30, 2020 as compared to$777.6 million for the year endedSeptember 30, 2019 . The change was primarily attributable to the timing of receipts and payments of working capital, which includes accounts receivable, contract assets, accounts payable, accrued expenses, and contract liabilities. The sale of trade receivables to financial institutions during the year endedSeptember 30, 2020 provided a net unfavorable impact of$143.3 million as compared to a net benefit of$21.9 million during the year endedSeptember 30, 2019 . We expect to continue to sell trade receivables in the future as long as the terms continue to remain favorable to us.
Net cash provided by investing activities was
Net cash used in financing activities was$1,628.0 million for the year endedSeptember 30, 2020 , as compared to$433.3 million for the year endedSeptember 30, 2019 . This change was primarily attributable to repayments of our credit agreement and the redemption of our unsecured senior notes. Total borrowings outstanding varied during the period. For the year endedSeptember 30, 2020 , our weighted average floating rate borrowings were$292.4 million .AECOM Caribe , a subsidiary of the Company, has incurred payment delays supporting the storm recovery work in theU.S. Virgin Islands .AECOM Caribe signed several contracts withVirgin Islands authorities to provide emergency design, construction and technical services after two Category Five hurricanes devastated theVirgin Islands in 2017, that were dependent on federal funding.AECOM Caribe and its subcontractors have performed over$750 million of work under theVirgin Islands contracts and payment delays have increased working capital by over$150 million fromSeptember 30, 2018 toSeptember 30, 2019 . We are currently negotiating with theVirgin Island authorities andU.S. Federal Emergency Management Agency to modify the contract and accelerate funding for current and future contractual payments; however, we can provide no certainty as to the timing or amount of future payments.
Working Capital
Working capital, or current assets less current liabilities, increased
Days Sales Outstanding (DSO), which includes net accounts receivable and
contract assets, net of contract liabilities, was 90 days at
In Note 4, Revenue Recognition, in the notes to our consolidated financial statements, a comparative analysis of the various components of accounts receivable is provided. Except for claims, substantially all contract assets are expected to be billed and collected within twelve months.
Contract assets related to claims are recorded only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, revenue is recorded only to the extent that contract costs relating to the claim have been incurred. Award fees in contract assets are accrued only when there is sufficient information to assess contract performance. On contracts that represent higher than normal risk or technical difficulty, award fees are generally deferred until an award fee letter is
received.
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Because our revenue depends to a great extent on billable labor hours, most of our charges are invoiced following the end of the month in which the hours were worked, the majority usually within 15 days. Other direct costs are normally billed along with labor hours. However, as opposed to salary costs, which are generally paid on either a bi-weekly or monthly basis, other direct costs are generally not paid until payment is received (in some cases in the form of
advances) from the customers. Debt
Debt consisted of the following:
September 30, September 30,
2020 2019
(in millions)
2014 Credit Agreement $ 248.5 $ 1,182.2
2014 Senior Notes 797.3 800.0
2017 Senior Notes 997.3 1,000.0
URS Senior Notes - 248.1
Other debt 41.9 122.2
Total debt 2,085.0 3,352.5Less: Current portion of debt and short-term borrowings (20.9) (98.3) Less: Unamortized debt issuance costs (23.0)
(36.2)
Long-term debt $ 2,041.1 $ 3,218.0
The following table presents, in millions, scheduled maturities of our debt as
of September 30, 2020 :
Fiscal Year
2021 $ 20.9
2022 17.9
2023 244.8
2024 5.1
2025 799.0
Thereafter 997.3
Total $ 2,085.0
2014 Credit Agreement
We entered into a credit agreement (Credit Agreement) onOctober 17, 2014 , which, as amended to date, consists of (i) a term loan A facility that includes a$510 million (USD) term loan A facility with a term expiring onMarch 13, 2021 and a$500 million Canadian dollar (CAD) term loan A facility and a$250 million Australian dollar (AUD) term loan A facility, each with terms expiring onMarch 13, 2023 ; (ii) a$600 million term loan B facility with a term expiring onMarch 13, 2025 ; and (iii) a revolving credit facility in an aggregate principal amount of$1.35 billion with a term expiring onMarch 13, 2023 . Some of our subsidiaries (Guarantors) have guaranteed the obligations of the borrowers under the Credit Agreement. The borrowers' obligations under the Credit Agreement are secured by a lien on substantially all of our assets and the Guarantors' pursuant to a security and pledge agreement (Security Agreement). The collateral under the Security Agreement is subject to release upon fulfillment of conditions specified in the Credit Agreement and Security Agreement. The Credit Agreement contains covenants that limit our ability and the ability of some of our subsidiaries to, among other things: (i) create, incur, assume, or suffer to exist liens; (ii) incur or guarantee indebtedness; (iii) pay dividends or repurchase stock; (iv) enter into transactions with affiliates; (v) consummate asset sales, acquisitions or mergers; (vi) enter into various types of burdensome agreements; or (vii) make investments. OnJuly 1, 2015 , the Credit Agreement was amended to revise the definition of "Consolidated EBITDA" to increase the allowance for acquisition and integration expenses related to our acquisition of URS. 59
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OnDecember 22, 2015 , the Credit Agreement was amended to further revise the definition of "Consolidated EBITDA" by further increasing the allowance for acquisition and integration expenses related to the acquisition of URS and to allow for an internal corporate restructuring primarily involving our international subsidiaries. OnSeptember 29, 2016 , the Credit Agreement and the Security Agreement were amended to (i) lower the applicable interest rate margins for the term loan A and the revolving credit facilities, and lower the applicable letter of credit fees and commitment fees to the revised consolidated leverage levels; (ii) extend the term of the term loan A and the revolving credit facility toSeptember 29, 2021 ; (iii) add a new delayed draw term loan A facility tranche in the amount of$185.0 million ; (iv) replace the then existing$500 million performance letter of credit facility with a$500 million basket to enter into secured letters of credit outside the Credit Agreement; and (v) revise covenants, including the Maximum Consolidated Leverage Ratio, so that the step down from a 5.00 to a 4.75 leverage ratio is effective as ofMarch 31, 2017 as well as the investment basket for our ACAP business. OnMarch 31, 2017 , the Credit Agreement was amended to (i) expand the ability of restricted subsidiaries to borrow under "Incremental Term Loans;" (ii) revise the definition of "Working Capital" as used in "Excess Cash Flow;" (iii) revise the definitions for "Consolidated EBITDA" and "Consolidated Funded Indebtedness" to reflect the expected gain and debt repayment of anAECOM Capital disposition, which disposition was completed onApril 28, 2017 ; and (iv) amend provisions relating to our ability to undertake internal restructuring steps to accommodate changes in tax laws. OnMarch 13, 2018 , the Credit Agreement was amended to (i) refinance the existing term loan A facility to include a$510 million (US) term loan A facility with a term expiring onMarch 13, 2021 and a$500 million CAD term loan A facility and a$250 million AUD term loan A facility each with terms expiring onMarch 13, 2023 ; (ii) issue a new$600 million term loan B facility to institutional investors with a term expiring onMarch 13, 2025 ; (iii) increase the capacity of our revolving credit facility from$1.05 billion to$1.35 billion and extend its term untilMarch 13, 2023 ; (iv) reduce our interest rate borrowing costs as follows: (a) the term loan B facility, at our election, Base Rate (as defined in the Credit Agreement) plus 0.75% or Eurocurrency Rate (as defined in the Credit Agreement) plus 1.75%, (b) the (USD) term loan A facility, at our election, Base Rate plus 0.50% or Eurocurrency Rate plus 1.50%, and (c) the Canadian (CAD) term loan A facility, the Australian (AUD) term loan A facility, and the revolving credit facility, an initial rate of, at our election, Base Rate plus 0.75% or Eurocurrency Rate plus 1.75%, and after the end of our fiscal quarter endedJune 30, 2018 , Base Rate loans plus a margin ranging from 0.25% to 1.00% or Eurocurrency Rate plus a margin from 1.25% to 2.00%, based on the Consolidated Leverage Ratio (as defined in the Credit Agreement); and (v) revise covenants including increasing the amounts available under the restricted payment negative covenant and revising the Maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) to include a 4.5 leverage ratio throughSeptember 30, 2019 after which the leverage ratio stepped down to 4.0.
On
OnJanuary 28, 2020 ,AECOM entered into Amendment No. 7 to the Credit Agreement which modifies the asset disposition covenant to permit the sale of our Management Services business and the mandatory prepayment provision so that only outstanding term loans were prepaid using the net proceeds from the sale. OnMay 1, 2020 , the Company entered into Amendment No. 8 to the Credit Agreement which allows for borrowings to be made, until three months after closing, up to an aggregate principal amount of$400,000,000 under a secured delayed draw term loan facility, the proceeds of which are permitted to be used to pay all or a portion of the amounts payable in connection with any tender for or redemption or repayment of the Company's or its subsidiaries' existing senior unsecured notes and any associated fees and expenses. The amendment also revised certain terms and covenants in the Credit Agreement, including by, among other things, revising the maximum leverage ratio covenant to 4.00:1.00, subject to increases to 4.50:1.00 for certain specified periods in connection with certain material acquisitions, increasing the potential size of incremental facilities under the Credit Agreement, revising the definition of "Consolidated EBITDA" to provide for additional flexibility in the calculation thereof and adding a Eurocurrency Rate floor of 0.75% to the interest rate under the revolving credit facility. 60 Table of Contents
On
Under the Credit Agreement, we are subject to a maximum consolidated leverage ratio and minimum consolidated interest coverage ratio at the end of each fiscal quarter. Our Consolidated Leverage Ratio was 2.7 atSeptember 30, 2020 . Our Consolidated Interest Coverage Ratio was 5.0 atSeptember 30, 2020 . As ofSeptember 30, 2020 , we were in compliance with the covenants of the Credit Agreement. AtSeptember 30, 2020 andSeptember 30, 2019 , outstanding standby letters of credit totaled$19.0 million and$22.8 million , respectively, under our revolving credit facilities. As ofSeptember 30, 2020 andSeptember 30, 2019 , we had$1,331.0 million and$1,327.2 million , respectively, available under our revolving credit facility. 2014 Senior Notes OnOctober 6, 2014 , we completed a private placement offering of$800,000,000 aggregate principal amount of the unsecured 5.750% Senior Notes due 2022 (2022 Notes) and$800,000,000 aggregate principal amount of the unsecured 5.875% Senior Notes due 2024 (the 2024 Notes and, together with the 2022 Notes, the 2014 Senior Notes). OnNovember 2, 2015 , we completed an exchange offer to exchange the unregistered 2014 Senior Notes for registered notes, as well as all related guarantees. OnMarch 16, 2018 , we redeemed all of the 2022 Notes at a redemption price that was 104.313% of the principal amount outstanding plus accrued and unpaid interest. TheMarch 16, 2018 redemption resulted in a$34.5 million prepayment premium, which was included in interest expense. As ofSeptember 30, 2020 , the estimated fair value of the 2024 Notes was approximately$863.0 million . The fair value of the 2024 Notes as ofSeptember 30, 2020 was derived by taking the mid-point of the trading prices from an observable market input (Level 2) in the secondary bond market and multiplying it by the outstanding balance of the 2024 Notes. OnJuly 21, 2020 , we completed a cash tender offer at par for up to$639 million in aggregate principal amount of the 2024 Notes and the 2017 Senior Notes. We accepted for purchase all of 2024 Notes validly tendered and not validly withdrawn pursuant to the cash tender offer, amounting to$2.7 million aggregate principal amount of the 2024 Notes at par. We made the cash tender offer at par to satisfy obligations under the indentures governing the 2024 Notes and the 2017 Senior Notes relating to the use of certain cash proceeds from our disposition of the Management Services business, which was completed onJanuary 31, 2020 . At any time prior toJuly 15, 2024 , we may redeem on one or more occasions all or part of the 2024 Notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a "make-whole" premium as of the date of the redemption, plus any accrued and unpaid interest to the date of redemption. In addition, on or afterJuly 15, 2024 , the 2024 Notes may be redeemed at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption.
The indenture pursuant to which the 2024 Notes were issued contains customary events of default, including, among other things, payment default, exchange default, failure to provide notices thereunder and provisions related to bankruptcy events. The indenture also contains customary negative covenants.
We were in compliance with the covenants relating to the 2024 Notes as of
2017 Senior Notes
OnFebruary 21, 2017 , we completed a private placement offering of$1,000,000,000 aggregate principal amount of our unsecured 5.125% Senior Notes due 2027 (the 2017 Senior Notes) and used the proceeds to immediately retire the remaining$127.6 million outstanding on the then existing term loan B facility as well as repay$600 million of the term loan A facility and$250 million of the revolving credit facility under our Credit Agreement. OnJune 30, 2017 , we completed an exchange offer to exchange the unregistered 2017 Senior Notes for registered notes, as well as related guarantees. 61
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As ofSeptember 30, 2020 , the estimated fair value of the 2017 Senior Notes was approximately$1,069.6 million . The fair value of the 2017 Senior Notes as ofSeptember 30, 2020 was derived by taking the mid-point of the trading prices from an observable market input (Level 2) in the secondary bond market and multiplying it by the outstanding balance of the 2017 Senior Notes. Interest will be payable on the 2017 Senior Notes at a rate of 5.125% per annum. Interest on the 2017 Senior Notes is payable semi-annually onMarch 15 andSeptember 15 of each year, commencing onSeptember 15, 2017 . The 2017 Senior Notes will mature onMarch 15, 2027 . At any time and from time to time prior toDecember 15, 2026 , we may redeem all or part of the 2017 Senior Notes, at a redemption price equal to 100% of their principal amount, plus a "make whole" premium as of the redemption date, and accrued and unpaid interest to the redemption date.
At any time on or after
The indenture pursuant to which the 2017 Senior Notes were issued contains customary events of default, including, among other things, payment default, exchange default, failure to provide notices thereunder and provisions related to bankruptcy events. The indenture also contains customary negative covenants.
We were in compliance with the covenants relating to the 2017 Senior Notes as of
URS Senior Notes In connection with the URS acquisition, we assumed the URS 3.85% Senior Notes due 2017 (2017 URS Senior Notes) and the URS 5.00% Senior Notes due 2022 (2022 URS Senior Notes), totaling$1.0 billion (URS Senior Notes). The URS acquisition triggered change in control provisions in the URS Senior Notes that allowed the holders of the URS Senior Notes to redeem their URS Senior Notes at a cash price equal to 101% of the principal amount and, accordingly, we redeemed$572.3 million of the URS Senior Notes onOctober 24, 2014 . The remaining 2017 URS Senior Notes matured and were fully redeemed onApril 3, 2017 for$179.2 million using proceeds from a$185 million delayed draw term loan A facility tranche under the Credit Agreement. The remaining$248.5 million principal amount of the 2022 URS Senior Notes were fully redeemed onAugust 31, 2020 using proceeds from a$248.5 million secured delayed draw term loan facility under the Credit Agreement, at a redemption price that was 106.835% of the principal amount outstanding plus accrued and unpaid interest. TheAugust 31, 2020 redemption resulted in a$17.0 million prepayment premium, which was included in interest expense.
Other Debt and Other Items
Other debt consists primarily of obligations under capital leases and loans, and unsecured credit facilities. Our unsecured credit facilities are primarily used for standby letters of credit issued in connection with general and professional liability insurance programs and for contract performance guarantees. AtSeptember 30, 2020 andSeptember 30, 2019 , these outstanding standby letters of credit totaled$510.1 million and$470.9 million , respectively. As ofSeptember 30, 2020 , we had$435.3 million available under these unsecured credit facilities.
Effective Interest Rate
Our average effective interest rate on our total debt, including the effects of the interest rate swap agreements, during the years endedSeptember 30, 2020 , 2019 and 2018 was 5.3%, 5.1% and 5.1%, respectively.
Interest expense in the consolidated statement of operations included
amortization of deferred debt issuance costs for the years ended
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Other Commitments
We enter into various joint venture arrangements to provide architectural,
engineering, program management, construction management and operations and
maintenance services. The ownership percentage of these joint ventures is
typically representative of the work to be performed or the amount of risk
assumed by each joint venture partner. Some of these joint ventures are
considered variable interest. We have consolidated all joint ventures for which
we have control. For all others, our portion of the earnings is recorded in
equity in earnings of joint ventures. See Note 6, Joint Ventures and Variable
Interest Entities, in the notes to our consolidated financial statements.
Other than normal property and equipment additions and replacements,
expenditures to further the implementation of our various information technology
systems, commitments under our incentive compensation programs, amounts we may
expend to repurchase stock under our stock repurchase program and acquisitions
from time to time and disposition costs, we currently do not have any
significant capital expenditures or outlays planned except as described below.
However, if we acquire additional businesses in the future or if we embark on
other capital-intensive initiatives, additional working capital may be required.
Under our secured revolving credit facility and other facilities discussed in
Other Debt and Other Items above, as of September 30, 2020 , there was
approximately $529.1 million outstanding under standby letters of credit
primarily issued in connection with general and professional liability insurance
programs and for contract performance guarantees. For those projects for which
we have issued a performance guarantee, if the project subsequently fails to
meet guaranteed performance standards, we may either incur significant
additional costs or be held responsible for the costs incurred by the client to
achieve the required performance standards.
We recognized on our balance sheet the funded status of our pension benefit
plans, measured as the difference between the fair value of plan assets and the
projected benefit obligation. At September 30, 2020 , our defined benefit pension
plans had an aggregate deficit (the excess of projected benefit obligations over
the fair value of plan assets) of approximately $406.0 million . The total
amounts of employer contributions paid for the year ended September 30, 2020
were $7.0 million for U.S. plans and $27.7 million for non-U.S. plans. Funding
requirements for each plan are determined based on the local laws of the country
where such plan resides. In some countries, the funding requirements are
mandatory while in other countries, they are discretionary. There is a required
minimum contribution for one of our domestic plans; however, we may make
additional discretionary contributions. In the future, such pension funding may
increase or decrease depending on changes in the levels of interest rates,
pension plan performance and other factors. In addition, we have collective
bargaining agreements with unions that require us to contribute to various third
party multiemployer pension plans that we do not control or manage. In addition,
we have collective bargaining agreements with unions that require us to
contribute various third party multiemployer plans that we do not control or
manage. For the year ended September 30, 2020 , we contributed $4.0 million to
multiemployer pension plans.
Condensed Combined Financial Information
In connection with the registration of the Company's 2014 Senior Notes that were declared effective by theSEC onSeptember 29, 2015 ,AECOM became subject to the requirements of Rule 3-10 of Regulation S-X, as amended, regarding financial statements of guarantors and issuers of guaranteed securities. Both the 2014 Senior Notes and the 2017 Senior Notes are fully and unconditionally guaranteed on a joint and several basis by some ofAECOM's directly and indirectly 100% owned subsidiaries (the Subsidiary Guarantors). Other than customary restrictions imposed by applicable statutes, there are no restrictions on the ability of the Subsidiary Guarantors to transfer funds toAECOM in the form of cash dividends, loans or advances. The following tables present condensed combined summarized financial information forAECOM and the Subsidiary Guarantors. All intercompany balances and transactions are eliminated in the presentation of the combined financial statements. Amounts provided do not represent our total consolidated amounts as ofSeptember 30, 2020 and for the twelve months then ended. 63 Table of Contents Condensed Combined Balance Sheets Parent and Subsidiary Guarantors (unaudited - in millions) September 30, 2020 Current assets $ 3,801.9 Non-current assets 3,620.1 Total assets $ 7,422.0 Current liabilities $ 3,175.1 Non-current liabilities 2,806.8 Total liabilities 5,981.9 Total stockholders' equity 1,440.1 Total liabilities and stockholders' equity $ 7,422.0 Condensed Combined Statement of Operations Parent and Subsidiary Guarantors (unaudited - in millions) For the twelve months ended September 30, 2020 Revenue $ 7,437.8 Cost of revenue 7,128.2 Gross profit 309.6 Net loss from continuing operations (94.2) Net income from discontinued operations 130.2 Net income $ 36.0 Net income attributable to AECOM $ 36.0
Commitments and Contingencies
We record amounts representing our probable estimated liabilities relating to
claims, guarantees, litigation, audits and investigations. We rely in part on
qualified actuaries to assist us in determining the level of reserves to
establish for insurance-related claims that are known and have been asserted
against us, and for insurance-related claims that are believed to have been
incurred based on actuarial analysis, but have not yet been reported to our
claims administrators as of the respective balance sheet dates. We include any
adjustments to such insurance reserves in our consolidated results of
operations. Our reasonably possible loss disclosures are presented on a gross
basis prior to the consideration of insurance recoveries. We do not record gain
contingencies until they are realized. In the ordinary course of business, we
may not be aware that we or our affiliates are under investigation and may not
be aware of whether or not a known investigation has been concluded.
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In the ordinary course of business, we may enter into various arrangements providing financial or performance assurance to clients, lenders, or partners. Such arrangements include standby letters of credit, surety bonds, and corporate guarantees to support the creditworthiness or the project execution commitments of our affiliates, partnerships and joint ventures. Performance arrangements typically have various expiration dates ranging from the completion of the project contract and extending beyond contract completion in some circumstances such as for warranties. We may also guarantee that a project, when complete, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, we may incur additional costs, pay liquidated damages or be held responsible for the costs incurred by the client to achieve the required performance standards. The potential payment amount of an outstanding performance arrangement is typically the remaining cost of work to be performed by or on behalf of third parties. Generally, under joint venture arrangements, if a partner is financially unable to complete its share of the contract, the other partner(s) may be required to complete those activities. AtSeptember 30, 2020 and 2019, we were contingently liable in the amount of approximately$529.1 million and$493.7 million , respectively, in issued standby letters of credit and$6.2 billion and$4.8 billion , respectively, in issued surety bonds primarily to support project execution. In the ordinary course of business, we enter into various agreements providing financial or performance assurances to clients on behalf of certain unconsolidated partnerships, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. Our registered investment adviser jointly manages and sponsors theAECOM-Canyon Equity Fund, L.P. (the "Fund"), in which we indirectly hold an equity interest and have an ongoing capital commitment to fund investments. AtSeptember 30, 2020 , we have capital commitments of$22.1 million to the Fund over the next 8 years. In addition, in connection with the investment activities ofAECOM Capital , we provide guarantees of certain contractual obligations, including guarantees for completion of projects, repayment of debt, environmental indemnity obligations and other lender required guarantees.
AECOM Energy and Construction, Inc. , anOhio corporation, a former affiliate of the Company ("Former Affiliate") executed a cost-reimbursable task order with theDepartment of Energy (DOE) in 2007 to provide deactivation, demolition and removal services at aNew York State project site that, during 2010, experienced contamination and performance issues. InFebruary 2011 , the Former Affiliate and theDOE executed a Task Order Modification that changed some cost-reimbursable contract provisions to at-risk. The Task Order Modification, including subsequent amendments, required theDOE to pay all project costs up to$106 million , required the Former Affiliate and theDOE to equally share in all project costs incurred from$106 million to$146 million , and required the Former Affiliate to pay all project costs exceeding$146 million . Due to unanticipated requirements and permitting delays by federal and state agencies, as well as delays and related ground stabilization activities caused by Hurricane Irene in 2011, the Former Affiliate was required to perform work outside the scope of the Task Order Modification. InDecember 2014 , the Former Affiliate submitted an initial set of claims against theDOE pursuant to the Contracts Disputes Acts seeking recovery of$103 million , including additional fees on changed work scope (the "2014 Claims"). OnDecember 6, 2019 , the Former Affiliate submitted a second set of claims against theDOE seeking recovery of an additional$60.4 million , including additional project costs and delays outside the scope of the contract as a result of differing site and ground conditions (the "2019 Claims"). The Former Affiliate also submitted three alternative breach of contract claims to the 2014 and 2019 Claims that may entitle the Former Affiliate to recovery of$148.5 million to$329.4 million . OnDecember 30, 2019 , theDOE denied the Former Affiliate's 2014 Claims. OnSeptember 25, 2020 , theDOE denied the Former Affiliate's 2019 Claims. The Company intends to appeal these decisions byDecember 30, 2020 . Deconstruction, decommissioning and site restoration activities are complete. 65
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OnJanuary 31, 2020 , the Company completed the sale of its Management Services business to the Purchaser including the Former Affiliate who worked on theDOE project. The Company and the Purchaser agreed that all futureDOE project claim recoveries and costs will be split 10% to the Purchaser and 90% to the Company with the Company retaining control of all future strategic legal decisions. The Company intends to vigorously pursue all claimed amounts but can provide no certainty that the Company will recover 2014 and 2019 Claims submitted against theDOE , or any additional incurred claims or costs, which could have a material adverse effect on the Company's results of operations.
InSeptember 2017 ,AECOM USA, Inc. was advised by theNew York State Department of Environmental Conservation (DEC) of allegations that it committed environmental permit violations pursuant to the New York Environmental Conservation Law (ECL) associated withAECOM USA, Inc.'s oversight of a stream restoration project forSchoharie County which could result in substantial penalties if calculated under the ECL's maximum civil penalty provisions.AECOM USA, Inc. disputes this claim and intends to continue to defend this matter vigorously; however,AECOM USA, Inc. cannot provide assurances that it will be successful in these efforts. The potential range of loss in excess of any current accrual cannot be reasonably estimated at this time primarily because the matter involves complex and unique environmental and regulatory issues; the project site involves the oversight and involvement of various local, state and federal government agencies; there is substantial uncertainty regarding any alleged damages; and the matter is in its preliminary stages.
A Former Affiliate of the Company entered into an agreement to perform turnaround maintenance services during a planned shutdown at a refinery inMontana inDecember 2017 . The turnaround project was completed inFebruary 2019 . Due to circumstances outside of the Company's Former Affiliate's control, including client directed changes and delays and the refinery's condition, the Company's Former Affiliate performed additional work outside of the original contract over$90 million and is entitled to payment from the refinery owner of approximately$144 million . InMarch 2019 , the refinery owner sent a letter to the Company's Former Affiliate alleging it incurred approximately$79 million in damages due to the Company's Former Affiliate's project performance. InApril 2019 , the Company's Former Affiliate filed and perfected a$132 million construction lien against the refinery for unpaid labor and materials costs. InAugust 2019 , following a subcontractor complaint filed in theThirteen Judicial District Court of Montana asserting claims against the refinery owner and the Company's Former Affiliate, the refinery owner crossclaimed against the Company's Former Affiliate and the subcontractor. InOctober 2019 , following the subcontractor's dismissal of its claims, the Company's Former Affiliate removed the matter to federal court and cross claimed against the refinery owner. InDecember 2019 , the refinery owner claimed$93.0 million in damages and offsets against the Company's Former Affiliate. OnJanuary 31, 2020 , the Company completed the sale of its Management Services business to the Purchaser including the Former Affiliate, however, the Refinery Turnaround project, including related claims and liabilities, remained as part of the Company's self-perform at-risk construction business which is classified within discontinued operations. The Company intends to vigorously prosecute and defend this matter; however, the Company cannot provide assurance that the Company will be successful in these efforts. The resolution of this matter and any potential range of loss cannot be reasonably determined or estimated at this time, primarily because the matter raises complex legal issues that Company is continuing to assess. 66
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Contractual Obligations and Commitments
The following summarizes our contractual obligations and commercial commitments as ofSeptember 30, 2020 : Contractual Obligations and Commitments Less than One to Three to More than Total One Year Three Years Five Years Five Years (in millions) Debt$ 2,085.0 $ 20.9 $ 262.7 $ 804.1 $ 997.3 Interest on debt 581.5 121.9 230.4 153.7 75.5 Operating leases 1,121.1 212.4 311.1 225.8 371.8
Pension funding obligations(1) 40.6 40.6 - - - Total contractual obligations and commitments$ 3,828.2 $ 395.8 $
804.2
Represents expected fiscal 2021 contributions to fund our defined benefit (1) pension and other postretirement plans. Contributions beyond one year have
not been included as amounts are not determinable.
New Accounting Pronouncements and Changes in Accounting
InMay 2014 , theFinancial Accounting Standards Board (FASB) issued new accounting guidance which amended the existing accounting standards for revenue recognition. The new accounting guidance establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. We adopted the new standard onOctober 1, 2018 , using the modified retrospective method, which resulted in an adjustment to retained earnings of$7.0 million , net of tax. Detailed disclosures regarding the adoption and other required disclosures can be found in Note 4. InFebruary 2016 , the FASB issued new accounting guidance which changes accounting requirements for leases. The new guidance requires lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance, on the balance sheet. It also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. We adopted the new guidance beginningOctober 1, 2019 using the modified retrospective adoption method, which resulted in a downward adjustment to retained earnings of$87.8 million , net of tax. Detailed disclosures regarding the adoption and other required disclosures can be found in Note 11. InJune 2016 , the FASB issued a new credit loss standard that changes the impairment model for most financial assets and some other instruments. The new guidance will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance will be effective for the fiscal year startingOctober 1, 2020 . We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements. InFebruary 2018 , the FASB issued new accounting guidance which provides entities the option to reclassify certain tax effects from other comprehensive income to retained earnings. The guidance addresses a narrow-scope financial reporting issue related to the tax effects that may become stranded in accumulated other comprehensive income as a result of the enactment of the Tax Cuts and Jobs Act (Tax Act). Under the guidance, an entity may elect to reclassify the income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings. We have determined that we will not make this election. InAugust 2018 , the FASB issued new accounting guidance aligning the capitalization of certain implementation costs incurred in a hosting arrangement that is a service contract with previously existing guidance for capitalizing costs incurred to develop internal-use software. The new guidance will be effective for the fiscal year startingOctober 1, 2020 . We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements. InAugust 2018 , the FASB issued new accounting guidance amending the disclosure requirements for fair value measurements. These improvements will require more disclosure for amounts measured at fair value, and specifically unobservable inputs used in fair value measurements. We expect to adopt the new guidance starting onOctober 1, 2020 . We are currently evaluating the impact that the new guidance will have on our financial reporting process. 67
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InMarch 2020 , theSecurities and Exchange Commission (SEC) adopted final rules that amend the financial disclosure requirement for guarantors of registered debt securities in Rule 3-10 of Regulation S-X. The new rules amend and streamline the disclosures required by guarantors and issuers of guaranteed securities. Among other things, the new disclosures may be located outside the financial statements. The new rule is effectiveJanuary 4, 2021 , and early adoption is permitted. We adopted the new rule onMarch 31, 2020 . Accordingly, the revised condensed consolidating financial information is presented in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Off-Balance Sheet Arrangements
We enter into various joint venture arrangements to provide architectural, engineering, program management, construction management and operations and maintenance services. The ownership percentage of these joint ventures is typically representative of the work to be performed or the amount of risk assumed by each joint venture partner. Some of these joint ventures are considered variable interest entities. We have consolidated all joint ventures for which we have control. For all others, our portion of the earnings are recorded in equity in earnings of joint ventures. See Note 6 in the notes to our consolidated financial statements. We do not believe that we have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.
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