ABM Industries Incorporated — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017. ABM provides integrated facility services. Fiscal Q1 results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $1,326.7 million | $1,268.4 million |
| Operating profit | $23.8 million | $13.6 million |
| Income from continuing operations | $16.1 million; diluted EPS $0.28 | $13.6 million; diluted EPS $0.24 |
| Net income (loss) | $(56.8) million; diluted EPS $(1.00) | $14.0 million; diluted EPS $0.24 |
| Cash from operating activities | $(11.1) million total; $(9.7) million continuing operations | $(29.8) million total; $(6.6) million continuing operations |
Revenue grew 4.6%, including 3.6% organic growth and $12.2 million of incremental acquisition revenue. Operating profit rose 74.9%; gross margin slipped 10 basis points to 9.9%. The company attributed stronger operating profit to revenue contribution, 2020 Vision savings, lower restructuring costs, and a $3.2 million reimbursement of previously expensed investigation fees; one additional working day partly offset performance. Continuing-operations interest expense was $3.2 million, versus $2.7 million.
The net loss chiefly reflects a $72.9 million after-tax loss from discontinued operations, primarily legal reserves for the Augustus and Karapetyan matters. The associated pretax loss was $123.1 million. Continuing-operations results therefore improved despite the consolidated net loss.
Balance sheet and liquidity
- At January 31, 2017, cash was $42.6 million; total assets were $2,411.9 million, total liabilities $1,504.5 million, and stockholders’ equity $907.4 million.
- Line-of-credit borrowings were $306.0 million, up from $268.3 million at October 31, 2016. ABM had an $800 million revolving facility; reported borrowing capacity was $356.1 million, but covenant restrictions limited currently available capacity to $141.9 million. Standby letters of credit were $137.9 million.
- ABM reported compliance with credit covenants. It believed operating cash flows and borrowing capacity would meet cash requirements for the next 12 months.
- Investing activities used $29.1 million, including $18.6 million for acquisitions and $11.0 million for capital expenditures. Financing activities provided $27.0 million. Cash and cash equivalents declined $12.7 million during the quarter.
- Receivables increased to $855.9 million from $795.6 million at fiscal year-end. Management cited the timing of client collections as a key factor in operating cash use and expected positive cash flow from continuing operations for FY2017.
Material changes and segment trends
- Business & Industry revenue increased 1.5% to $755.0 million; operating profit rose 13.8% to $32.4 million, with margin improving to 4.3%.
- Aviation revenue increased 13.8% to $232.0 million; operating profit rose 38.8% to $5.4 million, with margin improving to 2.3%.
- Emerging Industries Group revenue increased 0.8% to $200.6 million, but operating profit fell 16.9% to $12.4 million; margin declined to 6.2%, amid weaker High Tech contract contribution and lost contracts.
- Technical Solutions revenue increased 15.3% to $107.7 million, including acquisition growth and stronger project revenue; operating profit was $8.2 million, versus $4.1 million.
- ABM reorganized reporting segments effective November 1, 2016 under its 2020 Vision. Prior-period segment information was recast. It also classified Government Services as held for sale and expected to complete a sale during 2017.
Outlook, commentary, risks and unusual items
- Management expects positive FY2017 operating cash flow from continuing operations. It gave no specific full-year revenue or earnings guidance in the provided filing text.
- ABM expects total pretax 2020 Vision restructuring and related charges of $45 million to $60 million; $46.7 million had been incurred cumulatively through January 31, 2017. Remaining activities were expected to be completed by the end of 2017.
- Probable Augustus and Karapetyan settlements were recorded in the quarter. The Augustus settlement was $110 million, subject to court approval; the Karapetyan term sheet was for $5 million and also subject to finalization and approvals. ABM accrued $115.0 million for these settlements and $6.8 million for related payroll taxes. If approved, payments were expected in two $55 million installments, with an additional $6.3 million of payroll taxes. The company expected about $50 million in cash tax savings, primarily in 2018, and was reevaluating near-term cash uses, including share repurchases.
- ABM increased casualty insurance reserves by $5.0 million following unfavorable prior-year claim developments. Further adjustments may follow planned actuarial reviews. Total insurance claim reserves were $432.2 million at quarter-end.
- Accrued probable litigation losses totaled $128.4 million. Management estimated reasonably possible losses, where estimable, at $0–$15 million; this is not a maximum-exposure estimate. The filing warns that litigation, sales-tax audits, insurance estimates, client retention, labor and personnel, economic conditions, and execution of the transformation and Government Services sale could affect results.
- ABM paid $9.4 million in dividends and repurchased $7.9 million of stock during the quarter. The company noted settlement-related cash needs could affect future repurchases.
Important facts for investors to verify
- Whether the Augustus and Karapetyan settlements receive required court approvals, and the timing and funding of payments.
- Whether the Government Services sale closes in 2017 and at what proceeds; the filing does not provide a sale price.
- Subsequent operating cash flow, receivable collections, covenant headroom, and availability under the line of credit.
- Results of the planned actuarial reviews and any further changes to insurance reserves or litigation estimates.
- Whether segment margin performance—particularly in Emerging Industries Group—and 2020 Vision savings persist as restructuring continues.