AECOM F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

Nov.27.07 | About: AECOM Technology (ACM)

AECOM Technology Corporation (NYSE:ACM)

F4Q07 Earnings Call

November 27, 2007 11:00 am ET

Executives

Paul Gennaro - Senior Vice President, Chief CommunicationsOfficer

John M. Dionisio - President, Chief Executive Officer

Michael S. Burke - Chief Financial Officer, Chief CorporateOfficer, Executive Vice President

Analysts

Andrew Obin - Merrill Lynch

Christopher Gutek - Morgan Stanley

Steven Fisher - UBS

Sam Snyder - Renaissance Capital

Josh Rosen - Crystal Rock

Cliff Walsh - Julius Baer

Sun Moo-Young - Golden Tree Asset Management

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter fiscal 2007AECOM earnings conference call. (Operator Instructions) I would now like toturn the call over to Mr. Paul Gennaro, Senior Vice President of CorporateCommunications and Investor Relations. Please proceed, sir.

Paul Gennaro

Thank you and welcome everyone to AECOM's fourth quarterfiscal 2007 earnings conference call. Please go to slide two.

As we begin, let me remind everyone that today’s discussioncontains forward-looking statements based on the environment as we see it todayand as such, does include risks and uncertainties. Please refer to our pressrelease or slide two of our earnings presentation for more information on thespecific risk factors that could cause actual results to differ materially.

As we begin our call, let me remind you of some of theimportant information about our earnings that are posted on the investorwebsite, investors.aecom.com. First, we posted our earnings release and updatedfinancial statements on the site for anyone who still needs access. Second, areplay of today’s call will be posted there at around noon Eastern Time andwill remain there for approximately two weeks. Please go to slide three.

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

Now, I would like to turn it over to AECOM President andChief Executive Officer, John M. Dionisio.

John M. Dionisio

Thank you, Paul and thank you all for joining us today onour earnings call. Today I’ll start off the call by presenting a snapshot ofAECOM's global business and future opportunities. Mike Burke, our ExecutiveVice President and Chief Financial Officer, will then discuss our fiscal ’07fourth quarter and full year financial performance, which has grownsignificantly year over year.

As you all are aware, AECOM is a global leader ofprofessional technical and management support services. Our key end markets arefacilities, transportation, environment and energy. We provide a broad range ofservices, including architectural engineering planning, design, programmanagement, and construction management.

On slide five, I summarize our fiscal ’07 highlights.AECOM's fourth quarter and full year performance was strong. Revenues for theyear grew by 24% year over year to over $4.2 billion and we delivered an earningsper share of $1.15.

During fiscal ’07, our consistent strong organic operatingand marketing results strengthened our position in each of our geographicregions and end markets. In addition, we strengthened our financial performanceby completing our IPO, paying down our debt, and expanding our credit facility.During the year, we successfully completed and integrated seven keyacquisitions into the organization. Through both organic growth and ouracquisitions, we expanded our geographic footprint in Canada, the Middle East,and China and expanded our environmental and facilities market.

AECOM's outlook remains strong. Backlog for the year waswell ahead of last year. This growth was fueled by significant wins in each ofour key end markets. Despite the difficult employment market and the war fortalent, we added a net 5,300 new employees worldwide. It was a busy year but avery productive year.

Looking at page six, AECOM's outlook remains strong. I wouldlike to describe for you how we see our markets going forward. Overall, theglobal facilities and infrastructure markets remain strong and we have seen --although we have seen some impact in the market, we have not seen it -- we havenot been negatively impacted by the U.S. credit and sub-prime markets.

AECOM's broad geographic presence in North America, theU.K., China, Hong Kong, the Middle East, and Australia has continued to growand allowed us to capitalize on existing global market opportunities. Thisslide indicates some of the significant opportunities that AECOM has in each ofits key geographic markets.

In addition, not shown on this slide are the opportunitiesthat present themselves in India where AECOM's investments have resulted in keyplanning wins with private multi-national clients in our facilities inenvironment markets. AECOM's non-U.S. markets are growing at double the rate ofour U.S. markets.

Looking at slide seven, I would like to highlight AECOM'sstrength and what differentiates us from the rest of our peers -- it’s ourdiversification. Diversification is a key strategy to our business model and acritical AECOM success factor. Fifty-percent of AECOM's revenue is generatedoutside the United States. Our key geographic markets being North America,U.K., Hong Kong, China, Australia, New Zealand and the Middle East.

In addition to this geographic diversification, our clientmix of public and private clients, both in and outside the United States,remains balanced at approximately 45% private and 55% public. This broadgeographic and client diversification was a significant factor of our FY07growth and a key factor to our continued growth in FY08 and ’09.

The diversification will allow us to take advantage of thestrong and growing non-U.S. markets and at the same time, buffer AECOM againstany slowdowns in our U.S. markets.

As I mentioned previously, our non-U.S. revenue has grown atdouble the rate of our U.S. revenue. In addition, the margins outside theUnited States are generally higher than our U.S. project margins.

Our current FY08 market assessment in each of our keymarkets, namely non-residential commercial facilities, transportation,environmental management, and water and waste water markets remains strong. Ourgrowth and market confidence is fueled by the significant wins we reported infiscal ’07.

We are confident our existing backlog, which has grownapproximately 26% year over year, as well as the significant global facilitiesand infrastructure opportunities we have before us will sustain our growthtargets.

Our acquisitions in FY07 and in the first quarter of ’08continue to advance our geographic diversification, growing our China, Canada,and Middle East market presence.

Continuing on to slide eight, AECOM's results are reportedin two segments; management support services and professional technicalservices. On the management support services segment, it is comprised of 20% ofour fiscal ’07 revenue. In this segment, we provide outsourcing for variousU.S. government agencies. Approximately 80% is with the U.S. Department ofDefense, but we continue to diversify, providing services to Department ofEnergy, Department of Justice, Department of State, as well as HomelandSecurity.

The management support services segment funded by the U.S.Federal Government remains strong, with spending increasing in fiscal ’08 over11% for the Department of Defense and Department of State on internationalassistance programs. We are positioned well to grow our federal markets.

To assist us, we recently brought on board Michael Jackson,the former Deputy Secretary of Homeland Security and the former DeputySecretary of Transportation. He will be instrumental in helping us to expandour market presence in the federal arena.

The professional technical services area, that’s our primarysegment, that consists of 80% of our revenue in FY07. In this segment, weprovide engineering, architectural planning, design, program management andconstruction management services for public and private clients worldwide. Wehave a good balance of our key markets. Our focus, however, is to expand overthe next three to four year our environmental market to approximately 30% andour energy and power business to approximately 10%.

I would like now to spend some time discussing three of ourkey professional technical services markets; facilities, transportation, andenvironment.

If you look on slide nine, our facilities markets remainstrong, both in and outside the United States despite the slowdown in the U.S.residential housing market. Despite the heightened uncertainty in the largereconomic picture, demand for services in the facilities market remains strong.

Approximately 48% of our facilities work is outside theUnited States. Of the U.S. facilities market, we do not do residential housingor condominiums, but rather focus on major commercial and municipal facilities.Sixty-percent of our U.S. facilities work is with major public agencies.

Strong global market opportunities have developed insustainability and in green design. The Middle East and China are particularlystrong facilities markets for us and are driving our growth opportunities.Current European forecasts predict about a 3.1 increase in non-residentialconstruction in 2008 and in the United States it’s predicted to be about 10%increase in the U.S. non-residential building spending in 2008.

On slide 10, we look at the transportation market. AECOM isranked number one in transportation. As such, we maintain a strong globalposition in this market. We are a major player in highway and bridge, transitand rail, marine and airport projects around the globe.

The global transportation market demand remains very strong.In the U.S., this market is fueled by both federal government and state andlocal funding. The concern that has been voiced regarding the U.S.transportation market is that state and local funding sources will be impactedby the slowdown in the economy. To date, we have not see that. The federalgovernment is moving to continue to fund investments. As a matter of fact, wesee several major project opportunities being launched.

The private investment community remains strong and there isa pent-up opportunity for private funding of infrastructure projects. Recentwins in the United States and outside the United States will continue to seeour market grow in FY08.

For instance, in Canada, transportation is a growing market,as indicated by the recent Building Canada plan, which provides $33 billion instable and predictable funding for infrastructure improvements from 2007through 2014.

In the United States, the November 6th municipal electionssaw approximately $29 billion in municipal spending and new bond issues pastfor spending on infrastructure nationwide. The United States funding bill hasbudgeted over $104 billion for spending in FY08. It’s approximately a 7%increase over last year and additional funding is being provided in 2008 asemergency -- to address emergency deficiencies for bridges within the UnitedStates.

Our environmental market, which is described on slide 11,AECOM has targeted this market as a key growth market for us. We do environmentmanagement, water resources, water and waste water planning and design projectsaround the globe. We have expanded our market in FY07 through acquisitions inCanada and Australia.

Looking to the future, the U.S. Congress recently passed a$23 billion water bill that will fund water and waste water projects in theUnited States. From a global perspective, there is a need for over $26 trillionof investment globally over the next 25 years.

On slide 12, I briefly describe our acquisition strategy.AECOM's growth has been a combination of organic and acquisitive growth. Wetarget 50% of our growth from organic development and 50% from acquisitive. In2007, our revenue grew 24%, of which 63% was organic and 37% acquisitive. Wecontinue though to focus on growing our markets and geographies through bothorganic and acquisitive growth.

We’ve completed, as I mentioned, seven key acquisitions inFY07 and in the first seven weeks of FY08, we’ve closed on three acquisitions,one of them -- one of our recent acquisitions is a Chinese architectural firmwhich has given us a Class A license in engineering and architecture. Webelieve we are the first western firm that has 100% ownership of a Chinese firmwith a Class A license. This will significantly enhance our growthopportunities in the China facilities and urban planning markets.

I hope that gives you a good overview of AECOM and our positionand our strength going forward. I would like now to turn the call over to MikeBurke, our Chief Financial Officer, to describe some of the financialhighlights of the year. Mike.

Michael S. Burke

Thank you, John. Let me start off with our financialhighlights for the fourth quarter and our full fiscal year. Our fourth quarterrevenue was a record $1.1 billion and our full year revenue was a record $4.2billion. We experienced record fourth quarter net income of $29.4 million andfull year net income of $100.3 million.

Our net earnings were $0.29 per share for the quarter and$1.15 for the year. In addition, our full year cash flow from operations was$137 million, well above our planned cash flow forecast. Our operating incomegrew from $103 million to $156 million and about half of this operating incomegrowth was due to higher margins.

Now let me discuss the results in much greater detail onslide 14. On slide 14, you’ll see that we report our financial results in twosegments; professional technical services and management support services.

During the fourth quarter, we recorded a 25% revenue growthin professional technical services and a 15% increase in management supportservices on a year-over-year basis. These segment results contributed to a 23%growth in revenue on a consolidated basis.

I would like to draw your attention to our net servicerevenue growth. As you’ve heard from us in the past, we believe net servicerevenue is a very good indicator of our financial success. We incur a significantamount of pass-through costs that we incur on behalf of our clients that isincluded in gross revenue. Net service revenue is an indicator of the trueservices that we are performing on behalf of clients.

While we had a 23% growth in gross revenue, our net servicerevenue grew at 32% year over year. We had faster net service revenue growththan revenue growth during the fourth quarter, which reflects the fact that weare self-performing more of our work now than we were just a year ago. Our strategyof broadening our service offerings through acquisitions is allowing us to keepa greater share of our client spend.

Our organic revenue growth in Q4 was 12.4%, or 16% on a netservice revenue basis, while our growth attributable to M&A was 12.6% on agross revenue basis and 16% on a net service revenue basis. As we’ve alwayssaid and you heard John mention a minute ago, our long-term strategy is to havea healthy balance of organic and acquisitive growth and our results continue toprove out that strategy.

If you turn to slide 15, you’ll see that for the full yearwe recorded a 23% revenue growth in professional technical services and 26%increase in management support services on a year-over-year basis. Thesesegment results contributed to a 24% growth in revenue on a consolidated basis.Net service revenue also grew at a strong pace, increasing 27% over last year.Our gross revenue grew 15.1% organically and 8.8% through acquisitions. On anet service revenue basis, we grew 13.9% organically and 12.7% throughacquisitions. This exceptional growth is fueled by our non-U.S. business, whichis growing at twice the pace of our U.S. business.

Moving on to slide 16, you’ll see that our operating incomein our PTS segment was quite strong, including a 37% increase during the fourthquarter and a 43% increase for the year. It’s worth noting that our operatingincome is growing faster than our net service revenue due to our higher marginbusiness outside the U.S., as well as some benefit from the scaling of ourSG&A costs.

If you turn to slide 17, you’ll see that operating income inour MSS segment increased 3% during the fourth quarter and 25% for the year.This slower growth in Q4 is attributable to a few major events. First, werealized several one-time profit pick-ups in the fourth quarter of FY06 on ourIraq related work due to task order completions. Secondly, in Q4 of fiscal ’07we increased our contract reserves for our CSA contract in the normal course ofbusiness for indirect overhead rates in accordance with government costaccounting standards. And last, we significantly grew our revenue on a costreimbursable CSA contract that has lower profitability.

Moving on to slide 18, you’ll see our net income was alsoquite strong in the fourth quarter, as well as for the full year. Net incomeincreased to $29.4 million, a 90% increase from Q4 of FY06. On a full-yearbasis, net income increased 87% to $100.3 million. These overall resultsreflect an increase in our margins; in particular, our margins outside theU.S., as well as scaling our SG&A costs across the organization and adecrease in our interest expense due to our lower debt level than a year ago.

Please note that our income tax rate of 32% is notindicative of our structural rate which still remains at 33.5%.

Moving on to slide 19, as I just mentioned we experiencedsignificant margin improvement during the fourth quarter. As of September 30th,our year-to-date gross profit margin on net service revenue was 48.27%, animprovement of 59 basis points compared to the same period last year.Additionally, our pro forma EBITDA margin excluding the one-time $11.3 milliongain on an equity investment we experienced in Q1 was 7.65%, an 84 basis pointimprovement compared to last year. And we expect to see these margins continueto improve over the coming years.

Moving to slide 20, we continued to strengthen our balancesheet. At September 30, 2007, cash and cash equivalents were $415 million, anincrease of $287 million compared to the end of fiscal 2006 and we had totaldebt of $48 million, a decrease of $89 million year over year.

Of course, the increase in cash was primarily attributableto the IPO in FY07 and strong cash flow from operations throughout FY07.

During August of this year, we increased our credit facilityto $600 million, which remains un-drawn at this point in time.

As we said in the past, we believe that our balance sheet iscurrently under-leveraged. We believe the right capital structure for thisbusiness dictates a debt load of about two times EBITDA, and as John mentionedearlier, we will continue to search for the right strategic M&Aopportunities that will allow us to achieve our strategic plan and our optimalcapital structure.

Moving on to slide 21, at September 30, 2007 our total bookof business stood at $6 billion, a 26% increase over the prior year. But let mereiterate our definition of backlog and selected not booked category. A backlogrepresents the amount of work for which we have a signed contract and in the caseof a public client, where the project has also been funded. The selected notbooked category represents the amount of work which we have been awarded butwhere the contractual agreement has not yet been completed. Neither of thesemeasures include any IDIQ contracts or option years.

As of September 30th, our PTS backlog increased 17% and ourMSS backlog increased 85% year over year. Projects for which we were selectedbut have not booked grew at 29%. This gives us a combined backlog and selectednot booked total of $6 billion, up 26% from nearly $4.8 billion a year ago.

Moving on to slide 22, I would like to discuss our outlook.We expect diluted earnings per share for FY08 to be in the range of $1.19 and$1.26. This guidance takes into account our strong growth during the fourthquarter across service lines and geographies, our strong backlog, and themomentum contributed by our recently acquired companies.

I would like to point out a few things here. First of all,the midpoint of our EPS guidance range would result in a 25% increase in netincome year over year. However, our increased share count due to the mid-yearIPO has a dilutive effect on this 25% growth rate. Due to the IPO in mid ’07,in May of ’07, our diluted share count is expected to increase 17% next year --I should say 17% in ’08 versus ’07. This guidance assumes our weighted averagediluted share count for FY08 to be $102.3 million -- I’m sorry, 102.3 millionshares which is a steady share count from the beginning of ’08 through the endof ’08.

Another way to look at our EPS trendline is to eliminate themid-year impact of the IPO and you’ll see it on slide 22 here. If the IPOoccurred at the beginning of FY07 so that we had a steady share count from ’07to ’08, the EPS would grow by 14% in FY08, at the midpoint of our guidancerange, which is consistent with our long-term growth prospects for EPS.

I would also like to point out that our FY08 plan includessome significant non-cash charges that need to be considered. Due to the natureof our M&A strategy, our ’08 plan includes $19 million of intangibleamortization, non-cash intangible amortization charges. As you know, M&Adeals in our space carry significant amortization in the first year due to thepurchase accounting value ascribed to backlog. This $19 million non-cash chargein FY08 equates to about $0.12 EPS after tax in ’08.

With that, I would like to turn it over to John to recap ourresults and provide his outlook for the future.

John M. Dionisio

Thank you very much, Mike. As Mike discussed, our businessresults for the fourth quarter of FY07 and full year were strong, and ouroutlook remains equally strong for FY08. We expect to continue leveraging ourglobal diversification to take advantage of growing global market opportunitiesin China, the Middle East, Canada and India, and leveraging our strong marketposition in the United States to capture opportunities here.

There are several exciting opportunities that we arepursuing and we hope to continue the momentum we have established in winningkey projects.

And finally, our acquisition pipeline is robust. We lookforward to continue seeing the benefits of our successful M&A model as wego forward. Overall, we feel very positive about the future and we look forwardto continuing the success that we’ve experienced in FY07.

I would like to thank you all for listening and now I wouldlike to open it up the floor for any questions that you may have.

Question-and-AnswerSession

Operator

(Operator Instructions) Our first question is from AndrewObin with Merrill Lynch. Please go ahead.

Andrew Obin - MerrillLynch

Yes, hi, guys. I apologize for the poor noise. Actually I’min Dubai but in terms of your guidance, does it include incremental M&A orit’s just organic?

Michael S. Burke

Andrew, we have included an amount in our guidance at themidpoint of that range for moderate M&A activity consistent with ourhistory. We have not included any large, very significant M&A activity inthat number.

Andrew Obin - MerrillLynch

So what’s moderate? Just -- you know, you have a formula.How much should I allocate for M&A in terms of dollars? Or however you wantto calculate it. I mean, if you could quantify it at earnings per share fromM&A, that would be the most useful.

Michael S. Burke

I think what would be easier for us to do is just give you asense for at the midpoint of the range, you might see close to $20 million ofEBITA from acquisitions, but as I pointed out earlier, Andrew, that does nothave an enormous accretive impact in year one because of the amortization.

Andrew Obin - MerrillLynch

Okay, so basically if I’m thinking about -- it’s maybebetween $100 and $150 spent on M&A in next year but very little accretionfrom the deals next year. Is that a fair way to describe it?

Michael S. Burke

Yeah, that’s a fair way to describe it because as I pointedout, our amortization charges at the midpoint of the range would be about $19million for next year. I mentioned that that midpoint would produce about $20million of EBITA from M&A, so those essentially wash each other out beforewe talk about the cost of any debt associated with those.

Andrew Obin - MerrillLynch

So if there was no M&A, the guidance would still bepretty close to what you guys publish -- is that a fair statement?

Michael S. Burke

Fairly close, yes.

Andrew Obin - MerrillLynch

Okay. Thank you very much.

Operator

Thank you. Our next question is from Chris Gutek from MorganStanley. Please go ahead.

Christopher Gutek -Morgan Stanley

Thanks. Good morning. Two questions, the first for John; soyou mentioned, John, in your prepared comments you are seeing some signs of thecredit crunch in the market but not necessarily having any negative impact onthe company. Could you just elaborate a bit more on what you are seeing withyour customers or elsewhere in the marketplace? And just thinking a little bitmore broadly longer term, if the consensus account as forecast are correct anda more meaningful slowdown is likely next year, how much of a lag do you thinkyour business will take before you start to feel the effects and how do youthink that would play out?

John M. Dionisio

Well, where we’re seeing it is some impact is in theSoutheast, with certain of the -- of our clients in the water business as wellas looking at some of the small developers in the Southwest who are in theresidential housing markets.

In terms of the clients that we see, and on the private sidewe see are major developers, they are looking at the next cycle. I mean, theyare almost looking at beyond the slowdown into their next cycle and takingsteps and making plans providing looking for services in terms of planning onhow they are going to respond when we go through this down cycle.

So with the backlog that we have and the major programs thatwe’ve won, we believe that here in the United States, we will not see anysignificant impact during this slowdown -- if there is a slowdown, as again,what we’ve seen in our marketplace remains robust in transportation and theenvironmental sector, as well as in our major public facilities markets.

Christopher Gutek -Morgan Stanley

Presumably, at least with some of the state governmentfunded projects, there would be a bit of a lag effect but there wouldeventually be some slowdown if state government tax receipts moderate, but Iguess your view is that you are not concerned about that at this point?

John M. Dionisio

One of the -- you’re correct. After 9/11, there was asimilar type of lag. We were able to withstand that slowdown because of themajor projects that we have, that we had at that time. I think the same thingis what we see now; the major programs that we have, which will continue forthe next three, five, seven years are not being impacted.

Also, as I mentioned in the elections that just passed,there was -- what did I say, $20 billion something of bond issues were passed,which would complement the local state and municipal governments to continuetheir capital programs.

So it’s just not -- what I’m saying is the revenue, thefunding that’s coming from the states will not only come from sales tax butit’s also going to be coming from the bond issues which were passed, which willcontinue the programs moving along.

Christopher Gutek -Morgan Stanley

Okay, and my second question was for Mike. It’s on thebacklog and Mike, I know that the backlog is up nicely year over year, butlooking at it on a sequential basis, third quarter to fourth quarter it wasdown slightly despite some acquisitions. I know there is seasonality andinherent lumpiness and other issues driving the backlog but could you maybegive us an updated number through the end of November or talk a bit morequalitatively about how you think that backlog will hopefully likely grow overthe next couple of quarters.

Michael S. Burke

That’s a good question, Chris. First of all, the performancein Q4 was consistent with what we’ve experienced over the last four years. Thefederal government fiscal cycle ends at 9/30. Many state and local governmentsare on that same fiscal year, so you always see a slowdown of new contractsright at the end of the fourth quarter, and so for the past four years, like Isaid, it’s either been flat or dipped in our backlog in Q4 and then it comesright back.

And so we feel very confident about the backlog growing inQ1. The wins that we are experiencing just in the past month or so were verysignificant. I don’t have an updated number as of November, Chris, but I’mconfident that like we have in the past four years, we see a bump up in Q1.

Christopher Gutek -Morgan Stanley

Okay, great. Thanks.

Operator

Thank you. Our next question is from Steven Fisher with UBS.Please go ahead.

Steven Fisher - UBS

Good morning. It sounds like you are feeling under-levered atthis point and it looks like you’ve got quite a bit of room to go to achieveyour target leverage. Does that mean you are actively searching for largeracquisitions at this point?

John M. Dionisio

As I mentioned, Steve, our pipeline for mergers and acquisitionsis quite full and we are right now looking at several acquisitions. In thefirst part of -- the first seven weeks of this year, we closed on three and weexpect that we’ll be continuing the strong pace throughout this fiscal year.

Steven Fisher - UBS

And given that it sounds like you expect a fairly steadyshare count through fiscal 2008, does that mean there wouldn’t be much shareissuance for these acquisitions?

John M. Dionisio

Yes, that’s correct. That’s our assumption, Steve, is thatwe prefer to do our deals primarily in cash.

Steven Fisher - UBS

Okay, and then lastly, it sounds like you are targetingtaking your energy and power exposure up to about 10% of the business. Couldyou just talk about what parts of the market you are targeting at this point?

John M. Dionisio

Well, we are looking at -- in the energy side, we arelooking at renewables, renewable energy in terms of wind and water. We’relooking at hydro, the transmission and distribution markets. And we will beadvancing say in the hydro field over the next eight to 12 months.

Steven Fisher - UBS

Okay, and maybe I could get in one more; when you talk aboutthe Class A construction license in China, what kind of revenue potential doyou see from this opportunity and how competitive might you expect thatbusiness to be in China going forward? And how attractive could the margins be?

John M. Dionisio

Well, first of all, there is a real pent-up demand forfacilities and urban planning in China. It’s a very large market. We arewell-positioned, being there as a local company with about 1,000 employeesbefore this acquisition.

It is a competitive market but again, we have a niche inthat because of our strong position in Hong Kong, which has grown significantlyand we feel that leveraging our position in Hong Kong with the partnershipsthat we have in China, as well as this acquisition, will put us in good steadin terms of growing and expanding our market.

In terms of revenue, I don’t have the numbers of what we’reprojecting.

Steven Fisher - UBS

Okay, great. Thanks.

Operator

Thank you. Our next question is from Sam Snyder withRenaissance. Please go ahead.

Sam Snyder -Renaissance Capital

I was wondering what the organic growth trend was from thePTS segment for the quarter.

Michael S. Burke

The organic growth in the PTS segment -- I can give it toyou both on a gross revenue as well as a net service revenue basis. First ofall, organic growth PTS was 11.8% on the revenue line and 15.7% on the netservice revenue line, which is a more indicative number.

Sam Snyder -Renaissance Capital

Okay, and if you could just give us some color on what’sdriving that in this most recent quarter.

Michael S. Burke

What’s driving it is a number of things, but probably thesingle biggest contributor is our non-U.S. business. As you heard John mention,half of our business is outside the U.S. Our revenue growth, whether it beAustralia, Hong Kong, Canada, Europe or the Middle East is performingextraordinarily well. But our U.S. growth is still very strong also. But what’smoving it up to those levels is the 50% weighting of our business outside theU.S.

Sam Snyder -Renaissance Capital

Okay, and you guys will give sales geography breakdown inthe Q?

Michael S. Burke

We typically do not provide sales by geography in the Q.

Sam Snyder -Renaissance Capital

Okay. All right, thanks.

Michael S. Burke

But it is 50% of our revenue is outside the U.S., and that’sbeen moving up over as of the end of Q3, it was about 47% outside the U.S. It’snow 50.

Sam Snyder -Renaissance Capital

Is that mostly in Canada?

Michael S. Burke

No, it’s split between Canada, Europe is twice as big asCanada, the Middle East is about the same size as Canada in terms of revenueand EBIT. Hong Kong, China is bigger and Australia is bigger.

Sam Snyder -Renaissance Capital

Okay. Thanks a lot.

Operator

(Operator Instructions) Our next question is a follow-upfrom Steven Fisher. Please go ahead.

Steven Fisher - UBS

Just a follow-up here; I’m not sure if I missed this but howshould we think about organic growth rates in fiscal year ’08 relative tofiscal ’07?

Michael S. Burke

I think we are giving guidance based on an EPS growth and anet income growth, and you saw that I pointed out that at the midpoint of therange, we’re producing about a 25% increase in net income. I think some of thatwill come through margin improvement and a continued improved scaling of ourSG&A, but we’re not giving specific guidance on revenue growth but obviouslyto produce 25% growth in net income, there will be a fairly healthy, bothorganic and acquisitive growth of revenue.

Steven Fisher - UBS

Okay, great. Thanks.

Operator

Our next question is from Josh [Rosen] with Crystal Rock.Please go ahead.

Josh Rosen - CrystalRock

Thank you. Just two quick questions, if I may; first, Iwanted to just get a data point. Do you have the amortization number for thefourth quarter that ran through the P&L?

Michael S. Burke

For Q4, I don’t have that at my fingertips. I can tell youwhat it was for all of FY07. The intangible amortization number was $12.5million.

Josh Rosen - CrystalRock

Okay, and then secondly, just looking for some color on themargin trends. Obviously you guys had fantastic year-over-year improvementsecond and third quarter and then for the year, a little bit of deceleration inthe improvement in the fourth quarter. I’m just curious if there’s somelumpiness in the margins or there was some, anything in the fourth quarter thatwas out of normal or -- any color would be helpful.

Michael S. Burke

Sure. A couple of things; if you look at the MSS segment, Imentioned the contract reserve that we set up in Q4 in the MSS segment, so thatwas a one-time event in that quarter, so that will have downward pressure onthe margins in the MSS segment. The PTS segment we had an -- I’ll call it 15basis point drop in our margins if you are looking at it, income fromoperations over our net service revenue, which is how we view the business.

Those 15 basis points dropped just in that quarter wasprimarily attributable to the fact that in the fourth quarter, we gave amid-year salary increase in some of our non-U.S. markets. Due to theextraordinary growth in those markets, there’s a real war for talent and wedecided to increase the salary across the board in certain hot foreign marketsand it just takes us a little bit of time, sometimes a quarter, before -- aquarter or more before we can pass those costs through to our clients throughimproved contracting terms.

So it was about a 15 basis point drop that we expect that tocome right back once we’ve pushed those costs through our new contracts.

Josh Rosen - CrystalRock

Thank you.

Operator

Thank you. Our next question is from Cliff Walsh with JuliusBaer. Please go ahead.

Cliff Walsh - JuliusBaer

Good morning. Can you guys just circle back on the non-cashcharges that you have in your guidance? I didn’t catch the numbers there.

Michael S. Burke

Oh, the amortization?

Cliff Walsh - JuliusBaer

Yes, the amortization that you mentioned.

Michael S. Burke

Yeah, at the midpoint of our range, we are expecting $19million of non-cash amortization from acquired intangibles. That does notinclude the traditional depreciation and amortization from operations.

Cliff Walsh - JuliusBaer

Okay, and would that -- I mean, that wouldn’t necessarily beany different at the low point or the high point of the guidance either, right?

Michael S. Burke

Well, it could be. If you grew your business through moreM&A, you would have more depreciation expense or more amortization relativeto softer intangibles, but -- and if you did more M&A, obviously yourintangible amortization would increase also.

Cliff Walsh - JuliusBaer

Okay, so what kind of -- I mean, how much of a range shouldwe be looking at here?

Michael S. Burke

A range for what?

Cliff Walsh - JuliusBaer

For the non-cash charges. You gave a midpoint number but ifyou were looking throughout the -- from low to high, how wide could it get?

Michael S. Burke

It’s entirelydependent on the size of the transactions. If we do the standard normal courseM&A, it will be about that $19 million. If we find the right strategicopportunity and it’s a large M&A, that number would increase significantly.

Cliff Walsh - JuliusBaer

Okay, great. Thanks for the clarity.

Operator

Thank you. Our next question is from [Sun Moo-Young] fromGolden Tree Asset Management. Please go ahead.

Sun Moo-Young -Golden Tree Asset Management

Just a follow-up question on that; so it’s a non-cash chargerecurring beyond 2008?

Michael S. Burke

It would be recurring if we did more M&A, but as Imentioned, the way to look at this, what we call the FAS-141 intangible assetamortization is that in our business, since the lion’s share of the intangiblevalue is ascribed to backlog and the backlog burns off depending on the type ofbusiness, somewhere in 12 to 18 months, most of your amortization charge isgoing to hit in year one. So it’s a steep drop-off after year one in intangibleasset amortization from M&A, and so if we continue to do M&A, it would-- at that level, it would continue at that steady state. If M&A slowsdown, that drops off dramatically and typically the M&A transactions -- nottypically, in all cases the M&A activity is very accretive in year twobecause of that drop-off in amortization. It’s very accretive on a GAAP EPSbasis. They’re accretive on a cash basis right away.

Sun Moo-Young -Golden Tree Asset Management

Thanks.

Operator

Thank you. Management, there are no further questions atthis time. Please continue with any closing remarks you may have.

John M. Dionisio

I want to thank everyone again for dialing in and for takingthe time to ask us the questions you did and we look forward to speaking to youagain on the next earnings call. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes the fourthquarter fiscal 2007 AECOM earnings conference call. We thank you for yourparticipation. You may now disconnect.

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