AECOM — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017 unless noted. AECOM provides design and consulting, construction, management, and real estate/public-private partnership services. Results are unaudited.
Financial performance
- Revenue: $5.04 billion, up 2.6%. Gross profit was $170.6 million, up 25.3%; gross margin improved to 3.4% from 2.8%.
- Operating results: Operating income fell 36.1% to $83.9 million, including $63.3 million of restructuring costs and lower joint-venture earnings. Operating margin was 1.7%, versus 2.7%.
- Profit and EPS: Net income attributable to AECOM was $51.5 million, down 53.7%; diluted EPS was $0.32 versus $0.69. The $33.6 million income tax benefit included a $38.1 million release of a valuation allowance on foreign tax credits; the company said this item was not expected to continue affecting the fiscal-year tax rate.
- Segment trends: DCS revenue increased 4.5% to $2.03 billion and gross margin rose to 5.7% from 4.0%. Construction Services revenue declined 5.2% to $2.01 billion and gross margin fell to 0.2% from 1.3%, chiefly reflecting the absence of prior-year favorable performance on a U.S. power contract. Management Services revenue grew 17.3% to $989.4 million and gross margin increased to 4.8% from 3.7%, primarily on a federal project.
- Cash flow: Operating activities used $200.4 million, versus $52.4 million provided a year earlier, driven mainly by working-capital timing and federal payment delays during the partial government shutdown. Investing activities used $59.7 million; financing activities provided $213.2 million, principally reflecting net borrowings. Capital expenditures were $23.6 million.
- Liquidity and working capital: Cash and cash equivalents were $838.3 million at December 31, down from $886.7 million at September 30, 2018. Working capital was $1.21 billion, and the current ratio was approximately 1.20. DSO increased to 82 days from 78 days. A substantial portion of reported cash is held in consolidated joint ventures and restricted to those ventures’ use.
- Debt: Total debt was $3.96 billion, up from $3.67 billion at September 30; long-term debt was $3.76 billion. The credit-agreement leverage ratio was 4.2 and interest-coverage ratio 4.5; AECOM reported compliance with debt covenants. Revolver availability was $1.01 billion. Average effective interest rate was 4.7%.
Material changes and notable items
- AECOM adopted the new revenue-recognition standard on October 1, 2018. Adoption reduced opening retained earnings by $7.0 million, net of tax; current-quarter revenue recognition increased $1.5 million, net of tax. The prior-year comparison was not adjusted.
- Joint-venture earnings fell to $12.5 million from $29.7 million, partly because a prior-year acquisition-related gain did not recur and storm-recovery activity declined.
- AECOM repurchased 1.60 million shares for $52.3 million during the quarter. The company had $820 million remaining under its $1 billion authorization at December 31.
- Remaining North American non-core oil-and-gas assets were classified as held for sale; AECOM expected to complete the sale within 12 months. Fiscal 2018 included $168.2 million of impairment charges related to the disposal group.
- Contracted backlog was approximately $20.7 billion; awarded backlog $36.1 billion; and unconsolidated joint-venture backlog $2.7 billion, totaling $59.5 billion. Remaining unsatisfied performance obligations were $20.1 billion, with about 60% expected to be satisfied within 12 months. Backlog is not guaranteed revenue or profit.
Outlook, risks and contingencies
- Management launched a restructuring plan to improve profitability and forecast about $225 million of annual cost savings, including approximately $85 million in fiscal 2019. The filing gives differing fiscal 2019 restructuring-cost expectations: $80–$90 million in several sections, but $60–$70 million in the liquidity discussion. Verify the intended estimate.
- AECOM planned to exit fixed-price combined-cycle gas power-plant construction and non-core oil-and-gas markets, stop pursuing international at-risk construction opportunities, and evaluate exiting more than 30 countries. It expected to use future free cash flow for debt reduction and share repurchases, and anticipated returns from AECOM Capital asset sales in fiscal 2019.
- The partial U.S. federal government shutdown had delayed payments and pressured operating cash flow. A prolonged or renewed shutdown could further delay payments, reduce demand, disrupt contracts, or lead to workforce reductions. AECOM said expected liquidity sources were sufficient for projected needs for at least 12 months.
- Material disclosed exposures include approximately $5.6 billion of surety bonds and $537 million of standby letters of credit, as well as guarantees supporting projects and joint ventures. The DOE deactivation, demolition, and removal project remains exposed to uncertain recovery of claims and additional completion costs; AECOM warned unrecovered costs could materially affect results.
- Other specific legal matters include a California highway-design dispute with a contractor seeking $70 million in damages, New York environmental allegations, and an approximately $81 million claim by a joint venture against Illinois Power Generating Company. Outcomes or potential losses were not clearly estimable in the filing.
- Pension plans had an aggregate deficit of approximately $381.8 million at December 31. A U.K. court ruling on guaranteed minimum pension benefits could require retroactive benefit increases; the impact was still being assessed.
- Management highlighted risks from high leverage, variable interest rates, fixed-price project losses, government-contract funding and audits, claims and guarantees, international and currency exposure, and project delays or cancellations. A 1% rise in short-term floating rates was estimated to increase quarterly interest expense by $3.7 million.
Important facts for investors to verify
- Whether restructuring costs fall in the $80–$90 million range or the $60–$70 million range stated elsewhere, and whether the projected savings are realized.
- Whether operating cash flow and DSO improve as government payment timing and working capital normalize.
- Construction Services’ project performance and margins, particularly on fixed-price and power projects.
- Progress on non-core asset sales and planned geographic exits, and the resulting cash proceeds and costs.
- Debt reduction, covenant headroom, revolver availability, and the sustainability of share repurchases given leverage and cash generation.
- Developments in the DOE project, other material claims, surety and guarantee exposures, and the potential pension impact of the U.K. ruling.