AECOM (10-Q) — Fiscal 2015 Q1
Reporting period: Three months ended December 31, 2014. The quarter includes URS Corporation from its October 17, 2014 acquisition; reported year-over-year comparisons therefore include a substantial acquired-business effect. AECOM reorganized reporting into Design and Consulting Services (DCS), Construction Services (CS), and Management Services (MS).
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $4.186 billion | $1.954 billion |
| Gross profit / margin | $164.2 million / 3.9% | $78.2 million / 4.0% |
| Operating income / margin | $15.3 million / 0.4% | $90.4 million / 4.6% |
| Net income (loss) attributable to AECOM | $(103.5) million; $(0.73) per diluted share | $56.4 million; $0.58 per diluted share |
| Cash from operating activities | $282.6 million | $137.4 million |
- Excluding acquired companies, revenue rose 1.1% to approximately $1.976 billion; acquired companies contributed $2.210 billion. Excluding acquired businesses, gross profit fell $5.6 million.
- Cash and cash equivalents were $734.6 million at quarter-end, including $150.8 million held in consolidated joint ventures and restricted to their use. Working capital was $1.688 billion. Management said anticipated liquidity sources were expected to cover projected needs for at least 12 months.
- Total debt rose to $4.978 billion from $1.004 billion at September 30, 2014; $4.775 billion was long-term. AECOM reported $859 million available under its revolving credit facility and was compliant with debt covenants. Its December-quarter consolidated leverage ratio was 4.4; specified financial-ratio testing begins with the March 2015 quarter.
- Operating cash flow benefited from working-capital timing and included a $19.1 million net benefit from receivables sales. Investing cash outflow was $3.319 billion, mainly for URS; financing cash inflow was $3.206 billion, primarily from acquisition-related borrowing and $1.6 billion of senior notes.
- Total assets were $14.253 billion, including $5.672 billion of goodwill and $858.9 million of net intangible assets. The aggregate pension and post-retirement deficit was $612.6 million, up from $221.3 million at September 30.
Material changes and business drivers
- The URS acquisition was funded with approximately $2.3 billion in cash, $1.6 billion in AECOM shares, and assumed debt. URS contributed $2.0 billion in revenue and $83 million in operating income after acquisition. The purchase-price allocation remained preliminary; acquired goodwill was $3.801 billion.
- Acquisition and integration costs were $138.5 million, including $109.3 million of severance and personnel costs. Interest expense was $118.7 million and included approximately $68 million of acquisition-related financing costs, notably a $55.6 million debt prepayment penalty and $9.0 million of debt-issuance-cost write-offs.
- Reported revenue more than doubled, but operating income fell to $15.3 million and AECOM recorded a net loss. The comparison reflects acquisition and financing charges, higher interest expense, and a $37.4 million prior-year gain on a joint-venture change in control. A prior-year $10 million Libya-related receivable recovery also affected gross-profit comparisons.
- Reported segment revenue and gross margins were: DCS $1.877 billion and 2.6%; CS $1.530 billion and 3.5%; MS $778.6 million and 8.0%. Excluding acquired companies, DCS revenue declined 5.2%, CS revenue increased 25.3%, and MS revenue declined 8.3%.
- Contracted backlog was approximately $21.6 billion and awarded backlog $19.1 billion, totaling $40.7 billion. The filing cautions that awards may not be signed or funded and backlog may be delayed, reduced, or canceled.
Outlook, risks, and contingencies
- Management expected approximately $220 million of intangible amortization expense and approximately $340 million of acquisition and integration plus acquisition-related financing expense for fiscal 2015. The company noted that Q1 is typically its weakest quarter and results are seasonal.
- Management said lower oil and gas prices had negatively affected the business and expected project impacts to continue until prices stabilize; limited North American pipeline capacity also weighed on Canadian oil sands activity. In January 2015, AECOM was informed that control of its U.K. Sellafield joint venture would transition back to the U.K. government.
- Key risks include successful URS integration and realization of synergies, substantial leverage and variable-rate debt, government funding and contract termination, cyclical client spending, foreign-exchange exposure, and project execution, collection, and guarantee risks. A 1 percentage-point increase in short-term floating rates would have increased quarterly interest expense by $6.7 million, including swaps.
- Significant disclosed matters include a DOE project with approximately $300 million of costs incurred, a $103 million claim for recovery, and potentially more than $100 million in remaining completion costs; USAID-related Egyptian project litigation seeking return of approximately $373 million plus possible damages and penalties; and Australian litigation with claimed damages including approximately A$1.68 billion by receivers. AECOM stated outcomes or potential losses for these matters could not be assured or, in some cases, determined.
- URS-related WIPP incidents resulted in a $17.7 million administrative civil penalty and suspended disposal operations pending a recovery plan. AECOM and its joint-venture partner disputed the findings. The filing also describes a Canadian pipeline claim of approximately C$85 million and a U.S. investigation into potential overtime practices at Tishman; no action had been filed in the latter matter.
Most important facts for investors to verify
- Whether integration costs, intangible amortization, and acquisition financing charges track management’s fiscal 2015 expectations, and whether anticipated URS synergies materialize.
- Debt reduction, covenant headroom, refinancing needs, and sensitivity to floating interest rates following the acquisition.
- Underlying segment revenue and margins excluding acquired companies, especially DCS and MS, and the effect of oil and gas weakness and the Sellafield transition.
- Cash conversion and collection trends, including the increase in days sales outstanding to 92 days and the reliance on receivables sales.
- Developments, reserves, and potential cash exposure related to the DOE project, USAID matters, Australian litigation, and WIPP.
- Backlog conversion into funded, signed contracts and profitable revenue; backlog is not guaranteed future revenue.