AECOM — Fiscal 2016 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2015, compared with the three months ended December 31, 2014. AECOM provides engineering, construction, consulting, program-management and related services through Design and Consulting Services (DCS), Construction Services (CS) and Management Services (MS). The URS acquisition, completed in October 2014, affects comparability.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Revenue | $4,297.7 million | $4,210.5 million | Up 2.1%; excluding acquired-company revenue, down 5.1% |
| Gross profit / margin | $140.9 million / 3.3% | $134.7 million / 3.2% | Margin improved slightly |
| Operating income (loss) | $96.4 million | $(14.1) million | Improved, largely as acquisition and integration costs fell |
| Net loss attributable to AECOM | $(20.4) million; $(0.13) per share | $(139.0) million; $(0.98) per share | Loss narrowed substantially |
| Operating cash flow | $78.1 million | $282.6 million | Down 72.4%, primarily reflecting working-capital timing |
| Cash and cash equivalents | $658.0 million | $683.9 million at September 30, 2015 | Includes $132.6 million held in consolidated joint ventures |
| Total debt | $4,522.8 million | $4,606.9 million at September 30, 2015 | Long-term debt was $4,366.4 million |
Interest expense was $59.5 million versus $118.7 million; the prior-year quarter included a $55.6 million debt prepayment penalty. The effective tax rate was 62.9%, but management said comparison was not meaningful given near break-even pretax results. The quarter included a $10.3 million discrete tax benefit.
Segment performance and material changes
- DCS: Revenue of $1,862.1 million, down 1.6% reported and 7.9% excluding acquired-company revenue. Gross profit rose to $79.3 million and margin to 4.3% from 2.4%, reflecting cost efficiencies and URS integration synergies. Currency effects reduced revenue by about $80 million.
- CS: Revenue of $1,711.8 million, up 11.6% reported and 5.7% excluding acquired-company revenue. Gross profit declined to $12.9 million from $35.4 million; margin fell to 0.8% from 2.3%. The prior-year period benefited from power-project award fees. Current growth included New York high-rise and sports-arena work.
- MS: Revenue of $723.8 million, down 7.8% reported and 19.5% excluding acquired-company revenue; gross profit fell to $48.7 million. Lower U.S. government work in the Middle East and reduced chemical-demilitarization work and award fees weighed on results.
- Acquisition and integration expenses declined to $41.0 million from $138.5 million. AECOM recorded a $41.0 million loss on disposals of non-core URS energy-related businesses and assets. Favorable acquisition-related project and legal adjustments contributed $19.7 million of income, including a $13.2 million WIPP-related settlement benefit.
Liquidity, debt and cash flow
Working capital was $1,141.5 million, down from $1,410.0 million at September 30, 2015. Days sales outstanding increased to 89 days from 82. Net cash used in financing was $138.2 million, chiefly reflecting net credit-agreement repayments and distributions to noncontrolling interests. Investing activities provided $40.0 million, including business-disposal proceeds; the prior-year period included URS acquisition spending.
The company reported a consolidated leverage ratio of 4.7 and compliance with credit-agreement covenants at December 31, 2015. It had $951.4 million available under its revolving credit facility and $394.8 million available under other unsecured credit facilities. Credit-agreement obligations are secured by substantially all assets of the company and guarantors. The average effective interest rate on debt was 4.2%.
Outlook, risks and contingencies
- Management expects approximately $200 million of intangible-asset amortization expense and approximately $200 million of acquisition and integration expenses in fiscal 2016. It expects available liquidity sources to meet projected cash needs for at least 12 months.
- AECOM expects the five-year FAST Act infrastructure program to benefit transportation services over time and expects a return on part of its AECOM Capital investments in fiscal 2016. Management cautioned that the first fiscal quarter is typically the weakest because of weather, holidays and seasonal client spending patterns.
- Management cited commodity-price declines as a drag on oil-and-gas activity, with some contracts deferred, suspended or terminated. Other risks include lower government or private-sector spending, foreign exchange movements, contract execution and collection risks, acquisition integration, and substantial debt and covenant constraints.
- Reported backlog at December 31 was approximately $40.2 billion: $23.8 billion contracted and $16.4 billion awarded but not yet signed. Backlog may be delayed, reduced or canceled and is not a guarantee of future revenue or profit.
- Significant disclosed matters include the DOE deactivation and demolition project, where completion costs may exceed $100 million and recovery of submitted claims is uncertain; an unresolved Australian class action; Canadian pipeline litigation; and federal investigations or litigation related to Hanford projects. The company said potential losses in certain matters could not be reasonably estimated. AECOM also disclosed $461.2 million of contingent exposure under standby letters of credit and other performance assurances.
Most important facts for investors to verify
- Whether operating improvement persists after accounting for URS-related cost reductions, acquisition costs, disposal losses and favorable project/legal adjustments.
- Whether weak organic revenue, especially in MS and DCS, and reduced CS margins improve in subsequent quarters.
- Whether working-capital conversion and DSO recover, given the sharp year-over-year decline in operating cash flow.
- Progress on debt reduction and covenant headroom, particularly with a 4.7 leverage ratio and significant variable-rate borrowing.
- Updates to the DOE project, Australian class action, Hanford matters, and other contingencies, as well as the realization and profitability of backlog.