AECOM — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended June 30, 2018; comparative periods ended June 30, 2017. Amounts are in U.S. dollars. AECOM provides design and consulting, construction, management, and capital-investment services.
Financial performance and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $5.148B | $4.561B | $14.850B | $13.347B |
| Gross profit / margin | $185.2M / 3.6% | $175.2M / 3.8% | $462.6M / 3.1% | $513.6M / 3.8% |
| Operating income | $160.8M | $207.7M | $247.9M | $492.0M |
| Net income attributable to AECOM | $60.9M | $101.3M | $52.5M | $250.9M |
| Diluted EPS | $0.37 | $0.64 | $0.32 | $1.58 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $242.7M | $445.4M |
- Quarterly revenue rose 12.9%, but nine-month revenue growth of 11.3% did not translate into higher year-to-date profit: nine-month operating income fell 49.6% and AECOM-attributable net income fell 79.1%.
- At June 30, cash and cash equivalents were $801.4M, including $173.1M held in consolidated joint ventures and restricted to their use. Accounts receivable, net, was $5.448B; working capital was $1.154B. DSO increased to 80 days from 77 at September 30, 2017.
- Total debt was $3.930B, versus $3.896B at September 30, 2017. The company reported a 4.1 consolidated leverage ratio and 4.6 interest coverage ratio and said it complied with credit-agreement covenants. Revolver availability was $1.220B.
- Nine-month investing cash outflow was $117.1M and financing cash outflow was $123.8M. Cash ended the period at $801.4M, down $1.0M from fiscal year-end.
Material changes and unusual items
- Construction Services revenue increased 14.9% year to date, but gross profit fell 62.1% to $22.9M; margin declined to 0.4% from 1.1%. AECOM cited losses in North American oil and gas and two building/civil construction projects.
- Design and Consulting Services revenue rose 8.6% year to date, with gross profit up 7.4%. Management Services revenue rose 9.2%, while gross profit fell 21.9%, partly because prior-year DOE incentive fees and a favorable federal lawsuit settlement did not recur.
- AECOM recorded a $168.2M impairment in the first nine months on North American non-core oil and gas assets classified as held for sale, including $125.4M of goodwill impairment. A portion was sold; the company expected to sell the remaining assets within 12 months.
- Equity in joint-venture earnings fell to $55.6M from $109.7M for the nine months. The prior-year period included a $45M gain from the sale of AECOM Capital’s interest in a real-estate joint venture.
- Nine-month interest expense rose to $212.0M from $177.0M, including a $34.5M premium paid to redeem $800M of 5.75% notes due 2022. A March 2018 credit-agreement refinancing increased revolver capacity to $1.35B and reduced stated borrowing margins.
- The nine-month income-tax benefit was $38.4M. Results included a $41.7M net benefit related to U.S. tax-law changes and a $33.8M benefit from changes in uncertain tax positions; the company said its Tax Act accounting remained incomplete.
Outlook, management commentary, risks and contingencies
- Management said anticipated operating cash flows, existing cash, revolver capacity, and potential debt or equity issuance should meet projected cash requirements for at least 12 months. It planned to begin repurchases under its $1B authorization in August 2018, with free cash flow directed toward debt reduction and repurchases.
- The company expected the FAST Act to support transportation work, while noting that spending patterns could remain uneven. It also cited potential infrastructure initiatives as an opportunity, conditional on enactment.
- Management expected to sell remaining non-core North American oil and gas assets within 12 months and said additional restructuring costs might occur. It removed approximately $150M of oil and gas and $500M of power projects from backlog, which it expected to lower FY2018 earnings, and said it did not expect to pursue new fixed-price combined-cycle gas power-plant EPC projects.
- Key risks include cyclical client and government spending, contract funding and termination, fixed-price project losses and input-cost inflation (including steel and aluminum tariffs), leverage and variable interest rates, foreign-exchange and geopolitical exposure, joint-venture and subcontractor performance, and legal, environmental, insurance, pension, and cybersecurity matters.
- Disclosed matters include a DOE project with disputed claims and uncertain recovery, an SR-91 contract dispute with a $70M cross-claim, and a New York environmental enforcement matter; the company said excess potential losses for certain matters could not be reasonably estimated. Outstanding surety bonds were approximately $5.5B and standby letters of credit approximately $505.8M.
- The company reported $53.8B of total backlog at June 30, comprising $23.1B contracted, $27.6B awarded but not yet signed, and $3.1B in unconsolidated joint ventures; it cautioned that backlog may be adjusted, delayed, or canceled and is not a guarantee of revenue or profit.
Most important facts for investors to verify
- Whether construction-project losses and the weak Construction Services margin persist, and whether the held-for-sale assets are sold on expected terms.
- Cash conversion and receivables collection, given lower year-to-date operating cash flow and higher DSO; distinguish unrestricted corporate cash from joint-venture cash.
- Debt trajectory, covenant headroom, refinancing terms, and the balance between planned share repurchases and debt reduction.
- Resolution and accounting consequences of the Tax Act, uncertain tax positions, DOE-related claims, and other disclosed legal contingencies.
- Backlog conversion and funding, particularly the proportion awarded but unsigned, and exposure to government appropriations and fixed-price work.