ABM Industries Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended July 31, 2020. ABM provides integrated facility services, including janitorial, parking, facilities engineering, aviation, and technical solutions. The period was significantly affected by COVID-19 disruptions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,394.1 million | $1,647.9 million | $4,503.0 million | $4,850.6 million |
| Operating profit | $93.6 million | $57.3 million | $22.8 million | $142.1 million |
| Net income (loss) | $56.0 million | $36.8 million | $(52.8) million | $79.4 million |
| Diluted EPS | $0.83 | $0.55 | $(0.79) | $1.19 |
| Operating cash flow | Not separately stated | Not separately stated | $258.8 million | $114.0 million |
- Q3 revenue fell 15.4% year over year; operating profit rose 63.5%. Gross margin improved to 15.7% from 11.8%.
- For the nine-month period, revenue declined 7.2% and operating profit fell 84.0%. The company recorded $172.8 million of impairment charges, including $163.8 million of goodwill impairment and $9.0 million of intangible-asset impairment, largely tied to Education, Aviation, and U.K. Technical Solutions. The goodwill charge was nondeductible for tax purposes.
- Nine-month operating cash flow increased by $144.8 million year over year, aided by receivables collection timing and approximately $58 million of deferred payroll taxes; vendor-payment timing partly offset the increase. Capital expenditures were $28.9 million.
Liquidity, debt, and balance sheet
- At July 31, cash and cash equivalents were $229.4 million, versus $58.5 million at October 31, 2019. Net reported debt was $750.8 million; gross credit-facility borrowings were $757.3 million. The weighted-average borrowing rate was 3.42%.
- Available borrowing capacity was $563.7 million, subject to covenant restrictions. ABM repaid substantially all of the approximately $300 million drawn from its revolver in March during the quarter. It reported compliance with credit covenants.
- A May 2020 credit amendment introduced a minimum-liquidity covenant of $250 million, adjusted leverage and fixed-charge covenants, and restrictions on certain acquisitions and shareholder payments. The facility matures September 2022.
- Adoption of lease accounting rules added $156.6 million of right-of-use assets and $178.3 million of operating lease liabilities at quarter-end; the filing says adoption did not significantly affect earnings, cash flows, or liquidity.
Changes, outlook, and risks
- COVID-19 reduced Aviation revenue by 55.8% in Q3 as travel and passenger demand fell; Aviation reported an $8.2 million operating loss. Education revenue declined 12.5% amid school closures. T&M revenue increased 7.2%, supported by new business and pandemic-related cleaning work.
- Management attributed stronger Q3 margins to labor-cost management, higher-margin tag services, and exiting certain lower-margin accounts. These gains were partly offset by account compression, increased bad-debt expense, and investments in EnhancedClean.
- ABM cut or deferred costs, temporarily furloughed or reduced hours for some employees, suspended share repurchases, and reduced planned capital spending. Most furloughed staff and management employees returned August 1. Technology projects were largely paused.
- Management said it could not reasonably estimate the pandemic’s full future impact, but believed operating cash flow and borrowing capacity would fund requirements for the next 12 months. The filing provides no quantified earnings or revenue guidance.
- An actuarial review reduced prior-period insurance reserves by $15.1 million for the nine months, including $8.5 million in Q3; another review was expected in Q4 and could change reserves. Other risks include client credit deterioration, possible further impairments, labor and litigation exposure, and LIBOR transition uncertainty.
- Probable litigation losses accrued were $6.3 million; estimated reasonably possible losses were $0–$11 million, which the company cautioned does not represent maximum exposure.
Important facts for investors to verify
- Whether post-quarter demand, particularly in Aviation and Education, recovered or worsened and how that affected revenue, margins, and collections.
- Whether operating cash flow remains sustainable after the benefit of collection timing and deferred payroll taxes.
- Whether covenant headroom and borrowing capacity remain adequate under the amended credit terms.
- Whether Q4 insurance-reserve updates, client credit losses, or pandemic-related assumptions lead to additional charges or goodwill impairments.