AECOM's first quarter 2020 results, announced on Feb. 3, revealed a 4% drop in global revenue but better profitability news as the firm sheds some riskier construction work—informing investors that the completed sale of its government-focused management services unit for $2.4 billion, now renamed as Amentum and owned by private equity firms, will repay "a substantial portion" of outstanding debt.
Overall revenue fell to $3.23 billion, said the design giant, noting "a large outstanding balance" for hurricane recovery work in the U.S. Virgin Islands. International revenue fell 1% over last year's first quarter while net service revenue was "relatively flat" year over year. The firm says it is about halfway through a plan to exit about 30 non-US markets.
Chairman and CEO Michael Burke also noted negative results in the UK and Hong Kong, tied to current political upheavals. But he pointed to execution of "initiatives aimed at reducing overhead, simplifying our business, leveraging our scale through greater utilization of best cost, global design and shared services centers and de-risking our portfolio."
Burke noted some precautions against the coronavirus for its China-based employees but emphasized "the greater China area is a single-digit percentage of our net service revenue."
AECOM reported adjusted EBITDA of $173 million for the quarter was up 27% from its 2019 figure for the same period, with backlog of $36.5 billion up 2% compared to last year's first quarter.
"We started the year with a strong first quarter on nearly every key metric and leading indicator. Our professional services margins are near all-time highs," said CFO W. Troy Rudd.
"What became clear ... is that the profitability of the Americas business carries all the weight, with an adjusted operating margin of 16.6%, compared to the International adjusted operating margins of 4.7%," said Jamie Cook, Credit Suisse managing director of equity research and its construction sector analyst. "As such, International is where the opportunity lies, with peers reporting margins closer to 10%."
Burke told analysts that "with several large pursuits moving into the award phase ... we expect backlog to reach a new record in the second quarter."
While analysts had difficulty with all financial comparisons because of restructured results reporting, "overall, we think investors will look through the messiness of the reported numbers and see the business as on track," said Steven Fisher, industry analyst for UBS.
Andrew Wittmann, sector analyst for Baird Equity, said the positive earnings results in the typically slow first quarter, along with AECOM's revenue drop, "suggests very good flow-through and this "seems likely to repeat," particularly if weak international margins improve in the second half of 2020, as he expects.
The new stand-alone Amentum, with an estimated 20,000 employees leaving AECOM, will continue in supporting government and commercial clients in the U.S. and overseas, with "mission support and sustainment, threat mitiigation, facility maintenance, nuclear and environmental remediation, strategic capabilities engineering, information technology and intelligence support," said its president John C. Vollmer, who formerly headed the unit in AECOM.
The firm had announced its intent to spin off the management services unit last June, with pressure from activist investor Starboard Value, which added three directors to the AECOM board. The deal closed on Jan. 31.
But U.S. Energy Dept. officials are reportedly set to "have discussions" with Amentum and its new P.E. owners to assess the firms' financial capability to support continued large-scale cleanup projects at agency sites, such as the $6.8-billion tank waste management contract held by an AECOM-led team at the Hanford nuclear site in Washington state, a top agency cleanup executive told industry publication Weapons Complex Monitor on Jan. 31.
Rudd said AECOM is "advancing toward our goal of exiting nearly all at-risk, self-perform construction businesses by the end of this year. He noted that despite "a few challenges" in work on a combined cycle power plant construction project that would hike its final cost, the plant would be turned over to the client in the next quarter.
Burke declined to confirm or deny rampant market rumors of a merger with or acquisition by Montreal design giant WSP, and, related to his successor, only said that the board search committee had identified "both internal and external candidates."
The firm said previously Burke would step down before its annual meeting in May.
According to Wittmann, "acquisition chatter seems real and has merit," with the analyst speculating "the odds are over 50% that a deal gets done. We'll be watching for signs ... including buyback activity and CEO appointment announcements."
Also being watched is AECOM's success in completing its de-risking process.
Burke reiterated to analysts that "it's not a great time ... to sell construction-related assets."
But he also emphasized: "we are not going to give the businesses away. Those businesses are profitable. They have working capital investments that we expect to harvest in the very near term here."