- Los Angeles-based construction and engineering giant AECOM beat Wall Street earnings estimates for its fiscal third quarter on reduced revenue, increased its guidance for the rest of the year, and said it was resuming discussions to sell its at-risk, self-performing construction business, even as the pace of private contract awards slowed in June amid the continuing spread of the COVID-19 pandemic.
- AECOM reported adjusted earnings per share of $0.55, which bested analysts’ estimates of $0.49 per share, according to RTTNews. However, revenues fell 5% for the period from nearly $3.4 billion in third-quarter 2019 to just under $3.2 billion during the same period in 2020. The company increased its full year adjusted EBITDA guidance to $720 million - $740 million, an 11% growth over the prior year for the middle of the range. It reiterated its full-year free cash flow guidance of between $100 million to $300 million.
- Outgoing CEO Michael S. Burke said given the results, he has accelerated his exit from the company, which was previously announced, handing the reigns over to CFO W. Troy Rudd six weeks early on Aug. 15.
During a conference call with Wall Street analysts, AECOM, which focuses on large infrastructure projects, tied its earnings win, which came after three analysts lowered their estimates for the firm according to Seeking Alpha, to the fact that most of its work had been deemed essential, and said it was seeing high levels of productivity from the 90% of its employees who were working from home.
But it also said some markets were beginning to feel the impacts of funding uncertainty and slower client decision-making, with contracts from some environmental and private clients getting delayed or "effectively pushing that work out to the right.”
The results provide somewhat upbeat, albeit backward looking, data in a sector that has seen increasingly grim outlooks going forward during the COVID-19 pandemic.
Analysts on the company’s conference call questioned AECOM's ability to raise guidance for the rest of the year, given the uncertainty of the infrastructure funding environment.
The American Road and Transportation Builders Association (ARTBA) recently issued a report on cancellations or delays of $9.6 billion in infrastructure projects across various states, while Congress still needs to pass an extension of the FAST Act, which authorizes funding for the country’s highways and public transportation projects, and expires Sept. 30. AECOM said about 25% of its business comes from state and local infrastructure clients.
Rudd told analysts part of the firm’s confidence in its outlook came from its backlog, which increased 16% overall and 18% in the Americas, giving the company clear visibility into revenue potential in the near term. While Rudd acknowledged many states and municipalities had been impacted by funding uncertainty, he also said infrastructure funding is earmarked well in advance.
“The impact of COVID has altered the landscape,” Rudd said. “It is important to note, though, that while state budgets are under pressure, 95% of state transportation department funding is supported by specific user fees. This funding is much more insulated and less discretionary than other markets.”
At the same time, Rudd noted work from the firm’s private clients saw pressure beginning in June.
“Our clients are rethinking some of the decisions that they might be making for the future,” Rudd said. “On the design side of the private markets, we’re seeing the weakness.”
Rudd also updated analysts on plans to sell its at-risk, self-perform construction business as it continues to reposition itself as a pure play professional services firm.
The company sold its Management Services division in January, and it was reportedly in advanced talks with Canadian-based WSP Global about an overall merger of the two companies. While Rudd didn’t specifically address those reports, he provided context to past discussions around the sale of AECOM’s various business units.
“In the second quarter, we were involved in a process that was fairly advanced, expecting transactions to close on some of those businesses early in the third quarter,” Rudd said. “Obviously with the impact of the pandemic, all of those processes stopped and those deals were no longer available.”
But he said more recently, those talks have resumed.
“We’ve kind of gotten to the point where there is enough interest and perhaps enough certainty in the market where some deals can get done,” Rudd said. “We are out in the marketplace with those businesses in discussion with multiple parties.”
While Wall Street applauded the company’s results and guidance, driving the firm’s shares as much as 5% higher over the course of the day, one analyst cautioned that large construction projects don’t typically feel the fallout of economic downturns until long after the fact.
“It was a really solid quarter, and a really solid outlook for Q4,” said Adam Thalhimer, research director at Richmond, Virginia-based investment firm Thomson Davis & Co. “But with these downturns, it really just takes a while to see the impacts. When the pandemic hit, everybody was in full stride.”
He pointed to the Architectural Billings Index (ABI), a measure of nonresidential design activity, which is widely considered a leading indicator of work to come for construction firms. The index declined again in June, following drops in April and May.
“ABI is the best indicator for nonresidential construction,” Thalhimer said. “It’s been really weak for four months. And the question becomes, is that just a COVID hiccup, or is it a real warning sign? With AECOM saying private construction started to get weak in June, maybe it’s a real warning sign.”