SEC Company Response from AECOM (ACM) — Mar 28, 2016
AECOM
Date: March 28, 2016 · CIK: 0000868857 · Accession: 0001104659-16-108056
AI Filing Summary & Sentiment
Referenced dates: December 17, 2015, February 4, 2016
Letter
VIA EDGAR Securities and Exchange Commission Division of Corporation Finance Filed February 10, 2016 Form 8-K filed on February 9, 2016 Response dated February 25, 2016 File No. 0-52423
Dear Mr. O’Brien:
This letter is in response to the comment letter, dated March 7, 2016, of the Staff of the Division of Corporation Finance (the “Staff”) regarding the above-referenced filings (the “Filings”) for AECOM (the “Company”). To assist your review, we have retyped the text of the Staff’s comments in italics below.
Form 10-K for the fiscal year ended September 30, 2015
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 36
Critical Accounting Policies, page 39
1. We note your response to comment 1 in our letter dated February 4, 2016. It is not apparent from your response how much of the valuation allowance amount relates to the deferred tax assets for the pension obligations related to the URS acquisition, the specific positive and negative evidence considered that led to recording a valuation allowance against those deferred tax assets including how those may be different than the evidence considered in your evaluation of any net operating losses and tax credit carryforwards, and what facts and circumstances may lead to those valuation allowances reversing. As such, please tell us and expand your disclosures to provide investors with an understanding of all the specific positive and negative evidence considered for each of the material deferred tax assets that are considered not more likely than not to be realized. Please refer to ASC 740-10-30-16 through 30-25 and Section 501.14 of the Financial Reporting Codification for guidance.
AECOM’s Response to Question #1:
The Company evaluates the need for a valuation allowance against its deferred tax assets on a jurisdictional and/or legal entity basis (depending on whether or not a jurisdiction allows for combination or consolidation of legal entities for tax return filing purposes). At the time of the acquisition, both positive and negative evidence of a similar nature is evaluated regardless of the type of deferred tax asset (net operating loss, pension accrual, reserves, etc.). In connection with the Company’s acquisition of URS, one of the significant drivers of negative evidence was a history of losses for certain URS affiliates, specifically a cumulative three year history of losses. Other types of evidence evaluated (whether positive or negative) included the ability to use net operating losses or credits, reversal of deferred tax temporary differences, history of earnings, forecast of earnings (including an assessment of the quality of earnings) and market trends.
The valuation allowance recorded as a result of the URS acquisition related to the UK deferred tax assets, consisting of a pension obligation, net operating losses and other reserves and losses in the United Kingdom of $38.7 million, $34.7 million and $29.7 million, respectively, was consistent with the amounts recorded by URS in periods prior to the acquisition. The Company evaluated the positive and negative evidence for the net operating loss carry forward and the pension obligation separately as the assets are within separate affiliated legal entities and require separate income to be earned by each legal entity. The valuation allowances recorded with respect to deferred tax assets related to net operating losses, credit carry forwards and other reserves in Canada of $5 million, $4.8 million and $9.1 million, respectively, and other individually immaterial deferred tax assets in various foreign jurisdictions of $60 million were consistent with the amounts recorded by URS in pre-acquisition periods. While these particular amounts were consistent with the amounts recorded by URS in pre-acquisition periods, the Company performed its own assessment for the need of or additions to the valuation allowances recorded, evaluating the positive and negative evidence noted in the prior paragraph.
If the Company’s affiliates change to a cumulative income position and management is able to project sustained earnings from its core operations, the Company may reverse its valuation allowance on the associated net operating loss or pension asset.
The Company proposes the same disclosure as provided in its response dated February 25, 2016, with an additional statement describing the evaluation differences with respect to the positive and negative evidence for the United Kingdom net operating loss and pension deferred tax assets, such as:
In its determination of the realizability of these deferred tax assets at acquisition, the Company evaluated the positive and negative evidence for the United Kingdom net operating loss carry forward and the United Kingdom pension obligation separately as the assets are within separate affiliated legal entities and require separate income to be earned by each legal entity.
Note 1 — Significant Accounting Policies
Revenue Recognition, page75
2. We note your responses to comment 2 from our letter dated February 4, 2016 and comment 5 from our letter dated December 17, 2015. Please provide sufficient information to allow a user to understand the amount of revenue recognized for each period presented that falls under the percentage of completion method of accounting and those that do not by each type of contract, given the differing degrees of risk associated with percentage of completion method of accounting and other contract types.
AECOM’s Response to Question #2:
The Company advises the staff that during the year ended September 30, 2015 approximately 95% of its revenues were recognized under the percentage-of-completion method of accounting. The Company respectfully submits that differing degrees of risk are more closely associated with the type of contract. That is, the Company’s performance risk varies for cost-reimbursable, guaranteed maximum price, and fixed-price contracts. Item 1 of the Company’s Form 10-K for the fiscal year ended September 30, 2015 contains the following disclosure to address that risk:
“At September 30, 2015, our contracted backlog was comprised of 47%, 29%, and 24% cost-reimbursable, guaranteed maximum price, and fixed-price contracts, respectively.”
The below underlined text reflects the revised language that the Company proposes to include in its next Form 10-K in Note 1 to its consolidated financial statements and comparable language will be included for subsequent periods in future filings:
During the years ended September 30, 2015, 2014, and 2013, the types of contracts comprising the Company’s revenue were as follows:
September,
Cost reimbursable
%
%
%
Guaranteed maximum price
%
%
%
Fixed price
%
%
%
The Company respectfully notes that whether a contract falls under the percentage-of-completion method of revenue recognition under ASC 605-35 or falls under service contract accounting outside the scope of ASC 605-35 is not indicative of a contract’s risk profile. Instead, the contract types are indicative of risk profile, and accordingly, the above disclosure gives an understanding of the relative degrees of risk of the Company’s contracts as further disclosed in its Form 10-K for the fiscal year ended September 30, 2015.
Note 19- Commitments and Contingencies, page 113
3. We note your responses to comment 3 from our letter dated February 4, 2016 and comment 12 from our letter dated December 17, 2015. Specifically, we note your statements that you negotiated the settlement terms disclosed in the Deed of Release in the AECOM Australia matter for “several months preceding July 2015” and that the $205 million settlement amount was primarily covered by third party insurance carriers resulting in an immaterial accrual for this matter. Further, you state that you consider the need for any reasonably possible disclosures on a gross basis. As such, it remains unclear why you did not provide investors with the amount or range of reasonably possible loss prior to recognizing the accrual in the third quarter of fiscal year 2015. As previously noted, ASC 450-20-50 does not require estimation with precision or certainty for purposes of the disclosure of the estimate of reasonably possible range of loss. Please advise.
AECOM’s Response to Question #3:
The Company will disclose an estimate of any possible loss, or state that such an estimate cannot be made, if there is, at least, a reasonable possibility that a loss may have been incurred. In the Company’s Form 10-Q for the second quarter of fiscal 2015, filed with the Commission on May 13, 2015 (the “Second Quarter Form 10-Q”), the Company disclosed that a project performed by AECOM Australia in 2005 and 2006 was subject to a $1.68 billion (Australian dollar) owner related claim, a $76 million (Australian dollar) lender related claim and a class action claim with respect to approximately $155 million (Australian dollar) of securities acquired in an Australian IPO. The Company disclosed that “the potential range of loss and the resolution of this matter cannot be determined at this time” primarily because there was insufficient information to accurately predict with sufficient certainty whether a settlement of the claims would be achieved at that time, as well as other matters that made it difficult to reasonably estimate a possible loss in the absence of any settlement(s), including the complex, technical nature of issues raised in the claims against AECOM Australia, issues as to reliance on AECOM Australia’s reports, the quantum of damages and numerous proportionate liability defenses and cross-claims against third parties.
Even though AECOM Australia disputed, and continued to vigorously defend, each claim described above, AECOM Australia was open to negotiations to amicably resolve the claims. Substantive settlement negotiations commenced in March 2015 with respect to the owner and lender related claims and the class action claim. The negotiations with respect to the owner and lender related claims ultimately culminated in
the execution of the binding but conditional Deed of Release on July 10, 2015, while the class action claim remains unresolved. While progress had been made in negotiations with respect to the owner and lender related claims as of the Company’s Second Quarter Form 10-Q, those negotiations had not progressed to a point where the Company had sufficient credible information to accurately predict or determine the eventual outcome of those settlement negotiations as of that date. As of the filing of the Second Quarter Form 10-Q, there were many differences between the parties which could have caused the negotiations to fail, including the persons from whom various releases and indemnities were sought (including non-parties to the proceedings), the nature and extent of releases and indemnities sought, liability for legal costs, liability for any taxes payable with respect to any settlement and the timing and manner of any completion. These and other substantive matters continued to be the subject of vigorous negotiations into July 2015. Moreover, as of the Second Quarter Form 10-Q, internal and external approvals, which were a pre-requisite to AECOM Australia being able to enter into any binding settlement, had not been obtained and could not be obtained unless and until terms of the settlement were substantively agreed upon and finalized. The last of these required approvals was not obtained until July 2015. Shortly after obtaining such approval, AECOM Australia entered into the binding but still conditional Deed of Release on July 10, 2015.
Notwithstanding that the Deed of Release remained conditional as of July 10, 2015; the Company filed a Form 8-K on July 10, 2015 to inform its investors of the outcome because it then considered it had sufficient credible assurances to conclude that a binding, final settlement was obtainable.
The Company also considered that, because of the significant monetary value of the owner and lender claims, any disclosure of preliminary and on-going negotiations as of the filing of the Second Quarter Form 10-Q, or any disclosure prior to entry into an approved and binding settlement agreement, could be considered misleading (for example, if the disclosure resulted in the expectation that a settlement would soon follow, which could have a positive impact on the Company’s stock price), particularly if those on-going negotiations did not ultimately result in a final, binding settlement (as was possible).
In future filings, the Company will disclose an estimate of any possible loss, or state the specific reason that such an estimate cannot be made.
4. We note your response to comment 3 from our letter dated February 4, 2016. As previously requested, please confirm that you will expand your disclosures to provide your accounting policy for assessing reasonably possible loss disclosures on a gross basis per your response and also for recognizing gain contingencies. Also, please clarify whether your statement, “The Company recognizes losses associated with insured matters net of insurance recoveries…”, also means that you recognize loss contingency liabilities on the balance sheet on a net basis. To the extent you do, please tell us the guidance you relied on.
AECOM’s Response to Question #4:
The Company confirms that it will expand its disclosures in its Form 10-Q and other future filings, if applicable, to provide the underlined text to the notes to its consolidated financial statements:
The Company records amounts representing its probable estimated liabilities relating to claims, guarantees, litigation, audits and investigations. The Company relies in part on qualified actuaries to assist it in determining the level of reserves to establish for insurance-related claims that are known and have been asserted against it, and for insurance-related claims that are believed to have been incurred based on actuarial analysis, but have not yet been reported to the Company’s claims administrators as of the respective balance sheet dates. The Company includes any adjustment to such insurance reserves in its consolidated results of operations. The Company’s reasonably possible loss disclosures are presented on a gross basis prior to the consideration of insurance recoveries. The Company does not record gain contingencies until they are realized.
The Company’s historical loss contingency reserve was presented net of anticipated insurance recoveries as the Company historically had no issues with respect to disputes or collectability from its insurance carriers. The Company believes its presentation was consistent with other companies within its industry.
However, the Company acknowledges the guidance in ASC 210-20 as well as the amendments from ASU 2010-24 regarding the presentation of contingent liabilities gross of anticipated insurance recoveries. The Company believes this presentation would, in the light of surrounding circumstances, not change or influence the judgment of a reasonable person relying on the Company’s most recent Form 10-K, including the financial statements filed therewith. Presentation on a gross basis would result in an increase to total assets of approximately 1%, an increase to total liabilities of approximately 1%, and would not significantly impact any debt covenant or other financ
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CORRESP 1 filename1.htm AECOM 1999 Avenue of the Stars Suite 2600 Los Angeles, CA 90067 www.aecom.com 213.593.8000 213.593.8730 tel fax March 28, 2016 VIA EDGAR Terence O’Brien Accounting Branch Chief Securities and Exchange Commission Division of Corporation Finance 1 Station Place, N.E., Stop 7010 Washington, D.C. 20549 Re: AECOM Form 10-K for Fiscal Year Ended September 30, 2015 Filed November 25, 2015 Form 10-Q for Fiscal Quarter Ended December 31, 2015 Filed February 10, 2016 Form 8-K filed on February 9, 2016 Response dated February 25, 2016 File No. 0-52423 Dear Mr. O’Brien: This letter is in response to the comment letter, dated March 7, 2016, of the Staff of the Division of Corporation Finance (the “Staff”) regarding the above-referenced filings (the “Filings”) for AECOM (the “Company”). To assist your review, we have retyped the text of the Staff’s comments in italics below. Form 10-K for the fiscal year ended September 30, 2015 Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 36 Critical Accounting Policies, page 39 1. We note your response to comment 1 in our letter dated February 4, 2016. It is not apparent from your response how much of the valuation allowance amount relates to the deferred tax assets for the pension obligations related to the URS acquisition, the specific positive and negative evidence considered that led to recording a valuation allowance against those deferred tax assets including how those may be different than the evidence considered in your evaluation of any net operating losses and tax credit carryforwards, and what facts and circumstances may lead to those valuation allowances reversing. As such, please tell us and expand your disclosures to provide investors with an understanding of all the specific positive and negative evidence considered for each of the material deferred tax assets that are considered not more likely than not to be realized. Please refer to ASC 740-10-30-16 through 30-25 and Section 501.14 of the Financial Reporting Codification for guidance. AECOM’s Response to Question #1: The Company evaluates the need for a valuation allowance against its deferred tax assets on a jurisdictional and/or legal entity basis (depending on whether or not a jurisdiction allows for combination or consolidation of legal entities for tax return filing purposes). At the time of the acquisition, both positive and negative evidence of a similar nature is evaluated regardless of the type of deferred tax asset (net operating loss, pension accrual, reserves, etc.). In connection with the Company’s acquisition of URS, one of the significant drivers of negative evidence was a history of losses for certain URS affiliates, specifically a cumulative three year history of losses. Other types of evidence evaluated (whether positive or negative) included the ability to use net operating losses or credits, reversal of deferred tax temporary differences, history of earnings, forecast of earnings (including an assessment of the quality of earnings) and market trends. The valuation allowance recorded as a result of the URS acquisition related to the UK deferred tax assets, consisting of a pension obligation, net operating losses and other reserves and losses in the United Kingdom of $38.7 million, $34.7 million and $29.7 million, respectively, was consistent with the amounts recorded by URS in periods prior to the acquisition. The Company evaluated the positive and negative evidence for the net operating loss carry forward and the pension obligation separately as the assets are within separate affiliated legal entities and require separate income to be earned by each legal entity. The valuation allowances recorded with respect to deferred tax assets related to net operating losses, credit carry forwards and other reserves in Canada of $5 million, $4.8 million and $9.1 million, respectively, and other individually immaterial deferred tax assets in various foreign jurisdictions of $60 million were consistent with the amounts recorded by URS in pre-acquisition periods. While these particular amounts were consistent with the amounts recorded by URS in pre-acquisition periods, the Company performed its own assessment for the need of or additions to the valuation allowances recorded, evaluating the positive and negative evidence noted in the prior paragraph. If the Company’s affiliates change to a cumulative income position and management is able to project sustained earnings from its core operations, the Company may reverse its valuation allowance on the associated net operating loss or pension asset. The Company proposes the same disclosure as provided in its response dated February 25, 2016, with an additional statement describing the evaluation differences with respect to the positive and negative evidence for the United Kingdom net operating loss and pension deferred tax assets, such as: In its determination of the realizability of these deferred tax assets at acquisition, the Company evaluated the positive and negative evidence for the United Kingdom net operating loss carry forward and the United Kingdom pension obligation separately as the assets are within separate affiliated legal entities and require separate income to be earned by each legal entity. Note 1 — Significant Accounting Policies Revenue Recognition, page75 2. We note your responses to comment 2 from our letter dated February 4, 2016 and comment 5 from our letter dated December 17, 2015. Please provide sufficient information to allow a user to understand the amount of revenue recognized for each period presented that falls under the percentage of completion method of accounting and those that do not by each type of contract, given the differing degrees of risk associated with percentage of completion method of accounting and other contract types. AECOM’s Response to Question #2: The Company advises the staff that during the year ended September 30, 2015 approximately 95% of its revenues were recognized under the percentage-of-completion method of accounting. The Company respectfully submits that differing degrees of risk are more closely associated with the type of contract. That is, the Company’s performance risk varies for cost-reimbursable, guaranteed maximum price, and fixed-price contracts. Item 1 of the Company’s Form 10-K for the fiscal year ended September 30, 2015 contains the following disclosure to address that risk: “At September 30, 2015, our contracted backlog was comprised of 47%, 29%, and 24% cost-reimbursable, guaranteed maximum price, and fixed-price contracts, respectively.” The below underlined text reflects the revised language that the Company proposes to include in its next Form 10-K in Note 1 to its consolidated financial statements and comparable language will be included for subsequent periods in future filings: During the years ended September 30, 2015, 2014, and 2013, the types of contracts comprising the Company’s revenue were as follows: September, 2015 2014 2013 Cost reimbursable 57 % 46 % 51 % Guaranteed maximum price 15 % 14 % 11 % Fixed price 28 % 40 % 38 % The Company respectfully notes that whether a contract falls under the percentage-of-completion method of revenue recognition under ASC 605-35 or falls under service contract accounting outside the scope of ASC 605-35 is not indicative of a contract’s risk profile. Instead, the contract types are indicative of risk profile, and accordingly, the above disclosure gives an understanding of the relative degrees of risk of the Company’s contracts as further disclosed in its Form 10-K for the fiscal year ended September 30, 2015. Note 19- Commitments and Contingencies, page 113 3. We note your responses to comment 3 from our letter dated February 4, 2016 and comment 12 from our letter dated December 17, 2015. Specifically, we note your statements that you negotiated the settlement terms disclosed in the Deed of Release in the AECOM Australia matter for “several months preceding July 2015” and that the $205 million settlement amount was primarily covered by third party insurance carriers resulting in an immaterial accrual for this matter. Further, you state that you consider the need for any reasonably possible disclosures on a gross basis. As such, it remains unclear why you did not provide investors with the amount or range of reasonably possible loss prior to recognizing the accrual in the third quarter of fiscal year 2015. As previously noted, ASC 450-20-50 does not require estimation with precision or certainty for purposes of the disclosure of the estimate of reasonably possible range of loss. Please advise. AECOM’s Response to Question #3: The Company will disclose an estimate of any possible loss, or state that such an estimate cannot be made, if there is, at least, a reasonable possibility that a loss may have been incurred. In the Company’s Form 10-Q for the second quarter of fiscal 2015, filed with the Commission on May 13, 2015 (the “Second Quarter Form 10-Q”), the Company disclosed that a project performed by AECOM Australia in 2005 and 2006 was subject to a $1.68 billion (Australian dollar) owner related claim, a $76 million (Australian dollar) lender related claim and a class action claim with respect to approximately $155 million (Australian dollar) of securities acquired in an Australian IPO. The Company disclosed that “the potential range of loss and the resolution of this matter cannot be determined at this time” primarily because there was insufficient information to accurately predict with sufficient certainty whether a settlement of the claims would be achieved at that time, as well as other matters that made it difficult to reasonably estimate a possible loss in the absence of any settlement(s), including the complex, technical nature of issues raised in the claims against AECOM Australia, issues as to reliance on AECOM Australia’s reports, the quantum of damages and numerous proportionate liability defenses and cross-claims against third parties. Even though AECOM Australia disputed, and continued to vigorously defend, each claim described above, AECOM Australia was open to negotiations to amicably resolve the claims. Substantive settlement negotiations commenced in March 2015 with respect to the owner and lender related claims and the class action claim. The negotiations with respect to the owner and lender related claims ultimately culminated in the execution of the binding but conditional Deed of Release on July 10, 2015, while the class action claim remains unresolved. While progress had been made in negotiations with respect to the owner and lender related claims as of the Company’s Second Quarter Form 10-Q, those negotiations had not progressed to a point where the Company had sufficient credible information to accurately predict or determine the eventual outcome of those settlement negotiations as of that date. As of the filing of the Second Quarter Form 10-Q, there were many differences between the parties which could have caused the negotiations to fail, including the persons from whom various releases and indemnities were sought (including non-parties to the proceedings), the nature and extent of releases and indemnities sought, liability for legal costs, liability for any taxes payable with respect to any settlement and the timing and manner of any completion. These and other substantive matters continued to be the subject of vigorous negotiations into July 2015. Moreover, as of the Second Quarter Form 10-Q, internal and external approvals, which were a pre-requisite to AECOM Australia being able to enter into any binding settlement, had not been obtained and could not be obtained unless and until terms of the settlement were substantively agreed upon and finalized. The last of these required approvals was not obtained until July 2015. Shortly after obtaining such approval, AECOM Australia entered into the binding but still conditional Deed of Release on July 10, 2015. Notwithstanding that the Deed of Release remained conditional as of July 10, 2015; the Company filed a Form 8-K on July 10, 2015 to inform its investors of the outcome because it then considered it had sufficient credible assurances to conclude that a binding, final settlement was obtainable. The Company also considered that, because of the significant monetary value of the owner and lender claims, any disclosure of preliminary and on-going negotiations as of the filing of the Second Quarter Form 10-Q, or any disclosure prior to entry into an approved and binding settlement agreement, could be considered misleading (for example, if the disclosure resulted in the expectation that a settlement would soon follow, which could have a positive impact on the Company’s stock price), particularly if those on-going negotiations did not ultimately result in a final, binding settlement (as was possible). In future filings, the Company will disclose an estimate of any possible loss, or state the specific reason that such an estimate cannot be made. 4. We note your response to comment 3 from our letter dated February 4, 2016. As previously requested, please confirm that you will expand your disclosures to provide your accounting policy for assessing reasonably possible loss disclosures on a gross basis per your response and also for recognizing gain contingencies. Also, please clarify whether your statement, “The Company recognizes losses associated with insured matters net of insurance recoveries…”, also means that you recognize loss contingency liabilities on the balance sheet on a net basis. To the extent you do, please tell us the guidance you relied on. AECOM’s Response to Question #4: The Company confirms that it will expand its disclosures in its Form 10-Q and other future filings, if applicable, to provide the underlined text to the notes to its consolidated financial statements: The Company records amounts representing its probable estimated liabilities relating to claims, guarantees, litigation, audits and investigations. The Company relies in part on qualified actuaries to assist it in determining the level of reserves to establish for insurance-related claims that are known and have been asserted against it, and for insurance-related claims that are believed to have been incurred based on actuarial analysis, but have not yet been reported to the Company’s claims administrators as of the respective balance sheet dates. The Company includes any adjustment to such insurance reserves in its consolidated results of operations. The Company’s reasonably possible loss disclosures are presented on a gross basis prior to the consideration of insurance recoveries. The Company does not record gain contingencies until they are realized. The Company’s historical loss contingency reserve was presented net of anticipated insurance recoveries as the Company historically had no issues with respect to disputes or collectability from its insurance carriers. The Company believes its presentation was consistent with other companies within its industry. However, the Company acknowledges the guidance in ASC 210-20 as well as the amendments from ASU 2010-24 regarding the presentation of contingent liabilities gross of anticipated insurance recoveries. The Company believes this presentation would, in the light of surrounding circumstances, not change or influence the judgment of a reasonable person relying on the Company’s most recent Form 10-K, including the financial statements filed therewith. Presentation on a gross basis would result in an increase to total assets of approximately 1%, an increase to total liabilities of approximately 1%, and would not significantly impact any debt covenant or other financ