AECOM plans next year to spin off the business that contracts with the U.S. Departments of Energy and Defense into a separate publicly traded company.
The Los Angeles-based infrastructure multinational said Monday its Board of Directors unanimously signed off on the separation, which is expected to be completed in the second half of 2020.
The new entity, so far unnamed, will then own stakes in a number of existing contracts for the Energy Department’s Office of Environmental Management (EM), and aim to increase its business with DOE’s semiautonomous National Nuclear Security Administration (NNSA): the steward of the U.S. nuclear weapons arsenal.
In a message Monday to employees, AECOM Chairman and CEO Michael Burke called the upcoming separation “a strategic move that unlocks new value and will accelerate long-term growth for both companies.”
“On its own in 2020, Management Services will immediately become a competitive powerhouse in the fragmented government services sector — a Top 20 provider with more than 25,000 employees, $4 billion in revenue and the ability to more quickly expand and acquire the capabilities it needs to meet evolving and complex client demands,” Burke wrote.
John Vollmer, current president of the Management Services group, is expected to take his leadership team intact to the new company. AECOM Chief Operating Officer Randy Wotring will become chairman of the new business’ Board of Directors.
In AECOM’s latest earnings report in May, for its fiscal 2019 second quarter, Management Services reported slightly more than $1 billion in revenue. That represented a $14% rise on a year-over-basis, from $897.8 million in the same quarter of 2018. It was roughly 20% of AECOM’s total revenue for the second quarter.
In its last full fiscal year, 2018, Management Services brought in $3.7 billion in revenue, which generated $200 million in operating income and $239 in adjusted operating income. The company expects the business in the current fiscal 2019 to generate roughly $4 billion in revenue, with a 6% adjusted operating margin.
Management Services derives roughly 75% of its revenue from the Energy and Defense departments. It has a standing backlog of $20 billion and anticipates another $30 billion in upcoming opportunities.
The spinoff is part of a larger restructuring at AECOM, which includes plans to withdraw from over 30 nations and to end its pursuit of what it called “international at-risk construction opportunities.”
“Like our Management Services business, AECOM will benefit greatly from this change,” Burke stated in his message to employees. “It allows us to concentrate our focus and investments on global growth opportunities in transportation, water, energy, buildings and more that play to our industry-leading strengths in design, engineering, planning, building construction and other high-return professional services.”
In a telephone presentation Monday to financial analysts, AECOM executives said a stand-alone government services company offers a number of benefits for investors, including greater flexibility to seek deals in a growing market, a “laser” focus on that work, and a reduced risk profile.
While industry sources generally avoided saying much about the announcement this week, one noted a potential pitfall in the spinoff: that federal agencies might have concerns about issuing a major contract to the new company that no longer has all of AECOM’s financial resources as a backstop against unexpected complications in a project.
“We are actively seeking to expand the DOE practice into the NNSA market,” Wotring said in Monday’s conference call. “We expect to pursue a number of Tier 2 opportunities ahead of a larger Tier 1 opportunity in the coming three to five years.”
AECOM, through Management Services, has been a major player at the NNSA’s nuclear weapons labs. The company was until November 2018 a partner on the management and operations contractor for the Los Alamos National Laboratory in New Mexico and remains part of the prime team for the Lawrence Livermore National Laboratory in California.
The two labs designed all of the nuclear weapons in the U.S. stockpile and retain a role in maintaining and modernizing those weapons.
AECOM left Los Alamos last year after a series of high-profile nuclear safety lapses that led the NNSA to put the management pact for the nation’s oldest nuclear weapons laboratory back on the street almost a decade before the final option on then-incumbent Los Alamos National Security’s deal.
Los Alamos National Security was a partnership of Bechtel, BWXT, the University of California, and AECOM following its 2014 acquisition of URS. It was succeeded by Triad National Security, a joint venture of Battelle Memorial Institute, the University of California, and Texas A&M University.
Contract awards that occur alongside corporate restructurings can be complex, as the existing and new entities disentangle their roles, the industry source noted.
In 2016, the NNSA canceled a newly awarded management and operations contract for the Nevada National Security Site upon determining that the Lockheed Martin business that had won the award had been merged with a subsidiary of Leidos. The DOE branch said it had not been informed of the change of ownership. A different team eventually won the contract.
