AECOM records Q1 earnings decline, finalizes division sale, stays mum on potential WSP merger

AECOM leaders addressed a variety of pressing issues in the company's Q1 earnings call yesterday: a potential merger with Canadian firm WSP, the sale of one of its divisions, a replacement for its retiring CEO and whether the coronavirus is impacting any of its global operations.

The Los Angeles-based construction and engineering firm announced that it has finalized the $2.4 billion sale of its Management Services business. The sale, to private equity firms that are affiliates of American Securities LLC and Lindsay Goldberg LLC, had been anticipated for several months.

Chairman and CEO Michael S. Burke said the sale will allow the company to focus on higher-returning and lower-risk work. Company leaders plan to use the proceeds to accelerate debt reduction and share repurchases, Chief Financial Officer W. Troy Rudd said during the call.

"The net proceeds will allow us to pay a substantial portion of our outstanding debt and repurchase stock, including $1.2 million in prepayable debt," said Rudd.

The newly sold business has rebranded as Amentum, a standalone company with about 20,000 employees that plans to continue the work of AECOM's Management Services division.

"It should be pretty seamless for our customers and our colleagues, our peers in the industry," Mark Whitney, the executive vice president and general manager of Amentum's nuclear and environment sector, told the Aiken Standard. "I think the only real changes will be positive changes, ultimately."

No comment on potential merger

Burke said he would not discuss recent reports that the company is considering a merger with engineering services firm WSP. The proceeds from the Management Services sale could make it more attractive to an M&A suitor, analysts have pointed out.

“We’re not going to comment on speculation in the market about mergers or acquisitions,” Burke said.

Bloomberg reported last month that WSP approached AECOM about the potential transaction, according to sources familiar with the two companies.

Despite the lack of information from AECOM leaders yesterday about a potential WSP deal, analyst Andrew Wittmann, in a written research report after the earnings call, reiterated his belief that talk of an acquisition has merit. "We've previously noted credibility to the WSP takeover reports, and we believe the odds are over 50% that a deal gets done," said Wittmann, a senior research analyst with Baird Equity Research's Industrial Services division.

Wittmann believes the discussions "likely have some merit" for several reasons, including the fact that WSP's stated goals include acquisitive growth and that AECOM leadership is currently transitioning. Burke announced in November that he will retire this year.

AECOM leaders on the earnings call declined to give details on the ongoing search for Burke’s replacement, other than to say “things are all on track in the right way on that front.”

“The board is actively engaged in identifying my successor,” said Burke.

First-quarter results

Burke reported that the company, which has operations in more than 150 countries, has not seen any direct impact from the coronavirus epidemic that has sickened more than 20,000 people, mainly in China. He said that some AECOM employees in the Asia-Pacific region have been affected by mandatory quarantines but not by the virus itself and that the company has told employees in affected areas to work from home until at least Feb. 6.

"We'll continue to evaluate that guidance as we start to see things hopefully return to normal," he said. "At this point we don't expect it to have any impact on our business."

Highlights from the company’s Q1 2020 results reported yesterday include:

Revenue of $3.2 billion, including revenue of $2.5 billion in the Americas division, a 4% decrease from the prior year, primarily due to an expected reduction in disaster recovery activity in the U.S. Virgin Islands, and revenue of $783 million from the international division, a decrease of 1% from the prior year.
Net income of $31 million, a decline of 40% from last year's Q1.
Adjusted EBITDA of $173 million, an increase of 27% over the prior year.

The surge in EBITDA was not due to any one project or initiative, but instead reflects the results of the company’s two-year-long focus on de-risking and increasing profitability and margins, Rudd said. A near-record year-over-year backlog increase is also helping to spur growth and is driven by several factors including:

Increasing state tax revenues.
Gas tax increases in five states, which are key funding sources for public infrastructure investment.
State and city plans for infrastructure investment such as New York Gov. Andrew Cuomo's recently unveiled $275 billion infrastructure plan.
President Donald Trump's recently proposed changes to the National Environmental Policy Act that have demonstrated "political focus on accelerating infrastructure investment."

In addition, the company’s plan to exit 30 countries is nearly 50% complete, he said, as well as a plan to reduce its office footprint by 5 million square feet.