Aecon reports first quarter 2018 results

TORONTO, April 25, 2018 /CNW/ - Aecon Group Inc. (TSX: ARE) ("Aecon" or the "Company") today reported results for the first quarter of 2018.

"While Aecon's revenue and profitability in the first quarter reflect the normal seasonality of our business, the period was highlighted by significant project wins and growth in backlog that positions us well for the balance of 2018 and beyond," said John M. Beck, President and Chief Executive Officer, Aecon Group Inc. "Recent major awards illustrate our strong reputation with clients and our recognized ability to deliver successful results. While we continue to move our proposed partnership with CCCI forward, Aecon remains focused on bidding, securing and executing projects, and further improving margins over time."

HIGHLIGHTS 

• Adjusted EBITDA of $3.7 million (margin of 0.7 per cent) for the first quarter of 2018 compared to Adjusted EBITDA of $6.9 million (margin of 1.0 per cent) in the first quarter of 2017. Adjusting for one-time items related to severance costs and expenses incurred as a result of the sale process and associated Arrangement (as defined below), Adjusted EBITDA would have been $7.8 million (margin of 1.4 per cent) for the first quarter (adjusting for one-time items Adjusted EBITDA was $13.7 million (margin of 2.0 per cent) in the first quarter of 2017).  
   
• Backlog as at March 31, 2018 of $4.6 billion compares to backlog of $4.2 billion as at December 31, 2017.
  
• New contract awards of $910 million were booked in the first quarter of 2018, compared to $836 million in the same period of 2017.  
• On March 16, 2018, the $1.6 billion Site C Generating Station and Spillways civil works project in British Columbia was awarded to a consortium in which Aecon holds a 30 per cent interest, adding $482 million to Aecon's backlog.
  
• In addition to new awards booked in the quarter, subsequent to quarter end Aecon announced that:
• A partnership in which Aecon has a 24 per cent interest, finalized a $5.0 billion contract for the Réseau express métropolitain Montréal Light Rail Transit project. The project will add $1.2 billion to Aecon's backlog in the second quarter of 2018.
• A consortium in which Aecon has a 33.3 per cent interest, was selected as preferred proponent for the Finch West Light Rail Transit project in Toronto, with final contract award expected in the second quarter of 2018.
  

• Commencing in 2018, Aecon's previous Energy and Mining segments were combined into a single Industrial segment to align with Aecon's new operating management structure and to build on the "One Aecon" business strategy to capitalize and combine the strengths and synergies of the Aecon group. Prior year comparative figures have been restated to conform to the presentation adopted in the current year.

On October 26, 2017, the Company entered into an arrangement agreement (the "Arrangement Agreement") with CCCC International Holding Limited and 10465127 Canada Inc. (together, "CCCI"), pursuant to which CCCI agreed, subject to satisfaction of customary conditions, to acquire all of the issued and outstanding common shares of Aecon for $20.37 per common share in cash by way of a statutory plan of arrangement under the Canada Business Corporations Act (the "Arrangement").

At a meeting of shareholders held on December 19, 2017, shareholders of the Company approved the Arrangement with approximately 99.4% of the common shares voted at the meeting voting in favour of the Arrangement. On December 22, 2017, the Ontario Superior Court of Justice (Commercial List) issued a final order approving the Arrangement. Completion of the proposed transaction remains subject only to approval under the Investment Canada Act and other customary closing conditions for a transaction of this nature.  Assuming the satisfaction or waiver of these conditions, the proposed transaction is expected to close by the end of the second quarter and before the July 13, 2018 Outside Date of the Arrangement Agreement.

For additional details, please see the full text of the Arrangement Agreement included in Aecon's management information circular dated November 17, 2017 (the "Circular") filed under Aecon's SEDAR profile at www.sedar.com.

Both Aecon and CCCI remain committed to working together to obtain approval of the transaction under the Investment Canada Act.

OPERATING AND FINANCIAL RESULTS

Revenue for the three months ended March 31, 2018 was lower by $132 million, or 20 per cent, compared to the same period in 2017, driven by lower revenue in the Industrial segment ($150 million) with decreases in conventional industrial ($76 million), nuclear ($65 million), and utilities operations ($9 million). 

Operating loss of $22.2 million for the three months ended March 31, 2018 increased by $4.9 million compared to a loss of $17.3 million in the same period in 2017. Contributing to the operating loss was a $4.0 million decrease in gross profit with the largest decrease occurring in the Industrial segment ($9.4 million) due primarily to lower volume in conventional industrial and nuclear operations, and partially offset by improved gross profit margin in utilities operations. Gross profit also decreased slightly in the Infrastructure segment ($0.3 million) as an increase in gross profit margin in major projects was offset by lower gross profit margin in transportation operations. Partially offsetting these decreases was an increase in the Concessions segment ($5.5 million) due primarily to higher gross profit from the Bermuda International Airport Redevelopment Project.

Offsetting the impact of decreased gross margin was a $1.5 million decrease in marketing, general and administrative expenses ("MG&A") compared to the first quarter of 2017, with the decrease driven by lower severance and restructuring costs, offset to some extent by an increase in expenses incurred as a result of the sale process and subsequent Arrangement. Income from projects accounted for using the equity method of accounting decreased by $0.1 million period-over-period as an increase in concessions from light rail projects ($0.4 million) was offset in Infrastructure ($0.5 million) following completion of a project that was ongoing in the comparative period of 2017. Finally, the operating loss was impacted by depreciation and amortization expense being $3.1 million higher than the same period in 2017, primarily in the Concessions segment ($2.5 million) from higher amortization expense related to operating the existing airport as part of the aforementioned Bermuda airport project.

Financing expenses, net of interest income, of $4.9 million in the first quarter of 2018 decreased by $0.1 million compared to the same period in 2017.

Set out in Note 21 of the March 31, 2018 interim condensed consolidated financial statements is a reconciliation between the expected income tax expense in the first quarters of 2018 and 2017 based on statutory income tax rates and the actual income tax expense reported for both these periods. 

Reported backlog as at March 31, 2018 of $4,614 million compares to backlog of $4,365 a year earlier. New contract awards of $910 million were booked in the first quarter of 2018 compared to $836 million in the same period of 2017.

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 contractual future work to be performed at any given time is greater than what is reported as backlog.

REPORTING SEGMENTS 

Aecon reports its financial performance on the basis of three segments: Infrastructure, Industrial 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 transportation (roads and bridges, rail and transit, municipal road construction, asphalt production and aggregates, material engineering and design) and major projects (hydroelectric, tunnels and transit stations, foundations, major civil transportation infrastructure, water treatment facilities, mechanical systems and airports) markets.

For the three months ended March 31, 2018, revenue in the Infrastructure segment of $153 million was $1 million, or 1 per cent, higher than the first quarter of 2017. Revenue was higher in major projects ($1 million) as increases from continued progress on the Bermuda International Airport Redevelopment Project, and water and wastewater projects in Western Canada, were partially offset by lower volume from transit projects in Ontario and hydroelectric work in Western Canada. Revenue in transportation operations was unchanged period-over-period as lower roadbuilding activity in Ontario was offset by an increase in foundations work in Ontario.

In the first three months of 2018, operating loss in the Infrastructure segment of $20.7 million increased by $0.9 million compared to an operating loss of $19.8 million in the same period last year. Operating loss increased in transportation by $2.1 million due primarily to lower gross profit margin, and was partially offset by a gross profit margin-driven increase in operating profit in major projects of $1.2 million.

Infrastructure backlog as at March 31, 2018 was $2,414 million, which is $305 million higher than the same time in 2017. The largest period-over-period increase in backlog occurred in major projects ($188 million) driven by the 2018 award for the Site C Generating Station and Spillways civil works project in Western Canada, and offset partially by lower light rail and airport project backlog. Backlog also increased in the transportation sector ($117 million) period-over-period from higher roadbuilding backlog in both Western Canada and Ontario. New contract awards of $551 million in the first quarter of 2018 were $43 million lower than the same period last year.

INDUSTRIAL SEGMENT

As mentioned above, commencing in 2018, Aecon's previous Energy and Mining segments were combined into a single Industrial segment to align with Aecon's new operating management structure, and to build on the "One Aecon" business strategy to capitalize on and combine the strengths and synergies of the Aecon group. Prior year comparative figures have been restated to conform to the presentation adopted in the current year.

The Industrial segment encompasses a full suite of service offerings, primarily to energy and mining markets, including conventional industrial construction and manufacturing activities such as in-plant construction, site construction, fabrication, module assembly and contract mining. The Industrial segment offers turnkey services consolidating Aecon's industrial and manufacturing capabilities and services across Canada, with a focus on delivering construction services that span the scope of a project's life cycle from site preparation, overburden removal, and resource extraction, to processing and environmental reclamation. The activities of the Industrial segment are concentrated predominantly in Canada and focus primarily on the following sectors: conventional industrial, nuclear and utilities.

Revenue of $381 million in the first three months of 2018 in the Industrial segment was $150 million, or 28 per cent, lower than the first quarter of 2017. The largest period-over-period decrease occurred in conventional industrial operations ($76 million) primarily due to lower site construction work in the commodity mining sector. Revenue also decreased in the nuclear sector ($65 million) primarily from the timing of several projects that were ongoing in 2017 that are now nearing completion ahead of ramp up on new projects during 2018. Revenue in utilities operations was lower ($9 million) primarily from pipeline projects in Western Canada.

For the three months ended March 31, 2018, operating profit of $7.6 million decreased by $7.7 million compared to $15.3 million in the first quarter of 2017. Operating profit decreased in conventional industrial operations driven by lower volume in the commodity mining and nuclear sectors. Operating profit from utilities operations increased due to improved gross profit margin on gas and electricity distribution projects in Eastern Canada, offset partially by lower volume on pipeline projects in Western Canada.

Backlog in the Industrial segment at March 31, 2018 of $2,180 million was $63 million lower than the same time last year, driven primarily by lower backlog in the nuclear sector ($154 million) from the ongoing execution of a long-term refurbishment project in Ontario. Offsetting this decrease were backlog increases in utilities operations ($73 million) and conventional industrial operations ($18 million). The increase in utilities was driven primarily by increases from local electricity distribution, gas and pipeline projects. The increase in conventional industrial operations was driven mostly by increases in power generation projects in Eastern Canada and field construction work in Western Canada. New contract awards of $347 million in the first quarter of 2018 were $109 million higher than in the first three months of 2017.

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 per cent interest in Bermuda Skyport Corporation Limited ("Skyport"), the concessionaire responsible for Bermuda airport's operations, maintenance and commercial functions, and the entity that will manage and coordinate the overall delivery of the Bermuda International Airport 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 for the three months ended March 31, 2018 in the Concessions segment was $31 million, a decrease of $5 million compared to the same period last year. The lower revenue was a result of the Bermuda International Airport Redevelopment Project and resulted from the impact of lower revenue from construction activities related to the redevelopment of the airport which offset the impact of higher revenue from operating the existing airport.  Included in Concessions' revenue for the first three months of 2018 and 2017 was $18 million and $33 million, respectively, of construction revenue that was eliminated on consolidation as inter-segment revenue.

Operating profit of $2.9 million for the three months ended March 31, 2018, increased by $3.6 million compared to the same period in 2017 and was primarily due to increased operating profit from the Bermuda International Airport Redevelopment Project and light rail transit concessions 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

"The overall outlook for 2018 remains positive, with significant new long-term project awards providing greater certainty to our expectations for revenue growth in 2018 and beyond," said John M. Beck. "We expect backlog to reach record levels in Q2 2018 and all three segments continue to bid on opportunities that should further enhance backlog and support the goal of improving Adjusted EBITDA margin."

CONSOLIDATED RESULTS

The consolidated results for the three months ended March 31, 2018 and 2017 are available at the end of this news release.

BALANCE SHEET HIGHLIGHTS

ABOUT AECON

Aecon Group Inc. (TSX: ARE) is a Canadian leader and partner-of-choice in construction and infrastructure development.  Aecon provides integrated turnkey services to private and public sector clients in the Infrastructure and Industrial sectors and provides project management, financing and development services through its Concessions segment. For more information, please visit www.aecon.com and follow us on Twitter at @AeconGroup.           

STATEMENT ON FORWARD-LOOKING INFORMATION

The information in this press release includes certain forward-looking statements. Although these forward-looking statements are based on currently available competitive, financial and economic data and operating plans, they are subject to risks and uncertainties. In addition to general global events outside Aecon's control, there are factors which could cause actual results, performance or achievements to vary from those expressed or inferred herein including risks associated with an investment in the common shares of Aecon and the risks related to Aecon's business, including, but not limited to interest and foreign exchange rates, global equity and capital markets, business competition and operational and reputational risks, including Large Project Risk and Contractual Factors, and the uncertainty regarding whether the Arrangement will be completed on the terms detailed in the Circular, or at all, and the corresponding risks. In addition, there are risks and uncertainties inherent in the Arrangement, including the failure of Aecon and CCCI to obtain applicable Investment Canada Act approvals or to otherwise satisfy the conditions to the completion of the Arrangement, in a timely manner, or at all.  Failure to so obtain such approvals, or the failure of the parties to otherwise satisfy the conditions to or complete the Arrangement, may result in the Arrangement not being completed on the proposed terms, or at all.  In addition, if the Arrangement is not completed, and Aecon continues as an independent entity, there are risks that the announcement of the Arrangement and the dedication of substantial resources of Aecon to the completion of the Arrangement could have an impact on Aecon's current business relationships (including with future and prospective employees, customers, distributors, suppliers and partners) and could have a material adverse effect on the current and future operations, financial condition and prospects of Aecon. Risk factors are discussed in greater detail in the section on "Risk Factors" included in the Company's Annual Information Form dated March 27, 2018, and in the Circular, each of which are available through SEDAR at www.sedar.com. Forward-looking statements include information concerning possible or assumed future results of Aecon's operations and financial position, as well as statements preceded by, followed by, or that include the words "believes", "expects", "anticipates", "estimates", "projects", "intends", "should" or similar expressions.  Other important factors, in addition to those discussed in this document, could affect the future results of Aecon and could cause its results to differ materially from those expressed in any forward-looking statements. Aecon assumes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

SOURCE Aecon Group Inc.