AECOM (NYSE: ACM) — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, three months ended December 31, 2019; comparisons are to the three months ended December 31, 2018 unless otherwise noted. Unaudited results. AECOM provides technical and professional services, including planning, engineering, design and construction management. The filing presents Management Services and self-perform at-risk construction businesses as discontinued operations.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Continuing-operations revenue | $3.236 billion | $3.356 billion |
| Gross profit / margin | $165.8 million / 5.1% | $123.4 million / 3.7% |
| Operating income | $87.2 million | $30.8 million |
| Income from continuing operations attributable to AECOM | $30.9 million | $32.0 million |
| Net income attributable to AECOM, including discontinued operations | $40.6 million | $51.5 million |
| Diluted EPS, including discontinued operations | $0.25 | $0.32 |
| Cash flow from operating activities | $(206.9) million | $(200.4) million |
Revenue declined 3.6%, while gross profit increased 34.4% and gross margin improved 1.4 percentage points. Management attributed the margin improvement principally to stronger project execution and lower costs following restructuring. Continuing-operations income attributable to AECOM was nearly flat; total attributable net income and diluted EPS declined, in part because discontinued-operations income was lower. Interest expense was $40.4 million, versus $39.4 million.
Continuing-segment revenue was $2.452 billion in Americas, down 4.2%, and $783.1 million in International, down 1.1%. Gross margins improved to 5.7% from 4.2% in Americas and to 3.3% from 1.6% in International. AECOM Capital revenue was $0.5 million.
Cash, liquidity and debt
- Cash and cash equivalents at December 31 were $725.4 million for continuing operations; $887.4 million including cash classified as held for sale. Total cash decreased $193.0 million from September 30.
- Working capital was $1.006 billion, down from $1.073 billion at September 30. Days sales outstanding, including contract assets net of contract liabilities, rose to 100 days from 94.
- Total debt was $3.504 billion, including $111.6 million of short-term debt and current maturities; long-term debt on the balance sheet was $3.358 billion. The filing reports a 4.9% average effective debt interest rate.
- Available capacity under the revolving credit facility was $1.194 billion. AECOM reported a 3.6 consolidated leverage ratio and 4.9 interest coverage ratio, and compliance with credit-agreement covenants at quarter-end.
- Cash used in investing activities was $68.1 million; financing activities provided $79.3 million. Operating cash use reflected working-capital timing, including delayed collections in Management Services.
Material changes, outlook and risks
- Portfolio changes: AECOM sold its Management Services business on January 31, 2020, after quarter-end, for a stated purchase price of $2.405 billion, subject to customary adjustments and including approximately $150 million of contingent consideration related to prior-work claims. The company also planned to sell its self-perform at-risk civil infrastructure, power, and oil and gas construction businesses. Both were presented as discontinued operations.
- Restructuring: Management expected fiscal 2020 restructuring costs of $160 million–$190 million and total cash costs of $185 million–$205 million, including about $40 million of real-estate-related capital expenditures. Q1 restructuring expense was $44.9 million. The filing does not provide formal full-year revenue or earnings guidance.
- Backlog: At December 31, contracted backlog was approximately $17.6 billion, awarded backlog $18.1 billion, and unconsolidated joint-venture backlog $0.8 billion, totaling $36.5 billion. Remaining performance obligations were $17.1 billion, with about 60% expected to be satisfied within 12 months. Backlog may be delayed, reduced or canceled and is not a guarantee of revenue or profit.
- Cash collection risk: Delays on U.S. Virgin Islands storm-recovery contracts had increased working capital by more than $150 million since September 30, 2018. AECOM was negotiating to accelerate funding but gave no assurance on timing or amount of payments.
- Contingencies: Performance support included $4.8 billion of surety bonds and approximately $499.3 million of standby letters of credit. The DOE denied a former affiliate’s $103 million claim; further claims and alternative breach-of-contract claims were also pending, with recovery uncertain. A refinery dispute involved a former affiliate’s claim for approximately $144 million and the owner’s asserted damages and offsets of $93 million; the potential outcome was not reasonably estimable.
- Other risks and unusual items: AECOM cited high leverage, variable-rate debt, government funding and payment uncertainty, fixed-price project losses, international and Hong Kong exposure, and possible coronavirus-related disruption to China and Asia operations, whose impact could not yet be estimated. Adoption of the lease standard on October 1 reduced retained earnings by $87.8 million, primarily due to impairment of leased office assets. Q1 cash flow was seasonally weak; the filing says the first fiscal quarter is typically the weakest.
Most important facts for investors to verify
- Final cash proceeds and any purchase-price adjustments or contingent consideration from the Management Services sale, and how proceeds affect debt.
- Progress, timing and cash costs of the planned self-perform construction exits and restructuring, compared with management’s estimates.
- Collection and funding developments on Virgin Islands work, including the effect on working capital and DSO.
- Trends in continuing-business revenue, margins, backlog conversion and operating cash flow after the portfolio changes.
- Resolution and potential financial impact of the DOE and refinery disputes, and AECOM’s remaining guarantees, insurance and other contingent obligations.