AECOM FY2016 Form 10-K Summary
Business context and reporting period
AECOM provides design and consulting, construction, and management services for public- and private-sector clients in more than 150 countries. This 10-K covers the fiscal year ended September 30, 2016; the fourth quarter is July 1 through September 30. Results reflect the post-URS acquisition business, reported in three segments: Design and Consulting Services (DCS), Construction Services (CS), and Management Services (MS).
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $17.411 billion | $17.990 billion |
| Gross profit / margin | $642.8 million / 3.7% | $535.2 million / 3.0% |
| Operating income | $375.5 million | $129.0 million |
| Net income (loss) attributable to AECOM | $96.1 million | $(154.8) million |
| Diluted earnings (loss) per share | $0.62 | $(1.04) |
| Operating cash flow | $814.2 million | $764.4 million |
| Cash and cash equivalents at year-end | $692.1 million | $683.9 million |
| Total debt | $4.125 billion | $4.607 billion |
| Working capital | $696 million | $1.410 billion |
FY2016 fourth-quarter revenue was $4.323 billion, gross profit was $147.2 million, and net income attributable to AECOM was $7.2 million. The comparable FY2015 quarter recorded revenue of $4.724 billion, gross profit of $170.6 million, and attributable net income of $1.1 million.
FY2016 revenue fell 3.2%; excluding $302 million from acquired companies, it declined 4.9%. Gross margin improved, while operating income rose substantially and AECOM returned to attributable profitability. Interest expense declined to $258.1 million from $299.6 million, partly because FY2015 included a $55.6 million debt prepayment penalty. Operating cash flow increased 6.5%. Working capital fell partly due to deferred-tax reclassification and debt becoming current ahead of its 2017 maturity. Capital expenditure payments were $191.4 million; cash used in investing activities was $162.6 million.
Year-end debt included $1.955 billion under the credit agreement and $1.600 billion of 2022 and 2024 senior notes. The company reported a 4.3 consolidated leverage ratio, compliance with debt covenants, and $888.4 million available under its revolving facility. The $180.1 million URS 3.85% notes were due in April 2017; management expected to repay them using operating cash flow, credit facilities, or capital markets. Management stated that expected liquidity sources would cover projected cash requirements for at least 12 months.
Segments and material changes
- DCS revenue decreased 3.9% to $7.656 billion; gross profit rose to $382.5 million and margin to 5.0%. Currency effects and weaker public capital spending weighed on revenue; lower acquired-intangible amortization supported margin.
- CS revenue decreased 2.6% to $6.501 billion and gross profit fell 27.3% to $31.1 million; margin was 0.5%. Weak oil and gas markets and reduced power-project award fees offset growth in New York high-rise and arena construction.
- MS revenue decreased 2.9% to $3.254 billion, while gross profit rose to $229.2 million and margin to 7.0%. Results included favorable pension, legal, and project-related items, including an approximately $50 million expected pension-entitlement recovery and a $27 million DOE performance incentive.
- Backlog declined 0.7% to $42.8 billion from $43.1 billion. Contracted backlog was $23.7 billion, awarded backlog $15.4 billion, and unconsolidated joint-venture backlog $3.7 billion. Management cautions that backlog may be delayed, reduced, canceled, or not converted into profit.
Outlook, risks, contingencies, and unusual items
- Management expected the FAST Act, a five-year U.S. transportation funding program, to benefit transportation services over the following several years. It also expected returns from some AECOM Capital investments within 12 months.
- Management did not expect FY2016 MS benefits from favorable project, pension, and legal resolutions to repeat in FY2017; it also cited the wind-down of government projects, including Sellafield. It targeted approximately $325 million in annual URS integration savings by FY2017 year-end; reported annual run-rate savings were approximately $290 million at September 30, 2016.
- FY2016 included $213.6 million of acquisition and integration expenses and a $42.6 million loss on disposal activities, principally involving non-core URS energy businesses and assets. The filing also reported $202.4 million of acquired-intangible amortization in cost of revenue.
- Demand risks include cyclical client spending, lower commodity prices affecting oil and gas work, public-sector funding and procurement uncertainty, foreign-exchange movements, and Brexit-related uncertainty. U.S. federal agencies represented 23% of revenue; governments overall represented 47%.
- Debt and variable interest rates are significant risks. A 1% increase in applicable rates was estimated to increase annual interest expense under the credit agreement by $20.9 million, including swaps. Debt covenants restrict certain financing, investment, and distribution activities.
- The worldwide defined-benefit pension deficit was approximately $696.1 million, up from $572.6 million. Management expected fiscal 2017 contributions of about $24 million to international plans and $9.8 million to U.S. plans.
- Significant contingencies include a DOE demolition/removal project where final costs could exceed contracted amounts by more than $100 million and recovery of a $103 million DOE claim is uncertain. Hanford-related investigations and litigation remain unresolved; management could not reasonably estimate a potential loss range. The Australian traffic-forecast class-action settlement of $91 million was approved in 2016 and was not material to FY2016 results; related receiver and lender claims had previously settled for $205 million.
- At year-end, AECOM had $3.3 billion of surety bonds and $474.5 million of standby letters of credit outstanding, primarily supporting project execution. The filing also identifies fixed-price contract, performance, environmental, government-contract, cyber, and joint-venture risks.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. A material weakness in controls related to URS forward-loss reserves and income-tax accounts was reported as remediated in the fourth quarter.
Most important facts for investors to verify
- Whether revenue and backlog stabilize, particularly in DCS and MS, and whether backlog converts to funded, profitable work.
- Whether the company achieves the remaining integration savings and whether FY2016’s favorable MS items are replaced by recurring operating performance.
- Progress on leverage reduction, covenant headroom, the 2017 debt maturity, and available liquidity.
- Cash-flow quality, including working-capital timing and continued receivables sales, which provided a $120.1 million net benefit in FY2016.
- Developments and potential exposure in the DOE project, Hanford matters, pension funding, and project guarantees and surety obligations.