ABM Industries Incorporated — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020; comparisons are with the three months ended January 31, 2019 unless noted. Amounts are in millions of dollars except per-share data.
Business context
ABM provides integrated facility services, including janitorial, parking, aviation, engineering, and technical solutions. Its reportable segments are Business & Industry (B&I), Aviation, Technology & Manufacturing (T&M), Education, and Technical Solutions.
Financial results and liquidity
- Revenue: $1,612.9, up $5.0 (0.3%). Organic growth, led by U.S. Technical Solutions, was partly offset by lost accounts in Aviation, U.S. B&I, and U.K. Technical Solutions.
- Profitability: Operating profit was $45.8, up $15.5 (51.2%); gross margin rose to 11.1% from 10.1%. Net income was $28.0 versus $13.0, and diluted continuing-operations EPS was $0.41 versus $0.20.
- Cash flow: Operating cash flow was negative $34.3, compared with negative $39.3. Investing cash flow was negative $2.3 and financing cash flow was positive $48.4. Capital expenditures were $11.5. Cash ended the quarter at $69.8, up from $58.5 at October 31, 2019.
- Debt and liquidity: Credit-facility borrowings were $864.8; reported current and long-term debt, net of financing costs, totaled $858.6. Covenant restrictions limited available borrowing capacity to $353.2, despite stated facility capacity of $499.9. ABM reported compliance with its covenants.
- Other: Interest expense declined to $10.2 from $13.5. The effective tax rate was 23.6%, versus 26.4%. Dividends paid were $12.3, or $0.185 per share.
Material changes versus prior period
- Revenue was nearly flat, while operating and net income increased substantially. Management attributed much of the operating-profit improvement to an $11.6 decrease in corporate self-insurance reserve adjustments and improved Aviation and U.S. B&I margins.
- Technical Solutions revenue grew 22.4% to $142.0, primarily on U.S. bundled energy and power projects. Aviation revenue fell 5.4% to $238.7; B&I fell 1.0% to $820.9. T&M revenue declined 0.9% to $233.9.
- ABM reduced prior-period casualty insurance reserves by $6.6, versus a $5.0 increase in the prior-year quarter. Management cautioned that future claims development could prompt further reserve changes.
- Adoption of lease accounting Topic 842 on November 1, 2019 added operating-lease right-of-use assets and liabilities. At January 31, operating-lease assets were $163.4 and lease liabilities were $186.0. The company said adoption did not significantly affect earnings, cash flow, liquidity, or covenant compliance.
Outlook, risks, and contingencies
- Management expects positive operating cash flow from continuing operations for FY2020 and says operating cash flows plus borrowing capacity should cover cash requirements over the next 12 months. First-quarter cash use is typically higher because of working-capital timing. No specific revenue or earnings guidance was provided.
- Management cited a tight labor market, higher labor costs and turnover, and continued uncertainty in the global macroeconomy. It is continuing ERP, human-resources, and labor-management technology modernization and expects additional related charges in 2020.
- Key risks include client and contract losses, labor availability and costs, self-insurance reserve volatility, litigation, sales-tax audits, debt and interest-rate exposure, and execution of technology and control-system changes. The company also noted uncertainty around the transition from LIBOR after 2021.
- Probable litigation losses accrued were $7.0; estimated reasonably possible losses were between zero and $9.0, excluding matters for which ABM could not reasonably estimate exposure. A California janitorial class action had claims set for trial on October 26, 2020. ABM stated that outcomes could differ from estimates and that the disclosed amounts do not represent maximum exposure.
- Energy-savings guarantees totaled $186.0 and extend through 2038; ABM reported no material historical losses on these guarantees. The company also disclosed joint-and-several guarantees with partners for certain joint-venture contracts.
Investor verification points
- Assess how much of the earnings increase reflects the $6.6 favorable prior-period insurance reserve adjustment and whether this benefit recurs.
- Track conversion of reported earnings into cash, working-capital movements, and management’s expectation of positive FY2020 operating cash flow.
- Monitor covenant-limited borrowing capacity, debt maturities, interest-rate exposure, and compliance as leverage covenants tighten.
- Review segment trends, particularly Aviation and B&I account losses, T&M margin pressure, and the profitability of Technical Solutions growth.
- Follow developments in the Bucio litigation, sales-tax audits, insurance reserves, and implementation of financial and operating systems.