AECOM, the world’s trusted infrastructure consulting firm, reported third quarter fiscal 2023 results.
|
Third Quarter Fiscal 2023 |
Year-to-Date Fiscal 2023 |
||||||||||
|
(from Continuing Operations; $ in millions, except EPS) |
As Reported |
Adjusted1 (Non-GAAP) |
As Reported YoY % Change |
Adjusted YoY % Change |
As Reported |
Adjusted1 (Non-GAAP) |
As Reported YoY % Change |
Adjusted YoY % Change |
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|
Revenue |
$3,664 |
-- |
13% |
-- |
$10,536 |
-- |
8% |
-- |
|||
|
Net Service Revenue (NSR)2 |
-- |
$1,704 |
-- |
10% |
-- |
$4,975 |
-- |
8% |
|||
|
Operating Income |
($105) |
$220 |
NM |
11% |
$244 |
$622 |
(47%) |
10% |
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|
Segment Operating Margin3 (on NSR) |
-- |
15.2% |
-- |
+60 bps |
-- |
14.6% |
-- |
+60 bps |
|||
|
Net Income |
($126) |
$132 |
NM |
9% |
$80 |
$379 |
(71%) |
3% |
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|
EPS (Fully Diluted) |
($0.90) |
$0.94 |
NM |
11% |
$0.57 |
$2.70 |
(70%) |
5% |
|||
|
EBITDA4 |
-- |
$247 |
-- |
9% |
-- |
$712 |
-- |
8% |
|||
|
Operating Cash Flow |
$279 |
-- |
36% |
-- |
$411 |
-- |
3% |
-- |
|||
|
Free Cash Flow5 |
-- |
$265 |
-- |
45% |
-- |
$328 |
-- |
0% |
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Third Quarter Fiscal 2023 Highlights
- Revenue increased 13% to $3.7 billion, the operating loss was $105 million, the operating margin was (2.9%), the net loss was $126 million and the diluted loss per share was $0.90.
– Results included a $241 million after-tax, non-cash impairment related to the Company’s decision to transition the non-core AECOM Capital business.
- Organic net service revenue2 growth in the design business was 10%, driven by growth in nearly every major geography.
- The segment adjusted1 operating margin3 expanded by 60 basis points to 15.2%, which reflected strong execution and enabled ongoing investments in organic growth initiatives.
- Total design backlog increased by 10%6 to a new record, driven by a strong win rate and pipeline of opportunities.
– This performance was underpinned by the Company’s disciplined allocation of time and capital to the highest-returning opportunities that expand the long-term earnings capacity of the business and enhance value creation.
- Adjusted1 EBITDA4 and adjusted1 EPS increased by 9% and 11%, respectively. On a constant-currency basis, adjusted 1 EBITDA 4 and adjusted1 EPS increased by 10% and 12%, respectively.
Fiscal 2023 Financial Guidance
- AECOM increased its fiscal 2023 financial guidance.
– The Company increased its adjusted1 EBITDA4 guidance to between $950 million and $970 million and increased its adjusted1 EPS guidance to between $3.63 and $3.73, which would reflect 10% and 11% constant-currency growth at the mid-point of the respective ranges.
– This increase reflects strong year-to-date performance and momentum in the business.
– Additionally, outperformance of the underlying business has more than offset the previous removal of an expected $5 million to $10 million contribution to adjusted1 EBITDA4 from AECOM Capital that was contemplated in the initial guidance.
- The Company’s guidance includes expectations for:
– Organic NSR2 growth accelerating to approximately 8% for the full year.
– A segment adjusted1 operating margin3 of approximately 14.6%, which would represent a 40 basis point increase from the prior year driven by strong execution and inclusive of ongoing investments in growth.
– An average fully diluted share count of 140 million, which reflects only shares repurchased to date, though the Company intends to continue repurchasing stock.
– An effective adjusted tax rate of approximately 25%.
- The Company continues to expect free cash flow5 of between $475 million and $675 million in fiscal 2023, reflecting continued strong conversion of earnings to cash across the business.
Cash Flow, Balance Sheet and Capital Allocation Update
- Third quarter operating cash flow was $279 million, which contributed to year-to-date free cash flow5 of $328 million.
– This performance reflects the high earnings quality and cash generative nature of the Professional Services business, which is a key enabler of the Company’s returns-driven capital allocation policy.
– Through this policy, the Company continues to execute on its commitment to return substantially all available cash flow to investors through share repurchases and dividends.
– The Company returned $75 million to shareholders during the third quarter and has returned more than $220 million to date in fiscal 2023, inclusive of the dividend payment in July.
– In total, the Company has returned approximately $1.7 billion of capital to shareholders through stock repurchases and dividends since September 2020.
Long-Term Fiscal 2024 Financial Targets
- The Company has outperformed the operational expectations built into its long-term 2024 financial plan to date.
– This includes both organic NSR growth and adjusted operating margins that are ahead of the assumptions contemplated in the long-term plan.
– If foreign exchange and interest rates were held constant with the rates contemplated in the original long-term plan, the Company would be on track to deliver greater than $5.00 in adjusted1 EPS in fiscal 2024, which is above both the original $4.30 target and subsequently revised $4.75 target.
- This would represent a 130% increase from fiscal 2020 adjusted1 EPS at the start of the plan.
– Adjusted1 EBITDA4 is also on track to outperform the Company’s original plan on a constant-currency basis.
– The Company intends to provide formal guidance for fiscal 2024 in November.
“We are consistently delivering on our financial and strategic commitments, which is positioning us to outperform our initial guidance for a fourth consecutive year,” said Troy Rudd, AECOM’s chief executive officer. “Our third quarter results included accelerating organic NSR growth, margin expansion to a new quarterly high, double-digit adjusted EPS growth and strong cash flow. In addition, our backlog in the design business reached a new high and our proposals and bids submitted continued to increase at an even faster rate. This performance reflects the benefits of our Think and Act Globally strategy, which is centered on collaboration, a disciplined focus, consistent execution, and returns-focused allocation of time and capital to our highest-returning opportunities. With our expanding competitive advantage, we are confident in delivering continued organic growth and margin expansion towards our longer-term 17% segment adjusted operating margin target, and we are well positioned to continue to deliver long-term shareholder value.”
“Our leading technical capabilities and culture of collaboration are combining to create an unrivaled competitive advantage at a time when end market funding visibility is stronger than ever, which is translating to many commercial successes that are highlighted by our third quarter results,” said Lara Poloni, AECOM’s president. “The three secular megatrends of continued investments in global infrastructure, sustainability and resilience, and long-term energy and supply chain transitions are converging and accelerating to create a multi-decade growth cycle. To meet this demand, we are investing in innovation and delivery efficiencies, which allow us to expand our capacity and take full advantage of our global scale.”
“We are on track to deliver another year of strong performance that exceeds our initial expectations,” said Gaurav Kapoor, AECOM’s chief financial officer. “Our focus on profitable organic growth has resulted in a substantial increase in returns on capital and a record quarterly segment adjusted operating margin. Cash flow remains strong, and we continue to allocate capital based on the highest-returning opportunities, which includes ongoing investments in organic growth as well as the continued return of capital to shareholders, which has been a key element of our substantial value creation.”
Business Segments
Americas
Revenue in the third quarter was $2.8 billion. Net service revenue2 was $1.0 billion. In the design business, revenue increased by 11% and NSR increased by 10%.
Operating income increased by 11% over the prior year to $186 million. On an adjusted1 basis, operating income increased by 11% to $191 million. The operating margin was 6.6% and the adjusted operating margin on NSR2 of 18.8% reflected a 20 basis point increase over the prior year, which was achieved while substantial investments are being made to drive pipeline and backlog growth.
International
Revenue in the third quarter was $834 million. Net service revenue2 was $689 million, a 10% increase from the prior year, and included growth in the Company’s largest and most profitable markets.
Operating income increased by 21% over the prior year to $68 million. On an adjusted basis1, operating income increased by 21% to $68 million. The operating margin was 8.1% and the adjusted operating margin on NSR2 increased by 110 basis points over the prior year to 9.9%, which reflected the Company’s continued focus on pursuing the highest-value opportunities and reaffirms the Company’s confidence in delivering continued margin expansion over time.
AECOM Capital
The Company has signed a term sheet with respect to the AECOM Capital team that has the following impacts:
- Facilitates the transition of the AECOM Capital team to a new platform, while allowing the team to continue to support AECOM’s existing investment vehicles and investments in a manner consistent with their current obligations.
- Reduces and caps expected G&A costs associated with the wind-down of activities.
The Company undertook a project-by-project review of the existing investment portfolio, including an assessment of the potential return on incremental cash contributions that might be required to carry the investments on its balance sheet if current market conditions persist. However, the Company determined that incremental investments to these assets of a non-core business with uncertain returns would be imprudent. As a result of this change in strategy and the expected acceleration of these exits, the Company incurred an after-tax, non-cash impairment of $241 million in the third quarter. The Company anticipates receiving a return of capital of between $50 million and $100 million in the coming years related to realizations of its existing investments.
Balance Sheet
As of June 30, 2023, AECOM had $1.3 billion of total cash and cash equivalents, $2.2 billion of total debt and $962 million of net debt (total debt less cash and cash equivalents). Net leverage7 was 0.9x.
Tax Rate
The effective tax rate was 15.0% in the third quarter. On an adjusted1 basis, the effective tax rate was 27.0%. The adjusted tax rate was derived by re-computing the quarterly effective tax rate on earnings from adjusted net income8. 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.
Conference Call
AECOM is hosting a conference call tomorrow at 8 a.m. Eastern Time, during which management will make a brief presentation focusing on the Company's results, strategy and operating trends. Interested parties can listen to the conference call and view accompanying slides via webcast at https://investors.aecom.com. The webcast will be available for replay following the call.
1 Excludes the impact of certain items, such as restructuring costs, amortization of intangible assets, non-core AECOM Capital and other items. See Regulation G Information for a reconciliation of non-GAAP measures to the comparable GAAP measures.
2 Revenue, less pass-through revenue; growth rates are presented on a constant-currency basis.
3 Reflects segment operating performance, excluding AECOM Capital and G&A.
4 Net income before interest expense, tax expense, depreciation and amortization.
5 Free cash flow is defined as cash flow from operations less capital expenditures, net of proceeds from disposals of property and equipment.
6 On a constant-currency basis.
7 Net leverage is comprised of EBITDA as defined in the Company’s credit agreement dated October 17, 2014, as amended, and total debt on the Company’s financial statements, net of total cash and cash equivalents.
8 Inclusive of non-controlling interest deduction and adjusted for financing charges in interest expense, the amortization of intangible assets and is based on continuing operations.
