ABM Industries Incorporated — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. Amounts are in U.S. dollars; financial comparisons generally use FY2014. ABM provides integrated facility services, including janitorial, engineering, parking, energy, and aviation support. The Security business is presented as discontinued operations after its sale.
Business context and strategic changes
ABM announced its “2020 Vision” transformation in September 2015, planning to organize services around five industry verticals: Aviation, Business and Industry, Education, Healthcare, and High Tech. The company also changed leadership during the year: Scott Salmirs became CEO and D. Anthony Scaglione became CFO. On October 26, ABM sold substantially all Security business assets for $131.0 million in cash proceeds.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue from continuing operations | $4,897.8 million | $4,649.7 million | +5.3% |
| Operating profit | $73.6 million | $114.8 million | −35.9% |
| Income from continuing operations | $54.1 million | $66.9 million | −19.1% |
| Income from discontinued operations, net of tax | $22.2 million | $8.7 million | +$13.5 million |
| Net income | $76.3 million | $75.6 million | +0.9% |
| Diluted EPS | $1.33 | $1.32 | +$0.01 |
| Gross margin | 10.0% | 10.5% | −0.5 percentage points |
| Net cash from operating activities | $145.3 million | $120.7 million | +$24.6 million |
Continuing-operations cash from operating activities was $144.4 million in FY2015, compared with $115.1 million in FY2014. The increase in total operating cash flow was primarily attributed to the timing of vendor payments. FY2015 discontinued-operations income included a $14.4 million after-tax gain on the Security sale.
Segments and material comparisons
Revenue increased in Janitorial (4.2%), Parking (2.6%), Building & Energy Solutions (15.3%), and Other (14.6%); Facility Services revenue declined 0.8%. Building & Energy Solutions and Other had the strongest reported growth, reflecting acquisitions and organic business growth. Segment operating profits rose modestly, but corporate expenses increased $47.0 million to $162.3 million, substantially weighing on consolidated operating profit.
The principal driver of lower operating profit was an unfavorable $35.9 million prior-year insurance-claims reserve adjustment recorded in Corporate. ABM also increased reserves by $6.5 million for current-year claims, allocated across operating segments. The total FY2015 reserve increase was $42.4 million. Gross margin was also pressured by startup costs on new business and operational issues at certain Building & Energy Solutions clients. Higher technical-services contribution and exiting certain lower-margin contracts partly offset these pressures.
Liquidity, debt, and capital allocation
At October 31, 2015, ABM reported cash and cash equivalents of $55.5 million, current assets of $947.2 million, current liabilities of $568.2 million, and total assets of $2,149.8 million. Line-of-credit borrowings were $158.0 million, down from $319.8 million a year earlier; the $800.0 million revolving facility had $529.1 million of stated borrowing capacity, subject to covenants. ABM reported covenant compliance. The Security sale proceeds were used in part to repay borrowings.
Insurance claims liabilities totaled $387.4 million, including current and noncurrent amounts. FY2015 capital expenditures were $26.5 million. ABM paid $36.0 million in dividends, declared $0.640 per share for the year, and repurchased 1.0 million shares for $31.4 million at an average $30.72 per share. The board authorized a $200.0 million repurchase program in September; $188.6 million remained authorized at year-end.
Outlook, risks, and unusual items
- Transformation costs and expected benefits: ABM recorded $12.7 million of restructuring and related costs in FY2015 and estimated total pre-tax charges of $45 million to $60 million, with most expected through the end of 2016. It expected full implementation in the second half of 2017 and annualized operational benefits of $40 million to $50 million. Benefits and timing are uncertain and depend on successful execution.
- Insurance estimates: Higher-than-anticipated claim severity, frequency, and legal and claim-management expenses drove reserve increases. Management noted that a 10% change in projected ultimate losses would have affected FY2015 net income by approximately $22.7 million.
- Tax and liquidity: The effective tax rate on continuing operations fell to 25.3% from 39.5%, primarily due to tax credits and other tax benefits. A newly formed captive insurer generated $20.0 million of FY2015 cash tax savings; future savings are not assured. Management believed available cash, operating flows, and borrowing capacity could fund needs for the next 12 months, while cautioning that this depends on cash generation and credit availability.
- Other risks: The filing highlights competitive pricing and margin pressure, labor availability and collective bargaining, client cancellations and collections, multiemployer pension exposure, government-contract funding, variable-rate debt, self-insurance, and execution risks associated with restructuring. U.S. Government sales represented approximately 26% of Building & Energy Solutions revenue; four clients generated approximately 72% of Other segment revenue.
- Legal and contingent matters: The California Supreme Court agreed to review the Augustus rest-break case after an appellate court reversed an earlier $89.7 million judgment; the ultimate outcome remained unresolved. ABM also disclosed a continuing DOJ and SEC investigation related to a former joint-venture arrangement under the Foreign Corrupt Practices Act and said potential liability could not be reasonably estimated. Probable litigation losses accrued were $8.6 million; the estimated range for other reasonably possible losses was $0–$6 million, excluding certain individual cases.
- Subsequent event: On December 9, 2015, ABM acquired U.K. engineering-services provider Westway Services, with annual revenue of approximately $81 million; purchase price and final accounting were not provided in the filing text.
Important facts for investors to verify
- Whether the $40–$50 million expected annualized benefits from 2020 Vision are achieved, and how final restructuring costs compare with the $45–$60 million estimate.
- Whether insurance claims develop favorably or require further reserve increases, particularly in general liability, workers’ compensation, and automobile liability.
- How much continuing earnings depend on the Security-sale gain and FY2015 tax benefits, versus recurring operating performance.
- Whether the Augustus case, FCPA investigation, and other employment litigation lead to material costs beyond recorded accruals and disclosed estimates.
- Westway’s purchase price, integration costs, and contribution to future revenue and profitability.