- Building on the success of AECOM’s strategic value creating and margin enhancing actions to-date, as demonstrated by the 100 basis point year-to-date adjusted operating margin improvement in the DCS segment, AECOM announced additional restructuring actions expected to commence later this year to further enhance margins by aligning the Company’s cost structure with its transforming business profile.
– The Company is increasing its adjusted operating margin1 target for the DCS segment in fiscal 2020 by 50 basis points to at least 8.0%, which would represent a 210 basis point increase from the fiscal 2018 margin; this guidance continues to reflect the expected benefit in fiscal 2020 from the already-executed $225 million G&A reduction.
– These actions underscore the Company’s commitment to delivering on its expectation for fiscal 2020 adjusted EBITDA to be in excess of $1 billion.
– The Company will provide formal financial guidance for fiscal 2020 and additional details on the restructuring actions as part of its fourth quarter earnings presentation and at its Investor Day in December.
- On June 17th, the Company announced its intent to pursue a separation of the Management Services segment. The Company continues to make significant progress on the many activities associated with the separation.
- In addition, the Company continues to take actions to de-risk its portfolio with the goal of further honing management’s focus on its higher-returning and lower-risk professional services businesses where its competitive advantages are greatest, including the recently closed sales of its Oil & Gas Production Services and International Development businesses as well as ongoing actions to exit more than 30 countries.
- The Company is also continuing its accelerated review of its at-risk construction businesses with a stated goal of having zero self-perform at-risk construction exposure.
“The strategic actions we have taken over the past two years and continue to take are delivering positive results, including 14% year-to-date adjusted EBITDA growth, a 100 basis point increase in year-to-date DCS margins including a three year high margin achieved in the third quarter, and continued near record backlog across the business,” said Michael S. Burke, AECOM’s chairman and chief executive officer. “We are focused on executing our plan to maximize shareholder value and best position for long-term success, including a continued emphasis on de-risking the business, execution of the planned separation of the Management Services segment, and maximizing the benefit from the already-completed $225 million G&A reduction. To further build on this momentum, today we announced additional margin-enhancing cost reduction efforts that we expect will deliver another substantial increase in the DCS margin in fiscal 2020. Importantly, our markets are growing and, as a result, we are increasingly confident in our ability to achieve our long-term financial and strategic objectives and in driving substantial shareholder value.”
“We are pleased with our strong earnings performance, and the already-realized and anticipated benefits from our value creation efforts,” said W. Troy Rudd, AECOM’s chief financial officer. “We are focused on our lower-risk and higher-returning businesses that generate consistently strong free cash flow and have contributed to us achieving free cash flow near the mid-point of our guidance for the past four years. However, year-to-date cash flow performance was below expectations. This continues to be driven by timing, and we are actively focused on driving towards the low end of our annual guidance range, including our continued focus on collecting a large outstanding balance from storm recovery efforts for our client in the U.S. Virgin Islands, which is expected to be fully funded by FEMA. Importantly, total debt declined by $81 million, and we are executing on our capital allocation priorities and leverage targets through further debt reduction and EBITDA growth.”
Wins and Backlog
Wins were $3.4 billion and resulted in a book-to-burn ratio4 of 0.6. The book-to-burn ratio in the DCS segment was 1.0. Wins in the CS and MS segments are inherently lumpier, as evidenced by 1.9 and 1.5 book-to-burn ratios in the fiscal second quarter, respectively, and 0.5 and 0.4 book-to-burn ratios in the fiscal third quarter. Importantly, year-to-date wins of $21.2 billion were near a record level, and total backlog of nearly $59 billion is up 10%2 over the prior year and provides for strong visibility.
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 third quarter was $2.1 billion and decreased by 2%. Constant-currency organic3 revenue was unchanged from the prior year. Excluding the negative impact from the reduction in storm recovery activity in the U.S. Virgin Islands, constant-currency organic revenue increased slightly. This performance included continued solid underlying growth in the Americas and varied growth in international design markets.
Operating income was $147 million compared to $120 million in the year-ago period. On an adjusted basis, operating income1 was $151 million compared to $128 million in the year-ago period. The adjusted operating margin of 7.4% was a 130 basis point increase over the prior year and marked the highest margin in the past three years, which reflected the benefits from the already-executed $225 million of G&A reductions, solid execution against a near record level of backlog and continued favorable end market trends.
Construction Services (CS)
The CS segment provides construction services for energy, sports, commercial, industrial, and public and private infrastructure clients.
Revenue in the third quarter was $1.9 billion and decreased by 10%. Constant-currency organic3 revenue decreased by 9% due primarily to a decline in the Building Construction business as activities on major projects transition to new large wins that have yet to begin construction and the anticipated decline in the Power business following the Company’s decision to extract itself from the fixed-price combined cycle gas power market and as a large project nears completion.
Operating income was $29 million compared to $9 million in the year-ago period. On an adjusted basis, operating income1 was $49 million compared to $34 million in the year-ago period. The increase in adjusted operating income was due to solid performance across the portfolio of projects.
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 third quarter was $1.0 billion, and set a new quarterly record. Revenue and organic3 revenue increased by 10%, marking the fourth consecutive quarter of double-digit revenue growth. This performance included strong conversion of a record backlog and a continued strong funding environment for the U.S. Departments of Defense and Energy clients that represent approximately 77% of the segment’s revenue.
Operating income was $52 million compared to $66 million in the year-ago period. On an adjusted basis, operating income1 was $61 million compared to $76 million in the year-ago period. Excluding a benefit from an anticipated recovery on a federal project included in the prior year quarter, adjusted operating income was consistent with the prior year.
AECOM Capital (ACAP)
The ACAP segment invests in and develops real estate projects. Revenue in the third quarter was $1.4 million and operating income was $0.7 million.
Tax Rate
The effective tax rate in the third quarter was 25.8%. On an adjusted basis, the effective tax rate was 25.0%. The adjusted tax rate was derived by re-computing the annual effective tax rate on earnings from adjusted net income.6 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 third quarter was $77 million and free cash flow5 was $52 million. Cash flow reflected normal second half weighted seasonality to collections. However, the Company continues to pursue a substantial balance related to storm recovery work in the U.S. Virgin Islands, the timing of which remains uncertain. As a result, the Company now anticipates its annual free cash flow for fiscal 2019 to be at the lower end of its annual $600 million to $800 million guidance range.
