AECOM — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended June 30, 2015. Amounts are in U.S. dollars. The October 2014 URS acquisition substantially changed AECOM’s scale and makes year-over-year comparisons less representative of underlying growth.
Business context and results
AECOM provides technical, engineering, construction, and management services through Design and Consulting Services (DCS), Construction Services (CS), and Management Services (MS). URS contributed $2.509 billion of third-quarter revenue and $7.257 billion for the nine-month period. Excluding acquired companies, revenue increased 3.7% in both periods year over year.
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Revenue | $4.550 billion; +131.2% | $13.266 billion; +129.0% |
| Gross profit / margin | $126.5 million / 2.8% | $364.6 million / 2.7% |
| Operating income | $41.4 million | $33.8 million |
| Net income (loss) attributable to AECOM | $(17.2) million; $(0.11) per diluted share | $(155.9) million; $(1.05) per diluted share |
| Operating cash flow | Not separately presented for the quarter | $486.4 million |
Changes versus prior comparable periods
- Revenue rose sharply due mainly to URS; excluding acquired companies, revenue increased 3.7% year over year. Organic growth in CS, particularly New York high-rise construction management, was partly offset by declines in DCS and MS, foreign-exchange headwinds, and weaker oil, gas, and power activity.
- Gross margin fell to 2.8% from 5.5% in the quarter and to 2.7% from 4.7% year to date. Acquired intangible amortization and weaker underlying gross profit contributed to the pressure.
- Acquisition and integration expense was $88.5 million for the quarter and $318.6 million year to date, compared with $7.8 million in the prior-year periods. Year-to-date interest expense increased to $239.6 million from $30.7 million, reflecting acquisition financing, a $55.6 million debt prepayment penalty, and debt issuance cost write-offs.
- Net loss attributable to AECOM compared with prior-year net income of $69.2 million for the quarter and $165.8 million for the first nine months.
Cash, debt, and liquidity
- Cash and cash equivalents were $605.9 million at June 30, 2015, including $138.2 million held in consolidated joint ventures; joint-venture assets are restricted to those ventures and unavailable for general company use.
- Total debt was $4.773 billion, versus $1.004 billion at September 30, 2014. Long-term debt was $4.602 billion. The company had $976.1 million available under its revolving credit facility.
- The credit agreement’s consolidated leverage ratio was 4.5 at June 30; AECOM reported compliance with its debt covenants. Borrowings are secured by substantially all company and guarantor assets, and the agreement restricts certain activities.
- Operating cash flow was $486.4 million; investing cash outflow was $3.375 billion, mainly due to the URS acquisition; financing cash inflow was $2.941 billion. Management said expected operating cash flow, cash, borrowing capacity, and access to debt or equity markets should meet projected cash needs for at least 12 months.
- Working capital was $1.460 billion. Days sales outstanding, excluding recent acquisitions, increased to 88 days from 85 days at September 30, 2014. Receivables sales provided a $99.3 million net cash-flow benefit during the nine months.
Outlook, risks, and unusual items
- Management expected approximately $390 million of intangible amortization and approximately $400 million of acquisition/integration and acquisition-related financing expense for fiscal 2015. These are estimates, not earnings guidance; the filing provides no clear consolidated revenue or EPS forecast.
- Management cited weak oil and gas markets, uncertain federal transportation funding, foreign-exchange pressure, and declining services to the U.S. government in the Middle East and Africa. AECOM noted that a long-term federal highway and public transportation bill could benefit its transportation business. Results are seasonal and the fourth fiscal quarter is typically strongest.
- Major litigation and contingencies include the DOE deactivation and demolition project, where costs incurred were approximately $300 million and recovery of a $103 million claim and further completion costs remained uncertain; the USAID Egyptian projects case; WIPP environmental incidents; and multiple Hanford investigations and claims. The Australian traffic-forecast lawsuits brought by receivers and a lender were settled on July 10, 2015; a related investor class action remained unresolved, with potential loss not estimable.
- Standby letters of credit and other contingent guarantees totaled approximately $411.8 million. The aggregate pension deficit was $592.1 million, up from $221.3 million at September 30, 2014.
- Other key risks include substantial leverage and variable-rate debt, integration and synergy execution, government contract funding and termination, fixed-price project losses, oil and gas weakness, foreign-exchange movements, and legal, environmental, cybersecurity, and international operating exposures. A 1 percentage-point increase in floating rates would have increased nine-month interest expense by an estimated $18.8 million.
- Backlog at June 30 was $40.4 billion: $22.7 billion contracted and $17.7 billion awarded but not yet signed. Backlog may be delayed, reduced, or canceled and does not assure future revenue or profit.
Important facts for investors to verify
- Underlying margins and segment profitability, separating URS contributions and acquired-asset amortization from legacy operations.
- Progress on integration, expected synergies, remaining restructuring costs, and the fiscal 2015 expense estimates.
- Debt reduction capacity, covenant headroom, refinancing needs, and exposure to higher interest rates.
- Receivables collection, DSO, and the degree to which cash flow depends on receivables sales and working-capital timing.
- Developments and potential financial exposure in the DOE, USAID, WIPP, Hanford, and remaining Australian class-action matters.