AECOM — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; the filing also reports fourth-quarter results. AECOM provides design and consulting, construction, and management services globally. The October 17, 2014 acquisition of URS substantially expanded the company and led to a three-segment reporting structure. Unless noted, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $17.990 billion | $8.357 billion |
| Gross profit / margin | $535.2 million / 3.0% | $403.2 million / 4.8% |
| Operating income / margin | $129.0 million / 0.7% | $352.9 million / 4.2% |
| Net income (loss) attributable to AECOM | $(154.8) million; $(1.04) per diluted share | $229.9 million; $2.33 per diluted share |
| Operating cash flow | $764.4 million | $360.6 million |
| Capital expenditures, net | $69.4 million | $62.9 million |
| Cash and cash equivalents | $683.9 million | $574.2 million |
| Total debt | $4.607 billion | $1.004 billion |
| Working capital | $1.410 billion | $978.3 million |
| Backlog | $40.2 billion | $25.1 billion |
FY2015 revenue increased 115.3%, but revenue excluding acquired companies was essentially unchanged year over year. Gross profit increased in dollars partly due to URS, while the gross margin contracted. The attributable net loss primarily reflected $398.4 million of acquisition and integration costs and sharply higher interest expense. Interest expense was $299.6 million, including acquisition-related financing costs and a $55.6 million debt prepayment penalty.
Operating cash flow rose by $403.8 million, largely due to working-capital timing; sales of trade receivables contributed a net benefit of $108.9 million, versus $10.8 million in FY2014. Investing cash outflow was $3.346 billion, chiefly reflecting the URS acquisition, while financing provided $2.720 billion. Management said expected liquidity sources were sufficient for projected needs for at least 12 months.
At September 30, 2015, the company had $947.6 million available under its revolving credit facility after letters of credit. Its consolidated leverage ratio was 4.6, and it reported compliance with debt covenants. The filing reports $684 million in cash, including $141 million held in consolidated joint ventures whose assets are restricted to those ventures.
Material changes and fourth-quarter results
- URS contributed $8.5 billion in revenue after its acquisition. Reported full-year growth therefore substantially reflects consolidation rather than organic expansion.
- Segment revenue was $7.963 billion for Design and Consulting Services, $6.677 billion for Construction Services, and $3.350 billion for Management Services. Excluding acquired-company revenue, DCS revenue declined 9.1%, CS rose 31.9%, and MS declined 16.4%.
- Government clients provided 50% of revenue, down from 56% in FY2014; private entities provided the remaining 50%. Direct U.S. federal government contracts represented 24% of revenue, up from 15%.
- Backlog increased 60% to $40.2 billion, primarily because of URS. It included $24.5 billion of contracted backlog and $15.7 billion of awarded but not yet signed backlog; backlog is not assurance of future revenue or profit.
- Fourth-quarter revenue was $4.724 billion, operating income was $95.2 million, and net income attributable to AECOM was $1.1 million. Fourth-quarter acquisition and integration expense was $79.8 million.
- DSO, excluding the effect of recent acquisitions, improved to 82 days from 85 days. The worldwide defined-benefit pension deficit increased to $572.6 million from $221.3 million, primarily due to URS.
Outlook, risks, and unusual items
- No specific FY2016 revenue or earnings guidance is stated in the provided filing text. Management expected approximately $200 million of acquisition and integration expense and $195 million of acquired-intangible amortization expense in FY2016, and expected returns from AECOM Capital investments and disposal of certain non-core businesses or assets.
- Management cited lower oil and gas prices as weighing on client investment and causing some North American construction work to be deferred, suspended, or terminated. A strong U.S. dollar also reduced reported revenue. Federal highway and transit funding uncertainty was described as a constraint on long-term client investment decisions.
- Integration and execution remain key risks following URS: the acquisition expanded goodwill to $5.821 billion, debt to $4.607 billion, and the workforce to approximately 92,000. The company also recognized $391 million of acquired-intangible amortization in FY2015.
- Other key risks include government budget and contract-renewal uncertainty, competitive pricing, fixed-price and guaranteed-maximum-price project losses, international political and currency exposure, cybersecurity, environmental and safety liabilities, pension funding, and debt service and variable interest rates.
- Material disclosed contingencies include a DOE project claim for $103 million, with uncertain recovery and potentially more than $100 million of remaining completion costs; government claims seeking approximately $373 million in the USAID Egyptian projects case; WIPP environmental incidents and a $17.7 million civil penalty subject to a proposed resolution; and unresolved Hanford investigations and litigation. AECOM disputes or is defending several of these matters, and outcomes may be material.
- The Australian traffic-forecast lawsuits brought by receivers and a lending bank were settled in July 2015; a separate investor class action remained unresolved. Management stated that, apart from specified matters, it did not expect pending proceedings to materially affect consolidated results, while acknowledging uncertainty and possible material effects.
- Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- How much of reported revenue, backlog, and operating performance is attributable to URS versus the legacy business, and whether integration benefits offset recurring costs.
- Whether gross and operating margins recover, particularly in DCS and low-margin construction work, and whether FY2016 integration charges track management’s estimate.
- Debt reduction, covenant headroom, refinancing needs, and exposure to higher variable interest rates; the filing estimates a 1 percentage-point rate increase would add $24.8 million to annual Credit Agreement interest expense.
- The sustainability of operating cash flow after working-capital timing effects and receivable sales, alongside collection of the substantial unbilled receivable balance.
- Developments, reserves, and potential cash exposure for the DOE, USAID, WIPP, Hanford, and remaining Australian investor litigation matters, as well as pension funding requirements.