“I am proud of the entire organization for delivering a strong year of financial performance and record quarterly free cash flow, which continues our history of strong cash flow performance,” said W. Troy Rudd, AECOM’s chief financial officer. “Importantly, we are delivering profitable growth and expect another year of strong results in fiscal 2020, which we expect will provide significant opportunities to return capital to shareholders through stock repurchases under our $1 billion Board authorization.”
Wins and Backlog
Wins in the fourth quarter were $6.3 billion, resulting in a 1.2 book-to-burn ratio9, including a greater than 1 book-to-burn ratio in all three segments. Full year wins of $27.5 billion reflected a 1.3 book-to-burn ratio and similarly strong contributions from across the Company. Total backlog of nearly $60 billion is up 11%3 over the prior year. Importantly, the Company’s backlog in its pro forma Professional Services7 business, which comprise the DCS and Construction Management businesses, is at more than $36 billion, a 19% increase from the prior year, driven by a 1.4 book-to-burn ratio in the year and 6% growth in DCS contracted backlog to a new high.
Business Segments
Design & Consulting Services (DCS)
The DCS segment delivers planning, consulting, architectural and engineering design services to commercial and government clients worldwide in markets such as transportation, facilities, environmental, energy, water and government.
Revenue in the fourth quarter was $2.1 billion. Constant-currency organic4 revenue declined by 2%, with underlying growth offset by an approximately 500 basis point negative impact from lower U.S. Virgin Island storm recovery work. Full year revenue was $8.3 billion, a 1% increase over the prior year. Full year constant-currency organic revenue increased by 3%.
Net service revenue5 was $1.4 billion and $5.7 billion in the fourth quarter and full year, respectively, and on a constant-currency organic basis increased by 2% and increased by 1%. Performance included continued underlying growth in the Americas design business and positive growth in international design markets.
Fourth quarter and full year operating income was $150 million and $552 million, respectively. On an adjusted basis, fourth quarter and full year operating income1 was $166 million and $584 million, respectively. The fourth quarter adjusted operating margin of 8.0% reflected a 190 basis point increase over the prior year and contributed to a full year adjusted operating margin of 7.1%, which marked a 120 basis point increase over the prior year and exceeded the Company’s guidance. Both the fourth quarter and full year adjusted operating margins set new records, respectively. This strong margin performance was the result of the successful completion of $225 million of G&A reductions, ongoing additional restructuring actions, solid execution, continued favorable end markets trends and strong backlog performance.
Construction Services (CS)
The CS segment provides construction services for energy, sports, commercial, industrial, and public and private infrastructure clients.
Revenue in the fourth quarter was $1.9 billion. Constant-currency organic4 revenue decreased by 6%. Full year revenue was $7.8 billion, a decrease of 3% on an organic basis, which was primarily due to the completion of large fixed-priced Power projects and as a large combined cycle gas power plant project neared completion and was not replaced with new work due to the Company’s decision to extract itself from the fixed priced combined cycle gas power plant market.
Net service revenue5 in the Construction Management business was $155 million and $547 million in the fourth quarter and full year, respectively. The performance was due primarily to the phasing of recent wins, which are beginning construction and are expected to result in revenue growth in fiscal 2020.
Fourth quarter and full year operating loss was $569 million and $506 million, respectively, primarily due to a non-cash goodwill charge relating to the Company’s at-risk, self-perform construction businesses as described above. On an adjusted basis, fourth quarter and full year operating income1 was $36 million and $153 million, respectively. Full year adjusted operating income declined slightly from the prior year, reflecting a decline in the Power business, which was partially offset by strong execution in the Construction Management business, which maintains nearly four years of revenue visibility in backlog and is expected to deliver double-digit earnings growth in fiscal 2020 as recent large wins begin construction.
Management Services (MS)
The MS segment provides program and facilities management and maintenance, training, logistics, consulting, technical assistance and systems-integration services and information technology services, primarily for agencies of the U.S. government, national governments around the world and commercial customers.
Revenue in the fourth quarter was $1.1 billion, a 7% increase over the prior year. Organic4 revenue in the quarter increased by 8%. Full year revenue was $4.1 billion, an 11% increase over the prior year. Full year organic revenue increased by 12%.
Operating income was $51 million and $206 million in the fourth quarter and full year, respectively. On an adjusted basis, operating income1 was $70 million and $253 million in the fourth quarter and full year, respectively. Results for the fourth quarter and the full year were consistent with expectations and represented strong execution across the portfolio of projects.
AECOM Capital (ACAP)
The ACAP segment invests in and develops real estate projects. Revenue in the fourth quarter was $1 million and operating income was $11 million. Full year revenue was $8 million and operating income was $21 million.
In the fourth quarter, AECOM Capital Real Estate achieved the final close on a $500 million private equity fund with Canyon Partners targeting build-to-core investments in the top 25 markets in the U.S. across a range of property types. Where applicable, AECOM will also look to provide design, construction management and engineering services to the respective projects.
Tax Rate
The effective tax rate was 5.1% and 0.1% in the fourth quarter and full year, respectively. On an adjusted basis, the effective tax rate was 25.0% and 24.4% in the fourth quarter and full year, respectively. The adjusted tax rate was derived by re-computing the annual effective tax rate on earnings from adjusted net income.10 The adjusted tax expense differs from the GAAP tax expense based on the taxability or deductibility and tax rate applied to each of the adjustments.
Cash Flow
Operating cash flow for the fourth quarter was $794 million and free cash flow2 was $779 million, both of which set new records for the Company. For the full year, AECOM generated operating cash flow of $778 million and free cash flow of $694 million, which marked the fifth consecutive year of at least $600 million of free cash flow.
Balance Sheet and Capital Allocation
As of September 30, 2019, AECOM had $1.08 billion of total cash and cash equivalents, $3.4 billion of total debt, $2.4 billion of net debt and $1.33 billion in unused capacity under its $1.35 billion revolving credit facility. Total debt declined by $413 million compared to the third quarter, resulting in a net leverage6 ratio of 2.2.
Restructuring Update
Consistent with its previously-announced restructuring actions that are expected to deliver at least 210 basis points of adjusted operating margin expansion in the DCS segment in fiscal 2020 compared to fiscal 2018 and to address stranded costs associated with the sale of the Management Services business and the intended exit of at-risk, self-perform construction businesses, the Company expects to incur the following in fiscal 2020:
- Restructuring expenses of between $130 million and $160 million.
- Total cash costs of between $160 million to $180 million, including capital expenditures associated with real estate restructuring of approximately $40 million.
- Accelerated depreciation of $40 million associated with the transition of a project management tool.
The Company estimates total stranded costs associated with the Management Services sale of approximately $40 million, with a substantial majority expected to be eliminated by the end of fiscal 2020, with the balance to be eliminated in fiscal 2021.
