AECOM Technology Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Financial statements are unaudited. Amounts below are U.S. dollars unless noted.
Business context
AECOM provides professional technical services (PTS) and management support services (MSS) to public and private clients worldwide. The company reported approximately 43,400 employees. Government contracting is a significant part of its business; management identified government funding and spending decisions as important demand risks.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,968.2 million | $2,067.5 million | $5,794.3 million | $6,074.4 million |
| Gross profit | $108.5 million | $131.8 million | $274.1 million | $309.8 million |
| Operating income | $91.5 million | $111.9 million | $250.4 million | $254.3 million |
| Net income attributable to AECOM | $69.2 million | $70.8 million | $165.8 million | $162.7 million |
| Diluted EPS | $0.70 | $0.70 | $1.69 | $1.58 |
| Gross margin on revenue, net of other direct costs | 9.0% | 10.7% | 7.8% | 8.3% |
Revenue declined 4.8% in the quarter and 4.6% year to date. Gross profit fell 17.7% and 11.5%, respectively, while attributable net income was down 2.3% for the quarter and up 1.9% year to date. The nine-month result included a $37.4 million pretax gain from obtaining control of a Middle East joint venture ($23.4 million after tax), partly offset by an impairment of another joint venture investment.
- Segment trends: PTS revenue fell 2.8% in the quarter and 2.5% year to date; PTS gross margin on revenue net of other direct costs fell to 8.9% and 7.5%, respectively. MSS revenue declined 21.2% and 20.9%, mainly because of reduced U.S. government work in the Middle East. MSS year-to-date gross profit rose modestly, helped by collection of a previously reserved Libya-related receivable.
- Cash flow: Nine-month operating cash flow was $185.7 million, down from $248.5 million. Investing cash outflow was $78.8 million and financing cash outflow was $192.9 million. Cash declined $90.5 million from fiscal year-end.
- Liquidity and debt: June 30 cash and equivalents were $510.1 million, including $90.9 million held in consolidated joint ventures and restricted to those ventures. Working capital was $1.068 billion. Total debt was $1.043 billion, down from $1.173 billion at September 30, 2013. The $1.05 billion revolving facility had $1.041 billion available. The leverage ratio was 2.54 against a maximum of 3.0; AECOM reported compliance with debt covenants.
- Receivables: Net accounts receivable were $2.432 billion; days sales outstanding increased to 96 from 88 at fiscal year-end. Substantially all unbilled receivables were expected to be billed and collected within 12 months.
Outlook, material events and risks
- No specific earnings or revenue guidance is provided. Management said anticipated liquidity sources were sufficient for projected needs for at least 12 months, including in light of financing contemplated for the announced merger. Results for the nine-month period were stated not necessarily to indicate full-year results. AECOM also described seasonal patterns, with the fourth fiscal quarter typically strongest.
- After quarter-end, AECOM agreed to acquire URS Corporation for approximately $4.0 billion. The transaction remained subject to approvals and other closing conditions. AECOM expected to incur about $4.2 billion of additional debt for the cash consideration and refinancing of URS debt, with approximately $5.2 billion of total debt for the combined company after closing. Completion, financing, integration, increased leverage and potential dilution were identified risks; management’s preliminary expectation was that the deal would be accretive to fiscal 2015 GAAP EPS.
- AECOM also acquired Hunt Construction Group on July 24, 2014. Five putative shareholder lawsuits challenging the URS merger were disclosed; AECOM said it intended to defend them.
- AECOM Australia faces claims relating to a traffic forecast for an insolvent motorway project. Claims include approximately A$1.68 billion by receivers and A$76 million by a lender, with some potential overlap, plus a class action involving investors who acquired about A$155 million of securities. AECOM disputes the claims; resolution and potential impact could not be determined, and an unfavorable outcome could materially affect results.
- Other key risks include government budget reductions, contract termination or audit, fixed-price project losses, performance guarantees, international political and currency exposure, joint-venture obligations, pension funding, cybersecurity, and goodwill impairment. Backlog was approximately $20.5 billion, including $9.6 billion contracted and $10.9 billion awarded but unsigned; management cautioned that backlog may be delayed, reduced or canceled.
Important facts for investors to verify
- Whether revenue and margin trends improve, particularly in PTS engineering/program management and MSS government work.
- How much of earnings reflects recurring operations versus the joint-venture control gain and other unusual items.
- Receivables collection, DSO, operating cash flow and the sustainability of receivable sales.
- Final merger financing, closing conditions, post-merger leverage, integration costs and realized synergies.
- Developments and potential exposure in the Australian litigation and URS merger lawsuits.
- Backlog conversion, government funding, covenant headroom and the availability of liquidity after the merger.