AECOM Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2018 (fiscal 2018 second quarter and first half). Comparisons are with the corresponding 2017 periods. AECOM provides engineering, design, construction, program management and related services through Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS) and AECOM Capital.
Financial results and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $4.791bn | $4.427bn | $9.702bn | $8.786bn |
| Gross profit / margin | $141.3m / 2.9% | $168.4m / 3.8% | $277.4m / 2.9% | $338.4m / 3.9% |
| Operating income (loss) | $(44.1)m | $140.9m | $87.1m | $284.3m |
| Net income (loss) attributable to AECOM | $(119.7)m | $102.4m | $(8.4)m | $149.6m |
| Diluted EPS | $(0.75) | $0.65 | $(0.05) | $0.94 |
| Operating cash flow | Not presented separately | Not presented separately | $170.8m | $31.4m |
- Revenue rose 8.2% in the quarter and 10.4% in the half year, while gross profit fell 16.2% and 18.0%, respectively. Cost of revenue grew faster than revenue.
- At March 31, cash and cash equivalents were $867.2m, including $205.1m held in consolidated joint ventures and restricted to their use. Total debt was $4.0bn; long-term debt on the balance sheet was $3.815bn. Cash less total debt implies net debt of about $3.13bn, before considering cash restrictions.
- Working capital was $1.282bn, up from $1.104bn at September 30, 2017. DSO increased to 80 days from 77. Available capacity under the revolving credit facility was $1.159bn.
- Investing activities used $87.8m and financing activities used $24.3m in the first half. Operating cash flow improved year over year, which management attributed principally to timing of working-capital receipts and payments; receivables sales provided a $28.9m net benefit versus a $20.4m net unfavorable impact in the prior-year period.
Material changes and segment performance
- CS revenue increased 9.0% in Q2 and 15.2% in the first half, but gross profit declined to a $13.3m loss in Q2 and $13.8m for the half. AECOM cited losses in North American oil and gas and two building/civil construction projects. New York residential high-rise work and acquired businesses boosted revenue.
- DCS revenue increased 7.3% in Q2 and 6.4% in the half. Q2 gross margin improved to 6.0% from 5.7%; first-half margin declined to 5.0% from 5.4%.
- MS revenue rose 8.6% in Q2 and 9.2% in the half, while gross margin declined to 3.8% from 5.1% and 6.5%, respectively. The prior-year half included an approximately $35m benefit from a qui tam lawsuit settlement.
- Revenue growth includes substantial pass-through subcontractor costs. These costs were 51% of revenue in Q2 versus 48%, and 52% in the half versus 50%.
- Q2 and first-half operating results included a $168.2m impairment tied to planned sale of non-core North American oil and gas businesses, including $125.4m of goodwill impairment. The Disposal Group was classified as held for sale; management expected the sale by fiscal year-end.
Debt, outlook, risks and unusual items
- In March 2018, AECOM refinanced its credit facilities, increased revolving capacity from $1.05bn to $1.35bn and redeemed $800m of 5.750% senior notes due 2022. The redemption generated a $34.5m prepayment premium included in interest expense. The six-month effective interest rate on total debt was 4.7%, versus 4.2% a year earlier.
- The reported consolidated leverage ratio was 4.0 and interest coverage ratio 4.7 at March 31; AECOM reported compliance with debt covenants. The amended maximum leverage covenant was 4.5 through September 30, 2019, stepping down to 4.0 thereafter.
- Management said anticipated liquidity sources should meet projected cash requirements for at least 12 months and planned to use proceeds from asset and non-core oil and gas business sales to repay debt. Its capital allocation policy prioritizes debt reduction before share repurchases. No repurchases were made under the authorized $1bn program in the first half.
- AECOM removed about $150m of oil and gas projects and $500m of power projects from backlog; management said this was expected to lower FY2018 earnings and that it would not pursue new fixed-price combined-cycle gas power plant EPC projects. Additional restructuring costs could occur in the second half. No specific full-year earnings guidance is stated in the provided filing text.
- The Tax Act accounting remained provisional. First-half tax results included a $41.7m net benefit related to U.S. federal tax law changes and a $36.0m benefit from changes in uncertain tax positions, partly offset by $33.9m tax expense on the nondeductible goodwill impairment. A $26.2m benefit followed a favorable U.S. R&D credit settlement; final transition-tax calculations were incomplete.
- Key risks include high leverage, variable-rate debt, government funding and contract changes, fixed-price project losses, cost inflation from steel and aluminum tariffs, oil and gas market weakness, backlog cancellations, joint-venture and guarantee exposure, and legal, environmental, cybersecurity and international risks.
- Contingencies include $5.3bn of surety bonds and $519.3m of standby letters of credit, primarily supporting project execution. A DOE demolition/removal project has cost and recovery uncertainty; a California highway design matter includes a $70m counterclaim; and a New York environmental-permit claim remains unresolved. The filing says potential excess losses in the latter two matters cannot currently be reasonably estimated.
Important facts for investors to verify
- Whether the planned oil and gas business sale closes by fiscal year-end and at what proceeds relative to the recorded impairment.
- Whether CS project losses and weaker MS margins persist, and whether the removed backlog and restructuring affect FY2018 results as anticipated.
- Cash conversion excluding receivables-sale benefits, DSO trends, and the availability of cash held in joint ventures.
- Debt reduction progress, refinancing economics, covenant headroom and exposure to higher floating interest rates.
- Final Tax Act accounting, including transition-tax amounts, and developments in the DOE, SR-91 and environmental matters.