AMEC Company Description - Assignment Example

Table Of Contents Table Of Contents 1 1. Financial Ratios 2 2. The company and the Industry 2 3. IFRS Risk Disclosures 6 4. Corporate Responsibility Report 9 Reference 17 1. Financial Ratios 2. The company and the Industry The company With annual revenue of £2606.6 million the group, AMEC has its operations spread over the globe. They have over 22,000 talents to work for them in around 30 countries worldwide. This renowned group deals in engineering, consultancy and project management services in three different divisions named as natural resources, power and process, earth and environmental. They believe in providing services in the design, delivery and maintenance for the asset life time. Maximum of their employees, consisting of around 49%, are employed in natural resource division followed by 33% in Power and process and 18% in earth and environmental. Even in 2008, the highest share of the group revenues came from natural resources. This constitutes around 46% of the total revenue. Power and Process came second with 39% and Earth and Environmental division contributed 15% in total revenue. Having a wide range of customers from blue chip global companies to national and local governments worldwide, this company has marked its leaps in the industry of energy, power and process. They believe in a strong positive relationship with its stakeholders and thus get benefited from the relationship they maintain. The company is committed towards the community and society it belongs to. That must be the reason why AMEC has ranked as one of the leaders in oil equipment and services sector as per the Dow Jones Sustainability Index 2009/10. Hopefully in coming years the company will be able to stand high on the expectations of all the stakeholders. The Industry AMEC mainly competes in two industries; Architectural and Engineering services, Construction and Design services. They have certain competitors in these industries. To name a few, AECOM technology Corporation, Jacobs engineering group and CH2M hill companies Ltd. The construction and design services industry consists of 894,363 companies with total annual revenue of $1,533.3 billions (Hoovers, “Construction & Design Services Industry Financials”). In Architectural and Engineering services the line between these two has been blurred. One firm has to do both the designing and as well as building the same to ensure creating a well integrated project. Mainly the big ones have adopted this to meet the expectations of wide genre of clients (Hoovers, “Architectural & Engineering Services Industry Financials”). Financial State 1). Short term liquidity When any company takes loans or debt, it promises to make a certain payment through out the year and the whole amount after the end of the stipulated period. If AMEC is borrowing on short terms or may be a large amount of debt payment is due in near future, the company needs to make sure that it can get hold of cash or cash like assets whenever necessary. The creditors and suppliers of the company are very much interested to keep an eye on this short term liquidity state. AMEC have liquid assets as cash, short term marketable securities, receivables and inventories. Inventories sometimes can give a misleading measurement as it takes time to liquid the inventories and that may not be possible in short term. So to evaluate AMEC’s short term liquidity performance two ratios as quick ratio and cash ratio are considered. Quick ratio is a better measurement of short term liquidity than current ratio. This is mainly because for the calculation of quick ratio, the assets are taken into account are cash, marketable securities and receivables, the more liquid assets. AMEC has a current ratio of 1.77 and a quick ratio of 1.76. The two ratios are quite equal. The reason seemed to be that this company preferred to keep more liquid assets in their current asset portfolio. 2). Financial adaptability Financial adaptability of any organization lies in its ability to meet the unexpected needs or opportunities it comes through. For this AMEC has to take several effective actions to keep on their financial adaptability. For an example AMEC might have to raise capital for their new expansion or might be in need to repay some immediate debt obligations. In both the cases its flow of cash needs to be adapted in such a way that the objective can be fulfilled. Creditors of this company would be interested in the debt equity ratio. AMEC has a debt equity ratio of 1.11. That means there is 1.11 unit of debt invested in AMEC’s capital against every unit of equity in that. If a company has more debt in its portfolio, the investors may be worried about its financial state and may not be interested to pour more capital in. 3). Capital structure and long-term solvency Capital structure of any company consists mainly of debt and equity. AMEC is not an exception to that. Having a look at the capital structure of this company, it seems they believe in having almost equal share of debt and equity. The below pie chart is a snapshot of AMEC’s capital structure. The debt consists of 53% of the total capital of AMEC. Long term solvency of any company can be measured as long term debt divided by the total capital. Solvency is important from a company’s point of view. It indicates an organization’s capability to meet long term obligations and is stated to be very important from growth perspective. Financially higher solvency is good indicator for an organization. For AMEC the long term solvency ratio is quite high, around 22%. That means the company is solvent enough to meet all its long term obligations in future. 4). Operating efficiency Operating efficiency is very much important for an organization to make the best use of its assets. It can be measured by the Asset turnover ratio. AMEC always believes in higher productivity and it is very much visible from their Net asset turnover ratio. The group has quite a high ratio of 2.77.That means on an average the assets’ productivity is around 277% of the asset amount. 5). Profitability Profitability can have different facets. It can be measured in different ways, return on assets, return on equity, net profit margin or gross profit margin. This measurement is significant mainly from the shareholders’ perspective. Equity holders of AMEC would like to see a high return on equity and prefer the return to be higher than the cost of capital. The group has a return on equity of around 21.1 % and a gross profit margin of 12%. 3. IFRS Risk Disclosures IFRS 7 requires several disclosures to be presented in the annual report of a company. The disclosures consist of qualitative as well as quantitative ones. The company can have several risk components they are exposed to. The disclosures include summarization of risk as well as management’s perspective and action to minimize the same. Another inclusion that is a must in this disclosure is the change in the amount of risk from the risk amount of previous year. Some of risk as disclosed in the annual report of AMEC is being articulated below. Credit Risk: Credit risk is resulted from the counter party obligations when the counterparty is unable to pay the same. AMEC is open to the elements of credit risk, incase their customers are unable to make the due payment. The credit risk related to customers is seemed to be an important part, while reviewing the tenders. In an initial stage this risk is addressed through cautious articulation of the terms in contract payment document. If needed, payment security is added further. AMEC has wide credit control measurements, which would be applied throughout the project implementation phase. Currency Risk Being based out in UK, the company publishes its consolidated financial account in Sterling. It carries out its business in a wide range of foreign currencies including Canadian and US currencies. Liquidity risk Liquidity risk arises when a company is unable to meet its short term debt obligations. The company will finance its operations from its existing cash flows. The group has also availed unsecured loan facilities, maturing in 2009, from several relationship banks. At 31st December, 2008, this unsecured loan amount summed to the same amount of £315 million as in 2007. The average duration of the loan was of 4 months as against that of 16 months in 2007. However, having a number of cash resources, the provision for these facilities was not renewed during the year 2008. During 2009, this decision again would be reviewed. The group always strives to the betterment of their liquidity position. AMEC has certain present and future commitments and prefers to keep an adequate amount of liquidity to meet all the funding needs for their present and forecasted strategic plans. The treasury management division of this group is responsible for the management of funding and all type of liquidity risk that results from movements in the interest and foreign exchange rates. A significant amount of AMEC’s cash flows come in foreign currency. The hedging decisions of the company are taken based on forecasted values of cash flows in local and foreign currencies. For this kind of hedging AMEC mostly rely on forward contracts. Now AMEC would be exposed to certain kind of exposures if forward contracts need to be cancelled out in case the expected cash flows did not happen as anticipated. In 2008, total gross value of all outstanding forward contracts was calculated around £214 million against £116 million in the year 2007. On the last date of year 2008, the mark to market value of these out of the money summed around £14.8 million while the same for in the money contracts were £9.6 million. The former can be assumed as liability while the later can be consumed as assets. The group’s revenue is mainly in sterling. Now a days as sterling is getting weak against other strong currencies AMEC must be a bit bothered about carrying out the expenses in other countries. No hedging is there currently to minimize this exposure. As per the policies, this company preferred to hedge a part of its assets including the unamortized good will using cross currency hedging instruments. In the year of 2008, the net amount of the hedging investments was around £199 million against about 5o percent of assets overseas. The numbers are being higher against £138 million of hedging instruments covering around 40% of overseas assets in the year 2007. Interest Rate risk As UK interest rates have fallen gradually in the year of 2008, this would keep a bang on interest income in the coming year. On an average cash amount of £626million, AMEC used to pay an effective rate of 4%. For each unit of percentage drop in effective interest rates, interest income would be reduced by an amount of £6 million. So they have quite a bit interest rate risk. The treasury department of this group prefers to use derivative instruments to mitigate this kind of risk (AMEC, “Annual report 2008”). 4. Corporate Responsibility Report Sustainability is one of the most important parts of corporate responsibility. Every organization, be it small or large, can not forward its leaps while ignoring the society, the environment where it operates. These are all significant factors which need to be taken into account for an effective operation. Back in the year of 2001, AMEC started its journey towards sustainability. AMEC’s sustainability process is an ongoing procedure which is being carried out through out the year. The sustainability report is a medium which gives an idea about how the company and the globe, both are influenced by the sustainable development of each other. AMEC has divided the sustainability issues in different areas, i.e. Workplace, community, market place and environment. In AMEC, the board of directors is in the top most tier of authority. The board includes three executive directors including the Chief Executive. The company maintains the independence of the designations given to the Chairman and does not overlap the role of the chairman with that of the chief executive. Apart from them, there are six more highly qualified and experienced individuals. In 2008, the board consists of two female board members. This highly eligible board is responsible for the effective operation of the organization. For this, the internal control within the organization should be in place as well as a review process needs to be there to have an eye on the procedures towards effectiveness. Eleven committees, under the supervision of the board, are being established for monitoring and analyzing important sustainability aspects. Regular meetings are being held to identify and manage noteworthy risks faced by this company. A company can not grow without its stakeholders. AMEC has a number of stakeholders widely arranged over the globe. Different stakeholders can have differing needs as well as they can be conflicting with each other. To balance the needs of the customers aligned with the needs of the business is the main criterion for a better stakeholder management. The below mentioned snapshot gives a very interesting picture how serving the stakeholders well can be beneficial for the company. (Source: AMEC, “Sustainability Report 2008”) AMEC has a small number of generators working at their sites which directly comes under their control. Except those, there are a number of generators under the control of sub-contractors. The picture shows an excerpt of carbon-di-oxide omission from the oil and gas they have been used. (Source: AMEC, “Sustainability Report 2008”) The next picture gives a comparative snapshot about the electricity consumed in the year of 2007 and 2008. (Source: AMEC, “Sustainability Report 2008”) AMEC’s workforce is highly mobile as per their business requirements. The company has a fleet of vehicles for which they have included transport mileage in the report. AMEC has identified this area as a source of major expenditure and they would like to improve their efficiency in this case. Thus a way not only they would be able to reduce the emission, but also would be able to save money. Some of this data have been estimated as getting hold of accurate data was a hefty task. During 2009, this company supposed to find a more accurate way to gather data more efficiently. In total, the business has reported emission of 51,585 tones of carbon. (Source: AMEC, “Sustainability Report 2008”) Through investment in their operational excellence, AMEC has developed a tool to have an account for emission in compliance with the Green House Gas Protocol. AMEC believes in putting effort to keep on an effective environmental management system in place, aligned with ISO14001:2004 as a standard framework. Although in the year of 2008, the percentage of people working in a non-compliant system increased to 36% against the number being in the year 2007 of 32%. In the coming year, the group needs to address this issue more importantly. AMEC has a Head division to look upon the safety and health of the environment. Environmental regulatory decisions need to be disclosed to this head division. AMEC kept a target of zero environmental incompliance in these years and met the same in the year, 2008. These relate to those environmental incidents, reported by their environment management system, which resulted in no regulatory action. AMEC always strive towards lessening the number of environmental issues, although the number increased in the year 2008 to 423, from the number of 77 in 2007. The increased outcome resulted from power divisions in Europe and natural resources in America, mainly due to complex pipeline jobs in those places. AMEC was able to achieve the best performance in health, safety and environment (HSE) in 2008.The group has seen a noticeable improvement of 10% on previous year’s performance. AMEC kept zero fatalities as their target in 2008. The company did not accept any fatality at work place. Apart from this AMEC is very much attached to the community they are in; and they believe, the way they treat communities, is a way to express their identity. The community includes every stakeholder of AMEC and they are connected with a strong and positive relationship with the company. Working along with the stakeholders and being in a relationship with them brings the company a number of opportunities. So putting in time and endeavor for building relationships will be beneficial for the company in long run. AMEC invests in local infrastructure, skills and education and hence contributes towards the global sustainability initiative. In the year 2008, AMEC contributed around £5, 49, 000 for good reasons and charitable organizations over the globe. This is a noticeable 23 percent increase on previous year’s contribution; and it includes around 0.26 percent of the profit amount for the respective year. The board of directors has contributed towards creating charitable institutions around the globe. AMEC encourages employees to do charities voluntarily by giving direct investment or investing time. AMEC has certain structured guidelines for community engagement and expected their employees to follow the same. As the business is growing, AMEC prefers their employees to be open to the local opportunities. Apart from that, their community activities include encouraging budding talents through finance, education or providing mentorship. In the month of March, 2008, AMEC set up a program for around sixty students in Kazakhstan to support them either by financially or else by providing job experience. All of these students would be absorbed as part of their Kazakhstan talents. Back in 2003, AMEC initialized a center in UK to encourage the talents to grow as per the organization needs. Apart from this they also promote talents in school levels. AMEC has shaped several communities in partnership with local institutions. These include taking classes for safety awareness, work experience etc. AMEC is also connected with several national events by providing sponsorship to those. This was the best year for AMEC to prove their market performance. Through a great efficiency in operation, AMEC has exceeded their target margin for earning before interest and taxes (EBITA) to 7.1%, while their target was to achieve EBITA margin of 6%.A summary of the AMEC financials is shown below. (Source: AMEC, “Sustainability Report 2008”). Strategically, in year 2008, AMEC was involved in developing UK wind farms .They have already been leaders in wind farms of Canada and plans to expand it further. AMEC is committed to enhance the value for stakeholders through more advanced sustainability developments in near future. Reference AMEC. 2008. ”Sustainability Report 2008”. 27 Dec 2009. . Hoovers. 2008. ” Construction & Design Services Industry Financials”. 27 Dec 2009. < http://industries.hoovers.com/construction/construction-and-design-services/industry_financials >. Hoovers. 2008. ” Architectural & Engineering Services Industry Financials”. 27 Dec 2009. < http://industries.hoovers.com/construction/construction-and-design-services/architectural-and-engineering-services/industry_financials >. Read More