Aecom (ACM) Earnings

Management highlights

- Project Charge and Legacy Project Update - A $337 million pre-tax charge was recorded in Q3 2026 related to a delayed large P3 design-build construction management project bid in 2019. Completion is now expected in Q2 fiscal 2027, pushed back from Q1 fiscal 2027, driven primarily by low subcontractor productivity in the final phase. - A second legacy P3 design-build construction management project (bid around 2019) remains on track for phase one completion in Q1 fiscal 2027, consistent with prior guidance. Both projects have active claims for third-party-caused delays, and management is confident in partial recovery through dispute resolution. - ACOM stopped pursuing new P3 design-build construction management projects years ago after tightening risk controls and changing leadership, and these two projects would not meet current risk approval requirements. - Business Development and Backlog Performance - Quarterly wins hit a record high, driving total backlog up 13% year-over-year to an all-time high. Company-wide book-to-burn was 1.6x for the quarter, with a year-to-date book-to-burn of 1.4x, providing strong multi-year revenue visibility. - Record elevated business development spending for large pursuits impacted Q3 2026 Americas margins by 140 basis points, but has already delivered a strong 1.8x book-to-burn for the segment, with high expected long-term ROI. - Market and Regional Highlights - U.S.: State and local infrastructure investment remains strong, with less than half of IIJA funding spent to date; U.S. Department of Defense pipeline grew 30% in the quarter, with expected healthy growth from the proposed fiscal 2027 defense budget; data center development is a fast-growing private sector market; U.S. water pipeline expanded 30% year-over-year. - Canada: Activity is broad-based with double-digit NSR growth; post-quarter, ACOM won a large 10-year highway and transit program management contract, and defense infrastructure pipeline is growing rapidly with planned Canadian defense spending increases to 5% of GDP by 2035. - UK: NSR growth accelerated to high single digits, driven by water, environment, and energy projects including the ongoing Great Grid Upgrade, with growing momentum from the AMP8 program. - Australia: NSR grew double digits, with backlog up more than 40% year-over-year to a new multi-year high, driven by defense and accelerating transportation project activity. - Middle East: The ongoing military conflict has created near-term weakness in tourism and hospitality end markets, but infrastructure wins remained strong, delivering double-digit backlog growth; post-quarter, ACOM won a large rail project in Saudi Arabia, with long-term growth opportunities from planned U.S. military infrastructure expansion in the region. - Asia: Overall demand remains soft, but backlog grew double digits year-over-year after winning a major highway project in Hong Kong, positioning ACOM for future follow-on opportunities from the government's mega development initiative. - Operational Strength - Excluding the construction management charge, adjusted EBITDA grew 5% and adjusted EPS grew 11% year-over-year, with early margin benefits from AI-driven cost efficiencies. - ACOM has a resilient balance sheet with $2 billion of undrawn borrowing capacity and no near-term debt maturities, and delivered positive Q3 2026 free cash flow of $55 million despite cash burn on the two legacy construction projects. - The company remains on track to hit its long-term target of 20%+ adjusted operating margin by the end of fiscal 2028.

Guidance

- Full-year fiscal 2026 NSR guidance midpoint was lowered to $7.3 billion, which includes the $337 million construction management project charge. Excluding the charge, full-year NSR is expected to be $7.65-$7.7 billion, with lower growth driven by delayed start of new construction management projects and ongoing headwinds from the Middle East conflict. - Adjusted EBITDA and EPS guidance (adjusted for the charge) is maintained at prior midpoints of $1.29 billion and $6.00 respectively, while the adjusted EBITDA margin guidance was raised to 17.4% from the prior 17% due to stronger than expected international margin performance. - Full-year fiscal 2026 free cash flow guidance was lowered from $400 million to $300 million due to cash burn on the two legacy construction management projects. - 2027 fiscal year interest expense is expected to be 30-35 million yen higher year-over-year due to higher average debt balances from project-related cash burn. - Management reaffirmed the company's long-term organic growth algorithm of 5-8% per year for the entire business, including construction management, with construction management growth expected to ramp in the second half of fiscal 2027 after the two legacy projects are completed. - Restructuring cost guidance for fiscal 2026 remains unchanged at $150-$200 million, with most of the remaining restructuring activity expected to occur after Q4 2026.

Segment performance

1. Americas segment: Net Service Revenue (NSR) declined 29% year-over-year, primarily due to the $337 million pre-tax construction management project charge. Adjusted for the charge, Americas adjusted operating margin was 18%. When adjusted for one less working day in the quarter, Americas design business NSR grew 6% year-over-year. Overall segment adjusted operating margin (including the charge) was negative 16.1%. Backlog for design and construction management businesses grew high single digits year-over-year, with the Americas segment delivering a 1.8x book-to-burn ratio this quarter. The revenue contribution of the Americas segment is majority of ACOM's total NSR. 2. International segment: NSR increased 4% year-over-year (constant currency basis), led by double-digit growth in Australia and high single-digit growth in the UK. Backlog grew 28% year-over-year. International adjusted operating margin was 14.3%, with margin expansion driven by higher-margin growth in Australia, improved utilization in the UK, and early cost benefits from AI investments. The international segment contributed approximately 40% of total NSR growth in the quarter.

Risks & headwinds

- The two legacy P3 design-build construction management projects will continue to burden cash flow through the first half of fiscal 2027, with an expected total additional cash outflow of ~$500 million in the first two quarters of fiscal 2027. - Resolution of outstanding claims for the two delayed projects will take time, and there is uncertainty around the total amount of recoverable costs, which will negatively impact near-term leverage until the projects are completed and claims are settled. - Near-term NSR growth in construction management is weighed down by delayed project starts and resource tied up completing the two legacy projects, which will create headwinds for overall company growth in the first half of fiscal 2027. - The ongoing military conflict in the Middle East continues to create near-term uncertainty and weakness in tourism, hospitality, and private developer end markets, which is expected to pressure results through the fourth quarter of fiscal 2026. - Elevated business development spending for large pursuits can create quarter-over-quarter margin volatility, though management notes this has consistently delivered high long-term ROI.

Analyst Q&A

• Q: What is the timeline for completing the two charged legacy construction projects, how much additional cash will be needed, and what is management's confidence in the completion timeline? /

  A: The project with the Q3 charge is now expected to complete in Q2 fiscal 2027, while the second legacy project remains on track to complete in Q1 fiscal 2027. Full-year 2026 free cash flow guidance was cut by $100 million to $300 million due to project cash needs, with an additional ~$500 million total cash outflow expected in the first half of fiscal 2027. Management built slack into the revised timeline based on current subcontractor productivity, and the charged project is currently slightly ahead of the revised schedule, giving management confidence in meeting the updated deadlines.

• Q: How have risk controls for construction management changed after these project issues, and when will CM return to steady growth? /

  A: Both problematic projects were bid in 2019-2020, before comprehensive changes. ACOM has since revised its risk matrices, changed CM business leadership, and enacted a full prohibition on new P3 design-build construction projects, so these project types will not be approved under the current framework. Excluding the two legacy projects, the rest of the CM backlog has a low-risk GMP structure, and CM currently has a 1.9x book-to-burn. CM growth will ramp in the second half of fiscal 2027, as new backlog ramps and resources are freed up after completing the two legacy projects.

• Q: What is the current size of outstanding claims on the two projects, and how should investors think about potential recovery? /

  A: Total outstanding claims remain in the $600-$650 million range, with no material change from the prior quarter, and this total is not expected to increase significantly even after both projects are completed. The total amount ACOM is claiming from third parties is far larger than the recorded claim amount, and management has thoroughly vetted claims from operational, financial, and legal standpoints, with early dispute resolution progress boosting confidence in recovery. Details of the claims process remain confidential to preserve negotiating leverage.

• Q: When will elevated Q3 business development costs translate to revenue, and what is the competitive landscape for large projects? /

  A: The business development investment already delivered immediate results in Q3, with the Americas segment hitting a 1.8x book-to-burn and CM hitting 1.9x. ACOM maintains a healthy >80% win rate for large projects over $50 million, and the quarter's record large wins included two major environment re-competes that ACOM won outright against competing joint venture combinations. Revenue will flow consistently from these wins, which are mostly with long-standing high-quality clients, supporting the company's 5-8% long-term growth algorithm.

• Q: What is the accounting and margin impact of the $500 million 2027 project cost, and what risk profile do current CM projects have? /

  A: The Q3 impairment charge already captures all expected financial statement impacts through project completion; the $500 million is only a cash flow impact for funding completion, with no additional expected margin hits in 2027. Very little NSR remains for both projects (which are 80-85% complete, and ACOM's NSR share is generally <5% of total CM project value), so there is minimal net NSR or material margin impact in 2027. Current CM projects almost all use GMP contracting, where most design is completed and costs are locked in with subcontractors before final contracting, limiting ACOM's risk to just its project fee, resulting in a risk profile similar to ACOM's core design business.