ABM Industries Incorporated — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2019. ABM provides integrated facility services across Business & Industry, Aviation, Technology & Manufacturing, Education, Technical Solutions, and Healthcare.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $1,594.7 million | $1,580.8 million | $3,202.6 million | $3,169.2 million |
| Gross margin | 11.3% | 11.1% | 10.7% | 10.5% |
| Operating profit | $54.5 million | $45.3 million | $84.8 million | $64.8 million |
| Income from continuing operations | $29.9 million | $25.4 million | $42.9 million | $53.3 million |
| Net income | $29.7 million | $26.6 million | $42.7 million | $54.4 million |
| Diluted EPS | $0.45 | $0.40 | $0.64 | $0.82 |
- Q2 operating margin was approximately 3.4%, versus 2.9% a year earlier; six-month operating margin was approximately 2.6%, versus 2.0%.
- For the six months, operating cash flow was $56.3 million, down from $133.3 million. Capital expenditures were $27.5 million; cash dividends paid were $23.8 million. Cash increased to $53.7 million from $39.1 million at October 31, 2018.
- At April 30, total debt on the balance sheet was $952.6 million, net of deferred financing costs; gross credit-facility borrowings were $961.0 million. The weighted-average borrowing rate was 4.64%. Covenant-limited available borrowing capacity was $405.1 million. ABM reported compliance with its credit-facility covenants.
- Current assets were $1,280.9 million and current liabilities were $851.1 million. Insurance claim reserves were $517.4 million, excluding medical and dental reserves.
Changes and business drivers
- Q2 revenue rose 0.9%; six-month revenue rose 1.1%. Growth was led by U.S. Technical Solutions, including bundled energy and power projects, and by B&I. Account losses, weaker U.K. activity and foreign-exchange effects offset some growth.
- Q2 operating profit increased 20.4%, principally from better margins in B&I, T&M and U.S. Technical Solutions, a lower prior-period insurance adjustment, and reduced restructuring costs. Six-month operating profit increased 30.9%.
- Technical Solutions revenue grew 17.6% in Q2 and 10.8% year to date. Aviation operating profit and margin weakened amid account-level operating issues and higher labor costs; Healthcare’s six-month operating profit fell 30.2% as higher-margin accounts were lost.
- Six-month net income declined 21.6% despite higher operating profit, largely reflecting the comparison with the prior-year period’s $21.7 million net discrete tax benefit associated with the Tax Act. The current six-month tax provision was $17.3 million, versus a $15.1 million benefit in 2018.
- Comparability is affected by adoption of revenue-accounting standards on November 1, 2018. Prior periods were not restated. The standards reduced reported 2019 revenue by $13.4 million in Q2 and $23.4 million for six months; service-concession rent reclassification also shifted $12.2 million and $23.6 million, respectively, from operating expense to a reduction of revenue.
Outlook, risks and unusual items
- Management said operating cash flows and credit-facility capacity should be sufficient to fund requirements for the next 12 months. The filing gives no specific full-year revenue, earnings or EPS guidance.
- Management cited labor shortages and higher turnover as potential sources of increased labor and personnel costs. It also identified continued investment in technology, shared-services centralization and GCA integration as priorities; further integration-related project costs may occur.
- Operating cash flow fell substantially, primarily due to the timing of customer receivable collections and the absence of $25.9 million in prior-year proceeds from terminating interest-rate swaps. Receivables and costs incurred in excess of billings used $90.0 million of cash in the first half.
- ABM increased prior-period insurance-loss reserves by $5.0 million in the first half. The Q2 actuarial update required no further aggregate adjustment, but comprehensive reviews were expected in Q3 and could prompt additional reserve changes.
- Probable litigation losses accrued totaled $11.7 million; management estimated reasonably possible losses at $0–$7 million where estimable, while noting these figures do not represent maximum exposure. Notable matters include the Bucio employment class action and the pending final approval of the $5.4 million Castro settlement.
- ABM had $175.3 million of energy-savings guarantees, extending through 2038, and joint-and-several obligations with partners on certain joint-venture contracts. The company also flagged ongoing sales-tax audits as a possible source of adverse results.
- Lease accounting changes effective November 1, 2019 were expected to significantly increase reported assets and liabilities through recognition of right-of-use assets and lease liabilities. Management also warned that ongoing systems migrations and GCA integration could affect internal controls, though no material adverse effect was reported to date.
Important facts for investors to verify
- Whether working-capital collection timing improves and operating cash flow catches up with reported earnings.
- Progress on debt reduction, covenant headroom, interest costs and the impact of floating-rate exposure.
- Whether labor inflation, account losses and weaker Aviation and Healthcare performance persist, and whether Technical Solutions growth and margin gains continue.
- Results of Q3 insurance actuarial reviews and developments in material litigation, including the Bucio and Castro matters.
- The balance-sheet impact of the upcoming lease-standard adoption and execution risks from technology and GCA integration.