ABM Industries Incorporated — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a quarterly filing.
Business context and reporting period
ABM provides janitorial, facilities engineering, parking, aviation, education, healthcare, and mechanical and electrical technical services. It reorganized reporting segments in fiscal 2018 following its 2017 acquisition of GCA Services Group for approximately $1.3 billion. GCA contributed $1.0 billion of 2018 revenue, including $855.7 million of incremental revenue versus 2017. Approximately 93% of 2018 revenue came from U.S. operations.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $6,442.2 million | $5,453.6 million |
| Gross margin | 10.8% | 10.5% |
| Operating profit | $138.6 million | $101.9 million |
| Income from continuing operations | $95.9 million | $78.1 million |
| Net income | $97.8 million | $3.8 million |
| Diluted EPS | $1.47 | $0.07 |
| Operating cash flow from continuing operations | $299.7 million | $101.7 million |
| Cash and cash equivalents at year-end | $39.1 million | $62.8 million |
| Long-term debt, net, at year-end | $902.0 million | $1,161.3 million |
Gross margin improved 29 basis points. Operating profit rose 36.1%; continuing-operations income rose 22.9%. Net income’s sharp increase primarily reflects the absence of the $74.3 million after-tax discontinued-operations loss recorded in 2017, largely related to a former Security business settlement. Interest expense increased $34.9 million to $54.1 million, mainly due to GCA-related borrowing and higher rates. The 2018 income tax benefit was $8.2 million, including a net $23.2 million benefit related to the Tax Act.
At October 31, 2018, gross credit-facility borrowings were $949.0 million. Reported available capacity was $467.3 million before covenant limits and $441.3 million after those limits; ABM reported compliance with its covenants. Dividends paid were $46.0 million, or $0.700 per share declared for the year.
Material changes and segment results
- Revenue increased 18.1%, including $858.1 million of incremental revenue from acquisitions, primarily GCA; management also cited organic growth in B&I, T&M, Technical Solutions, and Aviation.
- Operating profit growth reflected GCA’s contribution and a lower prior-year insurance reserve adjustment, partly offset by $34.4 million of additional intangible amortization and $26.5 million of impairment charges.
- Business & Industry revenue was $2,917.6 million and operating profit $154.6 million; margin was 5.3%. Education revenue was $837.5 million and operating profit $43.8 million, with much of its growth attributable to GCA.
- Technical Solutions operating profit fell to $16.5 million from $37.6 million; margin declined to 3.6% from 8.5%, including U.K. goodwill and customer-relationship impairments. Aviation and Healthcare operating profits also declined year over year.
- Fourth-quarter 2018 continuing-operations income was $8.9 million, versus a $2.5 million loss in fourth-quarter 2017. Fourth-quarter 2018 included $26.5 million of impairment charges.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow and credit-facility capacity should be sufficient for expected cash needs over the next 12 months. No quantified revenue or earnings guidance is provided in the filing.
- ABM expected its effective tax rate to increase in fiscal 2019, with additional Tax Act provisions taking effect. It also expected approximately $6 million of accelerated cash tax savings from its captive insurer in 2019.
- Management cited a tight labor market, lower labor availability, employee turnover, and rising wage and personnel costs. Many contracts are cancelable on 30–90 days’ notice, and competitive bidding and cost pass-through limits may pressure margins.
- GCA integration, technology and back-office transitions, client retention, and realization of expected synergies remain execution risks. The company reported ongoing investment in HR, ERP, labor-management, and other systems.
- Insurance reserves are a significant estimate: ABM increased prior-period claim reserves by $10.2 million in 2018. It reported approximately $510.3 million of insurance claims on the balance sheet; a 10% change in projected ultimate losses would have affected net income by approximately $30.5 million.
- U.K. Technical Solutions impairment charges totaled $26.5 million, attributed to Brexit-related economic conditions, weaker outlook and an anticipated significant contract loss. U.K. currency movements also affected comprehensive income.
- Probable litigation losses accrued were $12.6 million; management estimated reasonably possible losses, where estimable, at between zero and $4 million. The Bucio California labor class action remained pending. A $5.4 million settlement in the Castro matter was subject to court approval; the Hussein settlement was approved after year-end, with payment expected in February 2019, subject to appeals or review.
- Other notable items included $25.9 million of proceeds from terminating interest-rate swaps and $26.5 million in impairment charges. The company’s auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of reported revenue and operating-profit growth is sustainable organically after separating GCA’s contribution and acquisition-related costs.
- Whether Technical Solutions’ U.K. business stabilizes and whether further impairment or contract losses arise.
- Debt repayment, interest-rate exposure, covenant headroom, and cash generation relative to dividends and other commitments.
- Actual insurance-claim development versus reserves, including workers’ compensation and California claims.
- Final outcomes and payments for pending employment litigation, and the progress and costs of GCA integration and systems transitions.