The top brass at AECOM said this week it has received plenty of positive feedback since announcing June 17 that it would spin off the business segment that contracts with the Department of Energy and other federal agencies.
“We are moving ahead of schedule” toward separating the Management Services line into its own publicly traded company, Chairman and CEO Michael Burke said Tuesday during the Los Angeles-based engineering company’s quarterly earnings call. Nonetheless, the spinoff of is in its early stages and remains on schedule to be completed in the latter half of AECOM’s fiscal 2020.
While Burke declined to discuss specifics, he said market reaction confirms the business is “a highly valued asset.” AECOM’s stock price, which started the year at around $26 per share, went from $33.40 the Friday before the spinoff news to $35.17 on the Monday of the announcement. After peaking at $37.85 on June 28 it has fallen off somewhat to $34.40 late Thursday.
Management Services includes AECOM’s contracts for the U.S. Departments of Defense and Energy, along with its commercial nuclear decommissioning operations. Once it becomes a stand-alone venture, the as-yet-unnamed government services company will have more than 25,000 employees and $4 billion in annual revenue, AECOM says.
Burke declined to elaborate on the status of the spinoff process during the call.
“We have seen revenue at double-digit growth in the last four quarters” at Management Services, AECOM Chief Operating Officer Randall Wotring said during the call. The business line has a high “win rate” on government contracts, he added.
During the call, analyst Michael Dudas of Vertical Research Partners seemed to inquire whether AECOM might consider simply selling the business line to another entity, rather than pursuing a spinoff. “Have you received interest from other parties about different structures?”
“We feel even more confident about that belief today than we did before the announcement, and I really can’t comment on the specifics because we’re early in the process, but we’re just very confident based on the initial steps in the process,” Burke said.
Initial conversations with unspecified people in the market have validated AECOM’s view regarding Management Services’ value, and “there is no question that we’re on the right path here,” Burke said. The CEO later added, as a public company, AECOM would consider all avenues to “unlock the value” of the Management Services business, but the spinoff appears to be the best option.
Earlier in the call, Wotring said AECOM’s success record with the Energy Department’s nuclear cleanup office gives Management Services an edge over most other players in securing new contracts in the weapons complex. “We’ve been in this market for over 50 years and have consistently been a top performer,” he said, pointing to a recent 94% performance evaluation that AECOM-led Savannah River Remediation received for liquid waste management at the Savannah River Site in South Carolina.
AECOM is the lead partner in joint ventures with long-term Energy Department contracts collectively worth $17 billion at Savannah River, the Oak Ridge Site in Tennessee, the Waste Isolation Pilot Plant in New Mexico, and the Hanford Site in Washington state.
The most valuable piece of business, a roughly $7 billion contract for management of the radioactive waste in underground tanks at Hanford, expires at the end of next month, barring another short-term extension.
The Energy Department is expected to award a new 10-year contract that could be worth $10 billion to $15 billion for closure of the Hanford tanks sometime in the next several months.
Wotring predicted the Energy Department’s Hanford Central Plateau Cleanup award could arrive in the next three to four weeks. The remediation contract that includes demolition of the Plutonium Finishing Plant is a potential 10-year agreement worth between $7 billion and $12 billion. AECOM is in the running for both.
Quarterly Revenue Dips
AECOM reported $4.98 billion in revenue for its third quarter of fiscal 2019, 3.3% less than the $5.15 billion it took in during the same period a year ago.
Revenue at the government contractor was affected by slower-than-expected storm recovery work payment by the Federal Emergency Management Agency in the U.S. Virgin Islands. AECOM is repairing homes as part of disaster recovery efforts from Hurricanes Irma and Maria in 2017, but has reportedly experienced problems with subcontractor payments and federal red tape on the job.
The company’s net income for the quarter ended June 30 was $84 million, or $0.52 per share, compared to about $61 million, or $0.37 per share, in the same quarter in fiscal 2018. That represents a roughly 41% improvement, according to AECOM’s earnings press release.
AECOM also reiterated its prior earnings guidance of between $2.60 and $2.90 per share for the fiscal year. The company continues to exit business in 30 countries where returns are less than desired.
The Management Services segment reported a new quarterly revenue record of more than $1 billion, about 10% higher than the $935 million a year ago, thanks to strong funding for DOE and defense contracts held by AECOM.
However, Management Services’ operating income was down from $66 million a year ago to $52 million in the latest quarter.
“As referenced in our earnings release, excluding the impact of a milestone payment on a project in the DOE market in 2018, our adjusted operating income in the third quarter was consistent with the prior year,” company spokesman Keith Wood said by email Thursday. Importantly, on a year-to-date basis, AECOM’s adjusted operating income increased by 11% over the prior year, he added.
The company’s Construction Services segment recorded revenue of about $1.9 billion, down from $2.1 billion a year ago. Design and Consulting Services took in just over $2 billion for the quarter, dropping slightly from $2.1 billion in the third quarter of fiscal 2018.
