AECOM announces intent to spin off its industry-leading government services business

LOS ANGELES–(BUSINESS WIRE)–AECOM (NYSE:ACM), a premier, fully integrated global infrastructure
firm, today announced that its Board of Directors has unanimously
approved a plan to pursue a spin-off of the Company’s Management
Services segment into a leading, standalone government services company.
The transaction is currently expected to be completed in the second half
of fiscal 2020.

Strategic & Financial Benefits
As
standalone entities, both AECOM and the government services business are
expected to benefit from:

  • Strong management teams with a honed focus on their respective
    businesses and capital structures optimized to the unique
    characteristics of each business.
  • Added long-term financial flexibility to invest in each business’s
    strategic growth priorities, and to allocate capital to the best and
    highest use.
  • Separate boards of directors with skillsets and experience to provide
    focused insights and to support strategic and financial objectives and
    enhanced value creation.
  • Company-specific incentive programs and performance indicators to most
    closely align employee incentive compensation opportunities with
    standalone business performance.
  • Enhanced appeal to a broader set of investors suited to the particular
    strategic and financial characteristics of each business.

The new public company resulting from the spin-off of the Management
Services segment will be a top 20 government services provider, as
ranked by Bloomberg, and will leverage its considerable intelligence,
cybersecurity, IT, nuclear remediation and O&M expertise to continue to
deliver value and best-of-class services primarily to national
government clients, including the U.S. Departments of Defense and Energy
and various intelligence and other agencies. As an independent entity,
the government services business will be best positioned to accelerate
the execution of its strategic plan, invest to expand its capabilities
and to pursue its more than $30 billion pipeline of opportunities. The
business has several key competitive advantages, including scale in a
fragmented market, a strong execution track record, a substantial base
of long-duration classified work and more than 25,000 talented and
committed employees, more than 10,000 of whom have security clearance.
The business also benefits from a lower-risk profile that features
predictable cash flow and high returns on capital, which will enable
flexibility to invest in profitable growth and deleveraging. In fiscal
2018, the Management Services segment generated revenue of $3.7 billion,
operating income of $200 million and adjusted operating income1
of $239 million. In addition, the segment delivered 18% adjusted
operating income growth in the first half of fiscal 2019.

This transformational initiative builds upon the strategic actions AECOM
has taken and continues to take to maximize shareholder value, including
the already-executed $225 million G&A reduction, the anticipated exit of
hard-bid at-risk construction, the exit of non-core Oil & Gas and
fixed-price combined-cycle gas power plant construction, the planned
exit from more than 30 countries and the decision to no longer pursue
international at-risk construction opportunities. As a result of the
proposed spin-off and these ongoing strategic actions, AECOM will
benefit from a honed focus on its high-returning professional services
businesses with leading market share, strong cash flow and on attractive
financial return profile to foster continued growth, return of capital
to shareholders, and debt reduction under the Company’s existing capital
allocation policy.

Today’s announcement marks a transformational step forward for AECOM
and continues our pursuit of maximizing shareholder value by best
positioning our industry-leading businesses for long-term success,” said
Michael S. Burke, AECOM’s chairman and chief executive officer. “Over
the past several years we have built a portfolio of leading
infrastructure and government services capabilities, and our success is
reflected in our strong first half fiscal 2019 financial performance,
including a record $18 billion in wins, a record $61 billion backlog,
continued positive organic growth and 16% adjusted EBITDA growth. The
Management Services segment has successfully capitalized on a
substantial pipeline of opportunities, leading intelligence and
classified sector capabilities and a proven leadership position with the
U.S. Departments of Defense and Energy. This is evidenced by 127%
backlog growth since the beginning of fiscal 2017 and three consecutive
quarters of double-digit organic revenue growth. Importantly, today the
Management Services segment is of the appropriate size and scale to
successfully stand alone as a leader in the government services market.”

Mr. Burke continued, “As part of our continuing efforts to best position
each business for long-term strategic and financial success, and in
recognition of our current valuation that we believe does not fully
reflect the value inherent across our enterprise, we identified an
opportunity to unlock value through a separation of our two businesses.
As leaders in their respective markets, both AECOM and the standalone
government services business will be ideally positioned to benefit from
a sharpened strategic focus on pursuing growth strategies best suited to
each company’s end markets and strategic growth objectives. This will
allow each company to deliver exceptional value to all its stakeholders,
including clients, employees and shareholders.”

Following the transaction, both AECOM and the standalone government
services business are expected to be capitalized with ample liquidity to
support operating and strategic investment plans. John Vollmer, group
president of the Management Services segment, and the existing
management team are expected to continue to lead the standalone
government services company. Additionally, Randy Wotring, AECOM’s chief
operating officer, is expected to serve as chairman of the Board of
Directors of the standalone government services business.

Financial Outlook
AECOM also
reiterated its financial guidance for fiscal 2019, including 12%
adjusted EBITDA1 growth at the mid-point, adjusted EPS1
of between $2.60 and $2.90 and free cash flow2 of between
$600 million and $800 million.

Transaction Details
The
transaction is expected to be effected through a pro-rata distribution
to AECOM shareholders of common stock of a newly-formed entity holding
Management Services segment as a standalone government services
business. The distribution is generally intended to qualify as tax free
to AECOM and its shareholders for U.S. federal income tax purposes. The
transaction is currently expected to be completed in the second half of
fiscal 2020. The completion of the transaction is subject to certain
customary conditions, including final approval of the AECOM board of
directors, effectiveness of a registration statement to be filed with
the U.S. Securities and Exchange Commission and receipt of an opinion
from counsel regarding the federal income tax treatment of the
distribution. The spin-off will not be subject to a shareholder vote.
There can be no assurance that any separation transaction will
ultimately occur or, if one does occur, of its terms or timing.

Advisor
Wachtell, Lipton, Rosen
& Katz is serving as legal advisor.

Conference Call
AECOM will host
a conference call today at 8 a.m. Eastern Time to discuss the planned
spin-off and its strategic actions to maximize the value inherent in the
enterprise. Interested parties can listen to the conference call and
view accompanying slides via webcast at http://investors.aecom.com.
The webcast will be available for replay following the call. The
conference call can be accessed directly by dialing 800-219-6918 (U.S.
or Canada) or 574-990-1027 (international) and entering passcode 7449916.

1 Excluding acquisition and integration related items,
transaction-related expenses, financing charges in interest expense,
foreign exchange gains, the amortization of intangible assets, financial
impacts associated with expected and actual dispositions of non-core
businesses and assets, restructuring costs and the revaluation of
deferred taxes and one-time tax repatriation charge associated with U.S.
tax reform. If an individual adjustment has no financial impact then the
individual adjustment is not reflected in the Regulation G Information
tables. See Regulation G Information for a reconciliation of Non-GAAP
measures.

2 Free cash flow is defined as cash flow from operations less
capital expenditures net of proceeds from disposals.

About AECOM
AECOM (NYSE:ACM) is built to deliver a better
world. We design, build, finance and operate critical infrastructure
assets for governments, businesses and organizations. As a fully
integrated firm, we connect knowledge and experience across our global
network of experts to help clients solve their most complex challenges.
From high-performance buildings and infrastructure, to resilient
communities and environments, to stable and secure nations, our work is
transformative, differentiated and vital. A Fortune 500 firm,
AECOM had revenue of approximately $20.2 billion during fiscal year
2018. See how we deliver what others can only imagine at aecom.com
and @AECOM.

Forward-Looking Statements
All statements in this
communication other than statements of historical fact are
“forward-looking statements” for purposes of federal and state
securities laws, including any projections of earnings, revenue, cost
savings, profitability, cash flows, tax rates, interest expense, or
other financial items, any statements of the plans, strategies and
objectives for future operations, profitability, strategic value
creation, risk profile and investment strategies, any statements
regarding future economic conditions or performance and any statements
with respect to the potential separation of the Management Services
segment from AECOM and the newly-formed entity holding the Management
Services segment or its distribution to AECOM shareholders, the expected
financial and operational results of AECOM and the Management Services
segment after the proposed spin-off, and expectations regarding the
Management Services segment’s and AECOM’s respective businesses or
organizations after the proposed spin-off. Although we believe that the
expectations reflected in our forward-looking statements are reasonable,
actual results could differ materially from those projected or assumed
in any of our forward-looking statements.

Important factors that could cause our actual results, performance and
achievements, or industry results to differ materially from estimates or
projections contained in our forward-looking statements include, but are
not limited to, the following: our business is cyclical and vulnerable
to economic downturns and client spending reductions; long-term
government contracts and subject to uncertainties related to government
contract appropriations; government shutdowns; governmental agencies may
modify, curtail or terminate our contracts; government contracts are
subject to audits and adjustments of contractual terms; losses under
fixed-price contracts; limited control over operations run through our
joint venture entities; liability for misconduct by our employees or
consultants; failure to comply with laws or regulations applicable to
our business; maintaining adequate surety and financial capacity; high
leverage and potential inability to service our debt and guarantees;
exposure to Brexit; exposure to political and economic risks in
different countries; currency exchange rate fluctuations; retaining and
recruiting key technical and management personnel; legal claims;
inadequate insurance coverage; environmental law compliance and adequate
nuclear indemnification; unexpected adjustments and cancellations
related to our backlog; partners and third parties who may fail to
satisfy their legal obligations; AECOM Capital real estate development
projects; managing pension cost; cybersecurity issues, IT outages and
data privacy; uncertainties as to the timing of the potential separation
or whether it will be completed; risks associated with the impact or
terms of the potential transaction; risks associated with the benefits
and costs of the potential transaction, including the risk that the
expected benefits of the potential transaction will not be realized
within the expected time frame, in full or at all, and the risk that
conditions to the potential transaction will not be satisfied and/or
that the potential transaction will not be completed within the expected
time frame, on the expected terms or at all; the expected tax treatment
of the potential transaction; the risk that any consents or approvals
required in connection with the potential transaction will not be
received or obtained within the expected time frame, on the expected
terms or at all; risks associated with expected financing transactions
undertaken in connection with the potential transaction and risks
associated with indebtedness incurred in connection with the potential
transaction; the risk that dissynergy costs, costs of restructuring
transactions and other costs incurred in connection with the potential
transaction will exceed our estimates or otherwise adversely affect our
business or operations; and the impact of the potential transaction on
our businesses and the risk that the potential transaction may be more
difficult, time-consuming or costly than expected, including the impact
on our resources, systems, procedures and controls, diversion of
management’s attention and the impact on relationships with customers,
governmental authorities, suppliers, employees and other business
counterparties; as well as other additional risks and factors that could
cause actual results to differ materially from our forward-looking
statements set forth in our reports filed with the Securities and
Exchange Commission. There can be no assurance that the potential
transaction will in fact be completed in the manner described or at all.
Any forward-looking statements are made as of the date hereof. We do not
intend, and undertake no obligation, to update any forward-looking
statement.

This press release contains financial information calculated other than
in accordance with U.S. generally accepted accounting principles
(“GAAP”). The Company believes that non-GAAP financial measures such as
adjusted EPS, adjusted EBITDA, adjusted net/operating income, adjusted
tax rate, adjusted interest expense, organic revenue, and free cash flow
provide a meaningful perspective on its business results as the Company
utilizes this information to evaluate and manage the business. We use
adjusted EBITDA, adjusted EPS, adjusted net/operating income, adjusted
tax rate and adjusted interest expense to exclude the impact of
non-operating items, such as amortization expense, taxes, acquisition
and integration expenses, and non-core operating losses to aid investors
in better understanding our core performance results. We use free cash
flow to represent the cash generated after capital expenditures to
maintain our business. We present constant currency information, such as
organic revenue, to help assess how our underlying businesses performed
excluding the effect of foreign currency rate fluctuations to aid
investors in better understanding our international operational
performance.

Our non-GAAP disclosure has limitations as an analytical tool, should
not be viewed as a substitute for financial information determined in
accordance with GAAP, and should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP, nor is it
necessarily comparable to non-GAAP performance measures that may be
presented by other companies. A reconciliation of these non-GAAP
measures is found in the Regulation G Information tables at the back of
this release.

When we provide our long term projections for organic revenue growth,
adjusted EBITDA, adjusted EPS growth, and free cash flow on a
forward-looking basis, the closest corresponding GAAP measure and a
reconciliation of the differences between the non-GAAP expectation and
the corresponding GAAP measure generally is not available without
unreasonable effort due to the length, high variability, complexity and
low visibility associated with the non-GAAP expectation projected
against the multi-year forecast which could significantly impact the
GAAP measure.

AECOM
Regulation G Information
($ in
millions, except per share data)

 

Reconciliation of Net Income Attributable
to AECOM to EBITDA and to Adjusted EBITDA

    Three Months Ended

Mar 31,
2018

 

Dec 31,
2018

 

Mar 31,
2019

 
Net (loss) income attributable to AECOM $ (119.7 ) $ 51.5 $ 77.9
Income tax (benefit) expense (24.4 ) (33.6 ) 20.9
(Loss) income attributable to AECOM before income taxes (144.1 ) 17.9 98.8
Depreciation and amortization expense1 81.0 64.3 66.4
Interest income2 (3.4 ) (2.7 ) (3.0 )
Interest expense3 90.9 53.5 55.4
EBITDA $ 24.4 $ 133.0 $ 217.6
Transaction-related expenses 4.4
Non-core operating losses 21.2 15.0 1.1
Impairment of assets held for sale, including goodwill 168.2
Acquisition and integration-related items (3.9 ) (3.7 )
Restructuring costs 63.3 15.9
FX gain from forward currency contract (9.1 )
Depreciation expense included in non-core operating losses and
acquisition and integration expenses above
(3.8 ) (0.2 ) (0.2 )
Adjusted EBITDA $ 200.9 $ 207.2 $ 235.1
   
Twelve Months Ended
Sep 30,
2017
  Sep 30,
2018

Reconciliation of Segment Income from
Operations to Adjusted Income from Operations

 
Management Services Segment:
Income from operations $ 241.1 $ 199.6
Amortization of intangible assets   52.1   39.2
Adjusted income from operations $ 293.2 $ 238.8
   
Six Months Ended
Mar 31,
2018
  Mar 31,
2019
Management Services Segment:
Income from operations $ 83.5 $ 102.4
Amortization of intangible assets   19.6   19.0
Adjusted income from operations $ 103.1 $ 121.4
   

FY19 GAAP EPS Guidance based on Adjusted
EPS Guidance

 

Fiscal Year End 2019

(all figures approximate)
GAAP EPS Guidance $1.89 to $2.24
Adjusted EPS Excludes:
Amortization of intangible assets $0.56
Acquisition and integration-related items ($0.09)
FY19 restructuring $0.50 to $0.56
Financing charges in interest expense $0.06
First half fiscal 2019 transaction-related expenses $0.03
First half fiscal 2019 non-core operating losses $0.10
Tax effect of the above items* ($0.32)
Tax expense associated with U.S. tax reform ($0.18)
Adjusted EPS Guidance $2.60 to $2.90
*The adjusted tax expense differs from the GAAP tax expense based on
the deductibility and tax rate applied to each of the adjustments.
 

FY19 GAAP Net Income Guidance based on
Adjusted EBITDA Guidance

 

Fiscal Year End 2019

(in millions, all figures approximate)
GAAP Net Income Attributable to AECOM Guidance* $302 to $358
Adjusted Net Income Attributable to AECOM Excludes:
Amortization of intangible assets, net of NCI $89
Acquisition and integration-related items ($15)
FY19 restructuring $80 to $90
Financing charges in interest expense $10
First half fiscal 2019 transaction-related expenses $4
First half fiscal 2019 non-core operating losses $16
Tax effect of the above items** ($51)
Tax expense associated with U.S. tax reform ($29)
Adjusted Net Income Attributable to AECOM $417 to $463
Adjusted EBITDA Excludes:
Adjusted interest expense $200
Depreciation $150
Taxes $150
Adjusted EBITDA Guidance $920 to $960
*Calculated based on the mid-point of AECOM’s fiscal year 2019 EPS
guidance.
**The adjusted tax expense differs from the GAAP tax expense based
on the deductibility and tax rate applied to each of the adjustments.
Note: the components in this table may not sum to the total due to
rounding.
 
 

FY19 GAAP Tax Rate Guidance based on
Adjusted Tax Rate Guidance

 
(all figures approximate)

Fiscal Year End 2019

 
GAAP Tax Rate Guidance 13%
Tax rate impact from adjustments to GAAP earnings 9%
Tax rate impact from inclusion of NCI deduction 3%
Effective Tax Rate for Adjusted Earnings Guidance 25%
 

FY19 GAAP Interest Expense Guidance based
on Adjusted Interest Expense Guidance

 

Fiscal Year End 2019

(in millions, all figures approximate)
GAAP Interest Expense Guidance $220
Financing charges in interest expense $10
Interest income $10
Adjusted Interest Expense Guidance $200

Contacts

Investors:
Will Gabrielski
Vice President, Investor
Relations
213.593.8208
William.Gabrielski@aecom.com

Media:
Brendan Ranson-Walsh
Vice President, Global
Communications & Corporate Responsibility
213.996.2367
Brendan.Ranson-Walsh@aecom.com

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