Business Context and Reporting Period
ABM Industries Incorporated provides facility services, including janitorial, engineering, parking, aviation, and specialized mechanical and electrical services. This Form 10-Q covers the three and six months ended April 30, 2017, the second quarter and first half of fiscal 2017. Segment reporting was reorganized effective November 1, 2016; prior-period segment figures were recast.
Financial Performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Apr. 30, 2017 | Three months ended Apr. 30, 2016 | Six months ended Apr. 30, 2017 | Six months ended Apr. 30, 2016 |
|---|---|---|---|---|
| Revenue | $1,310.5 | $1,257.1 | $2,637.2 | $2,525.5 |
| Operating profit | $51.0 | $11.8 | $74.8 | $25.4 |
| Income from continuing operations | $31.6 | $6.8 | $47.7 | $20.4 |
| Net income (loss) | $31.3 | $4.4 | $(25.5) | $18.4 |
| Diluted EPS | $0.55 | $0.08 | $(0.45) | $0.32 |
| Gross margin | 11.1% | 10.3% | 10.5% | 10.2% |
- Quarter revenue rose 4.2% (organic growth 3.6%); first-half revenue increased 4.4%. Acquisitions contributed $8.7 million in the quarter and $20.8 million in the half year.
- First-half net loss reflects a $73.2 million discontinued-operations loss, primarily from reserves for the Augustus and Karapetyan legal settlements. Continuing operations remained profitable.
- First-half net cash from continuing operating activities was $50.1 million, down from $79.0 million. Total operating cash flow was $48.1 million versus $56.5 million. Investing activities used $46.0 million; financing activities used $0.5 million. Cash ended the period at $55.7 million.
- At April 30, cash borrowings under the revolving credit facility were $277.9 million and letters of credit were $128.9 million. The $800 million facility showed $393.2 million borrowing capacity, but current covenant restrictions limited capacity to $262.1 million. ABM reported covenant compliance.
- Current assets were $1,061.3 million and current liabilities $740.1 million. The latter included $121.8 million of legal settlements from discontinued operations. Declared dividends were $0.34 per share for the first half; $18.9 million was paid.
Material Changes Versus Prior Period
- Quarter operating profit increased $39.2 million, primarily reflecting a $17.4 million impairment recovery on Government Services assets, cost savings, two fewer working days, lower restructuring costs, and the absence of certain prior-year receivable reserves. Results also benefited from the Government Services held-for-sale accounting. Aviation-market operational issues partly offset gains.
- First-half operating profit increased $49.4 million. The $17.4 million impairment recovery and improved margins contributed materially; operating cash flow from continuing operations declined, primarily due to timing of client receivable collections.
- For the first half, Aviation revenue rose 14.1%, Technical Solutions 12.4%, and Business & Industry 0.9%; Emerging Industries Group revenue fell 0.4%. Emerging Industries operating profit declined 12.4%, with lower contributions from High Tech contracts and higher allocated costs.
- Discontinued-operations results deteriorated substantially year over year due to settlement reserves. The effective tax rate on continuing operations for the first half was 32.7%, compared with 13.6% a year earlier.
Outlook, Commentary, Risks, and Unusual Items
- Under its 2020 Vision transformation, ABM reported approximately $10 million in incremental savings in the first half and anticipated another $10 million in the second half of 2017. Management expected restructuring activities to be substantially complete by year-end; cumulative charges were $52.5 million against a previously estimated total range of $45 million to $60 million. No specific revenue or earnings-per-share guidance was provided in the filing.
- ABM sold its Government Services business on May 31, 2017 for $35.5 million, subject to post-closing adjustments. The sale followed a second-quarter $17.4 million impairment recovery.
- The Augustus settlement is for $110 million and the Karapetyan settlement for $5 million; approvals remained outstanding at the filing date. Including payroll taxes, ABM accrued $121.8 million on the balance sheet for these settlements and related taxes, within total probable litigation accruals of $129.0 million. Management expected to fund settlement payments with operating cash flow and credit-facility borrowings, and estimated about $50 million of cash tax savings, primarily in 2018. It was reevaluating near-term cash uses, including share repurchases.
- Other reasonably possible litigation losses were estimated at $0–$16 million, but the filing cautions that actual exposure could exceed estimates and that maximum losses may not be estimable. Sales-tax audits and labor-related cases remain risks.
- Actuarial reviews prompted a $10 million increase in reserves for prior-period insurance claims during the first half, including adverse developments in general liability and workers’ compensation claims. Further comprehensive reviews were expected in the third quarter.
- Management cited risks including client retention and cost pass-through, competition, insurance-loss estimates, litigation, economic conditions, government-contract funding, acquisitions, cyber incidents, and multiemployer pension obligations. Management believed cash flows and available borrowing capacity would meet requirements for the next 12 months, subject to covenant restrictions.
Important Facts for Investors to Verify
- Final court approval, payment timing, and any changes to the Augustus and Karapetyan settlements and associated tax benefits.
- Subsequent adjustments to the Government Services sale proceeds and whether the sale changes ongoing results or cash generation as expected.
- Whether receivables convert to cash and operating cash flow improves after the first-half decline.
- Updated insurance actuarial estimates, claims reserves, and the effect of adverse prior-year claim developments.
- Actual 2020 Vision savings, remaining restructuring costs, and performance of weaker Emerging Industries and Aviation markets.
- Usable credit capacity under covenants, compliance, and the impact of settlement funding on debt, liquidity, and share repurchases.