AECOM 2020 Third-Quarter Form 10-Q Summary
Reporting period: The quarter and nine months ended June 30, 2020; AECOM’s fiscal third quarter. The filing was signed August 5, 2020. Unless noted, financial amounts below are in U.S. dollars.
Business context
AECOM provides engineering, design, consulting and construction-management services to government and commercial clients. Continuing operations are reported in Americas, International and AECOM Capital. The Management Services business was sold on January 31, 2020, and the company planned to sell its self-perform at-risk construction businesses. Both are presented as discontinued operations, so continuing-operations comparisons reflect that reclassification.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue from continuing operations | $3.190 billion, down 5.1% | $9.671 billion, down 4.5% |
| Gross profit / margin | $185.1 million / 5.8%, versus 4.6% | $519.7 million / 5.4%, versus 4.2% |
| Operating income | $118.9 million, versus $125.5 million | $316.1 million, versus $264.5 million |
| Income from continuing operations attributable to AECOM | $91.1 million, or $0.56 diluted EPS | $170.5 million, or $1.06 diluted EPS |
| Net income attributable to AECOM, including discontinued operations | $89.3 million, versus $83.7 million | $43.8 million, versus $213.1 million |
Quarterly gross margin improved despite lower revenue, reflecting lower costs and improved project execution. General and administrative expense rose, partly because of accelerated depreciation of a project-management tool; quarterly restructuring expense was $20.3 million. The nine-month net-income comparison was materially affected by discontinued operations, including oil-and-gas impairment charges in 2020 and a gain on the Management Services sale.
- Cash flow: For the first nine months, operating cash flow was negative $319.7 million, investing cash flow was positive $2.074 billion, and financing cash flow was negative $1.406 billion. Investing inflows principally included $2.219 billion of net sale proceeds from discontinued operations.
- Cash and working capital: Continuing-operations cash and equivalents were $1.331 billion at June 30, 2020. Working capital was $1.539 billion, up from $1.073 billion at September 30, 2019. Days sales outstanding increased to 101 days from 94 days.
- Debt: Total debt was $2.096 billion, down from $3.353 billion at September 30, 2019. The company reported a 2.8 consolidated leverage ratio and 5.2 interest coverage ratio and stated it was in covenant compliance. It had $1.329 billion available under its revolving credit facility.
- Backlog: Contracted backlog was approximately $19.6 billion; awarded backlog was $21.2 billion; and unconsolidated joint-venture backlog was $0.7 billion. Separately, $19.1 billion of remaining performance obligations was allocated, about 60% expected to be satisfied within twelve months.
Changes versus prior period
Revenue declined in both continuing segments: Americas revenue fell 3.6% for the quarter and International revenue fell 9.7%. International weakness was attributed in part to pandemic-related downtime in the U.K. and Middle East. Gross profit improved in both segments; management cited prior restructuring, cost reductions and project execution. Nine-month continuing operating income rose 19.5%, while AECOM-attributable net income for the nine months fell 79.4%, mainly reflecting discontinued-operation results and the prior-year comparison.
Following the Management Services sale, reported debt fell substantially as sale proceeds were used in part to repay borrowings. On July 30, after quarter-end, AECOM drew $248.5 million on a secured delayed-draw facility to redeem all 2022 URS Senior Notes.
Outlook, commentary and risks
- The filing gives no specific revenue or earnings forecast. Management said liquidity sources were expected to cover projected cash needs for at least twelve months.
- AECOM expected fiscal 2020 restructuring expense of $160–$190 million and total restructuring cash costs of $185–$205 million, mainly related to the divestiture and planned exits from at-risk construction. It expected to exit more than 30 countries, subject to applicable laws, and intended to direct available cash toward debt reduction and share repurchases.
- COVID-19 had caused project delays or stoppages, restrictions on travel and client contact, remote work, salary reductions or furloughs, and slower pursuit and award activity. State and local budget shortfalls and delays in the U.K., Middle East and Southeast Asia were cited. Government subsidies reduced third-quarter cost of revenue by $12.3 million.
- Key liquidity and execution concerns include working-capital demands and payment delays on U.S. Virgin Islands recovery contracts: more than $750 million of work had been performed and payment delays had increased working capital by over $150 million since September 2018. Timing and amount of future payments were uncertain.
- Contingencies include approximately $5.2 billion of surety bonds and $432.3 million of standby letters of credit. The DOE project claims seek recovery of substantial costs, but recovery is uncertain. The company also disclosed unresolved refinery-project claims and a New York environmental-permit matter for which potential loss could not be reasonably estimated.
- Other material risks include government funding and contract changes, fixed-price project losses, high leverage, pension funding, claims and insurance exposure, and uncertainty around planned divestitures. The company recorded $89.3 million of goodwill and intangible impairment in discontinued operations, primarily tied to its oil-and-gas business.
Important facts for investors to verify
- Whether COVID-related project delays, reduced client spending and government budget pressure continue to affect revenue, awards and backlog conversion.
- Actual cash generation and collection trends, particularly the rise in DSO and delayed U.S. Virgin Islands payments.
- Progress and final costs of the planned self-perform construction exits, restructuring program and geographic withdrawals.
- Use of divestiture proceeds, debt repayments and the effect of the post-quarter-end URS note redemption on debt, interest costs and covenant headroom.
- Outcomes and potential financial exposure from DOE, refinery and environmental matters, as well as surety, guarantee and pension obligations.