AECOM quarterly report, Q2 FY2017

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AECOM Q2 FY2017 Form 10-Q Summary

Reporting period: Quarter and six months ended March 31, 2017; unaudited. AECOM provides design and consulting, construction, and management services globally, including substantial government work. Amounts below are in U.S. dollars; financial statement figures are generally in millions.

Financial performance and liquidity

  • Quarter revenue: $4,427.2, up 1.0% year over year. Gross profit was $168.4, down 8.2%; gross margin declined to 3.8% from 4.2%. Operating income was $140.9, essentially flat. Net income attributable to AECOM was $102.4, or $0.65 diluted EPS, versus $41.8, or $0.27, a year earlier.
  • Six-month revenue: $8,785.5, up 1.2%. Gross profit was $338.4, up 4.3%; gross margin was 3.9% versus 3.7%. Operating income rose to $284.3 from $196.1. Net income attributable to AECOM was $149.6, or $0.94 diluted EPS, versus $21.5, or $0.14.
  • Cash flow: Six-month operating cash flow was $31.4, down from $191.2. Investing used $57.9; financing provided $64.1. Cash and cash equivalents, including cash in consolidated joint ventures, ended at $726.0, up from $692.1 at September 30, 2016.
  • Balance sheet: Total assets were $13,641.0. Current assets of $6,166.3 exceeded current liabilities of $5,064.1; reported working capital was $1,102.2. Net accounts receivable was $4,708.9, including $2,105.4 of unbilled receivables. DSO was 84 days, compared with 82 at fiscal year-end.
  • Debt: Total debt was $4,261.5, versus $4,125.3 at September 30, 2016; long-term debt was $3,851.1. AECOM issued $1.0 billion of 5.125% notes due 2027 and used proceeds to repay credit-facility borrowings. The reported leverage ratio was 4.5 and interest coverage ratio 4.6; AECOM reported compliance with debt covenants. Revolver availability was $870.1.

Material changes and segment results

  • Design and Consulting Services revenue fell 5.0% for the quarter and 3.1% for six months, but gross margin improved to 5.7% and 5.4%, respectively. Revenue pressure reflected lower Americas activity and unfavorable foreign exchange; lower acquired-intangible amortization supported margin improvement.
  • Construction Services revenue increased 14.5% for the quarter and 9.1% for six months. Gross margin improved to 1.2% and 1.0%, respectively, from low prior-year levels, reflecting better building construction, power, and oil and gas performance. Pass-through costs are significant in this segment.
  • Management Services revenue declined 8.3% for the quarter and 3.9% for six months. Gross margin fell to 5.1% and 6.5%, respectively, partly because a prior-year federal pension-entitlement recovery did not recur and prior-period favorable legal and pension items did not repeat.
  • Equity earnings from joint ventures declined to $21.8 for the quarter and $43.2 for six months, primarily because work on a U.K. nuclear cleanup project had been completed in fiscal 2016.
  • AECOM reported $330 million in annual run-rate savings from the URS integration as of March 31, 2017, and said the savings program was materially complete. Six-month acquisition and integration expense was $35.4, versus $91.7 a year earlier.

Outlook, commentary, risks, and unusual items

  • Management expected available liquidity sources to cover projected cash needs for at least 12 months and expected approximately $36 million of acquisition and integration expense in fiscal 2017. The filing cautions that interim results are not necessarily indicative of full-year results.
  • Management cited the FAST Act and proposed U.S. infrastructure initiatives as potential support for infrastructure demand, while noting uneven client spending. It also warned that oil and gas market weakness and the wind-down of government projects could affect results.
  • The quarter and six-month earnings benefited from a $57.2 million U.K. deferred-tax valuation-allowance release. The effective tax rate was unusually negative: (44.2)% for the quarter and (6.2)% for six months. This release is not expected to recur. Canadian deferred-tax valuation allowances remained in place.
  • Operating cash flow was pressured by working-capital timing, approximately $60 million of payments related to a federal lawsuit settlement, higher U.S. 401(k) matching contributions, and an unfavorable year-over-year impact from receivables sales.
  • On April 28, 2017, after quarter-end, AECOM Capital sold its 50% interest in Provost Square I LLC for $133 million, receiving $77 million net cash and recognizing a $45 million gain in fiscal Q3. AECOM said it would report AECOM Capital as a separate segment beginning the June 2017 quarter. On April 3, it redeemed $185 million of maturing URS notes using a delayed-draw term loan.
  • Contingencies: A DOE deactivation and demolition project remains incomplete; completion costs are expected to exceed $100 million over contracted and claimed amounts, and recovery of claims is uncertain. AECOM disclosed $462.2 million of standby letters of credit and $3.6 billion of surety bonds, mainly supporting project execution. Other matters include a securities class action, World Bank reviews of two Asia-Pacific affiliates, and risks from guarantees and joint ventures.
  • Key stated risks include cyclical demand and government funding, substantial debt and variable-rate exposure, project cost overruns and performance guarantees, collection and backlog uncertainty, pension funding, foreign-exchange and geopolitical risks, and legal, environmental, cybersecurity, and government-contract compliance matters. A 1 percentage-point increase in floating rates would have increased six-month interest expense by $8.3 million.

Important facts for investors to verify

  • Whether weak operating cash flow and the increase in DSO reverse, and whether receivables—particularly unbilled balances and retentions—are collected as expected.
  • Whether segment margin trends persist, especially Management Services’ lower margins and Construction Services’ improvement from a low base.
  • How much reported earnings improvement reflects the nonrecurring U.K. tax benefit, lower integration costs, prior-year disposal losses, and reduced acquired-intangible amortization.
  • Debt reduction, covenant headroom, refinancing costs, and the effects of fixed versus floating-rate borrowings; verify the subsequent Provost Square proceeds and use of cash.
  • Potential cost exposure and claim recoveries on the DOE project, as well as developments in the securities litigation and World Bank reviews.
  • Backlog quality and conversion: at March 31, 2017, contracted backlog was approximately $24.0 billion, awarded backlog $15.3 billion, and unconsolidated joint-venture backlog $3.1 billion; the filing cautions that backlog may be delayed, reduced, or canceled.