AECOM quarterly report, Q2 FY2016

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AECOM — Form 10-Q Summary

Business context and reporting period

Unaudited results for the quarter and six months ended March 31, 2016 (AECOM fiscal Q2 and first half), compared with the corresponding 2015 periods. AECOM provides design and consulting, construction, and management services globally. Its results continue to reflect integration of URS, acquired in October 2014.

Financial performance and condition

  • Revenue: Q2 revenue was $4.38 billion, down 2.8%; first-half revenue was $8.68 billion, down 0.4%. Excluding revenue from acquired companies, first-half revenue declined 3.9%.
  • Profit and margins: Q2 gross profit was $183.4 million (gross margin 4.2%, versus 2.3%); operating income was $140.8 million, versus $6.5 million; net income attributable to AECOM was $41.8 million, versus $0.3 million (diluted EPS $0.27 versus approximately break-even). First-half gross profit was $324.3 million (3.7% margin versus 2.7%); operating income was $196.1 million versus an operating loss of $7.6 million; AECOM-attributable net income was $21.5 million versus a loss of $138.7 million (diluted EPS $0.14 versus a loss of $0.95).
  • Cash flow: First-half operating cash flow was $191.2 million, down 42.5% from $332.6 million, primarily due to working-capital timing. Investing used $26.7 million; financing used $177.2 million. Cash and cash equivalents ended at $669.8 million, down from $683.9 million at September 30, 2015. Of ending cash, $141.3 million was held in consolidated joint ventures and restricted to their use.
  • Liquidity: Working capital was $1.03 billion, down from $1.41 billion, largely reflecting deferred-tax classification changes. The company reported $909.9 million available under its revolving facility and said expected liquidity sources should cover projected requirements for at least 12 months. Days sales outstanding increased to 87 from 82.
  • Debt: Total debt was $4.47 billion, down from $4.61 billion; $342.5 million was current. The consolidated leverage ratio was 4.4 at March 31, and AECOM reported compliance with debt covenants. The average effective debt interest rate was 4.3% for the first half. A 1 percentage-point increase in floating rates would have added $10.8 million to first-half interest expense.

Material changes and segment trends

  • Higher gross margins and joint-venture earnings, lower URS integration costs and lower intangible amortization contributed to improved operating results. Equity in joint-venture earnings rose 32.3% for the first half, primarily due to a nuclear cleanup project.
  • Design and Consulting: First-half revenue declined 2.5% (5.6% excluding acquired-company revenue), with foreign exchange, weaker Asia-Pacific activity and lower public capital spending cited. Gross margin improved to 4.6% from 2.5%, reflecting integration synergies and lower amortization.
  • Construction: First-half revenue increased 2.6%, but declined 0.3% excluding acquired-company revenue. Weak oil and gas markets and lower power-project award fees pressured first-half gross profit, down 50.5% to $18.7 million; margin fell to 0.6% from 1.2%. New York high-rise and sports-arena work partly offset declines.
  • Management Services: First-half revenue declined 1.3% (7.0% excluding acquired-company revenue), mainly from reduced chemical-demilitarization work. Gross profit rose 28.1% to $129.1 million; results included an approximately $45 million expected accelerated federal pension-entitlement recovery, approximately $20 million of favorable acquisition-related project and legal adjustments, and lower intangible amortization. Reduced award fees on Department of Defense chemical-demilitarization projects partly offset these benefits.
  • First-half results included a $42.6 million loss on disposal of non-core energy businesses and other assets acquired with URS. The company recorded approximately $45 million of revenue and a noncurrent asset for the anticipated pension-entitlement recovery; actual reimbursement could differ.

Outlook, risks and contingencies

  • Management expects approximately $200 million of intangible-asset amortization expense and approximately $200 million of acquisition and integration expense in fiscal 2016. URS integration savings were approximately $230 million at annual run-rate at March 31; the target is approximately $325 million annually by fiscal 2017.
  • AECOM expects the FAST Act infrastructure program to benefit transportation services over five years and expects returns on part of its AECOM Capital investments in fiscal 2016. These are expectations, not formal consolidated revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results and notes typical seasonality toward stronger second-half activity.
  • Demand is exposed to government and private-sector spending, economic cycles, foreign exchange, and weak oil and gas markets. Other key risks include substantial leverage and covenant limits, variable interest rates, project execution and fixed-price contract exposure, government-contract audits or termination, joint-venture guarantees, and environmental, cybersecurity and personnel risks.
  • Notable contingencies include a DOE deactivation and demolition project: AECOM affiliate WGI Ohio has submitted $103 million in claims, while remaining completion and related costs could exceed $100 million over contracted amounts; recovery and final costs are uncertain. Government investigations and litigation involving Hanford contracts also remain, with potential losses beyond current accruals not reasonably estimable. AECOM Australia settled certain related lawsuits for $205 million, but a separate investor class action remains and excess exposure cannot be reasonably estimated.
  • Standby letters of credit and performance-related guarantees totaled approximately $484.3 million. Defined-benefit pension obligations were $526.8 million. AECOM reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether operating cash flow recovers and DSO improves, given the first-half cash-flow decline and higher receivable-collection days.
  • Progress toward the $325 million annual URS synergy goal, and whether fiscal 2016 integration and amortization expense expectations are met.
  • Construction Services profitability and exposure to oil and gas markets, plus the durability of Management Services’ pension-recovery and other unusual benefits.
  • Debt reduction, leverage and covenant headroom, upcoming maturities, and whether available liquidity remains adequate.
  • Developments in the DOE project claims, Hanford matters and remaining Australian litigation, including any changes to accruals or estimated exposure.