AECOM Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020; filed May 6, 2020. Comparisons are with the corresponding 2019 periods. Unless noted, financial amounts are in U.S. dollars.
Business context
AECOM provides technical and management-support services to government and commercial clients. Continuing operations are reported in Americas, International, and AECOM Capital. The company completed the sale of Management Services on January 31, 2020, and classified that business and its self-perform at-risk construction businesses as discontinued operations. Accordingly, continuing-operations revenue and discontinued-operations results should be read separately.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Continuing-operations revenue | $3.246 billion, down 4.9% from 2019 | $6.481 billion, down 4.2% |
| Gross profit / margin | $168.8 million / 5.2%; prior year $144.8 million / 4.2% | $334.6 million / 5.2%; prior year $268.2 million / 4.0% |
| Operating income | $110.1 million; prior year $108.1 million | $197.3 million; prior year $139.0 million |
| Income from continuing operations | $53.8 million; prior year $58.3 million | $88.7 million; prior year $95.2 million |
| Net income (loss) attributable to AECOM | $(86.1) million; prior year $77.8 million | $(45.5) million; prior year $129.4 million |
| Diluted EPS | $(0.54); continuing operations $0.30 | $(0.28); continuing operations $0.49 |
Discontinued operations recorded losses of $130.7 million for the quarter and $112.6 million for the six months, versus income of $35.2 million and $63.4 million in the comparable 2019 periods. These results included a $147.0 million pretax gain on the Management Services sale, $89.3 million of goodwill and intangible impairments, and $41.4 million of transaction costs for the six months.
- Cash flow: Six-month operating cash use was $506.0 million, versus $92.9 million in 2019. Investing activities provided $1.991 billion, principally from the Management Services sale; financing activities used $1.293 billion, mainly for debt repayments.
- Cash and liquidity: March 31 cash and cash equivalents were $1.135 billion for continuing operations, or $1.266 billion including cash classified as held for sale. Working capital was $1.391 billion, up from $1.073 billion at September 30, 2019. DSO increased to 101 days from 94.
- Debt: Total debt was $2.153 billion at March 31, down from $3.353 billion at September 30, 2019. The company reported a 3.1 consolidated leverage ratio and 4.9 interest coverage ratio and said it was in covenant compliance. It had $1.328 billion available under its revolving credit facility.
- Backlog: Contracted backlog was approximately $17.0 billion, awarded backlog $23.8 billion, and unconsolidated joint venture backlog $0.8 billion, for total backlog of $41.6 billion. Remaining unsatisfied performance obligations were $16.5 billion; about 60% was expected to be satisfied within 12 months.
Changes and management commentary
- Continuing revenue declined in both Americas and International. Americas revenue fell 3.9% in the quarter, primarily due to lower storm-disaster-relief work and reduced subcontractor activity in New York residential high-rise projects. International revenue fell 7.8%, with coronavirus-related downtime in Asia Pacific cited as a factor.
- Gross margins improved in both segments. Management attributed gains primarily to prior restructuring and stronger project execution; International also cited improved project performance in the U.K. and Australia.
- The Management Services sale provided approximately $2.25 billion in expected cash consideration plus approximately $120 million of contingent consideration tied to certain claims. AECOM said proceeds were used in part to reduce debt.
- The company expected fiscal 2020 restructuring costs of $160 million to $190 million and total cash costs of $185 million to $205 million, primarily related to the sale and exits from at-risk construction businesses. It also planned to exit fixed-price combined-cycle gas power-plant construction and non-core oil and gas markets, and was evaluating an exit from more than 30 countries.
- AECOM said it believed available cash, operating cash flow, borrowing capacity, and potential capital-market access would meet projected cash requirements for at least 12 months. It gave no specific full-year revenue or earnings guidance in the provided filing text.
Risks, contingencies, and unusual items
- Coronavirus: Restrictions, remote work, reduced spending, furloughs or salary reductions, project stoppages, payment disruption, and difficulty winning work were affecting operations. The duration and financial impact were uncertain; the company warned the pandemic could materially adversely affect results and cash flows.
- Cash collection: Delayed payments for U.S. Virgin Islands storm-recovery work increased working capital by more than $150 million from September 2018 to March 2020. AECOM was negotiating to accelerate funding but could not predict timing or amounts.
- Claims and litigation: The DOE denied AECOM’s former affiliate’s 2014 claims; the company intends to appeal and pursue additional claims, but recovery is uncertain. The refinery turnaround dispute and a New York environmental matter also remain unresolved; potential losses were not clearly estimable for these matters.
- Guarantees and project exposure: At March 31, the company reported approximately $4.8 billion of surety bonds and $471.2 million of standby letters of credit. It may face additional project costs, guarantee calls, or joint-venture obligations.
- Other financial items: Pension plans had an aggregate deficit of approximately $345.6 million. Oil and gas business impairment reflected sharply weaker forecasts amid oil-price volatility. A lease-accounting adoption reduced retained earnings by $87.8 million.
- Subsequent financing event: On May 1, 2020, after quarter-end, AECOM amended its credit agreement to permit up to $400 million of secured delayed-draw borrowing for potential repayment or redemption of senior unsecured notes and related costs, and revised certain covenant terms.
Important facts for investors to verify
- Whether the planned disposal of self-perform construction businesses closes on expected terms and timing, and whether contingent Management Services sale consideration is collected.
- How coronavirus disruptions, client payment delays, and the elevated DSO affect operating cash flow and backlog conversion.
- Whether restructuring costs and cash outlays remain within management’s stated ranges, and whether expected cost savings materialize.
- The outcome and potential financial exposure of the DOE, refinery, and environmental matters, as well as the collectability of significant contract claims.
- Debt reduction, covenant headroom, and the use and terms of any borrowings under the May 1 delayed-draw facility.
- Whether total backlog converts to profitable revenue; the filing cautions that awarded backlog may not become contracted work and that backlog can be delayed, reduced, or canceled.