AECOM (ACM) Tops Q3 Earnings, Lags Revenues; View Intact

AECOM’s (NYSE:ACM) adjusted earnings per share for third-quarter fiscal 2016 came in at 81 cents, which surpassed the Zacks Consensus Estimate of 71 cents. Also, the bottom line witnessed 9.5% growth from the year-ago tally of 74 cents.

Adjusted earnings were boosted by solid execution on projects and the company’s strong foothold across diverse geographies and end markets. Also, fall in cost of revenues and lower expenses from acquisitions & integration boosted the bottom line.

Revenue Performance

For third-quarter fiscal 2016, revenues declined 3.1% year over year to $4,408.8 million and missed the Zacks Consensus Estimate of $4,473 million. The top-line decline is attributable to waning sales across all three segments.

Segment-wise, Design & Consulting Services revenues fell 3.7% year over year to $1,920.6 million. On a constant currency basis, organic revenues remained flat. Improved market conditions in the U.K., America and Australia acted as growth drivers. However, these improvements were offset by unimpressive sales in the Middle East.

Construction Services revenues edged down 1.2% to $1,683.8 million on a year-over-year basis. Stellar performance in the building construction business line was largely thwarted by the massive decline in oil and gas business. Especially, an incident of fire in Fort McMurray, Canada hurt operations at this segment in the reported quarter.

On the other hand, Management Services revenues registered a 5.6% decline to $804.4 million on a year-over-year basis.

However, AECOM’s adjusted operating income in third-quarter fiscal 2016 stood at $224.0 million, down from the year-ago tally of $268.6 million. New order wins in the quarter totaled $4.5 billion, mainly driven by two large contracts to construct combined cycle gas power plants in the U.S. and thriving Asia Pacific design markets. Also, AECOM’s total book-to-burn ratio during the quarter stood at 1.02, aiding growth in new orders. At the end of the fiscal third quarter, AECOM’s total backlog was $38.4 billion, down 5%, primarily on account of foreign currency rate fluctuations.

Liquidity and Cash Flow

As of Jun 30, 2016, AECOM’s cash and cash equivalents totaled $628 million compared with $683.9 million as of Sep 30, 2015. Total debt was $4,295.2 million versus $4,606.9 million on Sep 30, 2015.

In the third quarter of fiscal 2016, AECOM generated free cash flow of $191 million, up 27.4% on a year-over-year basis and in sync with its free cash flow target of $600–$800 million for fiscal 2016 and 2017.

2016 Guidance

AECOM reiterated its fiscal 2016 guidance for adjusted earnings at the range of $3.00–$3.40 per share.

Also, AECOM expects to exit the fiscal with synergy savings of $275 million and expenses of $200 million from acquisition and integration activities. Additionally, for full-year 2016, interest expense, excluding acquisition-related amortization, is predicted at around $210 million.

Despite these expenditures, AECOM is well on track to achieve $325-million of synergy savings target by the end of fiscal 2017. Also, while the company predicts adjusted effective tax rate of approximately 24%, capital expenditures have been pegged at $150 million for fiscal 2016.

Impressive performance of AECOM’s Americas Design and Building Construction businesses acted as solid growth drivers for the company’s fiscal third-quarter results. The company’s robust backlog levels highlight its capabilities in domains of design, build, finance and operation. Going forward, we believe the company’s diversified portfolio, which comprises both designing and construction services, and strong foothold in key markets will accelerate growth momentum by mitigating operating risks.

AECOM currently has a Zacks Rank #2 (Buy). Other well-ranked stocks in the industry include Willdan Group, Inc. (NASDAQ:WLDN) , Jacobs Engineering Group Inc. (NYSE:JEC) and A.O. Smith Corp. (NYSE:AOS) . While Willdan Group sports a Zacks Rank #1 (Strong Buy), both Jacobs Engineering and A.O. Smith Corp. hold the same Zacks Rank as AECOM.