Firm Seeks Safety In Afghanistan

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Aecom Technology Corp. designs massive, complex infrastructure projects: for instance, a bridge and undersea tunnel system crossing a busy Hong Kong shipping channel.

So what is the downtown L.A. engineering giant doing sending consultants to a war zone in rural Afghanistan to help build not bridges but democracy?

It’s jumping into a different revenue stream, a move analysts said can help insulate the company, largely dependent on public-sector engineering contracts, from the uncertainty that comes with today’s deficits and spending cuts.

“Aecom has done a good job of looking at pieces of the federal budget that are less likely to be cut,” said David Wells, who follows Aecom stock as senior equity analyst for Thompson Research Group in Nashville, Tenn.

Increasingly, that means doing projects that rely less on the firm’s design or engineering acumen than on ground-level work in logistics, diplomacy and intelligence. For example, Aecom’s latest deal, a $177 million contract with the U.S. Agency for International Development, calls for the company to help build Afghans’ confidence in their local leaders by assisting the government in carrying out its functions.

These so-called management and support services are nothing new for Aecom, but that part of the company’s business has seen strong growth over the past several years, with revenue more than tripling since 2005.

And Aecom isn’t alone. Another local engineering powerhouse, Pasadena’s Tetra Tech Inc., offers similar services and reported that segment as a bright spot in its latest annual report. While the company’s overall revenue was down from federal sources, Tetra Tech saw growth from services paid for by USAID, the same agency contracting with Aecom in Afghanistan.

Indeed, analysts said that as Washington tightens its belt, it makes sense for companies such as Aecom and Tetra Tech to offer more types of services. Working for many departments and offices could insulate companies from cuts that might come down the line.

“There are many parts of government – federal, state, local, different agencies – and the goal is to diversify to the extent you can,” said Andy Kaplowitz, who follows Aecom as an analyst for Barclays Capital Inc. in New York.

Service provider

Under its new contract, Aecom will run a USAID program called Stability in Key Areas, which aims to wean Afghans off of dependence on U.S. agencies and get them to work with their local governments.

If a village needs a well, for instance, villagers might ask the U.S. Army for help. Aecom diverts those requests to local officials and then helps them deliver, perhaps by finding an Afghan with expertise to do the work, USAID officials said.

The goal is to get Afghans to see their local governments as legitimate and reliable.

Aecom officials said they could not comment on the contract. USAID officials said they could not say when the program, which is still in the planning stage, will begin on the ground or which parts of Afghanistan the program will focus on.

Aecom already has a presence in Afghanistan and has been providing services to the U.S. and Afghan militaries there for years. The company has won contracts to provide maintenance and support services for U.S. military bases, environmental remediation services for the U.S. Army and vehicle maintenance for the Afghan army.

Afghanistan is a risky environment, and familiarity with that risk is likely a big reason Aecom won the new contract, Kaplowitz said.

“They have an expertise in working in relatively difficult places and providing good design and program management services,” he said.

Adam Thalhimer, who follows Aecom as an analyst for BB&T Capital Markets in Richmond, Va., said the new contract also shows how Aecom has expanded its service offerings from maintenance to nation building. He said he expects that expansion will continue and that Aecom will get into more intelligence-related services.

“They’ve gotten more high end, more technical, more white collar,” Thalhimer said. “As far as diversifying what they do for the government, they’re trying to go into cybersecurity, environmental remediation and intelligence. That’s where they feel the real growth is.”

As it’s gotten more technical, it’s also become more lucrative. While management and support services make up only 14 percent of Aecom’s total revenue, it represents nearly two-thirds of the company’s revenue from the federal government.

For the fiscal year ended Sept. 30, Aecom took in $1.2 billion in revenue from the U.S. government alone for management and support services. That’s up from $309 million in 2005.

“The growth rate has been quite strong. They’ve been focused on growing this business,” Kaplowitz said.

Reducing risk

Analysts said that while working in Afghanistan is physically risky, it could have the opposite effect of lowering Aecom’s financial risk from public-sector budget cuts.

Exactly 50 percent of Aecom’s revenue last year came from public engineering and technical services contracts, mostly from state, local and international governments. The federal government is the company’s largest single customer.

But the management and support services Aecom is providing and wants to provide, including in intelligence, are ones the government is likely to continue funding.

That’s also the case for Tetra Tech, which reported in its fiscal year ended Oct. 2 that revenue from the federal government was down because contracts for big engineering projects were slow in coming. But the company’s revenue from USAID for international development work was up.

In December, Tetra Tech announced a $225 million USAID contract to work with legislatures in Afghanistan, Pakistan and other troubled countries.

“If you look just at the defense budget in the U.S., to the extent it’s affected by cuts, they tend to cut hardware more than services,” Thalhimer said. “That’s how they’d sell this to investors.”