ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter ended July 31, 2016; comparisons are with the three and nine months ended July 31, 2015 unless noted. Amounts are in millions except per-share data. The financial statements are unaudited.
Business context
ABM provides integrated facility services, including janitorial, facility services, parking, building and energy solutions, and other services. Following its 2020 Vision strategic review, the company sold its Security business in October 2015, and reports it as discontinued operations. ABM is reorganizing around industry groups and pursuing growth in higher-margin technical services.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,296.9 | $1,249.9 | $3,822.4 | $3,620.8 |
| Operating profit (loss) | $18.5 | $(7.6) | $44.0 | $36.4 |
| Income from continuing operations | $32.9 | $1.2 | $53.3 | $31.5 |
| Net income | $31.1 | $1.5 | $49.4 | $37.5 |
| Diluted EPS | $0.55 | $0.03 | $0.87 | $0.65 |
- Q3 revenue increased 3.8%; organic revenue growth was 2.2%. Nine-month revenue rose 5.6%, including acquisition contributions.
- Gross margin was 10.1% in Q3 versus 7.5% a year earlier, and 9.9% for nine months versus 9.4%. Q3 operating profit improved by $26.1 million, reflecting a lower year-over-year self-insurance adjustment, higher-margin revenue, 2020 Vision savings, and one fewer working day.
- Q3 tax results included substantial favorable discrete tax items: the reported income tax benefit was $14.9 million, and management cited a $19.0 million benefit related to expiring statutes of limitations, including interest, along with other tax benefits. These items materially affect comparability of earnings.
- Nine-month cash provided by continuing operations was $98.5 million, down from $104.9 million. Total operating cash flow was $72.9 million, versus $101.4 million, including $25.6 million of cash used by discontinued operations, largely related to taxes paid on the Security sale. Investing cash use was $105.9 million, principally reflecting $81.0 million for the Westway acquisition and capital expenditures of $27.4 million.
- Cash was $51.6 million at July 31, 2016, compared with $55.5 million at October 31, 2015. Line-of-credit borrowings increased to $224.3 million from $158.0 million. The company reported $443.0 million of available borrowing capacity after outstanding letters of credit; it was in compliance with credit covenants.
- Total assets were $2,239.4 million and total liabilities were $1,241.5 million. Insurance claim reserves were $422.6 million, up from $387.4 million at October 31, 2015.
- Nine-month dividends paid were $27.7 million; dividends declared were $0.495 per share. Share repurchases totaled $31.2 million for the period.
Material changes and segment performance
- Q3 operating results swung from a $7.6 million loss to $18.5 million profit. For the nine months, operating profit increased 20.7% to $44.0 million.
- Building & Energy Solutions revenue increased 12.5% in Q3 and 20.7% for nine months, benefiting from Westway and technical services. Janitorial revenue grew 2.0% in Q3 and 3.0% year to date. Parking revenue increased, but operating profit declined 2.1% in Q3 and 9.9% for nine months.
- Westway, a U.K. technical engineering services provider, was acquired for $81.0 million effective December 1, 2015. It contributed $19.3 million of Q3 revenue to Building & Energy Solutions.
- Reported Q3 results include $3.3 million of restructuring and related costs; nine-month costs were $19.3 million. Cumulative 2020 Vision charges were $31.9 million through July 31.
Outlook, risks, and contingencies
- Management expects total pre-tax 2020 Vision restructuring and related charges of $45 million to $60 million, with most expected through the end of 2016. Full implementation is expected by the second half of 2017; targeted annualized operational benefits are $40 million to $50 million by the end of 2017. ABM reported $12.9 million of savings during the first nine months of 2016.
- Management believes operating cash flow and borrowing capacity are sufficient for requirements over the next 12 months. Cash needs include restructuring, dividends, repurchases, legal settlements, and potential acquisitions.
- Actuarial reviews increased reserves for prior-period insurance claims by $31.8 million during the first nine months of 2016, including a $19.8 million Q3 increase. Adverse developments involved general liability, workers’ compensation, and auto claims; further evaluation of certain acquired-business claims was expected in Q4.
- Accrued probable litigation losses were $9.2 million, including $4.8 million for wage-and-hour settlements. Management estimated reasonably possible losses, where estimable, at zero to $15 million, excluding the Augustus and Bucio cases; actual exposure could exceed the accrual or stated range. The Augustus case was pending before the California Supreme Court, with oral argument scheduled for September 29, 2016.
- Other stated risks include client receivable collectability, execution of the 2020 Vision, insurance reserve estimation, client retention, labor and legal costs, acquisitions, and economic and operational disruptions. ABM reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- How much earnings improvement is sustainable after separating discrete tax benefits, prior-year insurance adjustments, restructuring charges, and other unusual items.
- Whether 2020 Vision savings and the $40 million to $50 million annualized benefit target are achieved, and whether implementation costs remain within the $45 million to $60 million range.
- Further actuarial reserve developments, including the pending evaluation of claims from certain acquired businesses and the effect on future insurance expense and cash payments.
- Collection prospects for receivables and energy-savings contract receivables, given increased bad-debt provisions and the timing-related cash flow decline.
- Developments in material litigation, including Augustus and wage-and-hour matters, and potential exposure beyond amounts accrued or estimated.
- Borrowing levels, remaining credit capacity, covenant compliance, and cash needs for acquisitions, repurchases, dividends, and restructuring.