AECOM delivered some good news in reporting its latest quarter and year-end results on Nov. 12, noting records in both revenue, which rose 8% to $20.2 billion for fiscal 2018 and in backlog, up 14% to $54.1 billion.

But the design-build giant's profit picture was less rosy, with net income down 5% for the fourth quarter year over year to $84 million, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the year at $233 million, below analysts' consensus of $277 million. Analysts said it was the third consecutive annual EBITDA decline.

The company pointed to factors that include delayed asset sales in its AECOM Capital unit, business shortfalls in the Middle East and in the UK and what Chairman and CEO Michael S. Burke referred to as "execution challenges" in its construction segment that he said were "were avoidable and unacceptable."

AECOM confirmed that Construction Services unit President Daniel McQuade, in that role since 2015, has been replaced by corporate Chief Operating Officer Randy Wotring. The company did not say if and when there would be a successor named to the position held by McQuade, who it said has left the company.

While the firm was optimistic in its 2019 outlook, Burke outlined key strategies aimed at reducing its risk profile and boosting profits. These include plans for a $225-million cut in expenses, largely to occur in the first half of next year and related to its design and consulting group.

AECOM did not confirm whether staff cuts are part of the cost reduction.

Burke reiterated that the company had reduced volume related to power plant design and construction, with the firm previously saying it would exit fixed-price combined-cycle gas power plant work. It said the Alliant Energy Riverside CCPP is on schedule and budget.

Burke said the "challenges across its construction services unit impacted our results, including right down to the fourth quarter on a handful of projects." But the firm declined to provide details or identify projects on which it has construction execution issues.

A knowledgable industry source points to the estimated $1.4-billion Gerald Desmond Bridge in Long Beach, Calif, on which Shimmick Construction, acquired by AECOM in 2017, leads the construction joint venture. The source cites issues in deck tension specifications and added work required in pier installation. Duane Kenagy, capital programs executive for the port of Long Beach says foundation pile installation was just completed "and the bridge is starting to take shape," with plans still set to open it by the fourth quarter of next year.  

Even so, project difficulties have resulted in writeoffs for AECOM-Shimmick and other contractors. "It will be a break-even at best," says one executive.

Virginia Express Lanes Project

Also cited for likely execution difficulties is the $500-million I-395 Express Lanes project in northern Virginia, on which AECOM is on a team led by toll operator Transurban in a private concession arrangement. The project was set to open by late next year, but sources say design is reportedly not yet complete. A Virginia DOT spokesperson did not respond by posting time. 

Industry executives also point to signals from AECOM that it may exit its investor role in construction public-private partnerships, following a move announced last month by Skanska AB.

For AECOM, those projects could include the concession for the $1.5-billion LaGuardia Airport AirTrain and possibly the $1.4-billion Michigan I-75 Modernization Project, whose design-build-finance-maintain deal is set to close by year end. AECOM and John Laing are the principal equity investors.

AECOM made an unsuccessful bid earlier this year to privately develop the Kansas City international airport's new single terminal, teamed with Burns & McDonnell. City officials instead chose a competing proposal from developer Edgemoor, which now is proceeding.

AECOM says the firm remains committed to the firm's concessions unit, equity investments and the design, build, finance and operate strategy. A company spokesman says the firm is "actively engaged in closing" the I-75 deal.

Did AECOM Grow Too Fast?

One industry executive speculates whether AECOM "got too big too fast."  Analyst Jamie Cook of Credit Suisse said the investment firm "struggles with the strategic importance of the [construction services] operation and/or whether there is more room to shrink the portfolio and/or streamline the organization."

AECOM emphasized its construction capabilities and plans to pursue "a sizable pipeline of opportunities." It noted the designation last month of a Carlyle Group-led team as preferred developer for Terminal 1 at New York City's JFK Airport, an estimated $7-billion project on which it says AECOM Tishman and The Walsh Group will be the joint-venture construction manager.

AECOM reported strong growth in the Americas, particularly pointing to storm recovery and transportation sector growth, including California voters decision on Nov. 6 to reject Proposition 6, which would have repealed a key project funding tax hike enacted last year.

But AECOM also noted plans so shrink its global footprint, with plans to exit 30 countries producing limited revenue and "focusing management time in markets with greater opportunities," said Burke. The firm did not identify country markets it will drop.

Results in the UK that were "below expectations," said Burke, prompted by Brexit uncertainties as its March 2019 implementation date nears, but it will not leave that market. AECOM also reported a 5% falloff in its Middle East revenue but Burke predicted "a better outlook" over the next year with rising oil prices. He also noted a key contract award on the Melbourne, Australia transit megaproject and growth potential in a strong infrastructure market in Hong Kong.

Government Work

Executives were also bullish on opportunities in management services, with quarter revenue up 14% and backlog up 120% since the start of 2017, Burke touted the firm's "leading position" in federal defense and energy program consulting and noted "a good pipeline in remediation" in the U.S. Defense Dept.

Burke said AECOM has engaged consultant Bain & Co. in a review of its operations, looking for ways to "derisk" its portfolio and continuing to 
"evaluate ... where to place our bets." He did not provide added detail to analysts.

Andrew Wittman, construction sector lead analyst at Baird Equity Research, credited the revenue surge, but commented in a Nov. 12 investor report that "management's inability to deliver profits continues to negatively surprise even the most bearish of observers," adding that AECOM's "board and investors have been surprisingly patient with chronic underperformance; we believe fiscal 2019 is a make or break year."