A (Mostly) Blowout Third Quarter Full of Double-Digit Growth

How great has this year been for designers? Well, the headlines from the third-quarter reports from some of the leading publicly traded engineering, EA, and environmental firms paint a picture of a still rapidly growing and hugely profitable AE and environmental industry. 

Double-digit percentage increases in revenues and income abound. And it’s not just these publicly traded firms that are reporting 20-plus percentage increases in revenues and earnings. Firms of all sizes and types around the industry are experiencing unprecedented growth and profitability.

But it’s not all wine and roses. You don’t have to look far to find some publicly traded firms that didn’t report such stellar results. Similarly, there are still underperforming firms to be found in every state, in every market, and in every service area. For those leadership teams that are not driving double-digit growth in top and bottom lines in this market, they (and their boards and shareholders) should be asking “Why not?”

Let’s take a look at some of those publicly traded Q3 headlines and let the bon temps roll.

Stantec delivers record third-quarter results and all-time high backlog of $6.2 billion: On Thursday, Stantec reported its results for the three- and nine-month periods ended September 30. The firm delivered record third-quarter adjusted diluted earnings per share (EPS) of $0.86 driven by significant net revenue growth and solid project margins. Net revenue of $1.2 billion in the third quarter (up 24.3% over the same period in 2021) was generated on the strength of 11% organic growth and 12.9% acquisition growth. Every one of the firm’s regional and business operating units delivered organic net revenue growth in the third quarter. Project margin in the third quarter was 54.1%. And here’s the stat that really caught my attention—backlog at the end of September 30 reached an all-time high of $6.2 billion (up 20% from the end of 2021), driven primarily by organic growth of 15.1% since December 31, 2021. 

NV5 announces record third-quarter results; Exceeds analyst consensus: Some highlights from the firm’s third-quarter report from November 3 include these double-digit growth percentages over the prior year:

  • Gross revenues in the third quarter of 2022 were $204.1 million compared to $185.6 million in the third quarter of 2021, a 10% increase
  • Net income in the third quarter of 2022 was $16.1 million compared to $12.6 million in the third quarter of 2021, a 28% increase
  • Cash flows provided by operations were $26.1 million in the third quarter of 2022 compared to $15.8 million in the third quarter of 2021, a 65% increase

It’s no wonder CEO Dickerson Wright commented, “NV5 has consistently delivered growth and profitability exceeding the industry average and has demonstrated resilience to changing economic conditions. We enter the fourth quarter with a strong backlog, a healthy acquisition pipeline, and potential high-margin, non-discretionary service offerings.”

Tetra Tech reports record third-quarter results: On August 3, Tetra Tech announced record-high third-quarter results in gross and net revenue, operating income, and EPS. Revenue in the third quarter totaled $890 million and net revenue was $720 million, up 11% and 13% year-over-year, respectively. Operating income was $84 million, up 20% year-over-year. EPS was $1.09, up 15%. Cash generated from operations was $98 million, up 42% year-over-year. Backlog increased to $3.51 billion, up 8% year-over-year, and on a constant currency basis increased 12% year-over-year to $3.65 billion.

Parsons reports strong third-quarter 2022 results: November 2 saw Parsons report its third-quarter performance, which included the following double-digit highlights:

  • Revenue increased 19% year-over-year to $1.13 billion, including organic growth of 11%
  • Organic revenue growth was driven by both business segments: Critical infrastructure (13%) and federal solutions (10%)
  • Net income increased 53% to $30 million
  • Adjusted EBITDA increased 22% to $103 million
  • Cash flow from operations increased 59% year-over-year and 28% for the first nine months of 2022
  • Total backlog of $8.2 billion

Bowman announces record third-quarter results; Exceeds consensus estimates and raises guidance: On Thursday, Bowman Consulting’s Q3 report contained the following highlights for the three months ended September 30, as compared to the same period in 2021:

  • Gross revenue of $71.2 million, compared to $39.7 million, a 79% increase
  • Year-over-year organic gross revenue growth of 23%
  • Net service billing of $64.9 million, compared to $35.7 million, an 82% increase
  • Year-over-year organic net service billing growth of 25%
  • Adjusted EBITDA of $9.6 million, compared to $4.4 million, a 118% increase
  • Gross backlog of $230 million, compared to $139 million, a 65% increase

Atlas Technical Consultants reports strong third-quarter 2022 results: Last Tuesday, the folks at Atlas had some good news to report, which included the following highlights for the three months ended September 30 compared to the same period the prior year:

  • Gross revenue grew 17% to $162.1 million, including 10% organic growth
  • Net revenue grew 15%
  • Gross margin, excluding subcontractor costs, was 59.5%, up 75 basis points; operating margin excluding subcontractor costs was 10.8%, up 310 basis points, driven by higher revenues, benefits of scale, improved pricing, and solid operational execution
  • Adjusted EBITDA increased 30% to $25.8 million; Adjusted EBITDA margin, excluding subcontractor costs, was a record 20.0%, and up 240 basis points
  • Backlog reached another record level at $864 million, up 14% compared to last year

Conclusion: Our industry expanded rapidly this year despite rising interest rates and some slowing in single-family home building. Around the country, AE and design firms are experiencing double-digit percentage increases in both revenues and profits for yet another record year. Growing 20% when you’re a $10 million or $100 million firm is hard enough to do—especially when the supply of qualified labor is stretched thin. The fact that these publicly traded firms are pulling off double-digit growth at the billion-dollar scale of business is directly attributable to the quality of their leadership and management.

Questions, thoughts, ideas? To connect with Mick Morrissey, email him at mmorrissey@morrisseygoodale.com or text/call at 508.380.1868.

Where Do We Go From Here? 6 Tips For Mapping Your Firm’s Future

These are tricky times for AE firms—staffing remains a fundamental constraint, yet storm clouds appear to be gathering over a growing number of markets. In a business environment chock-full of mixed signals, figuring out a direction for your firm to take while getting buy-in is no garden-variety challenge. But a deliberate, focused strategic planning effort can go a long way in helping you accomplish the feat. Here are a few tips for creating a clear, compelling vision for 2023 and beyond, and the roadmap for achieving it.

Tip #1: Get the story behind the story

Before launching into strategy meetings, get a 360-degree perspective of the firm. Do this by preparing an unbiased evaluation of the company. Gather feedback from leaders, staff, and clients, and benchmark your firm’s financial performance, policies and procedures, marketing practices, and organizational characteristics against industry norms. Distill this information into a concise report that contains a summary of the information as well as observations, interpretations, and conclusions. Deliver the report to your planning team several days in advance of the session so they can digest the issues and test their assumptions about the firm’s strengths and weaknesses before engaging in discussion with the rest of the leadership team. This document should not be shared firm-wide. It is only a tool to help establish the strategic plan, which should then be communicated to everyone in your company soon after its development.

Tip #2: Consider a “Leadership Intervention”

If your preliminary analysis indicates that there is a moderate to high degree of dysfunction at the top of your organization, consider holding a “Leadership Intervention” to focus on the health of the leadership team and clear the air before the real planning begins. Use this forum to practice listening, exchanging ideas, giving and receiving honest assessments, surfacing lingering or festering issues, and ultimately, building trust.      

Tip #3: Hold the strategy meetings off site

A neutral setting has a way of relaxing the mood and providing a buffer for busy managers who would otherwise be tempted to rush to the fire du jour. Arrange for flip charts, white boards, markers, monitors, name tags, and any other tools and accessories you might need, and make sure whatever facility you use allows for plenty of natural light so the meeting participants stay alert and focused. Consider combining in-person meetings with remote sessions for added flexibility and reflection.

Tip #4: Set ground rules for the meeting

Before the bell rings for Round 1, take 15 minutes to set ground rules for the session. Let the participants know that it is their responsibility to fully engage, listen thoroughly, and be open and honest with their thoughts and comments. Encourage the team to build on ideas and take them as far as they can go before looking for holes. The phrase “Devil’s Advocate” should be banned from the session.

Tip #5: Work from big picture to little picture

Architects and engineers often seem more interested in taking the hill than figuring out whether it was the right hill to take in the first place. So start with the vision (not to be confused with mission—more on that in a moment), then figure out how to get there. Take the opportunity to explore the possibilities of what your leadership team could build together and what the company might look like five or ten years from now. What kind of firm will it be? What markets will it serve? What will the culture be like? How big will it be? If you observe a lot of inertia in your firm, an exciting, unifying vision might be just what the doctor ordered. 

Understand that a vision statement is quite different from a mission statement. A mission states why a firm is in business, or why it exists. Conversations about mission tend to eat up an inordinate amount of time and result in ice cream headache-inducing statements like, “Our purpose is to seamlessly coordinate unique infrastructures so that we may endeavor to enthusiastically customize mission-critical opportunities for 100% client satisfaction.” It’s almost a guarantee that after hours of waxing poetic, someone in the group will inevitably ask, “What are we supposed to do with this thing? Put it on a business card?” You’re far better off to simply state that your firm exists to help clients accomplish their goals, or some such thing, and move on.  

Once the vision is established, develop strategic objectives in the areas of individual learning and growth, internal process, market development and expansion, and financial performance. Next, identify key performance indicators (“KPIs”) that will help you determine whether the firm’s objectives are being achieved, and set annual goals (specific and measurable) for each. Finally, establish initiatives and actions to serve as controlled experiments that help leaders and managers learn their way toward the firm’s goals.  

Tip #6: Don’t keep secrets!

When senior management disappears for a couple of days, employees tend to get curious, or perhaps even suspicious. To put a lid on the gossip, plan for a firm-wide meeting as soon as possible after the session. Larger firms should schedule a road show and/or conduct remote meetings to deliver the plan to management and staff around the company. Share the floor with the planning team. Discuss the strategic planning process and its purpose, showcase the vision, reveal the core objectives, and KPIs, and field questions in an open and honest way.

Strategic planning can be of great value to an organization. But you need to have a well thought-out approach and a willingness to tackle the tough issues—or you could end up doing more damage than good.

If you’d like help creating a strategic plan for your architecture or engineering firm, call or text Mark Goodale at 508.254.3914, or send an email to mgoodale@morrisseygoodale.com.

50 in 50: New Jersey

50 states in 50 weeks: U.S. states economic and infrastructure highlights.

Key Economic Indicators

GDP: $561.8 billion

GDP 5-year compounded annual growth rate (CAGR) (2017-2021): 1.1% (U.S.: 1.6%)

GDP per capita: $61,805 (U.S.: $58,154)

Population: 9.2 million

Population 5-year CAGR (2017-2021): 1.0% (U.S.: 0.5%)

Unemployment: 3.3% (U.S.: 3.9%)

Economic outlook ranking: #49 out of 50

Fiscal health ranking: #49 out of 50

Overall tax climate ranking: #50 out of 50

Key Sectors and Metro Areas

Top five industry sectors by 2021 GDP:

Sector
GDP ($ billions)
% of total GDP
Real estate and rental and leasing
83.2
14.8%
Professional, scientific, and technical services
59.0
10.5%
Manufacturing
57.4
10.2%
Health care and social assistance
47.0
8.4%
Wholesale trade
45.4
8.1%

Top three industry sectors by GDP 5-year CAGR (2017-2021):

Sector
GDP 5-year CAGR
Mining, quarrying, and oil and gas extraction
8.0%
Information
7.7%
Manufacturing
5.5%

Top three metro areas by GDP*:

  • Trenton-Princeton
  • Atlantic City-Hammonton
  • Vineland-Bridgeton

    *Excludes areas for which the principal city is not in New Jersey (i.e., New York-Newark-Jersey City, NY-NJ-PA)

Top areas by population percentage increase in 2021 vs. 2020:

  • Ocean City, NJ
  • Atlantic City-Hammonton
  • Vineland-Bridgeton

Infrastructure Highlights

New Jersey has identified over 45 projects for more than $3 billion in funding the state has been allocated thus far as part of the Bipartisan Infrastructure Law (BIL). According to a 2021 report by TRIP, New Jersey’s interstate highways were in poorer condition than 48 other states. Additionally, 57 percent of major roads in New Jersey are in poor or mediocre condition. Of the $169 million made available for water projects in the state in 2022, $48 million is dedicated to lead pipe and service line replacement, and another $30 million for drinking water investments. According to the New Jersey Department of Environmental Protection, the demand for water infrastructure projects is at an all-time high and many of the projects identified will not get funded despite availability of more federal money. Over the next five years, New Jersey’s BIL funds will address the following categories of projects (additional funds may be deployed as federal grants get awarded to states):

Funds
Improvement Area
$6.8 billion
Roads and highways
$4.1 billion
Public transportation
$1.1 billion
Bridges replacement and repair
$1.0 billion
Water infrastructure
$272 million
Airports
$104 million
Electric vehicle (EV) charging network
$100 million
Broadband (minimum allocation)
$17 million
Cyberattacks protection
$15 million
Wildfires protection

Construction spending (Value of Construction Put in Place – CPiP):

  • Private Nonresidential 2021 CPiP: $6.3 billion; -0.5% 5-year CAGR (2017-2021), below overall U.S. CAGR of 1.4%
  • State & Local 2021 CPiP: $5.8 billion; 3.0% 5-year CAGR (2017-2021), below overall U.S. CAGR of 4.0%

AE Industry

ENR 500 firm headquarters (2022): 10

M&A activity since 2018:

  • 29 deals with buyers from New Jersey
  • 41 deals with sellers from New Jersey

For customized market research, contact Rafael Barbosa at rbarbosa@morrisseygoodale.com or 972.266.4955. Connect with him on LinkedIn.

Weekly M&A Round Up

Industry M&A is up 12% over the past 12 months: With last week’s deals in GA and NC, the Southeast continues to consolidate even while the overall pace of consolidation cools off in the second half of the year. We also reported deals in CA, CO, TX, and LA as well as Canada and the UK. You can check all the week’s M&A news here.

If you’d like to know more about our M&A services, and how we can help you either confidentially sell your firm or grow through acquisition then please contact Nick Belitz, Principal, at nbelitz@morrisseygoodale.com or 303.656.6151.

Weekly real-time market and industry intelligence from Morrissey Goodale.

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A guide to help you better understand how AE firms are valued and – perhaps more importantly – what you can do to build value now.

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Overviews on what industry consolidation means and forecasts for where activity, deals, and pricing is headed.

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At-a-glance snapshots of key market indicators in various market sectors and geographies.

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