AECOM reports Q2 FY 2018 results

Los Angeles — AECOM reported second quarter fiscal year (Q2 FY) revenue of $4.8 billion. Net loss and diluted loss per share were $120 million and $0.75 in the second quarter, respectively, which includes a $168 million non-cash charge on non-core Oil & Gas assets held for sale. On an adjusted basis, diluted earnings per share1 was $0.67.

Q2 2018 accomplishments:

• Organic revenue increased by 5 percent, which was led by growth in the higher-margin Design & Consulting Services (DCS) and Management Services (MS) segments and marked the sixth consecutive quarter of positive organic growth.
• Wins of $6.9 billion were highlighted by a greater than 1 book-to-burn ratio in all three segments; in addition, the company has already delivered more than $6 billion of wins in April in MS, which will be added to backlog in the fiscal third quarter.
• Total backlog reached a new record of $50 billion, an 18 percent increase over the prior year, which includes a continued favorable margin mix shift in backlog to the DCS and MS segments.
• Free cash flow of $95 million contributed to $129 of free cash flow for the first half of fiscal 2018; the company continues to expect annual free cash flow within its guidance range of between $600 million and $800 million.

Strategic decisions and financial outlook

Following management’s strategic review of the company’s risk profile and due to unfavorable market conditions, the company will no longer pursue fixed-price combined-cycle gas power plant EPC projects.

Importantly, construction of Alliant’s Riverside combined-cycle gas plant, AECOM’s only such project currently underway, is expected to be completed profitably and on schedule in 2019.

The company also intends to sell and exit certain non-core Oil & Gas operations.

The company is reducing its adjusted EBITDA guidance from $910 million to $880 million, primarily from the removal of two combined-cycle gas power plant EPC projects from backlog that were expected to positively contribute to earnings this year.

“Our revenue growth and $6.9 billion of wins reflect the competitive advantages of our diversified mix of geographies and leading capabilities, strong presence as a leading government services contractor, and strengthening markets in the Americas,” said Michael S. Burke, AECOM’s chairman and chief executive officer. “Our backlog is at a new high of $50 billion, which is an 18 percent year-over-year increase with the fastest growth in our higher-margin DCS and MS segments. Importantly, this momentum is continuing into the third quarter, including more than $6 billion of wins since early April in MS.

“Furthermore, with our intention to sell and exit certain non-core Oil & Gas operations and our decision to no longer pursue fixed price gas power plant EPC work, we are positioning the business to deliver consistent operational and financial performance for our shareholders,” Burke said. “As a result, we are confident in reiterating our industry-leading five-year financial targets through fiscal 2022, including a 5+ percent organic revenue CAGR, a 7+ percent adjusted EBITDA CAGR, a 12 percent to 15 percent adjusted EPS CAGR and at least $3.5 billion of free cash flow.”

“We are pleased with our cash flow performance through the first half of the year,” said W. Troy Rudd, AECOM’s chief financial officer. “During the quarter, we undertook a refinancing of our credit facility, including the repayment of our 2022 Senior Notes, which improved the cost and extended the maturity profile of our debt. With this transaction and our progress through the first half of the fiscal year, we are positioned to operate the business and execute our capital allocation policy with a great degree of certainty.”

Wins and backlog

Wins were $6.9 billion, and resulted in a book-to-burn ratio of 1.4. Wins were highlighted by strength across the business, including greater than 1 book-to-burn ratios in the DCS, CS and MS segments. Total backlog increased 18 percent over the prior-year period to $50 billion, and continued to reflect a favorable mix shift to the higher-margin DCS and MS segments.

Business Segments

Design & Consulting Services (DCS) — The DCS segment delivers planning, consulting, architectural and engineering design services to commercial and government clients worldwide in markets such as transportation, facilities, environmental, energy, water and government.

Revenue in the second quarter was $2.0 billion. Constant-currency organic revenue increased by 5 percent and included strong performance in the company’s transportation and water markets in the Americas, which are benefiting from improved levels of funding and a solid backlog position.

Operating income was $123 million compared to $113 million in the year-ago period. On an adjusted basis, operating income was $130 million compared to $120 million in the year-ago period. Profitability in the Americas and APAC regions was strong, which was partially offset by slower growth and profitability in the EMIA region.

Construction Services (CS) — The CS segment provides construction services for energy, sports, commercial, industrial, and public and private infrastructure clients.

Revenue in the second quarter was $1.9 billion. Constant-currency organic revenue increased by 4 percent, led by continued strong growth in the Building Construction business. Total revenue growth included strong performance from the recently acquired Shimmick Construction business.

Operating loss was $180 million compared to operating income of $26 million in the year-ago period due to a non-cash charge relating to Oil & Gas assets held for sale as described above. On an adjusted basis, operating income was $26 million compared to $34 million in the year-ago period, primarily due to two projects in the building construction and civil construction businesses.

Management Services (MS) — The MS segment provides program and facilities management and maintenance, training, logistics, consulting, technical assistance and systems-integration services and information technology services, primarily for agencies of the U.S. government, national governments around the world and commercial customers.

Revenue in the second quarter was $898 million. Organic revenue increased by 9 percent, which included strong performance across the company’s portfolio of projects.

Operating income was $43 million compared to $52 million in the year-ago period. On an adjusted basis, operating income was $53 million compared to $65 million in the year-ago period.

Tax rate

The effective tax rate in the second quarter was 18 percent. On an adjusted basis, the effective tax rate was 2 percent. The adjusted tax rate was derived by re-computing the expected annual effective tax rate on earnings from adjusted net income. The adjusted tax expense differs from the GAAP tax expense based on the taxability or deductibility and tax rate applied to each of the adjustments.

Cash flow

Operating cash flow for the second quarter was $118 million and free cash flow was $95 million. The company remains on track with its annual free cash flow guidance of $600 million to $800 million for fiscal 2018 and to achieve 2.5x net debt-to-EBITDA by the end of fiscal year 2018 and thereafter intends to return substantially all free cash flow to investors under a $1 billion stock repurchase authorization.

Balance sheet

As of March 31, 2018, AECOM had $867 million of total cash and cash equivalents, $3.1 billion of net debt and $1.16 billion in unused capacity under its $1.35 billion revolving credit facility.

Financial impacts of strategic decisions

AECOM also announced its intention to no longer pursue fixed-price combined-cycle gas power plant EPC projects and to sell and exit certain non-core Oil & Gas operations.

The following financial impacts are associated with these decisions:

• Classified certain Oil & Gas assets as held for sale.
• Removed $500 million of backlog associated with two fixed-price combined-cycle gas power plant EPC contracts.
• Reduced fiscal year 2018 adjusted EBITDA guidance by $30 million to $880 million, primarily to reflect the removal of anticipated profit contributions from the decision to no longer proceed on the aforementioned two EPC contracts.
• Expected proceeds from the Oil & Gas business sales will be deployed to accelerate debt reduction towards the company’s 2.5x net leverage target, which is expected to be achieved by the end of fiscal year 2018.