ABM Industries Incorporated — FY2016 Form 10-K
Business context and reporting period. ABM provides janitorial, facilities engineering, parking, aviation, energy, and related facility services. The fiscal year ended October 31, 2016; comparisons are with FY2015 unless stated otherwise. Approximately 94% of FY2016 revenue came from U.S. operations. The filing also reports unaudited fourth-quarter results.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $5,144.7 million | $4,897.8 million | +5.0%; organic growth was 3.0% |
| Gross margin | 10.1% | 10.0% | +17 basis points |
| Operating profit | $54.7 million | $73.6 million | -25.6% |
| Income from continuing operations | $62.3 million | $54.1 million | +15.2% |
| Net income | $57.2 million | $76.3 million | -25.0% |
| Diluted EPS | $1.01 | $1.33 | Down; continuing-operations diluted EPS was $1.09 vs. $0.94 |
| Operating cash flow, continuing operations | $110.5 million | $145.5 million | Down $35.0 million |
Margins and segments. Overall operating margin was approximately 1.1% versus 1.5%. Revenue increased across all reported segments except Facility Services, which was nearly flat. Building & Energy Solutions grew 15.3% to $643.2 million, but operating profit fell 57.9% to $11.1 million, reflecting the Government Services impairment and other pressures. Parking revenue rose 5.4%, while operating profit declined 12.2% to $26.0 million. Janitorial revenue rose 2.8% to $2,768.4 million and operating profit was essentially flat at $151.1 million. Facility Services operating profit rose 7.2% to $27.2 million; Other revenue and profit increased 11.6% and 13.0%, respectively.
Liquidity and debt. At October 31, cash and cash equivalents were $56.0 million; current assets were $993.7 million and current liabilities $599.2 million. The revolving credit facility had $268.3 million of borrowings, $130.9 million of standby letters of credit, and $400.8 million of stated borrowing capacity, subject to covenants. ABM reported covenant compliance and said operating cash flows and available capacity should fund requirements for the next 12 months. Total assets were $2,281.2 million and total liabilities $1,307.2 million. Insurance claim reserves totaled $423.8 million.
FY2016 investing cash outflow from continuing operations was $131.7 million, including $96.0 million for acquisitions and $44.0 million of capital expenditures. Financing activities provided $52.6 million, primarily from borrowings used to fund acquisitions. ABM repurchased 1.4 million shares for $46.6 million and paid $36.9 million in dividends; dividends declared were $0.66 per share.
Material changes and unusual items
- Revenue increased $246.9 million, including $101.9 million of incremental acquisition revenue. Acquisitions included U.K. technical-services provider Westway and data-center technical-cleaning provider 8 Solutions.
- Operating profit included $49.6 million of higher insurance expense, comprising a $32.9 million adverse prior-year reserve adjustment and a $16.7 million increase from the insurance-reserve rate; $29.0 million of 2020 Vision restructuring and related charges; and a $22.5 million impairment of Government Services. Approximately $22 million of 2020 Vision savings partly offset these items.
- The $22.5 million Government Services impairment included $6.0 million of goodwill and $15.3 million of other asset impairment. The business was classified as held for sale, with a sale expected in 2017; sale timing and proceeds remained uncertain.
- Continuing-operations income benefited from a $20.8 million tax benefit primarily due to lapses of statutes of limitations, Work Opportunity Tax Credits, and other tax items. The resulting 2016 effective tax rate was a benefit rate of 20.0%, compared with a 25.3% expense rate in 2015.
- Net income included a $5.1 million loss from discontinued operations in 2016, compared with $22.2 million of income in 2015, which included the after-tax gain on the Security business sale. Cash flow from discontinued operations included $20.0 million of taxes paid related to that sale.
- Fourth-quarter revenue was $1,322.3 million, income from continuing operations $9.0 million, and net income $7.8 million. The quarter included the $22.5 million Government Services impairment.
Guidance, outlook, and risks
- ABM said it expected annualized operational benefits from its 2020 Vision initiative at the high end of its previously announced $40–$50 million range by the end of 2017. It expected $27 million of 2017 savings from organizational realignment and a 12–15 basis-point margin lift from procurement initiatives. These are management expectations, not guarantees.
- Management planned to continue Phase 2 of the transformation in 2017, including shared-services migration, procurement consolidation, and company-wide operating procedures. It anticipated total pre-tax restructuring and related charges of $45–$60 million; $41.7 million had been incurred cumulatively through FY2016.
- Key risks include further adverse insurance-claim development, intense price competition and contract-margin pressure, labor availability and wage costs, collective-bargaining negotiations, client retention, and execution costs or disruption from the transformation and shared-services migration. The filing notes that the 2016 claims trend was improving but not mature and remained volatile.
- Other exposures include Government Services sale uncertainty, government funding and contract risks, receivable collectability, sales-tax audits, litigation, multiemployer pension plans, and potential energy-savings guarantees. Guaranteed energy-savings obligations totaled $60.9 million and extended through 2031; ABM said it had historically incurred no material losses on these guarantees.
- ABM accrued $6.2 million for probable litigation losses and estimated reasonably possible losses of $0–$7 million for matters that could be reasonably estimated; that range excludes the Augustus and Bucio cases. The Department of Justice closed its Foreign Corrupt Practices Act investigation without action against ABM in November 2016. The California Supreme Court review in the Augustus case was still pending at the filing date.
Important facts for investors to verify
- Whether the $32.9 million prior-year insurance reserve adjustment is followed by further adverse claims development, and whether safety initiatives reduce claim frequency and severity.
- Whether management realizes the stated 2020 Vision savings and margin targets, and how remaining restructuring costs compare with the $45–$60 million estimate.
- The timing, valuation, and completion of the Government Services sale, including whether actual proceeds differ from the estimate underlying the impairment.
- Cash conversion and working-capital trends, particularly receivable collections and the timing of Energy Savings Performance Contract receipts and vendor payments.
- Debt usage, borrowing capacity under credit covenants, and the effects of variable rates; ABM estimated a 100-basis-point LIBOR increase would reduce future earnings and cash flows by $1.3 million.
- The outcomes of the Augustus and Bucio litigation, sales-tax audits, and other employment-related claims, along with potential obligations from multiemployer pension plans.
Audit and controls. KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of October 31, 2016. Management excluded Westway and 8 Solutions from its control assessment; together they represented approximately 4% of consolidated assets and 1% of FY2016 revenue.