ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2020. ABM provides integrated facility services, including janitorial, facilities engineering, parking, aviation, education, and technical solutions. The company delayed filing under the SEC’s COVID-19 relief order, citing pandemic-related disruption to its quarterly review process.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,496.0 million | $1,594.7 million | $3,109.0 million | $3,202.6 million |
| Gross margin | 12.7% | 11.3% | 11.9% | 10.7% |
| Operating profit (loss) | $(116.7) million | $54.5 million | $(70.8) million | $84.8 million |
| Net income (loss) | $(136.8) million | $29.7 million | $(108.8) million | $42.7 million |
| Diluted EPS | $(2.05) | $0.45 | $(1.63) | $0.64 |
| Operating cash flow | Not separately reported | Not separately reported | $128.0 million | $56.3 million |
- Q2 revenue fell 6.2% year over year; six-month revenue declined 2.9%. Gross margin improved in both comparisons, but pandemic disruption and a $172.8 million impairment charge drove operating and net losses.
- The impairment was noncash: $163.8 million for goodwill in Education, Aviation, and U.K. Technical Solutions, plus $9.0 million for customer relationships in Aviation and U.K. Technical Solutions. The goodwill charge was not tax deductible.
- Six-month operating cash flow rose $71.7 million year over year, primarily reflecting timing of customer collections, partly offset by vendor-payment timing. Investing cash outflow was $9.3 million; financing cash inflow was $376.8 million, largely reflecting net borrowings.
- At April 30, cash was $555.9 million. Debt carrying value was approximately $1.19 billion ($87.4 million current and $1,105.7 million long term); the credit facility reported $1,198.6 million of gross borrowings. Covenant-restricted borrowing capacity was $152.5 million. The company drew approximately $300 million on its revolver in March as a precaution.
- Current assets were $1,715.0 million and current liabilities $941.2 million. Operating lease liabilities totaled $180.8 million; adoption of the lease accounting standard added material balance-sheet assets and liabilities without significant effect on earnings or liquidity.
- Interest expense declined to $10.5 million in Q2 from $12.8 million and to $20.7 million for six months from $26.3 million, mainly due to lower interest rates and lower average borrowings before the March draw. The April 30 weighted-average borrowing rate was 2.99%.
Material changes and segment performance
- Aviation: Q2 revenue declined 26.1% to $184.7 million as travel restrictions and passenger-demand collapse reduced service volumes. The segment recorded a $60.5 million operating loss, including impairment charges.
- Education: Q2 revenue declined 4.4% to $200.1 million amid school closures; the $85.8 million operating loss included a $99.3 million goodwill impairment.
- Business & Industry: Q2 revenue decreased 2.7% to $785.6 million, while operating profit rose 20.4% to $59.2 million, supported by higher-margin tag services and exits from lower-margin accounts.
- Technology & Manufacturing: Q2 revenue increased 4.2% to $233.7 million; operating profit was $19.7 million, up 2.7%.
- Technical Solutions: Q2 revenue declined 10.0% to $122.3 million, and the segment reported an $8.4 million operating loss, including goodwill and intangible-asset impairment.
- Q2 SG&A increased 10.1% to $119.4 million, including an $8.8 million rise in bad-debt expense, largely from specific client credit-risk reserves. Six-month bad-debt expense also increased, reflecting pandemic-related client credit deterioration and bankruptcies.
Outlook, risks, and unusual items
- Management said the pandemic’s duration and financial impact could not be reasonably estimated and could continue for an extended period. It cited risks to client demand and payment, facility closures, labor availability, operations, supply chains, and cash collections. No quantified revenue or earnings guidance was provided.
- Cost and liquidity actions included furloughs or reduced hours, temporary pay and benefit reductions, lower planned capital and operating expenditures, tighter discretionary spending, vendor-term extensions, and suspended share repurchases. ABM also launched its EnhancedClean program and reported increased pandemic-related cleaning and tag-service work.
- On May 28, 2020, after quarter-end, ABM amended its credit facility. Changes included revised leverage and fixed-charge covenants, a $250 million minimum liquidity requirement, tighter limits on certain acquisitions and restricted payments depending on leverage, and mandatory repayment of revolver or swingline borrowings if cash exceeds $250 million. ABM reported covenant compliance at April 30 and said it expected to remain compliant.
- ABM paid $24.6 million in dividends during the six months and repurchased $5.1 million of stock before suspending repurchases in March. The CARES Act had no material effect on the reported period, though deferred payroll taxes may affect future periods.
- Probable litigation losses accrued were $6.8 million; management estimated reasonably possible losses of up to $12 million where estimable, while noting this is not a maximum exposure. Other exposures include self-insured claims, sales-tax audits, energy-savings guarantees, and joint-venture guarantees.
- The company cited uncertainty around the future transition from LIBOR, which could affect its credit facility and interest-rate swaps. It also warned that further deterioration in pandemic-related assumptions could lead to additional asset impairment.
Most important facts for investors to verify
- Whether post-quarter trading, client collections, bad-debt reserves, and segment demand—especially Aviation and Education—developed in line with management’s assumptions.
- Available liquidity and covenant headroom under the amended credit facility, including the minimum-liquidity test and cash-triggered mandatory prepayment.
- Whether further goodwill or intangible-asset impairments, or changes in self-insurance reserves, were required in subsequent periods.
- The durability and margins of pandemic-related tag-service revenue relative to shutdown-related revenue declines and added credit losses.
- Developments in material litigation, sales-tax audits, and other contingent exposures; the filing states that the disclosed loss estimates are not maximum possible exposure.