Dive Brief:

• Top 10 contractor AECOM posted increased earnings of $41.6 million, or 29 cents per share, on $3.21 billion in revenue for its second fiscal quarter of 2022, the company said Monday. Those profits were 5.6% higher than the $39.4 million it earned a year ago, but revenue was down 1.6% from $3.27 billion. 
• The numbers underperformed the expectations of Wall Street analysts, however, who were looking for profits of $0.37 per share on revenue of $3.39 billion for the three-month period ended March 31, according to stock analysis site Seeking Alpha. In a bright spot, total backlog — the amount of jobs won but not started — increased 4% to $40.8 billion, compared to $39.4 billion a year earlier.
• AECOM executives said they faced higher worker absenteeism during COVID-19's omicron surge in the first three months of 2022, had to manage COVID-related shutdowns in China and wrote off $69 million when they immediately exited Russia after Vladimir Putin invaded Ukraine in February. The firm nevertheless reaffirmed its full-year earnings guidance of $3.30 to $3.50 per share.

Dive Insight:

On an adjusted basis, which doesn't include non-recurring costs or effects from discontinued operations, the company earned $0.83 per share. That actually bested analysts' estimates of $0.78 per share using non-GAAP accounting allowances, and the firm said adjusted operating margins increased to 13.8%, a new high for its fiscal second quarter.

But whereas investors gave peers Tutor Perini and Fluor the benefit of the doubt last week when they reported weaker-than-expected results but reiterated their full-year guidance, AECOM didn't enjoy the same white-glove treatment.

Instead, AECOM shares fell 7.6% to close at $65.76 on a day when the S&P 500 dipped 3.2% to reach its lowest level in a year.

Indeed, in a reverse of last week's construction earnings reactions, investors took AECOM's merely re-affirming its previous guidance in the face of beating adjusted earnings estimates as a de facto signal of tightening ahead. During a conference call to discuss results, Credit Suisse analyst Jamie Cook asked executives why they didn't raise their outlook instead. 

"Your earnings in the first half of the [fiscal] year would imply we're trending to the high end of the range, and you haven't narrowed your guidance," Cook said. "Just any color around that?"

Gaurav Kapoor, AECOM's chief financial officer, responded that given the tumult of the first part of the year, the firm was more comfortable playing it safe.

"The team continues to deliver in a pretty challenging environment with all the macroeconomic headwinds we're talking about. And one would argue today, the environment may be sometimes more unstable than it ever has been," Kapoor said. "We're going to be prudently conservative, given the environment we're operating in."

Outlook strong, recession possible

Troy Rudd, AECOM's CEO, played up the company's strengths on the call. He emphasized that its government clients were enjoying healthy balance sheets, and that the passing of an omnibus spending bill earlier this year means funds from the $1.2 trillion Infrastructure Investment and Jobs Act were closer to becoming reality.

"The outlook for the next several years is as strong as it's ever been. State and local clients have record levels of funding and are set additionally to benefit from the IIJA," said Rudd. "There is clearly a long-term investment in infrastructure that's being made, and we're exposed to it in all of our businesses."

He highlighted a new tool the company developed to help government clients navigate the complex web of requirements to qualify for grant funding through the infrastructure act. Rudd also reiterated that the company hasn't been materially impacted by soaring inflation, even though construction industry groups have sounded numerous alarms about the trend.

Instead, he said the firm has language in its contracts to pass along increased costs to clients, who haven't been pushing back. The proof, he said, is in its results and improved operating margins.

"You would think that we might see a slowdown because of inflation, but we're not," Rudd said. "That's evidenced in our growing backlog and our growing pipeline."

Indeed, in the firm's construction management business, Rudd said the firm was winning opportunities in airport construction, convention centers and sports arenas amid strength in commercial and residential real estate.

Despite those positive attributes, however, Rudd said the company was taking steps to prepare for the possibility of a weakening economy ahead. Economists have recently raised the specter of a recession, brought on by higher interest rates.

"Obviously, there's a discussion of a possible slowdown or recession, it's not something we certainly ever hope for, but you always have to be prepared for it," Rudd said. "We've shown in our business in the last few years that we're agile and we have the ability to act."