ABM Industries Incorporated — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended April 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
ABM provides integrated facility services through Business & Industry (B&I), Manufacturing & Distribution (M&D), Education, Aviation, and Technical Solutions. Results include the Able acquisition, completed in September 2021, and Momentum, acquired in April 2022. ABM reorganized its industry groups effective November 1, 2021; comparative segment information was reclassified.
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $1,897.8 | $1,497.4 | $3,834.1 | $2,989.8 |
| Operating profit | $75.0 | $50.3 | $181.0 | $160.1 |
| Net income | $48.8 | $31.1 | $124.8 | $105.7 |
| Diluted EPS | $0.72 | $0.46 | $1.84 | $1.56 |
| Gross margin | 13.1% | 14.9% | 13.7% | 15.6% |
Financial position, cash flow and liquidity
- Revenue increased 26.7% in Q2 and 28.2% for the six-month period, primarily from Able, easing pandemic-related disruption and new business. Operating profit rose 49.1% in Q2 and 13.1% year to date; net income rose 56.9% and 18.0%, respectively.
- Gross margin declined 174 basis points in Q2 and 186 basis points year to date. ABM cited reduced higher-margin pandemic-related cleaning and work orders, Able-related contract mix and amortization, and increased labor costs, partly offset by favorable self-insurance reserve adjustments.
- Six-month operating cash flow was a use of $137.5, versus a source of $171.2 in the prior year. Management attributed the change chiefly to the $143.8 Bucio settlement payment, $66.0 of deferred payroll taxes paid, and working-capital timing. Investing cash use was $75.5; financing provided $201.2.
- At April 30, cash was $48.9; total current assets were $1,508.2 and current liabilities $1,280.7. Debt, net, was $1,168.1, comprising $181.5 current and $986.6 long-term. Outstanding borrowings under the credit and receivables facilities were approximately $1.2 billion; reported borrowing capacity was $731.8, and the weighted-average borrowing rate was 2.22%.
- ABM reported compliance with its credit-facility covenants and said available operating cash flow and borrowing capacity should fund requirements for the next 12 months. The $1.3 billion secured revolving facility matures June 2026; the $150 million receivables facility is uncommitted and expires February 2023.
- Six-month dividends paid were $26.2, or $0.390 per share declared. ABM repurchased $43.3 of stock and had $101.6 remaining under its $150 million authorization.
Segments and material changes
- Q2 B&I revenue grew 48.9% to $1,003.6, largely reflecting Able; operating profit rose 6.5% to $76.7, while margin fell to 7.6% from 10.7%.
- Q2 Aviation revenue grew 27.4% to $185.9 as travel recovered; operating profit rose to $9.6 from $5.7. M&D revenue increased 4.9%, while Education revenue declined 3.9% and operating profit declined 14.9%.
- Technical Solutions Q2 revenue increased 18.1% to $147.0, supported by electric-vehicle charging installations; six-month operating profit included a $7.7 gain on sale of healthcare technology management contracts.
- A favorable actuarial review reduced prior-year and incurred-but-not-reported insurance reserves by $28.7 in the first six months of FY2022, compared with a $11.4 reduction in the prior-year period.
Outlook, commentary and risks
- ABM announced its multiyear ELEVATE strategy, planning investments of $150–$175 over four years in client and employee experience, technology, data, and operating capabilities. The filing provides no specific earnings or revenue guidance.
- Management cited continuing opportunities as travel and in-person activity recover, but noted lower pandemic-related service demand. It also highlighted labor availability and wage costs, contract mix, acquisition integration, working-capital volatility, and uncertainty in the pandemic’s duration and effects.
- Key disclosed risks include competition, client retention, labor and collective bargaining, self-insurance estimates, litigation, acquisitions, cybersecurity, foreign exchange, interest rates and debt, and implementation of ELEVATE systems. ABM warned that system transitions could affect internal controls, while reporting disclosure controls and procedures were effective and no material control change was identified.
- ABM accrued $35.3 for probable litigation losses. The Bucio settlement received final approval; the company paid $143.8 in April, including $0.9 of additional expense. The filing estimates reasonably possible losses at $0–$5, but notes potential exposure may exceed its estimates.
- OFAC issued a cautionary letter on March 30, 2022, concerning a U.K. subsidiary’s past aircraft-cleaning services for Iran Air; the agency said it was not pursuing civil monetary penalties or other enforcement action.
Important facts for investors to verify
- How much revenue and profit growth is attributable to Able versus organic growth, and whether Able integration and expected synergies are progressing.
- Whether gross and segment margins stabilize as pandemic-related higher-margin work declines and labor costs rise.
- Whether working capital and operating cash flow normalize after the settlement and deferred payroll-tax payments.
- Developments in litigation and self-insurance reserves, including whether actual claims differ from actuarial estimates.
- Debt, covenant headroom, facility availability and refinancing exposure, including the 2023 receivables-facility expiry and 2026 credit-facility maturity.
- Execution and spending under ELEVATE, including the effect of systems implementation on financial controls.