Aecon reports third quarter 2017 results

Toronto, Ontario – October 26, 2017: Aecon Group Inc. (TSX: ARE) today reported results for the third quarter of 2017.

“Aecon’s third quarter results illustrate the stability provided by Aecon’s diversified business model,” said John M. Beck, President and Chief Executive Officer, Aecon Group Inc. “While 2017 has presented challenges with continued soft commodity and oil markets creating less opportunity in those areas, Aecon’s strength in other sectors and significant long-term backlog, positions us well for 2018 and beyond.”

HIGHLIGHTS

• Revenue for the three months ended September 30, 2017 was $760 million compared to $838 million in the third quarter of 2016.
• Adjusted EBITDA of $59 million (margin of 7.7 per cent) for the third quarter of 2017 compared to Adjusted EBITDA of $60 million (margin of 7.2 per cent) in the third quarter of 2016. Adjusted EBITDA for the third quarter of 2017 includes $4.1 million of severance expense and costs of $3.2 million related to activities pursuant to the previously disclosed strategic process to explore a potential sale of the company. Adjusting for these items Adjusted EBITDA would have been $66 million (margin of 8.7 per cent).
• Operating profit of $33 million and diluted earnings per share of $0.37 compared to $43 million and $0.42 respectively in the third quarter of 2016. The reduction was due to the one-time items noted above and higher depreciation and amortization of $10.2 million primarily due to the amortization of the intangible concession asset related to the Bermuda International Airport Redevelopment Project in the third quarter of 2017 of $8.5 million.
• Backlog as at September 30, 2017 of $4.32 billion compares to backlog of $4.37 billion as at the end of the second quarter of 2017.
• New contract awards of $714 million were booked in the third quarter of 2017 including:
  • A $337 million award, of which Aecon's share is $135 million, for construction of a 7.6 km tunnel in British Columbia. The project began in August 2017 and is expected to be complete in the third quarter of 2020;
  • A $150 million award from Alberta Transportation, of which Aecon's share is $75 million, for the construction of the Peace River Bridge structure and twinning of Highway 2 through the town of Peace River, Alberta. The work began in October 2017 and is expected to be complete in the fourth quarter of 2020; and
  • A $59 million award from the Ministry of Transportation of Ontario for widening of four lanes of Highway 417 and associated construction work near Ottawa, Ontario. The work commenced in August 2017 and is expected to be complete in the fourth quarter of 2020.

(3)      “Adjusted EBITDA” represents operating profit (loss) adjusted to exclude depreciation and amortization, the gain (loss) on sales of assets and investments, and net income (loss) from projects accounted for using the equity method, but including “Equity Project EBITDA” from projects accounted for using the equity method.

OPERATING AND FINANCIAL RESULTS

Revenue for the three months ended September 30, 2017 of $760 million was lower by $78 million, or 9%, compared to the third quarter of 2016.  The largest decrease occurred in the Mining segment ($145 million), where a decrease in site installation work in the commodity mining sector ($146 million) and lower revenue from civil and foundations projects ($4 million) were only partially offset by higher revenue from contract mining activity ($5 million).  Revenue in the Infrastructure segment was also lower ($13 million) as lower revenue in social infrastructure ($10 million) and transportation operations ($4 million) were only slightly offset by higher volume on heavy civil projects ($1 million).  Revenue in the Energy segment increased ($55 million), driven by an increase in utilities operations ($56 million), while industrial operations were down slightly ($1 million). Higher revenue in the Concessions segment ($32 million), related to the Bermuda International Airport Redevelopment Project, was partially offset by higher inter-segment eliminations ($7 million), primarily related to revenue between the Infrastructure and Concessions segments.

Operating profit of $33.1 million for the third quarter of 2017 decreased by $10.0 million compared to operating profit of $43.1 million in the third quarter of 2016, despite an increase in gross profit of $3.3 million.  Gross profit increases occurred in the Concessions segment ($14.8 million) from the commencement of the Bermuda International Airport Redevelopment Project in 2017 and in the Energy segment ($2.0 million), where an increase in the utilities sector more than offset a decrease in gross profit from industrial operations. Gross profit in the Mining segment decreased in the quarter ($10.4 million) as lower volume and gross profit in the commodity mining sector offset higher gross profit from contract mining work.  Gross profit in the Infrastructure segment decreased in the quarter ($3.0 million), primarily from lower volume and gross profit on roadbuilding work in transportation operations. Operating profit for the third quarter of 2017 was impacted by increased MG&A, which includes severance expense of $4.1 million and costs of $3.2 million related to activities pursuant to the previously disclosed strategic process to explore a potential sale of the Company.

Reported backlog as at September 30, 2017 of $4,319 million compares to backlog of $4,365 million as at June 30, 2017 and $4,551 million as at September 30, 2016.  New contract awards of $714 million and $2,236 million were booked in the third quarter and year-to-date 2017, respectively, compared to $500 million and $3,658 million in the same periods in the prior year.

Aecon does not report as backlog the significant number of contracts and arrangements in hand where the exact amount of work to be performed cannot be reliably quantified or where a minimum number of units at the contract specified price per unit is not guaranteed.  Examples include time and material and some cost-plus and unit priced contracts where the extent of services to be provided is undefined or where the number of units cannot be estimated with reasonable certainty.  Other examples include the value of construction work managed under construction management advisory contracts, concession agreements, multi-year operating and maintenance service contracts where the value of the work is not specified, supplier of choice arrangements and alliance agreements where the client requests services on an as-needed basis.  None of the expected revenue from these types of contracts and arrangements is included in backlog.  Therefore, Aecon’s effective backlog at any given time is greater than what is reported.

REPORTING SEGMENTS

Aecon reports its financial performance on the basis of four segments: Infrastructure, Energy, Mining, and Concessions. 

INFRASTRUCTURE SEGMENT

The Infrastructure segment includes all aspects of the construction of both public and private infrastructure, primarily in Canada, and on a selected basis, internationally. The Infrastructure segment focuses primarily on the transportation, transit, heavy civil, and water and wastewater treatment markets.

For the three months ended September 30, 2017, revenue in the Infrastructure segment of $309 million was $13 million, or 4%, lower than the same period in 2016.  The decrease was driven by lower revenue in social infrastructure ($10 million) primarily due to a lower volume of buildings work in Ontario.  In addition, revenue was lower in transportation operations ($4 million), where higher roadbuilding volume in Western Canada was more than offset by lower roadbuilding activity in Ontario.  Revenue increased slightly in heavy civil operations ($1 million) as higher civil construction work in Ontario was largely offset by reduced activity on hydroelectric projects in Western Canada.

Operating profit in the Infrastructure segment of $17.8 million in the third quarter of 2017 decreased by $3.0 million compared to an operating profit of $20.8 million in the same period in 2016.  Operating profit decreased in heavy civil operations by $1.8 million, primarily from a volume-driven decrease in gross profit in Western Canada as well as lower activity and earnings from construction projects accounted for using the equity method of accounting.  Operating profit also decreased in transportation operations by $1.6 million, due primarily to lower volume and gross profit margin on roadbuilding activity in Ontario.  Operating profit in social infrastructure operations increased by $0.4 million compared to the third quarter of 2016 as higher gross profit from buildings projects, including the Bermuda International Airport Redevelopment Project, was partially offset by lower gross profit margin on water treatment projects in Western Canada.

Infrastructure backlog at September 30, 2017 of $2,083 million was $207 million higher than at the same time in 2016. The largest increase in the segment occurred in social infrastructure operations ($371 million), primarily from the award of the Bermuda International Airport Redevelopment Project, and from new awards in the water treatment sector.  Backlog in the transportation sector also increased ($25 million) year-over-year.  Partially offsetting these increases was lower backlog in heavy civil operations ($189 million) as the execution of existing projects in the transportation and hydroelectric sectors outpaced new awards. 

New contract awards totaled $357 million in the third quarter of 2017 and $1,111 million year-to-date, compared to $78 million and $427 million, respectively, in the same periods in 2016. 

ENERGY SEGMENT

The Energy segment encompasses a full suite of service offerings to the energy market including industrial construction and manufacturing activities such as in-plant construction, site construction and fabrication and module assembly. The Energy segment focuses primarily on the following sectors: power generation, pipelines, utilities, oil and gas, and energy support services.

Revenue in the third quarter of 2017 of $379 million in the Energy segment was $55 million, or 17%, higher than the same period in 2016.  Most of the increase is attributable to higher revenue in the utilities sector ($56 million), and offset slightly by lower revenue ($1 million) from industrial operations.  The increase in utilities was driven primarily by the ramp-up of pipeline projects in Ontario and Western Canada and, to a lesser extent, increased volume in the telecommunication and electricity distribution sectors.  Higher industrial revenue in Eastern Canada ($18 million), largely from increased nuclear power work, was offset by lower revenue in Western Canada ($19 million), driven by lower fabrication, module assembly, and field construction activity in Alberta.

For the quarter ended September 30, 2017, operating profit of $14.1 million increased by $1.3 million compared to operating profit of $12.8 million in the same period in 2016.  Operating profit from utilities increased by $6.9 million on the strength of volume-driven increases in gross profit.  This increase was partially offset by a decrease in operating profit from industrial operations of $5.6 million following a decrease in gross profit margin.

Backlog as at September 30, 2017 of $2,129 million was $346 million lower compared to the same time in 2016, driven by a decrease in industrial operations ($455 million), primarily in Eastern Canada ($445 million), due to the continued execution of significant projects in the nuclear and gas sectors.  Backlog in Western Canada was also down year-over-year ($10 million) due to fewer new awards in the oil sector.  Partially offsetting these decreases was higher backlog in utilities ($109 million), due primarily to pipeline project awards in Ontario and Western Canada, as well as higher awards in the gas distribution sector in Ontario. 

New contract awards of $255 million in the third quarter of 2017 were $4 million lower than the third quarter of 2016, and new awards of $834 million year-to-date in 2017 were $1,935 million lower than the same period in 2016, due mostly to the award of the Darlington Nuclear Refurbishment Project in the first quarter of 2016.

MINING SEGMENT

The Mining segment offers turnkey services consolidating Aecon’s mining capabilities and services across Canada, including both mine site installations and contract mining. This segment offers construction services that span the scope of a project’s life cycle: from overburden removal and resource extraction, to processing and environmental reclamation.

Mining segment revenue in the third quarter of 2017 of $64 million was $145 million, or 69%, lower than the same period a year earlier.  Most of the decrease was due to lower volume in the commodity mining sector ($146 million), as a large site installation project was completed earlier in the year.  Revenue from civil and foundations work related to mining projects was also lower ($4 million) in the quarter.  Contract mining revenue was higher ($5 million), as traditional contract mining work in Alberta increased, compared to the same quarter in 2016. 

For the quarter ended September 30, 2017, operating profit of $6.4 million in the Mining segment decreased by $11.1 million when compared to the same period in 2016.  Most of the decrease in the segment was the result of lower volume and gross profit in the commodity mining sector ($17.4 million).  Partially offsetting this decrease was a $5.5 million increase in the contract mining sector due to higher volume and gross profit margin compared to 2016, which was adversely affected by the wildfires in Fort McMurray.  The third quarter of 2017 also benefitted from lower equipment fleet maintenance costs compared to the same period last year.  Operating profit from civil and foundations work also increased ($0.8 million).

Backlog as at September 30, 2017 of $91 million was $109 million lower than at the same time last year. Backlog decreased in the commodity mining ($129 million) and contract mining ($1 million) sectors, while backlog in civil and foundations increased over the prior year ($21 million).  

New contract awards of $92 million in the third quarter of 2017, and $271 million in the first nine months of 2017, were $89 million and $217 million lower, respectively, than the same periods in 2016.

CONCESSIONS SEGMENT

The Concessions segment includes the development, financing, design, construction and operation of infrastructure projects by way of build-operate-transfer, build-own-operate-transfer and other Public-Private Partnership contract structures.

Aecon holds a 100% interest in Bermuda Skyport Corporation Limited (“Skyport”), the concessionaire responsible for the Bermuda airport's operations, maintenance and commercial functions, and the entity that will manage and coordinate the overall delivery of the redevelopment project over a 30-year concession term.  Aecon’s participation in Skyport is consolidated and as such is accounted for in the consolidated financial statements by reflecting, line by line, the assets, liabilities, revenue and expenses of Skyport.  However, Aecon’s participation in the Eglinton Crosstown Light Rail Transit (“LRT”) and Waterloo LRT concessions are joint ventures which are accounted for using the equity method.

Revenue in the Concessions segment of $33 million in the third quarter was $32 million higher than the same period in 2016.  The higher revenue was driven primarily by Skyport, which was awarded the Bermuda International Airport Redevelopment Project in the first quarter of 2017.  Included in Skyport’s revenue for the third quarter of 2017 was $11 million of construction revenue that was eliminated on consolidation as inter-segment revenue.

For the three-month period ended September 30, 2017, operating profit of $7.5 million increased by $7.6 million compared to the same period in 2016.  The higher operating profit resulted from the Bermuda International Airport Redevelopment Project and LRT concession projects in Ontario.

Except for Operations and Maintenance (“O&M”) activities under contract for the next five years, Aecon does not include in its reported backlog expected revenue from concession agreements.  As such, while Aecon expects future revenue from its concession assets, no concession backlog, other than from O&M activities, is reported.

OUTLOOK

“Based on lower revenue in the first nine months of 2017, primarily driven by lower activity in our Mining segment, and an expectation for Mining revenue to be lower in the fourth quarter of 2017 when compared to the prior year, we expect lower overall revenue in 2017,” said John M. Beck. “This lower volume is offset by an expectation of Adjusted EBITDA margin improvement which will result in an overall improvement in Adjusted EBITDA for the year.” 

CONSOLIDATED RESULTS

The consolidated results for the three and nine months ended September 30, 2017 and 2016 are available at the end of this news release.

BALANCE SHEET HIGHLIGHTS