AECOM — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, three months ended December 31, 2016; compared with the quarter ended December 31, 2015 unless noted. Amounts are in U.S. dollars.
Business context and financial performance
AECOM provides design and consulting, construction, and management services to public and private clients. The company notes that its first fiscal quarter is typically its weakest because of weather and holiday-related productivity effects; quarterly results may not indicate full-year performance.
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Revenue | $4.358 billion | $4.298 billion |
| Gross profit / margin | $170.0 million / 3.9% | $140.9 million / 3.3% |
| Operating income / margin | $143.4 million / 3.3% | $55.4 million / 1.3% |
| Net income attributable to AECOM | $47.2 million; diluted EPS $0.30 | Net loss $20.4 million; diluted EPS $(0.13) |
| Operating cash flow | $77.5 million | $78.1 million |
Revenue increased 1.4%. Management cautions that revenue includes substantial subcontractor and other pass-through costs: these costs were $2.3 billion versus $2.1 billion and rose to 52% of revenue from 48%. Gross profit rose 20.7%, while cost of revenue increased 0.8%.
Segment revenue and gross profit were: Design and Consulting Services, $1.841 billion and $95.2 million; Construction Services, $1.750 billion and $13.8 million; Management Services, $767.3 million and $61.0 million. Their gross margins were 5.2%, 0.8%, and 7.9%, respectively. Segment comparisons reflect a realignment of an operation and maintenance entity from Construction Services to Management Services.
Cash, liquidity, debt, and balance sheet
- Cash and cash equivalents were $697.7 million at December 31, 2016, up $5.6 million from September 30. This total includes $137.2 million held in consolidated joint ventures and restricted to their use.
- Operating cash flow was $77.5 million; investing activities used $38.9 million and financing activities used $26.4 million. Capital expenditures were $23.6 million.
- Working capital was $819.8 million, up from $696.0 million at September 30. Days sales outstanding were 81 days, versus 82 days.
- Total debt was $4.164 billion, up from $4.125 billion at September 30. The company had $3.751 billion of long-term debt on the balance sheet. Approximately $179.7 million of URS notes were due in April 2017.
- Revolving credit availability was $862.1 million after letters of credit. The reported consolidated leverage ratio was 4.4 and interest coverage ratio 4.6; AECOM stated it was in compliance with debt covenants.
- Management said existing cash, operating cash flows, borrowing capacity, and potential capital-market access should be sufficient for projected cash needs for at least 12 months.
- Foreign-currency translation reduced other comprehensive income by $73.9 million; comprehensive loss attributable to AECOM was $8.1 million, despite positive net income.
Material changes and unusual items
- Net income attributable to AECOM improved by $67.6 million from the prior-year loss. The comparison includes fewer URS acquisition and integration expenses ($15.4 million versus $41.0 million) and no repeat of the prior-year $41.0 million disposal loss.
- Q1 FY2017 Management Services gross profit benefited by approximately $35 million, net of legal fees, from settlement of the Hanford Waste Treatment Plant qui tam matter. The settlement required an affiliate to pay $57.5 million plus interest and relators’ attorneys’ fees; AECOM recorded a net benefit of approximately $35 million.
- URS-related intangible amortization declined, supporting gross profit, while the associated acquired-contract margin liability contributed $1.6 million of revenue and operating income, versus $15.1 million in the prior-year quarter.
- Equity earnings from joint ventures fell to $21.4 million from $25.2 million, primarily because of lower earnings from a U.K. nuclear cleanup project. Interest expense declined to $53.6 million from $59.5 million.
- The effective tax rate was 27.4%. Management cited geographic income mix and noncontrolling-interest benefits, partly offset by valuation allowances on certain foreign losses. It said U.K. valuation allowances of approximately $55 million could potentially be released if sustained earnings provide sufficient evidence; Canadian allowances of approximately $20 million may also be reduced if profitability improves.
Outlook, risks, and contingencies
- AECOM expected approximately $30 million of acquisition and integration expense in FY2017. It targeted approximately $325 million of annual cost savings by FY2017 end; reported annualized savings were approximately $300 million at December 31. Management said progress was materially consistent with expectations.
- Management expected a return on a portion of AECOM Capital investments within 12 months. It viewed the FAST Act and proposed U.S. infrastructure initiatives as potential positives, while noting uneven client spending. Fiscal 2016 Management Services benefited from favorable project, pension, and legal resolutions not expected to recur; winding down certain government work may affect near-term performance.
- Material uncertainties include a DOE demolition project with uncertain remaining costs that may exceed contracted amounts by more than $100 million, and a $103 million claim against the DOE whose recovery is uncertain. A Hanford River Corridor qui tam matter remained in discovery; the company could not reasonably estimate a loss range.
- The filing also discusses a securities class action, a World Bank review of two Asian affiliates that could result in sanctions, and guarantees and performance exposures. At quarter-end, issued surety bonds were approximately $3.6 billion and standby letters of credit approximately $464.9 million.
- Key broader risks include substantial leverage and covenant limits, variable interest rates, government funding and contract risks, cyclical demand and oil-and-gas exposure, Brexit and foreign-exchange effects, project execution and fixed-price contract losses, pension funding, environmental and professional liability, and cybersecurity. A 1 percentage-point increase in floating rates was estimated to raise quarterly interest expense by $4.6 million.
Important facts for investors to verify
- How much of the quarter’s improved earnings is sustainable after the approximately $35 million Hanford settlement benefit and lower acquisition costs?
- Whether AECOM meets its $325 million cost-savings target and FY2017 integration-cost expectation, and whether further restructuring costs arise.
- Funding and repayment plans for the $179.7 million URS notes due in April 2017, progress in reducing leverage, and continued covenant compliance.
- Developments, potential cash exposure, and reserve adequacy for the DOE project, Hanford litigation, World Bank review, and other legal and performance contingencies.
- Whether operating cash flow and collections remain adequate, including reliance on receivables sales; $375.1 million of trade receivables sold remained outstanding at quarter-end.
- Whether segment margins and backlog convert to profitable revenue; reported total backlog was $43.8 billion, including contracted, awarded, and unconsolidated joint venture backlog, which management cautions may be delayed, reduced, or canceled.