AECOM — Form 10-Q Summary
Business context and reporting period
AECOM provides design and consulting, construction, and management services to public- and private-sector clients. This unaudited filing covers the quarter and nine months ended June 30, 2016, in fiscal 2016. Comparisons are with the corresponding periods of 2015 unless noted.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $4.409 billion, down 3.1% | $13.088 billion, down 1.3% |
| Gross profit / margin | $171.3 million / 3.9%, versus $126.6 million / 2.8% | $495.6 million / 3.8%, versus $364.6 million / 2.7% |
| Operating income | $110.4 million, versus $41.4 million | $306.5 million, versus $33.8 million |
| Net income attributable to AECOM | $67.4 million ($0.43 diluted EPS), versus a $17.2 million loss | $88.9 million ($0.57 diluted EPS), versus a $155.9 million loss |
| Operating cash flow | Not presented for the quarter | $451.3 million, versus $486.4 million |
At June 30, cash and cash equivalents were $628.0 million, including $119.2 million held in consolidated joint ventures and restricted to their use. Total debt was $4.295 billion, down from $4.607 billion at September 30, 2015; long-term debt was $3.941 billion. The consolidated leverage ratio was 4.3, and AECOM reported compliance with debt covenants. It had $940.5 million available under its revolving credit facility and $523.1 million available under other unsecured credit facilities.
Current assets exceeded current liabilities by $885.7 million; reported working capital fell $524.3 million from September 30, primarily because deferred tax balances were reclassified as non-current. Days sales outstanding were 83 days, versus 82 at fiscal year-end. Capital expenditures were $141.6 million for the nine months.
Material changes versus prior period
- Revenue declined, but gross margin improved and acquisition and integration expense fell to $50.7 million for the quarter and $142.4 million for nine months, from $88.5 million and $318.6 million, respectively. Lower URS-related intangible amortization also supported gross profit.
- For nine months, revenue excluding acquired-company revenue fell 3.6%. DCS revenue declined 2.9%, MS declined 2.8%, and CS increased 1.3%; excluding acquired revenue, CS revenue declined 0.6%.
- Reported nine-month net income turned positive from a prior-year loss. Lower acquisition costs and interest expense helped; the prior-year interest expense included a $55.6 million debt prepayment penalty. The current-year nine-month results also included a $42.6 million loss on disposal of non-core energy-related businesses and assets.
- Operating cash flow decreased $35.1 million year over year, mainly due to working-capital timing. Cash declined $55.9 million from September 30, reflecting debt repayments, distributions to noncontrolling interests, and joint-venture investment, partly offset by operating cash flow and disposal proceeds.
Outlook, management commentary, risks and unusual items
- Management said liquidity sources were expected to cover projected cash needs for at least 12 months. It expected approximately $210 million of intangible amortization expense and $200 million of acquisition and integration expenses in fiscal 2016.
- URS integration savings had reached an approximately $265 million annual run-rate by June 30; the target was approximately $325 million by the end of fiscal 2017. Management reported cumulative savings of about $290 million and said timing and amounts were materially consistent with prior expectations.
- Management expected the FAST Act’s five-year infrastructure program to benefit transportation services. It also expected returns on a portion of AECOM Capital investments within 12 months. No numerical revenue or earnings guidance was provided.
- Demand remained pressured by weak oil and gas markets, foreign-exchange effects, reduced U.S. government work in the Middle East, and lower chemical-demilitarization revenue. Management cited seasonal patterns, with the fourth fiscal quarter typically strongest. Brexit and related currency and demand uncertainty were identified as risks.
- The nine-month tax benefit included $38.4 million from releasing U.K. and Australian deferred-tax valuation allowances, alongside other tax items. Management said further U.K. valuation-allowance releases could occur if sustained earnings provide sufficient evidence; such releases are uncertain.
- AECOM recorded about $45 million of revenue and a non-current asset for expected accelerated recovery of a federal-government pension entitlement; actual reimbursement may differ. Management separately discussed an approximately $47 million benefit to Management Services gross profit associated with the entitlement.
- A proposed $91 million Australian class-action settlement remained subject to court approval scheduled for August 10, 2016; the company said it would not materially affect results if approved. A prior settlement with other Australian claimants was $205 million. DOE Hanford investigations and litigation remain unresolved, and potential losses above accruals could not be reasonably estimated. A DOE project claim seeks $103 million; completion costs could exceed contracted amounts by more than $100 million, and recovery is uncertain.
- Standby letters of credit totaled $487.5 million and surety bonds $2.9 billion, primarily supporting project execution. A 1% increase in floating interest rates would have increased nine-month interest expense by $16.0 million. AECOM disclosed a material weakness in internal control over financial reporting relating to acquired-contract forward-loss reserves and income-tax accounts; it reported remediation progress, while disclosure controls were considered effective.
Important facts for investors to verify
- Whether the $325 million annual URS integration-savings target is achieved, and whether savings translate into sustainable operating-margin improvement.
- Underlying revenue and cash-flow trends, including the effect of receivable sales, working-capital timing, and DSO.
- Debt reduction, covenant headroom, refinancing and maturity requirements, and exposure to floating interest rates.
- Whether deferred-tax valuation allowances can be released based on sustained earnings, and how much reported profit depends on tax benefits.
- Resolution and potential financial exposure from the DOE project, Hanford matters, Australian litigation, and other guarantees and contingencies.
- Progress in remediating and testing controls for the disclosed material weakness, and the quality and conversion prospects of the reported $38.4 billion backlog.