AECOM — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Results are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
AECOM provides design and consulting, construction, management, and real estate investment services. Its four reportable segments are Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS), and AECOM Capital (ACAP). Revenue includes substantial subcontractor and other pass-through costs, so revenue growth alone may not indicate underlying business growth.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $5,040 | $4,791 | $10,078 | $9,702 |
| Gross profit / margin | $195 / 3.9% | $141 / 2.9% | $366 / 3.6% | $277 / 2.9% |
| Operating income (loss) | $168 | $(44) | $252 | $87 |
| Net income (loss) attributable to AECOM | $78 | $(120) | $129 | $(8) |
| Diluted EPS | $0.49 | $(0.75) | $0.81 | $(0.05) |
| Operating cash flow | Not presented by quarter | $(93) | $171 |
Q2 revenue increased 5.2% year over year; six-month revenue increased 3.9%. Q2 operating results improved substantially versus the prior year, which included a $168 million impairment charge on assets held for sale. Six-month FY2019 results included $79.2 million of restructuring costs. The six-month effective tax rate was negative 8.7%, including a $38.1 million benefit from releasing a valuation allowance on foreign tax credits.
Balance sheet, debt, and liquidity
- At March 31, 2019, total cash and cash equivalents were $826.9 million, including $234.1 million held in consolidated joint ventures and restricted to their use. Cash declined from $886.7 million at September 30, 2018.
- Total debt was $3.934 billion, up from $3.674 billion at fiscal year-end. The average effective interest rate was 4.7%.
- Revolver availability was $1.039 billion. AECOM reported a 4.1 consolidated leverage ratio and 4.6 interest coverage ratio, and stated it was in compliance with debt covenants. The stated maximum leverage ratio was 4.5 through September 30, 2019.
- Working capital was $1.350 billion, versus $998 million at September 30, 2018. Days sales outstanding rose to 86 from 78, with the company citing U.S. Virgin Islands storm recovery work.
- Six-month operating cash flow was a $92.9 million use, compared with $170.8 million provided a year earlier, primarily reflecting timing of working-capital receipts and payments. Investing activities used $105.3 million; financing activities provided $138.6 million.
Material changes and segment performance
- DCS: Q2 revenue rose 4.8% to $2.101 billion; gross margin improved to 6.2% from 6.0%. Growth included U.S. storm recovery and transportation work.
- CS: Q2 revenue rose 1.6% to $1.918 billion, and gross profit recovered to $16.7 million from a $13.3 million loss. Six-month revenue declined 2.0% to $3.932 billion, reflecting lower power and building-construction revenue, partly offset by U.S. oil and gas work.
- MS: Q2 revenue rose 13.6% to $1.020 billion and gross margin to 4.6% from 3.8%, primarily on a Department of Defense project.
- Interest expense fell year over year, chiefly because the prior-year period included a $34.5 million premium on redemption of senior notes. Equity earnings from joint ventures increased in Q2, partly due to a property-sale gain, but declined for the six-month period.
- Remaining North American non-core oil and gas assets were classified as held for sale; management expected their sale within the next quarter. Related held-for-sale assets were $55 million at March 31.
Outlook, management commentary, and risks
- Management forecast approximately $225 million in annual cost savings from its restructuring program, including about $85 million in FY2019. It expected FY2019 restructuring costs of $80–$90 million, primarily personnel and real estate costs, and planned to evaluate exiting more than 30 countries and reduce at-risk construction exposure.
- The liquidity discussion separately says the company expects to spend approximately $60–$70 million in restructuring costs in FY2019, while the filing reports $79.2 million incurred in the first half. These figures are not reconciled in the provided filing text.
- Management stated that available cash, operating cash flows, revolver capacity, and potential debt or equity issuance should meet projected cash requirements for at least the next 12 months. It also described future free cash flow allocation as including debt reduction and stock repurchases.
- Remaining performance obligations were $22.9 billion, with approximately 55% expected to be satisfied within 12 months. Total reported backlog was $61.0 billion, including contracted, awarded, and unconsolidated joint-venture backlog; backlog may be delayed, reduced, or canceled and is not assured revenue or profit.
- Key risks include high leverage, variable interest rates, government funding and shutdown delays, fixed-price contract losses, collection and claim uncertainty, joint-venture and guarantee exposure, international and foreign-exchange risks, and cybersecurity and regulatory matters. A 1 percentage-point rate increase would have increased six-month interest expense by an estimated $7.7 million.
- Contingencies include $5.4 billion of surety bonds and $511.9 million of issued standby letters of credit, primarily supporting project execution. Notable matters include unresolved DOE project claims and costs; a refinery dispute involving approximately $90 million of additional work and a $132 million lien; a SR-91 counterclaim for alleged damages of $95 million; and an interim $41 million arbitration award in AECOM’s favor in the Illinois Power matter. Outcomes or potential losses for several matters were not estimable.
Important facts for investors to verify
- Whether operating cash flow and DSO improve as storm-recovery receivables and contract assets convert to cash.
- Progress against restructuring targets, actual savings, the remaining asset sale, and the filing’s differing FY2019 restructuring-cost estimates.
- Debt reduction, covenant headroom, and access to revolving and other credit facilities given the 4.1 leverage ratio.
- Recoverability and timing of significant project claims, particularly the DOE and refinery matters, and any resulting reserve or cash-flow impacts.
- Whether reported backlog converts to funded work and profitable revenue, and whether growth in MS and DCS offsets CS exposure and pass-through revenue.