AECOM Technology Corporation (ACM) Memo

Company  Description  AECOM  is  a  premier,  fully  integrated  infrastructure  and  support  services  firm.  ACM  is  a  leading  solutions  provider  for  supporting  professional,  technical,  and  management  solutions  for  diverse  industries  across  end  markets.  The  company  is  a  leader  in  all  of  the  key  markets  that  it  serves,  including  transportation,  facilities,  environment,  energy,  oil  and  gas,  water,  high-­‐rise  buildings  and  government.  AECOM  specializes  in  providing  integrated  services  for  planning,  construction  and  maintenance  of  infrastructures  that  includes  consulting,  architecture,  engineering  as  well  as  managing  the  requirements  for  energy,  water  and  environment.  AECOM’s  businesses  have  been  classified  into  two  distinct  segments:  Professional  Technical  Services  (PTS),  92.2%  of  revenue  and  Management  Support  Services  (MSS),  7.8%  of  revenue.  Thesis  /  Key  Points  Ø Diversified  Core  Business  Portfolio  and  Smart  Repositioning  

§ AECOM’s  diversified  portfolio  comprises  both  designing  and  construction  services.  The  company’s  business  is  also  spread  across  a  number  of  key  markets  that  mitigates  operating  risks.  o AECOM   has   been   going   strong   in   the   U.S.   and   Europe,   the   Middle-­‐East   and   Africa   (EMEA)   (See   Exhibit1).   Also,   AECOM   is  

strengthening   its   core   business   by   developing   its   integrated   service   platform   and   gaining   global   expertise   as   a   leading  infrastructure  provider  (See  Exhibit2).  For  example,  the  company’s  construction  services  business   in  EMEA  witnessed  revenue  growth  of  100%  and  backlog  growth  of  50%  in  the  year.  

§ ACM  has   been   repositioning   its  MSS   business   to  make   it  more   profitable.   The   company   is   taking   initiative   to   shift   from  higher-­‐volume  lower-­‐margin  international  and  designing  work  to  lower-­‐volume  higher-­‐margin  construction  and  maintenance  work  in  U.S.,  primarily  in  markets  other  than  the  Department  of  Defense.  o The  business   is   showing  signs  of   improvement  with   increasing  number  of  new  orders  and  desired  backlog.   In   fiscal  2014,   the  

segment’s   backlog   increased   51%   y-­‐o-­‐y   to   $2B   with   significant   reduction   in   the   overseas   contingency   operations   work   and  domestic  designation  work.   The   segment  operating   income   recorded   y-­‐o-­‐y   growth  of   21%,  while  operating  margin   increased  about  600  basis  points  in  the  year.  

o With   the   overall   fiscal   2014   revenue   increased   2.5%   to   $8.35B,   the   PTS   segment’s   revenue   grew   27%,   driven   by   growth   in  construction  services  in  the  metropolitan  cities  and  continued  strength  in  the  international  market.    

² The   strong  organic   growth   trends   in   the   international   and   construction   services  markets  more   than  offset   the  weak  America’s  designation  business,  which  has  already  been  the  repositioning  target.  

o The  MSS  segment’s  revenue  fell  9%,  which  gave  the  company  a  huge  market  misperception.    ² The  decrease   in  MSS   revenue  was  mainly  due   to  decreased   services  provided   to   the  U.S.   government   in   the  Middle  

East,  which  would  just  be  a  one-­‐time  event.  However,  it  is  the  MSS  business  that  can  provide  continuously  increasing  growth  on  strong  backlog  and  profit  growth  amid  business  repositioning.  

o The  accumulated  backlog  began  to  be  converted  to  sales  at  a  faster  rate,  driven  primarily  by  private  infrastructure  investments.  Those  backlogs  will   contribute   greatly   to   the   construction   services   revenue.  ACM  closed   the   fiscal   year  with   total   backlog  of  $25.1B.  (See  Exhibit3)  

o The  emerging  trends  that  show  central  bank  easing  policies  need  to  be  accompanied  by  fiscal  stimulus  to  have  a  lasting  impact  on   the   real   economy   and   positive   inflation.   The   construction   of   infrastructure   is   one   of   the  most   often  ways   to   boost   fiscal  spending  and  provide  faster  rate  for  backlog  conversion.  

Ø Continuously  Strategic  Acquisitions  position  ACM  as  the  industry  leader.  § AECOM  continuously   evaluates   the  marketplace   for   acquisition  opportunities.   The   company   remains   focused  on  acquiring   firms,  which  have  proven  expertise  in  their  domain.  o In   the   past   few   years,   AECOM   has   made   key   acquisitions   like   Tishman   Construction   and   Bovis   Lend   Lease,   which   are   now  

contributing  significantly  to  its  growth.  o AECOM  has  acquired  Hunt  Construction  Group  in  the  middle  of  2014.  The  acquisition  of  Hunt  added  significant  contracting  and  

construction  capabilities  to  AECOM’s  primarily  architectural  and  engineering  expertise.  The  synergies  would  be  easy  to  grab  as  in  many  U.S.  projects,  Hunt  was  often  a  partner  rather  than  a  competitor  for  AECOM  due  to  Hunt’s  specialization  in  construction  and  contracting,  as  well  as  its  focus  on  the  U.S.  markets,  whereas  AECOM  derives  ~60%  of  sales  from  overseas.  Also,  AECOM  has  expertise   primarily   in   the   commercial   tall   buildings,   residential   and   hospitality   sectors;   Hunt   added   a   strong   position   in   the  sports,  health  care  and  aviation  market.  

o Recently,  AECOM  closed  the  acquisition  of  URS  Corp.  for  about  $4B,  becoming  one  of  the  largest  companies  in  the  engineering  and  construction  industry.  Following  the  acquisition,  AECOM  intends  to   leverage  URS’  knowledge  and  expertise   in  key  sectors  like  construction,  oil  &  gas,  power  and  government  services,  which  are  expected  to  be  significant  growth  drivers.  (See  Exhibit4)  

² The   acquisition   of   URS   was   largely   driven   by   the   need   to   stay   the   number   one   global   design   company   due   to   the  acquisition-­‐driven  pressure  from  Jacobs  Engineering  Group,  Inc.  

² The  deal  was  expected  to  return  over  25%  in  the  very  first  year  of  operation  while  realizing  cost  savings  of  about  $250  million  by  the  end  of  fiscal  2016.  

 

Name:    Xiao  Dong   Phone  #:  (434)  466-­‐2061   College/School:  COMM   Year:  2016  

AECOM Technology Corporation (ACM) Memo Misperception  Ø For  MSS  segment,  the  9%  net  service  revenue  decline  indicates  27%  y-­‐o-­‐y  to  $98  million  in  the  Q3,  which  showed  the  unsuccessful  

business  repositioning.  § However,   as   indicated   above,   the   decline  was   owing   to   the   project-­‐repositioning   initiative   undertaken   by   the   company   to   shift  focus   from   lower-­‐margin  projects   to  higher-­‐margin   services.   In   the   future,   the  MSS  business  will  provide  continuously   increasing  growth  on  strong  backlog  and  profit  growth  amid  business  repositioning.  

Ø The  synergies  from  the  acquisition  of  URS  would  hard  to  find.  Both  URS  and  ACM  have  struggled  with  falling  or  stagnant  sales  and  their  sales  often  overlap  so  some  sales  are  likely  to  be  cannibalized.  § However,  the  acquisition  makes  strong  strategic  sense  for  both  companies.  The  main  competitor,  Jacobs  Engineering  Group  jumped  from  the  spot  number  four  to  number  two  on  the  list  of  the  top  global  design  firms  as  well  as  the  top  U.S.  design  firms  ranked  by  revenue  and  it  surpassed  the  URS.  After  the  acquisition,  AECOM  will  maintain  a  large  lead  in  its  number  one  status,  which  would  be  a   great   selling  point   for   its   sales   and  marketing   teams.  And  URS   could  better  off   than  dropping   to   a  number   three  or   four  with  uncertain  prospects.  

§ However,   the   acquisition   was   aimed   for   a   “complementary   acquisition”   since   AECOM   and   URS   had   highly   complementary  operations  and  culture  have  been  solidify  confirmed.  Also,  URS  could  bring  strong  sector  expertise   in   important  end  markets   for  AECOM  and   accelerate   AECOM’s   strategy   of   creating   an   integrated   delivery   platform  with   superior   capabilities   to   design,   build,  finance  and  operate  infrastructure  assets  around  the  world.  

VAR  Ø When   asking   about  URS’   strong   presence   on   the   oil&gas   segment,  which   could   provide   complementary   benefit   for   AECOM,  

“One  of  the  best  opportunities  near  term  is  in  the  industrial  segment  along  the  Gulf  Coast  –  that  was  one  area  within  URS  that  was  poised  for  resurgence.”    -­‐  Adam  Thalhimer,  analyst  at  BB&T  Capital  Markets  

Ø When   asking   about   the   acquisition   of   URS   by   AECOM,   “You   couldn’t   have   had   a   better   marriage   of   two   companies   that  complement  each  other’s  skill  sets,  scope  and  capabilities  so  well…  they  both  have  the  federal  government  as  a  large  customer,  but  there  is  very  little  overlap  in  what  they  do”    -­‐  Will  Gabrielski,  analyst  at  Stephens  Inc.  

Ø Recently,  Greenlight   Capital   by  David   Einhorn,   disclosed   a   new  position   in  AECOM.   The   position   accounted   for   1.48%  of   the  fund’s  portfolio.  “Although  the  company  reported  soft  fourth-­‐quarter  and  fiscal  2014  results…  the  top  line  improved  driven  by  the   strength   in   Professional   Technical   Services…  we  were   also   impressed   by   the   company’s   backlog   levels   and  Management  Support  Services  business  would  benefit  from  the  restricting  initiatives.”  –  Yingying  Zhang,  intern  analyst  at  Greenlight  Capital.  

How  It  Plays  Out  Ø Internally,  AECOM  has  been  the  market  leader  in  almost  every  key  ending  market.  To  further  maintain  the  profitability  and  grab  

more  market  shares,  ACM  has  initiated  the  business  repositioning  which  aimed  to  transform  the  focus  of  business  from  the  low  margin   PTS   business   to   the   higher  margin  MSS   segment.   The  MSS   segment   could   provide   continuous   backlog   and   revenue  growth  in  the  future.  Those  backlogs  will  contribute  greatly  to  the  construction  services  revenue  and  require  higher  conversion  rate,  which  has  been  executed  through  the  increasing  government  infrastructure  investments  as  the  result  of  the  fiscal  stimulus.  

Ø Externally,  AECOM  continuous  to  expand  the  company  through  strategic  acquisitions.  The  recent  acquisition  of  Hunt  and  URS  proved  the  right  direction  of  the  executive  board  that  enlarged  the  company  market  share   in   its  core  business  market.  Those  strategic  acquisitions  not  only  increased  the  organic  sales  growth  but  also  provided  the  potential  for  the  synergies,  which  could  benefit  the  company  through  increasing  backlogs  and  enlarging  business  operational  segments.  

Risks  /  What  Signs  Would  Indicate  We  Are  Wrong?  Ø AECOM  derives  a  considerable  share  of  revenue  from  government  projects.  Therefore,  the  company  tends  to  be  impacted  by  

the  changes  in  government’s  rules  and  regulations.  Moreover,  these  projects  are  mostly  long-­‐term  contracts  and  any  budgetary  changes  in  the  tenure  can  affect  AECOM’s  business.  Also  AECOM  will  be  negatively  impacted  if  the  U.S.  government  reduces  the  percentage  of  outsourced  projects.  

Ø A  significant  portion  of  the  company’s  business   is  on  fixed-­‐price  basis.  As  the  company  generally  executes  these  contracts  via  third  parties,  it  runs  the  risks  of  loss  if  the  sub-­‐contractors  are  not  able  to  do  the  required  amount  of  work  in  scheduled  time.  

Ø The  company’s  long-­‐term  debt  remains  a  burden  going  forward,  given  its  recent  acquisitions.  The  total  enterprise  value  of  the  URS  acquisition  will  reach  about  $6  billion  including  the  debt  held  by  URS.  Further  the  company  intends  to  utilize  its  free  cash  flow  for  repaying  long-­‐term  debts  with  an  aim  to  reduce  leverage  ratio  to  2.0x  by  2017  (See  Exhibit5).  

Signposts  /  Follow-­‐Up  Ø The  future  conversion  situation  and  usage  of  backlogs  Ø The  upcoming  10-­‐K  file  in  the  fiscal  2014  year  Ø Debt  payoff  situation  for  the  acquisition  of  URS  Ø Global  government  easing  policies,  especially  the  focus  on  

fiscal  stimulus  Ø Any  further  potential  bid  opportunities  for  AECOM    Ø The   progress   of   the   transformational   deal   for   AMC   and  

URS:  the  Barclays  Center  and  World  Trade  Center    

Important  Company  Financial  Data  (See  Exhibit6&7)  Ø The   company   delivered   strong   new  wins   of   $4.2B   in   Q4  

and   closed   the   fiscal   year   with   total   backlog   of   $25.1B,  including  $3B  inherited  from  the  acquisition  of  Hunt.  

Ø Book-­‐to-­‐burn   ratio   was   of   1.7x,   a   52%   y/y   increase   and  33%  organic  y/y  growth.  

Ø FCF  exceeded  net   income:   $162M  FCF   in  Q4  and  $298M  for   the   fiscal   year;   operating   income   of   $103M   and   net  income  $64M;  adjusted  EPS  for  Q4  was  $0.79  and  the  full-­‐year  EPS  was  $2.53  

Ø Adjusted  EPS  Guidance  of  fiscal  2015  will  be  $2.75  -­‐  $3.35  

AECOM Technology Corporation (ACM) Memo  Exhibit1:  Global  Presence  of  AECOM:  

       Exhibit2:  AECOM  as  the  market  leader  and  the  reasonable  merger  with  URS  

                         

AECOM Technology Corporation (ACM) Memo  Exhibit3:  AECOM  benefits  from  the  MSS  segment  for  the  accumulated  backlogs    

   Exhibit4:  The  complementary  strategic  acquisition  with  URS      

     

   

Page  of  Exhibit(s)      

AECOM Technology Corporation (ACM) Memo    Exhibit5:  FCF  and  Debt  Reduction  drive  balanced  capital  allocation  strategy  

                             

Exhibit6:  Company  Comparable  Valuations     P/E  (TTM)   P/E  2015   P/E  2016   Est.  5-­‐Yr  EPS  

Gr%  P/CF  (TTM)  

ACM   14.5x   12.3x   10.0x   12.4   9.7x  Industry  Average   34.2x   36.8x   76.7x   10.9   18.7x  S&P  500   18.7x   17.4x   16.2x   10.7   15.6x  JEC   15.1x   12.6x   11.1x   11.5   12.2x  FLR   16.1x   15.7x   13.9x   12.3   11.7x  PWR   18.1x   19.2x   14.9x   8.0   14.5x  KBR   50.2x   189.2x   14.5x   12.0   7.3x       P/B  (Q3)   ROE  (TTM)   D/E  (Q3)   EV/EBITDA  (TTM)  

ACM   1.4   10.0   0.4   7.7  

Industry  Average   1.8   -­‐2.7   0.2   17.3  

S&P  500   7.2   24.7      

 Exhibit6:  ACM  always  beats  the  EPS  expectations    

 

AECOM Technology Corporation (ACM) Memo  Ideas  for  the  Club      1. MII  could  hold  internal  stock  pitch  competition,  which  could  let  members  get  more  involvement  and  truly  

practice  their  skills.  Also,  it  would  be  nice  to  organize  stock  pitch  competitions  with  other  investing  groups  in  UVa,  i.e.  AIF,  GMG,  SWS  and  etc.  

 2. MII  could  give  more  feedbacks  about  the  stock  pitches  that  presented  in  the  meeting.  The  clear  Criteria  for  a  

good  pitch  may  be  a  great  way  to  let  people  know  what  they  can  improve.    3. MII  could  give  more  specific  goals  for  associate  teams.  MII  could  set  up  weekly  goals  for  the  team  to  educate  

team  members  about  fundamental  investing  ideas  and  basic  accounting  and  investing  approaches.    4. MII  could  set  up  the  Risk  Management  Department,  which  could  make  MII  react  more  efficiently  with  the  

existed  portfolio.