AECOM Technology Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012, unless noted. AECOM provides professional technical and management support services through Professional Technical Services (PTS) and Management Support Services (MSS). The filing is unaudited.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $1,953.9 million | $2,017.3 million | Down 3.1% |
| Gross profit | $78.2 million | $78.1 million | Up 0.1% |
| Gross margin on revenue, net of other direct costs | 6.8% | 6.3% | Up 0.5 percentage points |
| Operating income | $90.4 million | $61.9 million | Up 46.0% |
| Net income attributable to AECOM | $56.4 million | $38.1 million | Up 48.0% |
| Diluted EPS | $0.58 | $0.36 | Up $0.22 |
| Cash provided by operating activities | $137.4 million | $67.1 million | Up $70.3 million |
Amounts in millions except per-share data. Revenue, net of other direct costs, a non-GAAP measure, fell 7.5% to $1,151.5 million. GAAP gross profit as a share of revenue was approximately 4.0% versus 3.9%. The filing attributes the stronger operating and net income chiefly to a one-time $37.4 million pretax gain from gaining control of a previously unconsolidated joint venture; the gain was partly offset by an impairment of a separate joint venture investment.
Cash and cash equivalents totaled $681.7 million at December 31, 2013, including $171.0 million held in consolidated joint ventures and restricted to those ventures’ use. Cash outside those ventures was $510.7 million. Total debt was $1,204.1 million, up from $1,173.3 million at September 30, 2013. Working capital was $1,089.2 million. DSO increased to 93 days from 88 days at September 30, 2013.
Operating cash flow benefited primarily from the timing of working-capital receipts and payments. AECOM reported $20.5 million of investing cash outflow and $33.3 million of financing cash outflow; the latter included $33.7 million of share repurchases. The company had $876.3 million available under its $1.05 billion revolving credit agreement and reported compliance with debt covenants. Its most restrictive leverage ratio was 2.65 against a maximum of 3.0.
Material changes and management commentary
- Revenue excluding acquired-company contributions declined 4.1%. Management cited lower MSS activity, reduced Australian mining-related services, and weaker Americas engineering and program-management services; increases in the Americas and Middle East partly offset the declines.
- PTS revenue was nearly flat, but segment gross profit fell 13.4% to $60.0 million and its net-of-other-direct-costs gross margin declined to 5.8% from 6.3%, mainly due to lower gross profit in Australia and the Americas.
- MSS revenue fell 25.4% to $183.7 million, primarily due to reduced U.S. government services in the Middle East. MSS gross profit rose to $18.2 million from $8.8 million, largely because of collection of a previously reserved Libya-related project receivable.
- Reported net income benefited materially from the nonrecurring joint-venture remeasurement gain. The diluted weighted-average share count fell to 97.6 million from 105.5 million.
- Backlog at December 31, 2013 was $18.4 billion: $8.8 billion contracted and $9.6 billion awarded but not yet signed. The filing cautions that backlog may be delayed, reduced, or canceled and is not a guarantee of future revenue or profit.
Outlook, risks, contingencies, and unusual items
No specific revenue or earnings guidance is provided. Management said anticipated operating cash flow, existing cash, borrowing capacity, and potential debt or equity issuance should be sufficient to meet projected cash requirements for at least 12 months. AECOM states that its first fiscal quarter is typically its weakest, with revenue generally higher in the second half and the fourth quarter typically strongest.
- Key exposures include government funding and contract cancellations, sequestration and reduced public spending, cyclical client demand, fixed-price project overruns, execution and performance guarantees, and international political, economic, and foreign-exchange risks.
- Material matters disclosed include the GLS joint venture dispute over approximately $19 million of U.S. government withholdings and a related investigation; Australian litigation relating to a toll-road traffic forecast, with damages unspecified; and a U.S. investigation of a Hawaii landfill project, with no action filed as of the report date. Management believes the matters are not expected to materially adversely affect the company overall, but unfavorable outcomes in the GLS matter could materially affect results.
- AECOM had approximately $294.0 million of standby letters of credit outstanding, primarily supporting insurance programs and payment or performance guarantees. Pension liabilities were $190.7 million; employer contributions in the quarter were $5.0 million.
- Goodwill and intangible assets totaled approximately $2.0 billion. The filing notes a $336 million goodwill impairment recorded in fiscal 2012 and the possibility of future impairment charges.
- On January 29, 2014, AECOM amended and restated its revolving credit agreement, retaining $1.05 billion of borrowing capacity and extending maturity to January 29, 2019.
Important facts for investors to verify
- How much of the earnings increase is attributable to the nonrecurring $37.4 million pretax joint-venture gain, and whether underlying earnings trends support the reported improvement.
- Whether PTS margin pressure, Australian mining-related weakness, and lower MSS government work persist; assess the quality and repeatability of MSS’s receivable collection.
- Cash conversion and collections, including the increase in DSO to 93 days and reliance on working-capital timing and receivables sales.
- Debt maturities, leverage covenant headroom, and the distinction between unrestricted cash and cash restricted within consolidated joint ventures.
- Developments in the GLS, Australian, and Hawaii matters; exposure under guarantees and letters of credit; and any changes in backlog conversion or cancellation risk.