AECOM Delivers a Fine Fiscal Q4

Recommended List engineering firm AECOM Technology (ACM, $26.72, 1.25) reported a solid increase in profits for its fiscal fourth quarter this morning despite a slight drop in revenue. Guidance was a bit below the consensus, but the stock nonetheless advanced smartly on the news.

The Los Angeles company reported that its Q4 net income from continuing operations jumped by 27% year over year to $54 million, or 48 cents per share, compared to $43 million, or 40 cents per share, for the same period last year.

Fourth-quarter revenue totaled $1.6 billion, -0.2% lower than the fourth quarter of fiscal year 2008. AECOM’s gross revenue includes a significant amount of pass-through costs. Net revenue was $989 million, -2% lower than the same period last year.

“Our fourth-quarter results were impacted by weakness in our private facilities market and it continued to slow down project activity as our customers focused on strategies for obtaining stimulus funding.” CFO Mike Burke said. “This weakness was offset by strength in Asia, Australia, the Middle East and our federal government services sector in the United States.”

For the full fiscal year 2009, AECOM reported net income from continuing operations of $187 million, or $1.70 per share, up 27% from $147 million, or $1.41 per share, in fiscal 2008.

The EPS from continuing operations excluded 1 cent in Q4 earnings from discontinued operations acquired as part a July 2008 acquisition.

Revenue for fiscal year 2009 was $6.1 billion, 18% higher than fiscal year 2008. For fiscal year 2009, the company’s revenue, net of other direct costs, increased 16% to $3.8 billion.

Analysts were expecting quarterly earnings of 46 cents a share, before items, on revenue of $1.67 billion.

“Our strong performance, in spite of economic pressures, reflects the success of our diversified business model as well as our ability to leverage AECOM’s global network of expertise to expand client relationships,” said CEO John Dionisio.

AECOM said it won over $1.8 billion in new projects in Q4.

The Professional Technical Services (PTS) segment reported revenue of $1.3 billion and operating income of $91 million. Revenue declined by -3.6% from the same period last year while operating income grew by 1%.

The Management Support Services segment (MSS) reported Q4 revenue of $292 million and operating income of $10 million. This represents an increase of 18% over revenue of $247 million for the same period last year and an increase of 64% from operating income of $6 million for the same period last year.

As of September 30th, AECOM had $287 million of total cash and cash equivalents on its books along with just $169 million of debt. AECOM has $600 million in committed bank facilities with over $470 million in unused capacity, so it has plenty of liquidity for additional bolt-on acquisitions. Cash flow from operations increased by 38% to $217 million for the year ended September 30th, 2009.

AECOM has completed three deals since the start of the last quarter. In August it acquired Land Engineering, a California design and construction management firm. Last month, AECOM announced the acquisition of Ellerbe Becket a 450-person architecture interiors and engineering firm.

“This acquisition expands our capability in a number of attractive end markets including healthcare, sports, and education,” Dionisio said. “These markets provide significant global growth opportunities for AECOM in 2010.”

Last week, it announced the purchase of SSI International, which Dionisio said has an established reputation with the U.S. intelligence community for its support operations. U.S. spending on intelligence exceeded $50 billion in 2009, Dionisio noted.

AECOM’s total backlog stood at $9.5 billion on September 30th, a 10% increase year over year and a 3% increase over the backlog balance at June 30th, 2009.

“Our record backlog of $9.5 billion speaks to our ability to grow our book of business in a challenging market,” Burke said. “Additionally, our strong execution against our margin improvement initiatives, and our strong balance sheet, position AECOM well for fiscal year 2010.”

AECOM’s EBITDA margin improved by 133 basis points over the last year and was up 74 basis points for the full year.

Management noted there is also the possibility Congress could pass a second stimulus measure focused on the nation’s transportation infrastructure.

“The second stimulus would increase federal transportation funding by 20% annually for the next two years. It remains clear that with the U.S. employment rate at over 10% that the federal government will continue to invest in infrastructure to create and sustain new jobs,” Dionisio said. “In the past we have been asked about the viability of U.S. state and local funding. First note that only 14% of our global revenue is attributable to this funding source. While this funding has been under pressure,, we expect monies will be available through various sources, namely federal stimulus program, bonds, dedicated tax measures, public-private partnerships, and other dedicated sources such as tolls.”

AECOM guided for fiscal year 2010 EPS to be in the range of $1.90 to $2.00. The midpoint of this range reflects 15% growth in earnings per share. The analyst consensus, however, was for 2010 EPS of $2.02.

“Our guidance includes upside in fiscal year 2010 from the U.S. stimulus package,” Burke said. “As we have said, we expect stimulus spending will start to make a material contribution to our revenue beginning in the second quarter and continuing into 2011. Consequently our 2010 results will accelerate after Q1. You should note we have historically realized 20% of our full-year earnings in the first quarter. However, in the first quarter we expect to be below our historical average earnings distribution.”

BMR Take: AECOM turned in a solid quarter and if anything we think its 2010 guidance is conservative. Importantly the company’s backlog continues to grow, unlike some of its E&C peers. Many of the contract wins that AECOM has been booking have been for projects at the planning level. Funding for the planning stage of a project is often available even if the entity behind the project hasn’t committed to going forward with actual construction.

We also think the company is correct that the government will find a way to pass a substantial highway bill next year: new roads and bridges have long been the kind of tangible job-creating projects that congressmen can tout to the constituents back home, and AECOM has a solid footprint in the sector.

With a pristine balance sheet that is if anything under-leveraged, AECOM is in a strong position to keep growing and expanding its business both in the U.S. and overseas. We continue to rate the stock a “Buy” with a Target of $34.

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Tags: ACM