AECOM Q2 FY2015 Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2015; AECOM’s fiscal year ends September 30. Amounts below are in U.S. dollars. URS Corporation was acquired on October 17, 2014, so reported year-over-year growth largely reflects the acquisition and is not directly comparable.
Business context and results
AECOM provides engineering, construction, program-management and related services. Following the URS acquisition, it reported three segments: Design and Consulting Services (DCS), Construction Services (CS), and Management Services (MS).
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $4,506.2 million | $1,872.2 million | $8,716.7 million | $3,826.1 million |
| Gross profit | $103.3 million | $87.4 million | $238.0 million | $165.6 million |
| Gross margin | 2.3% | 4.7% | 2.7% | 4.3% |
| Operating income (loss) | $6.5 million | $68.4 million | $(7.6) million | $158.8 million |
| Net income (loss) attributable to AECOM | $0.3 million | $40.2 million | $(138.7) million | $96.6 million |
| Interest expense | $60.7 million | $10.5 million | $179.4 million | $20.9 million |
Revenue rose 140.7% in the quarter and 127.8% for the six-month period. Excluding acquired-company revenue, management reported growth of 6.5% for the quarter and 3.7% for the six months. Acquired companies contributed $2.5 billion and $4.7 billion of revenue, respectively, in those periods. Reported margins declined, reflecting the mix of acquired work and acquired-intangible amortization, among other factors.
By segment, Q2 revenue was $2.04 billion in DCS, $1.64 billion in CS and $829.2 million in MS. Excluding acquired revenue, DCS revenue declined, CS grew—primarily from New York high-rise construction—and MS declined, partly due to lower U.S. government services in the Middle East and Africa. Lower oil, gas and power activity weighed on acquired CS results.
Cash flow, debt and liquidity
- Six-month operating cash flow was $332.6 million, versus $106.0 million a year earlier. Management attributed the increase mainly to working-capital timing; receivables sales provided a $58.7 million net benefit.
- Investing cash outflow was $3.35 billion, largely for the URS acquisition. Financing cash inflow was $3.07 billion, chiefly from acquisition-related borrowings and senior-note issuance.
- At March 31, 2015, cash and cash equivalents were $612.6 million, including $151.4 million held in consolidated joint ventures and restricted to those ventures’ use. Working capital was $1.52 billion; DSO was 86 days, excluding recent acquisitions.
- Total debt was $4.87 billion, compared with $1.00 billion at September 30, 2014. The consolidated leverage ratio was 4.4; AECOM reported compliance with its debt covenants. Revolver availability was $951.7 million after outstanding letters of credit. The new credit agreement is secured by substantially all assets of the company and guarantors.
- The company said available cash, operating cash flow, borrowing capacity and access to debt or equity markets were expected to meet projected cash needs for at least 12 months.
Material changes, outlook and risks
- URS was acquired for approximately $2.3 billion in cash and $1.6 billion in AECOM stock; AECOM also assumed URS debt. Goodwill increased to $5.67 billion and net intangible assets to $854.5 million. The preliminary purchase-price allocation remained subject to adjustment.
- Six-month acquisition and integration expenses were $230.1 million; acquisition-related financing expenses were approximately $72 million, including a $55.6 million debt prepayment penalty. Management expected about $410 million of intangible amortization and about $400 million of acquisition, integration and acquisition-financing expense for FY2015 combined.
- Management cited expected favorable effects from acquisition-accounting adjustments for the remainder of FY2015. It provided no broader earnings or revenue guidance in the supplied filing text.
- Key business risks include integration and synergy execution, high leverage and variable interest rates, government spending and contract funding, oil-and-gas market weakness, foreign-exchange exposure, project execution and fixed-price contract losses. A 1 percentage-point increase in floating rates would have increased six-month interest expense by $10.6 million, including swaps.
- Material contingencies include a DOE project with uncertain recovery of $103 million in claims and potential remaining completion costs exceeding $100 million; Australian litigation with claimed damages including approximately A$1.68 billion by receivers and A$76 million by a lender; and the USAID Egyptian-project action seeking repayment of approximately $373 million plus potential damages and penalties. A WIPP civil penalty of $17.7 million was subject to a proposed settlement approach involving DOE-funded work. Management stated outcomes and potential losses in several matters could not be determined or assured.
- Other notable items: the UK government was to take back control of the Sellafield nuclear-site joint venture; an $8 million benefit from release of a Libya-related payroll-tax accrual boosted MS segment results. The company also reported significant foreign-currency translation losses in other comprehensive income.
Important facts for investors to verify
- Whether post-acquisition revenue growth translates into durable organic growth and improved segment margins, particularly in DCS and MS.
- URS integration progress, realized synergies, remaining integration costs and final purchase-price allocation.
- Debt reduction, covenant headroom, refinancing needs and sensitivity to higher interest rates.
- Receivable collection, working-capital cash conversion and the continued use and terms of receivables sales.
- Developments and any updated loss estimates for the DOE project, Australian litigation, USAID matter and WIPP incident.