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AECOM (ACM) Q1 Earnings Surpass Estimates, Backlog Solid

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AECOM (ACM - Free Report) reported first-quarter fiscal 2019 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Adjusted earnings of 56 cents per share surpassed the consensus mark of 52 cents by 7.7%. However, the reported figure decreased 1.8% on a year-over-year basis.

Revenues of $5,037.5 million missed the consensus estimate of $5,064 million by 0.5%. The figure, however, increased 2.6% on a year-over-year basis. Moreover, AECOM achieved 5% organic growth in the quarter, which marked the ninth-consecutive quarter of positive organic growth, owing to higher-margin Americas design and Management Services or MS business.

Segment Details

Design & Consulting Services (DCS) revenues rose 5% year over year to $2,029.7 million. On a constant-currency basis, organic revenues also increased 7%, backed by strong performance in the company’s transportation and water markets in the Americas. Positive contribution from storm recovery efforts in the Southeastern United States and Caribbean also added to the positives. Adjusted operating income of $126.4 million grew 38.1% year over year.

Construction Services (CS) revenues were down 5% on a year-over-year basis to $2,014.5 million. On a constant-currency basis, organic revenues declined 2%. The downside was due to lower contribution from Building Construction and Power. Adjusted operating income in the segment was down 39.6% from a year ago to $31 million.

Management Services (MS) revenues recorded a year-over-year increase of 17% to $989.4 million. Also, on an organic basis, revenues recorded growth of the same percentage, reflecting stellar improvement in backlog, and strong funding for the U.S. Departments of Defense and Energy clients. Adjusted operating income also improved 21.2% from a year ago to $59.8 million in the reported quarter.

AECOM Capital (ACAP), which develops real estate, public private partnership (P3) and infrastructure projects, contributed $3.9 million to the total revenues. The segment incurred operating loss of $0.3 million.

AECOM Price, Consensus and EPS Surprise

AECOM Price, Consensus and EPS Surprise | AECOM Quote

Operating Highlights

AECOM’s gross margin expanded 60 basis points (bps) to 3.4% from the prior-year figure. Adjusted operating income in the quarter under review amounted to $184 million, up 16% from the year-ago level. Adjusted EBITDA also increased 16% year over year to $207 million.

At the end of the fiscal first quarter, the company’s total backlog was recorded at $59.5 billion, up 22% from a year ago.

New order wins during the quarter were recorded at $11 billion, up 80% from the prior-year period. The company’s total book-to-burn ratio was 2.0, given higher contribution from all the segments and a significant 1.3 book-to-burn ratio in the MS segment.

Liquidity & Cash Flow

As of Dec 31, 2018, AECOM’s cash and cash equivalents totaled $838.3 million compared with $886.7 million on Sep 30, 2018.

As of Dec 31, 2018, total debt (excluding unamortized debt issuance cost) came in at $3.96 billion, increasing from $3.67 billion at Sep 30, 2018-end. AECOM used operating cash flow of $200 million in the quarter and $222 million of free cash flow.

Fiscal 2019 Guidance

AECOM has reaffirmed its fiscal 2019 guidance, with adjusted EBITDA in the range of $920-$960 million. Adjusted EPS is expected within $2.60-$2.90 per share.

In terms of spending, the company’s adjusted interest expenses (excluding amortization of deferred financing fees) are expected to be nearly $200 million and capital expenditure is projected at about $120 million for fiscal 2019. Free cash flow is likely to be in the $600-$800 million range. However, AECOM is expected to incur $80-$90 million of restructuring costs in fiscal 2019.

The company is confident about its General and Administrative (G&A) reduction program, which is expected to generate $225 million of annual cost savings every year till fiscal 2021. Moreover, the company expects to generate $85 million of realized savings in fiscal 2019.

Strategic Actions

In order to improve profitability and de-risk its business profile, AECOM has already initiated a $225 million G&A reduction plan. The action is anticipated to benefit its DCS segment, with fiscal 2019 adjusted operating margin expectation of more than 7%, reflecting year-over-year growth of 110 bps.

The company is likely to exit more than 30 countries, in order to prioritize investments in markets with higher growth prospects and competitive advantages. It has entered into a joint venture with Canyon Partners for ACAP, which will support AECOM’s overhead costs.

Its adjusted EBITDA expectation reflects 12% mid-point growth from the prior-year figure, supported by strong payback on the above-mentioned initiatives.

Zacks Rank & Key Picks

Currently, AECOM carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same industry include Jacobs Engineering Group Inc. (JEC - Free Report) , Gates Industrial Corporation plc (GTES - Free Report) and Altair Engineering Inc. (ALTR - Free Report) , each carrying a Zacks Rank #2 (Buy). You can the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Jacobs’ earnings per share are expected to increase 16.6% in fiscal 2019.

Gates Industrial is expected to record an EPS growth rate of 9.7% in 2019.

Altair Engineering has an expected earnings growth rate of 69.8% for 2019.

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