A/E industry on track for best year ever

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss changes and innovations impacting the A/E industry.

2020: The best year yet for the A/E industry?

Cast your mind back to the middle of March. The pandemic was surging, the stock market crashing. A/E firms around the country were directing their employees to work from home and wondering if the world was coming to an end. Who would have predicted then that this would be a banner year for our industry?

Well that’s exactly what’s happening. What we’re seeing in our work with firms of all types and sizes is that 2020 is shaping up to be yet another record year in terms of financial performance – top line, bottom line, and balance sheet. It’s being driven by demand – the essential nature of what our industry delivers in terms of immediate urgency and long-term sustainable importance for the nation as a whole and individual communities. And it’s being reinforced by a total transformation of the industry’s cost and production model in the first six months of the year.

The starting point for a record 2020 industry performance is the dramatic forced reduction of overhead expenses. Non-billable travel expenses are a fraction of where they were pre-pandemic. Office leases are not being renewed at record rates. Underperforming principals and employees have been belatedly trimmed from teams (with zero negative impacts to team performance – go figure!). The salary cuts implemented in March still remain in place for many senior executives.  Combined, these reductions set the stage for every firm to see profits north of 20% in 2020.

But wait, there’s more…The design and environmental industry was a major beneficiary of the CARES act PPP loan program. Per the ACEC Research Institute, most of the 88% of consulting engineering firms that applied for a PPP loan received one, providing them with a major financial shot in the arm from April through June.

While expenses are down, demand remains robust. This dynamic can be seen most vividly in the relatively strong financial performance of the largest, publicly traded industry firms. By and large, they reported first quarter financial results that either exceeded or met expectations. And their valuations have either recovered to, or are approaching, pre-pandemic levels with backlogs holding strong or increasing, carrying them well into 2021.

And the story continues with national and regional engineering and E/A firms, especially those focused on public works and infrastructure. Most firms in this category saw record revenues and profits in 2019. In almost every case, they are indicating to us that revenues are up again this year (in one case by 30%), profits are “off the charts”, and that the record backlogs they entered the year with are generally holding up (and growing in some cases.

It’s going to be a great year financially for many smaller, non-infrastructure focused firms, too. We are observing all types of firms in the $5 million to $20 million revenue range – from structural to M/E/P to architecture, serving a variety of different markets in the public, private, and institutional sectors – experiencing phenomenal performance. Utilization rates are still sky-high, firms have a ton of cash on their balance sheets, and projects continue to come online. From the Pacific Northwest to Florida and from California to New York, we are hearing this constant refrain from clients and CEOs of industry firms.

Of course, not every firm is doing well, or is even going to make it through 2020. Architecture firms with significant exposure to specific retail, entertainment and hospitality sectors are struggling. As are engineering firms with exposure to special oil production sectors. But the financial headwinds faced by these firms – which comprise a relatively small percentage of the industry– are by far outweighed by the strong performance of most firms.

So, it’s looking like this first phase of the industry’s new reality will be characterized by unprecedented bottom-line performance and balance sheet strength.

Most CEOs are concerned about what the next phase will look like. Many are now focused on retooling their businesses and investing this year’s record profits in technologies and learning programs to ensure their systems and distributed teams – at home and in the field- are prepared for a transformed industry in the long-term and a hyper-competitive market in 2021.

When 2020 is in our collective rearview mirror, one of its most unexpected features will be how it was such a strong financial year for the design and environmental industry. The big question for industry leaders is how they will have used that record year to benefit their firms and shareholders in 2021 and beyond.

Industry consolidation continues to track at 2016/2017 levels with the 12-month rolling average of deals down 19%. The average has been bouncing around this level for about six weeks.

This article originally appeared on Morrissey Goodale’s website. Morrissey Goodale is a CFE Media content partner.

Original content can be found at www.morrisseygoodale.com.

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