AECOM FY2018 Form 10-K Summary
Business context and reporting period
AECOM provides engineering, design, construction, program management and related services through Design and Consulting Services (DCS), Construction Services (CS), Management Services (MS) and AECOM Capital (ACAP). This 10-K covers the fiscal year ended September 30, 2018; the filing also reports fourth-quarter results. Figures are U.S. dollars.
Key financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $20.16 billion | $18.20 billion |
| Gross profit / margin | $650.6 million / 3.2% | $683.7 million / 3.8% |
| Operating income / margin | $424.9 million / 2.1% | $653.9 million / 3.6% |
| Net income attributable to AECOM | $136.5 million; diluted EPS $0.84 | $339.4 million; diluted EPS $2.13 |
| Cash from operations | $774.6 million | $696.7 million |
| Cash used in investing / financing | $59.1 million / $624.9 million | $202.7 million / $386.5 million |
Revenue rose 10.7%, but gross profit fell 4.8% and attributable net income fell 59.8%. FY2018 cash capital expenditures were $113.3 million; operating cash flow less those expenditures was approximately $661.3 million. Year-end cash and equivalents were $886.7 million, including $244.6 million held in consolidated joint ventures and restricted to their use. Working capital was $997.6 million, down from $1.104 billion; current assets were $7.127 billion and current liabilities $6.130 billion.
Total debt was $3.674 billion, down from $3.896 billion; long-term debt was $3.484 billion. AECOM had $1.321 billion available under its revolving facility. Its covenant leverage ratio was 3.9 and interest coverage ratio 4.6 at year-end; the company reported compliance with debt covenants. A 1 percentage-point rise in floating interest rates was estimated to increase annual interest expense by $12.2 million.
Material changes versus the prior comparable period
- DCS revenue increased 8.7% to $8.223 billion and gross profit rose 11.2% to $439.2 million, supported in part by U.S. disaster-relief work.
- CS revenue increased 12.9% to $8.239 billion, while gross profit fell 56.5% to $40.4 million and margin declined from 1.3% to 0.5%. Management cited approximately $50 million of North American oil-and-gas losses and weaker project results; acquired businesses and New York high-rise construction contributed to revenue growth.
- MS revenue increased 10.6% to $3.694 billion, but gross profit declined 12.8% to $171.0 million. FY2017 benefited from nonrecurring lawsuit-settlement and Department of Energy incentive-fee items.
- Equity earnings from joint ventures declined to $81.1 million from $141.6 million. FY2017 included a $52 million gain on the sale of an ACAP investment.
- Operating results included a $168.2 million impairment on non-core North American oil-and-gas assets held for sale, including $125.4 million of goodwill impairment. Interest expense increased to $267.5 million, including a $34.5 million premium to redeem $800 million of 5.75% notes.
- Backlog increased 13.9% to $54.1 billion, driven largely by awarded MS work. It included $21.9 billion contracted backlog, $29.2 billion awarded backlog and $3.0 billion attributable to unconsolidated joint ventures; awarded work is not yet fully contracted.
For Q4 FY2018, revenue was $5.306 billion versus $4.856 billion in Q4 FY2017, and net income attributable to AECOM was $84.0 million versus $88.5 million. The large asset impairment was recorded in Q2, not Q4.
Outlook, commentary, risks and unusual items
- Management expected to sell remaining non-core North American oil-and-gas assets within 12 months and expected ACAP asset-sale returns in FY2019.
- A restructuring plan begun in Q1 FY2019 was expected to cost $80–$90 million in the first half of FY2019, including $60–$70 million of cash costs. The company also planned to evaluate exiting more than 30 countries to improve profitability and reduce risk.
- Management identified the FAST Act and possible U.S. infrastructure initiatives as potential supports for infrastructure demand, while noting uncertain and uneven client spending. Steel and aluminum tariffs could raise costs and hurt fixed-price construction margins.
- Government entities represented 53% of FY2018 revenue, including 23% from U.S. federal contracts. Risks include annual appropriations, contract termination or modification, procurement audits and competitive pricing pressure.
- Other material exposures include fixed-price and guaranteed-maximum-price project losses, project claims and delays, substantial surety and guarantee commitments, joint-venture obligations, environmental and professional liability, international political and currency risks, cybersecurity, and pension funding. Defined-benefit plans had an aggregate deficit of about $400.5 million; multiemployer plan contributions were $49.8 million.
- Tax benefits and expenses were affected by the Tax Cuts and Jobs Act, credits, valuation allowances and audit settlements. The company said its Tax Act accounting was incomplete, including its transition-tax calculation and assessment of foreign earnings.
- Management said expected liquidity sources were sufficient for projected cash needs for at least 12 months. Ernst & Young issued unqualified opinions on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether remaining oil-and-gas asset sales close on schedule and at values consistent with the recorded impairment.
- Whether CS project margins recover, particularly given FY2018’s 0.5% gross margin, fixed-price exposure and tariff-related cost risk.
- How much of the $54.1 billion backlog converts to revenue and profit, especially the $29.2 billion awarded but unsigned portion.
- Cash availability after excluding joint-venture cash, working-capital movements and continued receivables sales; also monitor covenant headroom and debt reduction.
- Actual restructuring charges, cash costs and savings, and progress on the proposed country exits.
- Resolution and potential financial effects of the DOE project claims, SR-91 litigation, New York environmental allegations and the Illinois Power Generating Company arbitration; several potential losses were not estimable in the filing.
- Final Tax Act accounting, deferred-tax-asset recoverability and pension funding needs.