AECOM — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts are U.S. dollars.
Business context
AECOM provides design and consulting, construction, management, and infrastructure and real-estate investment services in more than 150 countries. It reports four segments: Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS), and AECOM Capital (ACAP). ACAP became a separate reportable segment in the quarter.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $4.56 billion, up 3.5% year over year | $13.35 billion, up 2.0% |
| Gross profit / margin | $175.2 million / 3.8%; prior year 3.9% | $513.6 million / 3.8%; prior year 3.8% |
| Income from operations | $207.7 million, versus $110.3 million | $492.0 million, versus $306.5 million |
| Net income attributable to AECOM | $101.3 million, versus $67.4 million; diluted EPS $0.64 versus $0.43 | $250.9 million, versus $88.9 million; diluted EPS $1.58 versus $0.57 |
| Operating cash flow | Not separately presented for the quarter | $445.4 million, versus $451.3 million |
| Cash capital expenditures | Not separately presented for the quarter | $64.7 million, versus $141.6 million |
Quarterly and year-to-date earnings benefited substantially from higher equity earnings in joint ventures, including a $45 million gain on ACAP’s sale of its 50% interest in Provost Square I LLC. Year-to-date operating income also benefited from lower URS acquisition and integration costs and the absence of the prior-year disposal loss. These items mean reported earnings growth was stronger than revenue growth.
- Segment trends: Third-quarter DCS revenue fell 3.0% and gross profit fell 25.8%, with weaker EMEA project performance. CS revenue rose 11.6% and gross profit increased to $26.2 million, driven mainly by building construction and power. MS revenue rose 2.3% and gross profit rose 42.0% in the quarter, including DOE contract incentive fees; year-to-date MS gross profit was down 7.2%.
- Liquidity and working capital: Cash and cash equivalents were $812.5 million, including $167.6 million held in consolidated joint ventures and restricted to their use. Working capital was $1.14 billion, up from $696.0 million at September 30, 2016. DSO improved to 80 days from 82.
- Debt: Total debt was $3.97 billion, down from $4.13 billion at September 30, 2016. The company issued $1.0 billion of 5.125% senior notes due 2027 and used proceeds to repay credit-agreement borrowings. Long-term debt on the balance sheet was $3.75 billion. The covenant leverage and interest-coverage ratios were each 4.4; AECOM reported compliance with its debt covenants.
- Cash generation: Operating cash flow was nearly flat year over year despite higher earnings. Management cited approximately $60 million of cash payments for a federal lawsuit settlement, working-capital timing, and a less favorable impact from receivables sales. Cash increased by $120.3 million during the nine months.
Changes, outlook, and notable items
- Management said URS integration savings were materially complete, with approximately $330 million in annual run-rate savings by June 30, 2017. Year-to-date URS integration expense was $35.4 million, down from $142.4 million.
- The effective tax rate was unusually low: 8.2% for the quarter and 0.5% year to date. Benefits included a $57.2 million UK valuation-allowance release and a $21.2 million benefit from recapitalizing a European subsidiary. Management said the UK release and recapitalization benefit were not expected to recur. Canadian deferred-tax valuation allowances remained, approximately $25 million.
- AECOM stated that available cash, operating cash flow, revolving-credit capacity, and potential debt or equity issuance were expected to cover projected requirements for at least the next 12 months. Revolver availability was $991.6 million. Management also warned the 2027 fixed-rate refinancing could increase near-term interest expense.
- Management cited the FAST Act and proposed U.S. infrastructure initiatives as potential support for infrastructure demand, while noting spending patterns could remain uneven. No quantified earnings or revenue guidance is provided in the filing. The company noted seasonality, with revenue generally higher in the second half of its fiscal year.
- Backlog at June 30 was $46.4 billion: $23.6 billion contracted, $19.8 billion awarded but not yet signed, and $3.0 billion in unconsolidated joint ventures. Backlog may be delayed, reduced, or canceled and is not a guarantee of future revenue or profit.
- Contingencies and subsequent events: A legacy DOE demolition project remains incomplete; the filing says completion costs are expected to exceed contracted and claimed amounts by more than $100 million, and recovery of submitted or future claims is uncertain. On July 11, 2017, two Asia-Pacific entities agreed to World Bank-related debarments of 18 months and six months, respectively. A securities class action was dismissed with prejudice on June 30. On July 28, AECOM acquired Shimmick Construction for $175 million, after the reporting date.
- Key stated risks include high leverage, government funding and contract uncertainty, fixed-price project losses, joint-venture and guarantee exposure, foreign-exchange and interest-rate risk, pension obligations, legal and environmental claims, and geopolitical, compliance, cybersecurity, and personnel risks. A 1% increase in floating rates would have added approximately $11 million to nine-month interest expense.
Important facts for investors to verify
- How much of the earnings improvement is sustainable after removing the $45 million Provost Square gain, tax benefits, and lower integration costs.
- Whether DCS project performance improves and whether CS growth can maintain profitability despite its low gross margin and high pass-through costs.
- Cash conversion, receivables collection, and working-capital movements, including the effects of receivable sales and restricted joint-venture cash.
- Debt reduction, covenant headroom, refinancing costs, and sensitivity to interest rates.
- Developments and potential financial exposure in the DOE project, World Bank debarments, performance guarantees, and other legal or contract claims.
- Integration, financing, and expected contribution from the post-quarter Shimmick acquisition, and the quality and conversion of reported backlog.