Aecom (ACM) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal 2011 AECOM Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Paul Cyril, Senior Vice President of Investor Relations. Please proceed, sir.

Thank you. Please turn to Slide 2. As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we see it today and, as such, does include risks and uncertainties. As you know, our actual results might differ materially from those projected in these forward-looking statements. Please refer to our press release or Slide 2 of the earnings presentation and to our reports filed with the Securities and Exchange Commission for more information on risk -- specific risk factors that could cause actual results to differ materially. As we begin our call, let me remind you of some of the important information about our earnings that are posted on the investor website, investors.aecom.com. We posted our earnings release and updated financial statements on the site for anyone who still needs access. A replay of today's call will be posted there at about 1 p.m. Eastern Time and will remain there for approximately one month. Lastly, since are using some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted on our website as well. Presenting today will be John M. Dionisio, Chief Executive Officer and President; and Michael S. Burke, Chief Financial Officer and Executive Vice President. John, please go ahead.

Thank you, Paul. Good morning, everyone, and thank you for joining our call today. I will begin with a brief recap of our recent highlights. And then, our CFO, Mike Burke, will discuss our third quarter financial performance and our outlook for the remainder of fiscal year 2011. Following Mike's comments, I will provide an update on our markets and business strengths. Joining us on the call today are Steve Kadenacy who becomes CFO and Jane Chmielinski who becomes our Chief Operating Officer both on October 1. As a reminder, Mike Burke transitions from CFO to President on October 1 as well. As we get started, I would like to provide some perspective on AECOM's historical strategy and our future objectives. 10 years ago, we embark on a geographic and end-market expansion program that has transformed AECOM into a global professional technical services firm. Further dimension of our growth has been an expansion in our service offerings into the commercial and public sectors. We had grown through a combination of organic investments and strategic acquisitions. As a result, AECOM now operates in over 125 countries including many high-growth emerging and natural resource-rich economies. These strategic actions are producing meaningful investments today, especially in light of recent economic developments across the globe. Our solid third quarter results are prime examples of this. We posted 11% earnings growth, won a record $2.7 billion in new work and grew our backlog organically by 18% year-over-year, the largest increase in over 2 years. Most recently, AECOM was named the #1 international design firm in Asia as well as the #1 design firm in the United States by Engineering News-Record. In addition, we completed a strategic acquisition in India, of Spectral Services, which significantly expands our platform in a rapidly growing market. The strong diversified base we have created supports our vision to grow our international business to 65% of our mix over the next 5 years. To further discuss our performance in the third quarter, I'd like to turn the call over to our CFO, Mike Burke. Mike, please go ahead.

Thank you, John. Let's first discuss several key performance indicators in the quarter. Our third quarter gross revenue increased 25% over last year's third quarter to $2 billion and net service revenue was up 24% to $1.3 billion. More importantly, organic net service revenue increased by 4.5% year-over-year in the quarter. Our third quarter's growth is driven by continued strength in Asia, Australia, the Middle East, environmental management and energy and power. That growth was partially offset by continued weaker performance in Western Europe, particularly in the U.K. Operating income rose 19% year-over-year to $110 million, while net income increased 14% to $74 million. This resulted in a diluted earnings per share of $0.62, which is up 11% year-over-year. During the quarter, we strengthened our book of business as organic backlog grew by 18% year-over-year and rose 4% sequentially. Please turn to Slide 6. Our PTS segment accounted for 87% of our third quarter revenue. Net service revenue in our PTS segment increased 21% from last year to $1.2 billion. Organic net service revenue in this segment increased by 4% year-over-year. Operating income in the PTS segment increased 6% year-over-year to $115 million. Our Management Support Services segment accounted for 13% of our third quarter revenue. This segment is undergoing a transition from contracts with significant subcontractor and pass-through costs to projects with more self-performed work and a higher net service revenue content. As a result, gross revenue for the quarter was down 8% year-over-year, while net service revenue increased 48%. In total, segment operating income increased 48% over last year to $19 million and operating margins improved by 260 basis points year-over-year and by 28 basis points sequentially. This quarter, significant margin performance underscores the success of our strategy of moving into high value-added government services through our security and intelligence acquisitions over the past 2 years. Going forward, we are well positioned to capitalize on numerous opportunities in the MSS segment, both domestically and abroad. Please turn to the next slide. In the third quarter, our EBITDA margin was 10.36%, representing an increase of 39 basis points year-over-year. As we have previously stated, over the next 4 years, we aim to further improve our EBITDA margin to at least 12% of net service revenue. Two key drivers of our margin expansion will be a shift to higher margin services and continued improvement in project delivery. In addition, we will realize operational efficiencies over time as our acquired businesses integrate into the AECOM platform. For example, collocation at the single metropolitan offices has permitted more effective use of our real estate. Over the past 2 years, we have reduced approximately 700,000 square feet and generated $32 million in savings. Please turn to the next slide. At the end of the third quarter, our balance sheet remains strong with $381 million in cash and cash equivalents and $1.2 billion of debt. We recently increased our revolving credit facility from $600 million to $1 billion and extended the term by 5 years. We negotiated even more favorable pricing than last year when we came to market with our term loan. We believe this demonstrates the credit market's confidence in our financial strength and business model. It also gives us additional liquidity and an increased financial flexibility to execute our growth strategy. On a pro forma basis, we had $743 million in unused capacity under the new credit facility. Our current leverage ratio is 1.7x net debt-to-EBITDA, well within our target range of 1.5x to 2x EBITDA. Now turning to working capital, one of our top operating priorities. On the DSO front, we delivered positive results in the PTS segment, which comprises 87% of our revenue. PTS DSOs improved by 3 days sequentially and are now at their lowest level in 7 quarters. Overall DSOs, however, rose 1 day to 93 due entirely to an increase in MSS receivables. This increase was due to the closeout of a $3.6 billion 11-year contract in the MSS segment and we are awaiting final payment on invoices totaling $140 million. We feel confident about this receivable as it's with a low-risk client and equates to just a 4% holdback, which is typical for the U.S. government contracts. Excluding this loan closeout, our overall DSOs would have improved by 5 days sequentially and would have been the lowest in 4 quarters, a more accurate reflection of our MSS business. We have already received good news after the quarter's close as we've collected $12 million on the closeout contract and expected additional $20 million shortly. Looking ahead, as we drive our DSOs back to prerecession levels, we expect our free cash flow to consistently exceed net income. This year, we expect our free cash flow excluding items related to our deferred compensation plan termination to approximate net income. However, this is dependent upon the collection of the significant government receivable we just discussed. Please turn to the next slide. New business wins in the third quarter totaled $2.7 billion equating to a book-to-bill ratio of 1.3. We closed the quarter with backlog of $16 billion, a 66% increase over last year. Our organic backlog increased by 18% year-over-year and by 4% sequentially. As we have previously stated, our backlog does not include IDIQ contracts or unconsolidated joint ventures. IDIQs are taking on greater relevance today as the U.S. government increasingly turns to these contracting vehicles for procuring work. For instance, during the third quarter, AECOM joint ventures were awarded participation on 2 $10 billion IDIQs, one with the Department of State and the other with the Department of Defense. Factoring in all of our IDIQs, we estimate an additional opportunity of $12 billion for AECOM over the life of these contracting vehicles. In addition, there's approximately $3 billion in backlog equivalent and option years at our unconsolidated joint ventures, which we expect to ultimately recognize as equity earnings. The combination of backlog and IDIQ opportunity amounts to a book of business in excess of $31 billion. All in all, our current book of business is solid and provides us with improved visibility and increased confidence in our long-term strategy. Please turn to the next slide. Now I'd like to update you on our outlook for the remainder of fiscal 2011. Our strong third quarter results, particularly with our organic growth and backlog improving, would normally give us a high level of confidence in our prior guidance range. However, considering the ongoing challenges in Western Europe, we are evaluating several restructuring scenarios that could impact our fourth quarter results by approximately $0.05 per share. We have carefully analyzed our European business, particularly in the U.K., and concluded that the economic recoveries were sluggish than previously anticipated. Therefore, we are considering taking actions to reduce our cost structure. As a result, we now expect our FY '11 EPS to be in the range of $2.30 to $2.35. The midpoint of this guidance implies 13% year-over-year growth in earnings per share on a GAAP basis. This guidance assumes $38 million in amortization expenses related to acquired intangible assets, depreciation of $76 million, interest expense of $41 million, a diluted share count of 119 million shares and a tax rate of 27%. Looking forward, we are confident in our long-term annual EPS projections of 15%. With that, I would now like to turn the call back to John who'll provide additional detail on our third quarter performance and outlook. John, please go ahead.

Thank you, Mike. Please turn to Slide 11. At the beginning of the third quarter, our international business accounted for 58% of our net service revenue. AECOM's markets continue to be driven by long-term structural changes, such as urbanization, population growth and climate change, which are fueling $3 trillion in annual investments in energy, minerals and civil and social infrastructure. With these trends in mind, let me spend a few minutes discussing each of our markets. Asia Pacific, which now accounts for about 1/4 of our business, reporting strong organic growth in excess of 20% again this quarter. Our business in Asia is being driven primarily by economic and population growth that is now spreading to second- and third-tier cities. This is driving significant new opportunities for AECOM in master planning, urban transit, mining and facilities. We are also winning significant business in some of the region's other markets such as Singapore, Malaysia and Thailand, particularly in transportation and social infrastructure. As an example, just this week, AECOM was selected out of 22 competitors for the River of Life master planning project in Kuala Lumpur, which has an estimated construction value of $337 million. In India, the structural growth drivers are similar to those we saw in China 10 years ago. The government's infrastructure plan calls for doubling its infrastructure investment to $1 trillion over the next 5 years. In particular, growth opportunities in health and education infrastructure align well with our recent Spectral Services acquisition. We view India as well as the rest of Asia Pacific, as key contributors to AECOM's international expansion, and we will continue to seek out future opportunities to build our position in this market. The natural resources industry is expanding rapidly due to strong demand from China and India for iron ore, coal, copper and LNG. This demand is being led by resource-rich markets such as Australia, Canada, Latin America and Africa. AECOM's integrated service capabilities and geographic breadth are showcased in the mining industry where we can deploy resources from our global environment, water and transportation business as we recently have won projects in Africa and Canada. By way of example, our Australian mining business grew by more than 30% year-to-date and we are bidding on several new projects. Australia is also making significant civil infrastructure investments, which are creating new opportunities for AECOM. Last month, we won a major rail design project in New South Wales, which will involve the longest rail tunnel ever constructed in Sydney, Australia. In addition, as we integrate recent acquisition, we are already reporting key core selling wins by leveraging our new construction services capabilities. Moving on to the Middle East. Global demand for energy is driving strong economic growth in the region. In turn, this is prompting local infrastructure investments that address the changing demographic trends. Our latest acquisitions extend our service offerings into cost and construction management and have added nearly 25% to our PTS net service revenue in the region. The recent political developments had a positive impact on infrastructure development. Countries such as Qatar, Saudi Arabia, Egypt and UAE have dramatically increased their investments in infrastructure such as roads, rail, water, schools and hospitals to create job opportunities and improve the quality of life. Also, we see attractive opportunities across all of our end markets in the Middle East. As you heard earlier, Western Europe remains an extremely challenging market, and in conjunction with the political restructuring plan, we are carefully managing our business and resources there to optimize profitability in FY '12 and beyond. However, we see significant opportunities in the emerging Eastern European economies especially in the oil and gas and infrastructure markets in Russia, Romania and Azerbaijan. Our platform in the region, which we acquired 2 years ago, is already producing positive results, and we continue to invest in this market. In the third quarter, we recorded facilities wins in the automotive, telecommunications and leisure industries in addition to important transportation wins in the region. Latin America and Africa are 2 of AECOM's newest markets, which present significant growth opportunities for our business. In addition to the targeted investments we have made, we continue to focus on future opportunities to capitalize on this growth. We will realize a return on our investment in FY '12. Similar to Latin America and Africa, Canada has also experienced significant natural resource investments. AECOM is involved in numerous planning and environmental and facilities projects that support the country's mining industry. In addition, the Canadian government remains committed to infrastructure development and the P3 funding model. During the third quarter, we booked several key wins, including mining wins [ph] in multiple provinces and a major bridge assignment in Alberta. Now turning to United States, which continues to be a meaningful contributor to AECOM's growth. Despite the economy, in the third quarter, we won over $1 billion in new awards in the United States, taking our year-to-date total to over $3 billion in wins. Third quarter bookings were strong in all of our end markets. The private sector is starting to make some significant investment, and our latest acquisitions have positioned us well to participate in these opportunities. For example, private sector facilities wins nearly tripled from April through June of this year, fueled by the demand from high-growth technology, media and entertainment companies. In addition, the United States energy sector is strong across all segments and we continue to expand our capabilities in its growing end market. Most recently, we made a strategic investment in a small oil and gas engineering firm based in Houston, which has already led to cross-selling wins on 2 midstream terminal projects. At the state and local level, we see infrastructure spending being driven by user fees, dedicated funding sources and investments by major cities. Our strategy in the current economic climate is to focus on larger cities with available funds and this approach is provided -- it's proving to be successful. For instance, we are currently engaged on 3 of the largest infrastructure projects in San Francisco, the Central Subway, the water systems improvement program and the sewer systems improvement program. In addition, the Measure R tax in Los Angeles is driving 6% growth in the Los Angeles MTA 2012 budget and it's supporting 9 AECOM projects with fees totaling approximately $120 million. We also expect to see a substantial increase in P3 investment over the next 2 to 3 years with opportunities spanning social infrastructure, transportation and energy. In the third quarter, we saw a considerable increase in P3 activity. Recent examples include AECOM's appointment as sponsor's technical advisor on the $1.4 billion brownfield road P3 project in Puerto Rico and as the government's technical advisor in Washington State on potential transportation P3s. As more of these large projects come to market, AECOM is well positioned with its integrated delivery platform, which spans financing to construction. On the federal government side, the Department of Transportation recently announced a $1.6 billion new stock funding program, which benefits 3 major AECOM projects. At the Department of Defense, the recently unveiled unified cybersecurity strategy reinforces our strategic investments and recent acquisitions in this area. In summary, we see significant opportunities across our U.S. end markets. Please turn to Slide 12. Overall, our third quarter performance was solid. We recorded $2.7 billion in new wins, grew organically and improved our earnings. We benefited from strength in emerging and natural resource-rich markets and from a pickup in the private sector spending. We further diversified our global platform through the acquisition of Spectral Services in India. This third quarter marks the third consecutive quarter of organic year-over-year backlog growth. As I noted in the beginning, AECOM's seamless ability to penetrate global markets and deliver integrated service offerings, particularly in the natural resource sector, provides a solid foundation for future success. Our book of business, combined with our strong position in high-growth international markets, underpins our optimism for the future and gives us confidence in our ability to deliver on our long-term earnings growth target of 15% per year. With that, I would like to open the call to your questions. Operator, please open the call.

[Operator Instructions] Your first question comes from the line of Steven Fisher with UBS.

Just first a clarification. What was the currency impact on that 4% PTS organic NSR growth?

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

Okay. So overall, we're looking at basically about flat. So I guess the question is when you add it all up, just wondering if you're seeing more headwinds or tailwinds to that, I guess, flat organic revenue growth going forward.

I would say we're seeing tailwinds, which is evidenced by our backlog growth. If you're looking at the wins, you heard John mention the $2.7 billion of wins. You saw the backlog increased by 18% organically, 66% year-over-year, and that's the best indicator of a tailwind for the future.

Okay. And I know you're not quite at the point of giving 2012 guidance, but you indicated that the bookings in the quarter give you confidence in 15% long-term growth. I mean since you pointed out a specific quarterly benefit, I mean, how should we interpret what long term means? Does that include 2012?

Long term, as it's commonly known in the industry, as you know, it's a 5-year term, and that's what we've always indicated as our long-term projections. But we're not ready to give guidance on '12 at this point.

Okay. And then just a question on the MSS side. I mean how sustainable do you think the pace of bookings are that you achieved in the quarter? And Jacobs talked about some pricing pressure on the public side, I mean with the big MSS backlog growth, can you just comment on what the margins going into backlog look like compared to what you're reporting now?

Well, our margins continue to be better than our historical margins, and that is predominantly due to the shift in our service offering mix that we've been talking about. Historically, we were primarily a DoD provider on big outsourcing contracts that do have lower margins. And, as you know, over the past 2 years, we've made significant acquisitions in the intelligence space, the cyber warfare space and homeland security, and the margins in that business are much greater than our historical margins on the DoD side.

Okay. And then the potential for sustainability of those nice pace of bookings there?

We still feel very good about it.

We see the market being up in so many different places. The one place that reflects our changing guidance to -- the one place that we have concern, it's not improving and probably not improve for another 12 to 18 months is the U.K. and Western Europe.

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

Yes, just a question post this whole brouha [ph] with the government shutdown and the news coming out of, I guess, a lot of defense primes about pressure on the margins going forward. How do you guys think about the sustainability or profitability of your federal business in the U.S., and if you got any particular insights having gone through this process over the past couple of weeks, if you're hearing any more details from your sources in D.C. on a state level?

Well, first, I think it's important to note that the act that was just passed reduces the growth rate of future discretionary spending. However, the growth rate remains positive, so that's the confusion. It's a reduction in growth rate, but still they're spending and they're spending more than they -- they will be spending more actually [ph] than they did last year. We don't believe looking at our book of business and looking at our clients on the federal side and the types of work that there is any immediate or material impact on our business. What has been positive for us, though, in terms of the rhetoric that we see coming out of Washington over the last couple of days, the President, Vice President, members of Congress is they're still -- now they're going to focus on improving infrastructure because that's one way of creating jobs. The MSS work we do for the federal government overseas in Afghanistan, Iraq, Kuwait is not subject to any of the caps, so we feel confident about that. Our work in Afghanistan will continue to be strong over the next couple of years. Next, I think we look at the -- look at the government has expressed also strong interest in redirecting its defense budgets to cyber and intelligence versus hardware. And with the recent acquisitions over the past 12 months, we've made significant investments in building up our capabilities in the security side of the business. We're also -- I mean we're looking at -- you asked about the states. We tried [ph] going into the highway bill, the reauthorization bill. I mean I think it will be another continuing resolution, which again in that marketplace, and we've been in that the last couple of years of continuing resolutions, we continue to win significant amount of work. The United States year-to-date in the highway and bridge market and the transportation market, we've won $1 billion. And when you add that in all of North America, we won $1.2 billion worth of transportation. In this new resolution with what Boxer is proposing a [indiscernible] Is the infrastructure bank, which would raise TIFIA funds from, I think, about $120 million a year to $1 billion a year, and that would be dedicated to P3 programs, which would leverage that $1 billion into $60 billion over the 6 years. And also, what we've seen [indiscernible] -- as I've been saying on these calls for some time, there's still a significant need in transportation infrastructure in the United States, and what we've been seeing over the past year, and really it's ratcheted up over the past 6 months, is the number of P3 opportunities that are coming to the market. As I mentioned in my discussion, we just -- we won a P3 job in Puerto Rico. We're advising the State of Washington on P3. We're looking at more funds going into the P3 market. And also the states are now looking -- as they finance things, they're looking to finance their projects not through sales tax, but look through dedicated funds, tolls and, as I mentioned, P3 sources. So we -- I read the paper. I listen as you do. I'm positive because I'm positive in terms of what I'm seeing here in the United States. That all being said, our business, 58% of our business is international and which is very, very strong. And the United States market remains robust despite what you hear and the papers.

And what about margin pressure?

Margin pressure has existed for -- it's continuing. We've seen the margin pressures since 2007 in certain markets. We've been able to address that by internally making some cost controls and cost efficiencies. We do see margin pressure. But again, when you look at our EBITDA margins, they've continued to grow and we've done that through a combination of things, looking at different procurements in terms of types of work, going into more PM/CM work from the traditional highway work, also looking at the mix of business, more work outside of the United States. But again, the proof of the pudding is what our EBITDA margins have been and you saw the slide, and they've continually to increase over the past several years.

One additional comment, Andrew, is that our project margins increased this quarter for the first time in a while and so the project margins are the best indicator of short-term pricing, and over the past quarter, it has actually improved.

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

Just a follow-up on Steve's question about the organic growth. The bookings for the several quarters actually have been up pretty strongly, I think you guys would agree, but the revenue growth may be quite hasn't followed suit. So I'm just wondering, you booked these projects and we know what the government projects, especially they tend to -- you book them and then maybe they don't start for a while. So are you seeing sort of more delays like that? Or is that actually getting better?

I think it's probably -- first of all, it's not getting better. If anything, it's about the same as it was and it might be drawing out. One of the reasons is there's a larger percentage of our backlog which are in large projects, large projects which we take longer to negotiate and then start up. But there are other projects that start right away, our work in Jeddah for instance. It started immediately, a major program that we're doing there. I mean, so it's a mixed bag. I think what you'll see is with the backlog that we've developed in FY '11 and which we'll going to continue to grow through the fourth quarter, you'll see the strong results that we'll have in FY '12. So resulting in stronger results in FY '12.

Okay, John, I mean kind of joking, I mean you have more cash than some of these government customers probably. So like when you look at the cash situation and I know Mike mentioned that you're hoping to get the cash in the fourth quarter, but what are the chances that DSOs really don't respond for the company because these governments just don't have enough cash to pay you very quickly? Is it possible we're going to continue to see some pressure on DSOs in this environment?

We are expecting an improvement in DSOs and our performance over the past few quarters has been a significant improvement except for the one contract with the U.S. Federal Government. When I look at the overall PTS DSOs, we have been bringing it down quarter-after-quarter here. We're not at prerecession levels yet, but we're getting into that ballpark. And so when I carve out the one contract, our MSS days have improved and our PTS days have improved. So I'm not expecting DSOs to go backwards. I'm expecting them to increase and especially when we collect that one receivable.

And when you look at some of the areas that we had some concerns with like 2008, 2009, for instance some place in the Middle East, they have improved. I mean the cash is coming in. In North America, we had a very, very good quarter in terms of collecting cash. So it seems like the tide has turned and there is more confidence in the marketplace as we've seen, more confidence with the clients that we deal with, both on a public side as well as on the private side.

Okay, that's great. And John or Mike, maybe you can give us an update on -- you made 4, 5 larger acquisitions last year, how they're all doing and then maybe dovetail that with how do you think about U.S. nonresidential construction and somebody like Tishman, are you any seeing signs of recovery there?

Yes, I could start with the nonresidential construction and our construction services group. We're seeing that the market is really bouncing back. Tishman has won some very nice work and also we're seeing that some projects that had been put on hold are now back online. One of them that we've mentioned I think a few quarters ago was Revel Casino Hotel down in Atlantic City. Here in New York, there are some opportunities that are developing, which were not on the radar at all 6, 7 months ago in new developments here in Manhattan. Also, they're winning work on the West Coast. So from the private commercial space, we're seeing the activity increasing. When you look at the acquisitions we did in the security side, they're doing very, very well. Basically, it's a function of looking at our M&As, and basically, all the integrations have gone very well, so it's not about integration. It's a matter of where those acquisitions were located in the markets that we're in. The acquisitions that we did with Davis Langdon, which had facilities -- which had locations in the U.K., Middle East, Australia and Africa. Well, as you can imagine, Australia and the Middle East are doing very well. United States is doing better than we had expected. The U.K. is not doing well. They are hurting. And, of course, it's a function of the market. Africa, they provided us a foothold in South Africa and we're seeing great potential there. So overall, the markets -- the [indiscernible] that we bought a few years ago, they're focused there in Russia and Eastern Europe. At the beginning of the year, they were sluggish, but now they bounced back. So again, the mergers and the acquisitions we did, we're still very happy about doing them, and we're glad we did them. They situate us in key strategic markets and geographies and they are performing in line with the economic trends within the locations they're in and the end markets they're serving.

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

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

I don't know that number off the top of my head. We have -- obviously, our goodwill on our balance sheet, it's about $2 billion of acquisitions that have been done over many, many years. So I don't know the specific number off the top of my head just in Europe.

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

No. We do not have a goodwill impairment. The $0.05 is entirely related to restructuring charges.

And how are you going to go about doing the restructuring? Is it all sort of headcount or...

It's a combination of things. We're looking at our cost structure. So it's a -- some piece it will be staff reassignments, relocations and I don't know and another piece will be in leases in physical plants.

Okay. Mike, without a balance sheet, it was a little bit difficult for me to follow your comments on the kind of pro forma DSOs. How much receivables were you talking about in the MSS business from the federal government that you were awaiting?

The one contract that I'm referring to is $140 million.

Okay. And that's in the $140 million receivable? I heard you talked about you've collected some already and were awaiting another amount, but that didn't calculate to $140 million, so I was a little confused.

No. We have $140 million receivable on one contract. On that contract, we received a $12 million payment after the close of our quarter. We have $20 million that's in processing that we expect to be here literally within days since we track where they are in the processing cycle. That's $32 million of the $142 million. Obviously, the remaining $108 million is what we expect to collect in the next couple of months.

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

They've been going very well. Just if you take Q3 of FY '10 for instance, in the PTS segment, we've gone from 90 days to 86 days. So if you look at the biggest part of our business, 87% of our business is in the PTS sector. We've reduced our DSOs by 4 days year-over-year. And given the challenging market conditions, we're pretty happy about that. We still have more room for improvement to get back to prerecession levels. But overall, in the PTS segment, we feel good. On the MSS segment, exclusive of one contract, we feel good.

Of that 4-day improvement, how much of that was from the Libya right down?

How much of it was from the Libya, I don't know how to calculate that off the top of my head.

Okay. I guess we can -- I'll try to back into it just to get a sense of it. Also, you talked about backlog with -- contracted backlog, which is a project in hand and awarded backlog, which is kind of a verbal agreement. I'd like to focus on the contracted backlog numbers. So I'm curious if you can disclose, as you have disclosed in the past, organic contracted backlog in the 2 segments.

So what I could tell you is that we acquire -- our overall acquired backlog was $4.7 billion on a year-over-year basis. The contracted piece of that is $2.6 billion.

Okay. And how much of that was in PTS versus MSS?

$2.5 billion (sic) [$2.6 billion] in PTS.

Okay. I can figure out the MSS side.

$2.1 billion.

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

Couple of questions: Number one, if I look at your full year guidance outside of the $0.05 charge, obviously implies a very powerful fourth quarter for your year. Could you -- as we look qualitatively to forecast our fiscal year '12 and I couple that with your very positive commentary in general around your end market, is there anything in the fourth quarter we should assume as an anomaly that we should not project out as being the likely quarterly run rate going forward?

Yes. As nothing anomalous other than the seasonality that we have always had. As you know, our slowest quarter is always our first quarter. And last year, around this time, we were pointing out that generally the first quarter is only 20% of our total for the year and then it starts to accelerate through the year with the fourth quarter always being the strongest. And we don't see that being any different this year than it has been in the past.

Got it. Okay, that's very helpful. And then, obviously, as we look at margins, a nice impressive jump up. It looks like your business model is playing out as you've indicated. As we look forward, we obviously -- it seems like the mix, et cetera is going to help you out. Could you talk a bit about the amortization fall-off from the large junk of acquisitions you did the year before and how much that could potentially benefit your operating margins as well?

Well, this year, the number is about -- expect it to be about $38 million and the normal amortization curve drops off fairly steeply, and so we would expect that amortization in FY '12. We're not giving FY '12 guidance yet, but we're in the mid-$20 million range. I would think it would be a good way to think about it.

Excellent. Thank you. And I guess last question for me is, I concur from all the channel checks we've been doing, it seems like the PPP activity in the U.S. finally picking up. Are there any implications for competitive dynamics in any of your businesses as we start to see more PPPs come through? And are you going to be -- is there a sort of difference in the sponsor quality as we start to see these PPPs come through? For example, there are a couple of Spanish sponsors that apparently are running into some financial issues and some small projects in the Midwest. And I'm just wondering if you have to do more due diligence than you did before.

First of all, I want to thank you for the question because it's a great question for us. The reason being is as more and more projects go to PPPs, there is less competitors. Not many companies can play in that space. There may be 3, and if it was a traditional job, there might be 15 people who would compete or companies that would compete. So for us, and companies like us, I mean it's an advantage because, as I said, it gives us a competitive advantage. In terms of any of these PP (sic) [PPP] projects, I mean they do take longer and they require a significant amount of due diligence. And the good news also is we have a strong working relationship with many and most or all of the Spanish contractors and the foreign contractors as they come into the United States. We feel very comfortable in this space. As you remember, AECOM is a 25% owner of a company called Meridian, which invests in public-private partnerships so we've been active in the PPP market for the last 5 to 6 years. We have made investments in projects both in the United States and outside the United States. So we are very pleased that the market is moving to address the needs that we have, the needs that we have in the United States, but also it's something that we feel that works well for us.

[Operator Instructions] Your next question comes from the line of David Wells with Thompson research group.

I guess my first question is looking at the SG&A in the quarter, came in lighter than we were anticipating. Is this a reasonable run rate to think about going forward or were there some onetime things that helped pull that number down?

The SG&A number that you see on that sheet is just really a small portion of our overall SG&A. We have -- most of our SG&A is up in cost of revenues and so there's allocation issues between those 2 and that's why we focus on EBITDA margins to really tell you the true direction of the business because the SG&A that's included in cost of revenues is so much more significant than the numbers that we're required to show on the GAAP financial statement. But there is no onetime anomalies in there that would be distorting that number.

Okay, that's helpful. And then I guess lastly, if I look at the incremental this quarter in the PTS business versus last year, low-single digits versus almost kind of a 40% type number. I guess I'm trying to understand the puts and takes as to what drug down the incremental this year despite some pretty nice top line growth.

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

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

You're talking about the margin?

Correct. When you have -- your net revenues improved from $965 million to $1.2 billion. I'm trying to understand why we didn't see the same amount, a strong amount of that flow through on the operating income line.

Yes. So you're seeing 2 different things. What we focus on is the EBITDA margins. The operating income line includes the D&A for the acquisitions, right? So more than half of that change is due to the amortization related to the acquisitions, which tails off quickly. So if you're looking at margins on an op income basis, it distorts it versus looking at the true EBITDA margins on NSR, which gives you a better flavor for the business. But the predominant amount of that change is either the amortization related to acquired intangible assets or the European business.

Ladies and gentlemen, this concludes the question-and-answer portion of today's event. I'd like to turn the conference back over to management for closing remarks.

Thank you. I want to thank everyone for participating on the call today and also for the good questions and interest in -- and continued interest in AECOM. I hope everyone has a great summer and we'll be speaking again in about 3 months. Okay, thank you very much.

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a wonderful day.