AECOM (NYSE: ACM) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019; comparisons are with the periods ended June 30, 2018. Amounts are in U.S. dollars. The filing cautions that interim results are not necessarily indicative of full-year results.
Business context
AECOM provides design and consulting, construction, management services, and real-estate investment services through its DCS, CS, MS, and AECOM Capital segments. Reported revenue includes substantial subcontractor and other client pass-through costs, so revenue changes may not directly indicate underlying activity or profitability.
Financial performance
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $4.980 billion, down 3.3% year over year | $15.058 billion, up 1.4% |
| Gross profit and margin | $209.2 million; 4.2%, versus $185.2 million and 3.6% | $575.2 million; 3.8%, versus $462.6 million and 3.1% |
| Operating income | $192.9 million, up 20.0% | $444.8 million, up 79.4% |
| Net income attributable to AECOM | $83.7 million; diluted EPS $0.52 | $213.1 million; diluted EPS $1.34 |
For the nine-month period, higher gross profit and the absence of the prior-year $168.2 million impairment of oil-and-gas assets helped lift operating income. The prior-year period also included a $34.5 million debt prepayment premium in interest expense. The 2019 nine-month effective tax rate was 8.3%, compared with a tax benefit and a negative 71.8% effective rate in 2018; tax credits, a $38.1 million foreign-tax-credit valuation-allowance release, and prior-year tax items affected comparability.
- Segment trends: Nine-month DCS revenue grew 2.2% and gross profit grew 23.5%; CS revenue fell 4.7%, although gross profit rose from a low base; MS revenue grew 13.3%, while its quarterly gross profit margin declined to 4.8% from 6.4%. Management cited restructuring-related cost reductions in DCS, weaker building-construction activity in CS, and a Department of Defense project supporting MS revenue.
- Cash flow: Operating activities used $16.1 million in the first nine months, versus $242.7 million provided in 2018, mainly due to working-capital timing. Investing activities used $123.6 million; financing activities provided $46.4 million. Cash and cash equivalents were $793.6 million at June 30, down from $886.7 million at September 30, 2018. Cash held in consolidated joint ventures is restricted to those ventures and is not available for AECOM’s general operations.
- Working capital and collections: Working capital was $1.331 billion, up from $997.6 million at September 30, 2018. DSO increased to 89 days from 78 days. Management attributed the increase primarily to storm-recovery work in the U.S. Virgin Islands, where payment delays increased working capital by more than $200 million.
- Debt and liquidity: Total debt was $3.853 billion, up from $3.674 billion at September 30, 2018. The company reported $1.115 billion available under its revolving facility and $499.4 million available under other unsecured credit facilities. Its credit-agreement leverage ratio was 4.0 and interest-coverage ratio 4.7 at June 30; AECOM reported compliance with debt covenants. Average effective interest rate on debt was 4.7% for the nine-month period.
Material changes, outlook, and risks
- AECOM began a restructuring plan in fiscal 2019 and recorded $79.2 million of restructuring expenses during the nine months, including personnel and real-estate costs; $29.0 million remained accrued and unpaid at June 30. Management projected approximately $225 million in annual cost savings, including $85 million expected to contribute in fiscal 2019, and anticipated additional fiscal-2019 restructuring costs. The filing also says the company expected to spend approximately $60–$70 million on restructuring in fiscal 2019; investors should clarify how that estimate relates to costs already recorded.
- Management planned to exit fixed-price combined-cycle gas power plant construction and non-core oil-and-gas markets, reduce self-perform at-risk construction exposure, and evaluate exiting more than 30 countries to improve profitability and reduce risk.
- On June 17, 2019, AECOM announced a proposed tax-free spin-off of Management Services, then expected in the second half of fiscal 2020, subject to customary conditions and approvals. The filing highlights execution, separation-cost, dissynergy, tax, financing, and business-disruption risks; completion and timing were not assured.
- Backlog at June 30 was approximately $58.9 billion in total, comprising $23.2 billion contracted, $33.6 billion awarded but not yet signed, and $2.1 billion in unconsolidated joint ventures. AECOM cautioned that backlog can be delayed, reduced, or cancelled and may not produce expected revenue or profits. It separately reported $22.6 billion of transaction price allocated to remaining performance obligations, about 55% expected to be satisfied within 12 months.
- Material collection and project exposures include the U.S. Virgin Islands recovery contracts; approximately $360 million of significant claims recorded in contract assets and other non-current assets; a Department of Energy project with uncertain recovery of claims and additional costs; and a refinery turnaround dispute involving AECOM’s approximately $144 million payment demand and the owner’s allegations. The SR-91 litigation included a contractor claim seeking $103 million, with trial commencing in July 2019. The filing states that potential losses in several matters cannot be reasonably estimated.
- A joint venture received a $45.8 million arbitration award against Illinois Power Generating Company; the award was being challenged in court and related proceedings were stayed pending venue issues.
- AECOM was contingently liable for approximately $4.8 billion of surety bonds and $511.2 million of issued standby letters of credit, primarily supporting project execution. Other key risks include government funding and payment delays, fixed-price project losses, high leverage and variable rates, claims and guarantees, pension funding, foreign-exchange exposure, cybersecurity, and the proposed spin-off.
Important facts for investors to verify
- Whether the U.S. Virgin Islands funding discussions resolve payment delays and reduce the elevated DSO and working-capital burden.
- Underlying operating cash generation and working-capital conversion, given the $16.1 million operating cash outflow despite higher reported earnings.
- Debt-covenant headroom and the effect of the leverage-limit step-down to 4.0 after September 30, 2019.
- Restructuring spending, timing and realization of the stated savings, including the relationship between costs already recorded and the $60–$70 million fiscal-year estimate.
- Progress, conditions, costs, and expected timing of the Management Services spin-off.
- Recoverability and accounting estimates for significant claims and contract assets, and outcomes of the DOE, refinery, SR-91, environmental, and arbitration matters.
- How much of awarded backlog converts to signed, funded work and at what margins, particularly given weaker CS revenue and the decline in MS quarterly margin.