AECOM — Form 10-Q Summary
Reporting period: Three months ended December 31, 2017 (AECOM fiscal 2018 first quarter); unaudited. Comparisons are with the three months ended December 31, 2016, unless noted. Dollar amounts below are in millions except per-share data.
Business context
AECOM provides design and consulting, construction, and management services globally, and invests in real estate, public-private partnership, and infrastructure projects through AECOM Capital. Its four reportable segments are Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS), and AECOM Capital (ACAP). The first fiscal quarter is typically the company’s weakest due to weather and holiday-related productivity effects.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $4,910.8 | $4,358.3 |
| Gross profit / margin | $136.2 / 2.8% | $170.0 / 3.9% |
| Operating income / margin | $131.2 / 2.7% | $143.4 / 3.3% |
| Income before tax | $77.3 | $90.6 |
| Income tax benefit (expense) | $47.1 benefit | $24.8 expense |
| Net income attributable to AECOM | $111.3 | $47.2 |
| Diluted EPS | $0.69 | $0.30 |
| Cash from operating activities | $52.4 | $77.5 |
Revenue grew 12.7%, but cost of revenue rose faster, by 14.0%, and gross profit declined 19.9%. The improvement in attributable net income and EPS primarily reflects the income tax benefit, rather than stronger operating results. The effective tax rate was (60.9)%, compared with 27.4% a year earlier.
- Segments: DCS revenue rose 5.5% to $1,941.9, while gross profit fell 18.3% to $77.8; the filing cites approximately $21 million of severance costs. CS revenue increased 21.4% to $2,125.5 and gross profit rose to $27.1 from $13.8, reflecting project performance and higher construction activity, including acquired businesses. MS revenue grew 9.9% to $843.4, but gross profit fell 48.7% to $31.3, largely because the prior-year quarter included an approximately $35 million legal-settlement benefit. ACAP results were not materially changed.
- Cash and working capital: Cash and cash equivalents were $813.2 at December 31, 2017, including $197.0 held in consolidated joint ventures and restricted to those ventures’ use. Working capital was $1,166.0. Operating cash flow declined year over year, which management attributed mainly to working-capital timing. DSO increased to 80 days from 77 days at September 30, 2017. Receivables sold to financial institutions provided a $29.6 cash-flow benefit in the quarter.
- Debt and liquidity: Total debt was $3,951.7, up from $3,896.4 at September 30, 2017; long-term debt on the balance sheet was $3,738.9. The company reported a 4.0 consolidated leverage ratio and 4.7 interest coverage ratio and said it was in compliance with debt covenants. Revolving-credit availability was $915.2. Average effective borrowing cost increased to 4.8% from 4.2%.
- Other balance-sheet measures: Total assets were $14,623.0 and total stockholders’ equity was $4,330.8 at December 31, 2017. Goodwill was $5,997.0.
Material changes and unusual items
- Revenue increased by $552.5. Management attributed most of the increase to CS, including approximately $240 million from New York high-rise and sports-arena construction, and approximately $160 million of revenue from entities acquired in fiscal 2018 and 2017. DCS growth also included favorable foreign-currency effects.
- Gross margin contracted from 3.9% to 2.8%. The prior-year quarter benefited from an approximately $35 million settlement of a Waste Treatment Plant qui tam lawsuit; that benefit did not recur. The current quarter also included restructuring expenses of $22.4 million, primarily severance.
- Acquisition and integration expenses were zero, compared with $15.4 million in the prior-year quarter; management said URS integration expenses were complete.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate rate to a blended 24.5% for fiscal 2018 and 21% thereafter. AECOM recorded provisional tax effects, including a $36.1 million deferred-tax remeasurement benefit, a $77.0 million benefit from releasing certain foreign-subsidiary deferred tax liabilities, and $71.4 million of transition-tax expense. The company had not completed its accounting for the law, and estimates could change.
- Backlog at December 31, 2017 was reported as $23.4 billion contracted, $22.0 billion awarded, and $3.4 billion in unconsolidated joint ventures, totaling $48.8 billion. Awarded backlog is not yet supported by signed contracts; neither category guarantees revenue or profit.
Outlook, risks and contingencies
AECOM provided no specific revenue or earnings guidance in the filing. Management said anticipated liquidity sources should be sufficient for projected cash requirements for at least 12 months. In September 2017, the company announced that it intended to use free cash from operations to reduce debt and leverage, with stock repurchases planned after significant deleveraging. A $1.0 billion repurchase authorization was in place, but no shares were repurchased under the new or prior program during the quarter.
Key disclosed risks include substantial leverage, variable-rate debt, government funding and contract-renewal uncertainty, fixed-price project losses, backlog delays or cancellations, joint-venture and guarantee exposure, international and foreign-exchange risks, staffing and integration challenges, cybersecurity, and environmental and professional-liability claims. The company reported $5.7 billion of surety bonds and approximately $515.7 million of issued standby letters of credit, primarily supporting project execution and insurance programs.
Notable contingencies include a DOE demolition project with unresolved claims and completion costs more than $100 million above contracted and claimed amounts; an SR-91 design dispute with a contractor counterclaim seeking $70 million; and a New York environmental-permit claim for which potential losses could not be reasonably estimated. The filing also discusses other litigation and project-performance guarantees. Management stated that, apart from matters described in the filing, it did not expect the other proceedings to materially adversely affect the company.
Important facts for investors to verify
- How much of the net-income increase is attributable to provisional, nonrecurring Tax Act effects, and how will the final tax accounting change reported results?
- Can AECOM restore segment and consolidated margins after the prior-year settlement benefit, current restructuring costs, and weaker DCS and MS gross profit?
- Will operating cash flow improve, given lower quarterly cash generation, higher DSO, and the benefit from receivables sales?
- Can the company reduce leverage while maintaining covenant compliance and capacity for project guarantees and other obligations?
- What are the eventual financial outcomes of the DOE, SR-91, and New York environmental matters, and how much backlog will convert to profitable contracted revenue?