AECOM Technology Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2014; fiscal second quarter. Unaudited results are compared with the periods ended March 31, 2013. AECOM provides global professional technical services (PTS) and management support services (MSS).
Key financial metrics
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Revenue | $1.872 billion, down 5.9% | $3.826 billion, down 4.5% |
| Gross profit | $87.4 million, down 12.5% | $165.6 million, down 7.0% |
| Operating income | $68.4 million, down 15.0% | $158.8 million, up 11.5% |
| Net income attributable to AECOM | $40.2 million, down 25.3%; diluted EPS $0.41 vs. $0.53 | $96.6 million, up 5.1%; diluted EPS $0.99 vs. $0.88 |
| Gross margin on revenue net of other direct costs | 7.4% vs. 8.0% | 7.1%, unchanged |
| Operating cash flow | Not separately reported in the supplied filing text | $106.0 million vs. $152.3 million |
- At March 31, cash and cash equivalents totaled $502.5 million, including $99.6 million held in consolidated joint ventures and restricted to those ventures’ use. Total debt was $1.091 billion, down from $1.173 billion at September 30, 2013.
- Working capital was $1.022 billion, down from $1.078 billion. Days sales outstanding rose to 97 days from 88 days.
- AECOM had $986.3 million available under its $1.05 billion revolving facility. Its leverage ratio was 2.52 against a maximum of 3.0; the company reported compliance with debt covenants.
Changes versus prior-year periods
- Quarterly revenue fell mainly because of lower Americas engineering and program management, Australia, and MSS activity; higher EMEA revenue partly offset the declines. For the half-year, lower Americas engineering and program management, Australia, and MSS revenue was partly offset by EMEA and Americas construction growth.
- PTS revenue declined 4.7% in the quarter and 2.4% year to date. Its gross margin on revenue net of other direct costs fell to 7.8% from 8.3% in the quarter and to 6.8% from 7.3% year to date.
- MSS revenue declined 15.7% in the quarter and 20.8% year to date, primarily due to reduced U.S. government services in the Middle East. MSS gross profit fell sharply in the quarter, but increased year to date, partly reflecting collection of a previously reserved Libya-related receivable.
- Year-to-date joint-venture earnings increased to $43.5 million from $13.8 million, principally due to a $37.4 million pretax gain on gaining control of a Middle East engineering and program-management joint venture. This gain is unusual and not indicative by itself of recurring operating performance.
- Year-to-date operating cash flow declined 30.4%, mainly from working-capital timing. Cash fell $98.1 million from September 30, 2013, reflecting debt repayments, repurchases, capital spending and investments, partly offset by operating cash generation.
Outlook, risks and unusual items
- Management said anticipated operating cash flow, existing cash, borrowing capacity and potential debt or equity issuance should be sufficient for projected needs for at least 12 months. The filing provides no numerical earnings or revenue guidance. Management noted that revenue is typically higher in the second half of the fiscal year, with seasonal and project-timing fluctuations.
- Backlog at March 31 was approximately $20.2 billion: $10.0 billion contracted and $10.2 billion awarded but not yet signed. Backlog may be delayed, reduced or canceled and does not ensure future revenue or profit.
- Key risks include reliance on government contracts and appropriations, spending reductions and contract termination, economic cyclicality, fixed-price and performance obligations, international political and currency risks, acquisition integration, and collection and working-capital exposure.
- AECOM Australia faces litigation related to a historical traffic forecast for an insolvent motorway project. Claimed damages were not specified, and the potential loss could not be determined; AECOM said an unfavorable outcome could materially affect results.
- In April 2014, a subsidiary entered into a non-prosecution agreement concerning the Hawaii landfill matter and agreed to pay $1.35 million. The GLS joint-venture government cost dispute was resolved, with substantially all withheld payments released.
- Standby letters of credit totaled approximately $285.1 million, primarily supporting insurance and performance guarantees. The filing states that ordinary-course lawsuits are not expected to have a material adverse effect, while noting the uncertainty of litigation outcomes.
Important facts for investors to verify
- Whether the MSS decline and weaker quarterly margins stabilize, particularly given lower U.S. government work in the Middle East.
- How much of year-to-date earnings growth depends on the nonrecurring joint-venture remeasurement gain, and the effect of the unrelated joint-venture impairment.
- Whether higher DSO and lower operating cash flow reflect temporary timing or persistent collection and working-capital pressure.
- The status, possible exposure and subsequent developments in the Australian litigation, and the treatment of the Hawaii payment.
- Conversion of awarded backlog into signed, funded contracts; backlog execution and profitability; and continued headroom under debt covenants, especially with $600 million of scheduled debt maturity in fiscal 2018.