ABM Industries Incorporated — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 31, 2018; comparative period is the three months ended January 31, 2017. Amounts are in U.S. dollars unless stated otherwise.
Business context
ABM provides integrated facility services across Business & Industry, Aviation, Technology & Manufacturing, Education, Technical Solutions, and Healthcare. Results include GCA Services Group, acquired September 1, 2017; the prior-year quarter excludes GCA. ABM reorganized its reportable segments effective November 1, 2017. Government Services, sold in May 2017, is no longer an ongoing business.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $1,588.3 million | $1,326.7 million |
| Operating profit | $19.5 million | $23.8 million |
| Operating margin | 1.2% | 1.8% |
| Continuing-operations income | $28.0 million | $16.1 million |
| Net income (loss) | $27.8 million | $(56.8) million |
| Diluted EPS | $0.42 | $(1.00) |
| Operating cash flow | $33.7 million | $(11.1) million |
Revenue rose 19.7%, including $253.9 million of incremental acquisition revenue, primarily from GCA. Gross margin was 10.0%, up 9 basis points. Operating profit fell 18.2% as higher amortization, SG&A, and restructuring costs outweighed revenue growth. The prior-year net loss included a $72.9 million discontinued-operations loss, so the net-income comparison is not representative of continuing operations alone.
Q1 FY2018 continuing-operations income included a $22.2 million income tax benefit. A $21.7 million net discrete benefit related to the Tax Act materially lifted reported earnings; the benefit included $28.7 million from deferred-tax remeasurement, partly offset by a $7.0 million transition-tax expense. These tax amounts were provisional.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $68.6 million at January 31, 2018, versus $62.8 million at October 31, 2017.
- Long-term debt, net of financing costs, was $1,180.4 million, including $7.0 million current and $1,173.4 million noncurrent. Gross credit-facility borrowings were $1,192.5 million; the weighted-average rate was 3.74%.
- Credit-facility borrowing capacity was $330.5 million before covenant limits and $245.5 million after those limits. ABM reported compliance with its covenants.
- Operating cash flow was $33.7 million; investing cash outflow was $15.3 million and financing cash outflow was $14.3 million. Management attributed the operating-cash-flow improvement mainly to the timing of customer collections, partly offset by vendor-payment timing.
- Cash dividends paid were $11.5 million; dividends declared were $0.175 per share. No shares were repurchased during the quarter.
Material changes and segment trends
- GCA contributed $251.6 million of revenue and $5.0 million of operating profit in the quarter. Its acquisition increased debt, interest expense, amortization, and integration costs.
- Education revenue increased to $206.3 million from $67.0 million, principally reflecting GCA. Technology & Manufacturing revenue rose 35.3% to $232.0 million, also largely from GCA.
- Technical Solutions revenue declined 3.4% to $104.0 million and operating profit declined 30.5% to $5.5 million; management cited project timing, higher sales-related compensation, and lost higher-margin U.K. contracts.
- Corporate expenses increased 36.9% to $47.4 million, including GCA-related restructuring and 2020 Vision technology investment. Restructuring and related expense was $14.3 million, versus $5.0 million.
- Interest expense increased to $14.3 million from $3.2 million, primarily due to acquisition-related debt and higher relative borrowing rates.
Outlook, risks, and contingencies
Management expects positive operating cash flow for FY2018 and believes operating cash flows and available credit are sufficient for requirements over the next 12 months. It expects $5–$10 million of accelerated cash tax savings in 2018 from its captive insurer. The GCA restructuring program is expected to be completed by the second half of 2018; management did not expect significant future 2020 Vision costs except continued real-estate lease consolidation. No specific revenue or earnings guidance was provided.
Key risks include realizing GCA’s expected synergies while servicing substantial acquisition-related debt, covenant-limited borrowing capacity, execution of the 2020 Vision and systems migration, tax-law and provisional tax-accounting changes, and volatility in self-insured claims. An actuarial review led to a $2.0 million increase in prior-year insurance reserves in the quarter. ABM reported $10.0 million accrued for probable litigation losses and estimated reasonably possible losses of $0–$8 million where estimable; these figures do not represent maximum possible exposure. The Bucio matter returned for further proceedings after reversal of a class-certification denial, and the Castro case received class certification. The Hussein and Isse settlements totaled $8.3 million, subject to court approval for the Hussein settlement.
Important facts for investors to verify
- How much of ongoing revenue and operating-profit growth is organic versus attributable to GCA, and whether GCA integration produces expected synergies.
- Debt repayment, interest costs, covenant headroom, and the effect of restricted borrowing capacity on liquidity.
- The final Tax Act accounting adjustments and the effective tax rate, particularly as fiscal 2019 tax provisions take effect.
- Whether segment margins recover, especially in Technical Solutions, and whether insurance-reserve estimates or litigation outcomes require additional charges.
- Progress and remaining costs for GCA restructuring, 2020 Vision, and the Enterprise Services Center migration.