AECOM 2017 Form 10-K Summary
Business context and reporting period
AECOM provides engineering, design, construction, program management and related services to public- and private-sector clients in more than 150 countries. Its four reportable segments are Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS) and AECOM Capital (ACAP). The filing covers the fiscal year ended September 30, 2017; fiscal-year figures are annual, with fourth-quarter results also presented separately. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $18.20 billion | $17.41 billion |
| Gross profit / margin | $683.7 million / 3.8% | $642.8 million / 3.7% |
| Operating income / margin | $653.9 million / 3.6% | $375.5 million / 2.2% |
| Net income attributable to AECOM | $339.4 million | $96.1 million |
| Diluted EPS | $2.13 | $0.62 |
| Cash from operating activities | $696.7 million | $814.2 million |
| Cash and cash equivalents | $802.4 million | $692.1 million |
| Total debt | $3.90 billion | $4.13 billion |
| Working capital | $1.10 billion | $696.0 million |
| Total backlog | $47.5 billion | $42.8 billion |
Fiscal 2017 fourth-quarter revenue was $4.86 billion, versus $4.32 billion in the prior-year quarter. Net income attributable to AECOM was $88.5 million, or $0.55 diluted EPS, compared with $7.2 million, or $0.05 diluted EPS, in fiscal 2016 Q4.
Material changes versus the prior comparable period
- Revenue grew 4.6%, driven mainly by CS, whose revenue rose 14.5% to $7.30 billion. Increased sports-arena and New York high-rise construction contributed substantially.
- DCS revenue declined 1.2% to $7.57 billion; MS revenue declined 1.3% to $3.34 billion. MS gross profit fell 16.6% to $196.0 million, partly because favorable pension, legal and project adjustments in 2016 did not recur.
- CS gross profit increased to $92.9 million from $25.4 million, and its margin improved to 1.3% from 0.4%. Overall gross margin remained low at 3.8%; subcontractor and other direct costs were about 51% of revenue.
- Operating income increased 74.1%. Lower acquisition and integration expense ($38.7 million versus $213.6 million), higher joint-venture earnings, and the absence of 2016 disposal losses contributed. The 2017 joint-venture earnings included a $52 million gain on the sale of AECOM Capital’s interest in Provost Square I.
- Net income growth also reflects a low 1.8% effective tax rate. Management identified $106.3 million of one-time tax benefits in 2017, including valuation-allowance releases and foreign tax-related benefits.
- Operating cash flow declined 14.4% to $696.7 million, reflecting working-capital timing and approximately $60 million of payments related to a federal lawsuit settlement, partly offset by cash received from the Provost Square sale. DSO improved to 77 days from 82.
- Backlog rose 11.0% to $47.5 billion. Awarded backlog increased to $20.0 billion from $15.4 billion, notably reflecting MS awards; awarded work is not necessarily signed or fully funded.
Outlook, commentary, risks and unusual items
- Management said free cash from operations would first be directed to reducing long-term debt and leverage, with stock repurchases planned after leverage is reduced. The board authorized up to $1.0 billion in repurchases; none were made under the new or previous program during FY2017. The filing gives no quantified FY2018 revenue or earnings guidance.
- Management cited the FAST Act as a potential support for transportation work and said proposed U.S. infrastructure initiatives could benefit the business if enacted. It also expected continued pressure on oil-and-gas work from commodity-price volatility.
- Government clients represented 48% of revenue. Government appropriations, contract renewals, audits, termination rights and procurement competition expose revenue and margins to policy and funding changes.
- Debt was $3.90 billion at year-end. A $1.0 billion 5.125% senior-note issuance due 2027 refinanced part of secured, variable-rate borrowings. The company reported a 4.0 consolidated leverage ratio, 4.7 interest coverage ratio and compliance with debt covenants; $991.9 million was available under its revolving credit facility. A 1% rise in short-term rates was estimated to increase annual interest expense by $13.4 million.
- Performance-related contingent exposures included $5.7 billion of surety bonds and $503.8 million of standby letters of credit. These are contingent amounts, not stated expected losses.
- Significant matters include the DOE deactivation project, where costs exceeded contracted and claimed amounts by more than $100 million and recovery of a $103 million claim is uncertain; a California SR-91 dispute with a $70 million counterclaim; and New York environmental allegations for which the potential loss could not be estimated. Management stated that, apart from matters disclosed, it did not expect current legal proceedings to materially affect the company.
- Other notable exposures include a $553 million defined-benefit pension deficit, fixed-price and guaranteed-maximum-price project risk, environmental liability, joint-venture guarantees, cybersecurity, international political and currency risks, and the Qatar embargo’s potential impact on projects.
- AECOM acquired Shimmick Construction in July 2017 for consideration of approximately $165.5 million. The acquisition accounting was not complete at year-end. AECOM’s independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of the $20.0 billion awarded backlog becomes signed, funded contracts, and how backlog converts to profitable revenue.
- Whether CS construction growth and improved margins are sustainable, given the segment’s 1.3% FY2017 gross margin and execution risks.
- The recurring earnings and cash-flow contribution excluding the $52 million property-sale gain and the $106.3 million of identified one-time tax benefits.
- Progress on management’s debt-reduction objective, covenant headroom, refinancing needs and sensitivity to interest rates.
- Developments and potential cash exposure in the DOE, SR-91 and New York environmental matters, along with surety, letter-of-credit and guarantee obligations.
- The effect of the Shimmick integration, pension funding needs and future adoption of revenue-recognition and lease accounting standards.