ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 31, 2018. ABM provides integrated facility services, including janitorial, engineering, parking, aviation, education, healthcare, and technical services. Results include GCA Services Group, acquired September 1, 2017; comparative 2017 results do not include GCA.
Key financial results
| Metric | Three months ended July 31, 2018 | Prior-year comparison | Nine months ended July 31, 2018 | Prior-year comparison |
|---|---|---|---|---|
| Revenue | $1,624.3 million | +$305.9 million; +23.2% | $4,793.5 million | +$837.9 million; +21.2% |
| Gross margin | 10.9% | 10.2% | 10.7% | 10.4% |
| Operating profit | $48.1 million | $22.6 million | $112.9 million | $97.4 million |
| Continuing-operations income | $33.7 million | $32.9 million | $87.1 million | $80.6 million |
| Net income | $33.6 million | $32.9 million | $88.1 million | $7.4 million |
| Diluted EPS | $0.51 | $0.58 | $1.33 | $0.13 |
Quarterly diluted EPS from continuing operations was $0.51 versus $0.58; the difference from net EPS reflects discontinued operations. Nine-month net income comparisons are heavily affected by a $73.2 million discontinued-operations loss in 2017. Nine-month continuing-operations income rose 8.0%, while pretax income fell 19.1%, mainly as interest expense increased following the GCA-financing debt and interest-rate changes. The 2018 tax benefit included a $21.5 million net discrete benefit related to U.S. tax reform.
- Revenue drivers: GCA contributed $260.0 million of quarterly revenue and $768.0 million for the nine-month period. Nine-month acquisition-related revenue was $770.3 million, primarily from GCA. Organic growth also contributed, particularly in Business & Industry; sale of Government Services and lost Aviation accounts partly offset growth.
- Cash flow: Nine-month operating cash flow was $207.4 million ($206.4 million from continuing operations), versus $25.3 million a year earlier. Investing cash outflow was $36.3 million and financing cash outflow was $187.7 million. Operating cash flow included $25.9 million of proceeds from terminating interest-rate swaps, as well as the effects of collection timing and lower required insurance deposits.
- Liquidity and debt: July 31 cash was $46.0 million, current assets $1,240.6 million, and current liabilities $769.8 million. Debt carrying value was $1,025.4 million, including current and long-term debt, down from $1,178.2 million at October 31, 2017. Cash borrowings were approximately $1.0 billion; reported borrowing capacity was $477.3 million, but covenant limits reduced actual availability to $196.0 million. ABM reported compliance with credit covenants at quarter-end.
- Capital returns: ABM paid $34.5 million in dividends and declared $0.525 per share for the nine months. It made no share repurchases in that period.
Material changes and management commentary
- Quarterly operating profit increased $25.5 million, supported by GCA, higher gross margin, and lower restructuring costs. Higher GCA-related amortization and selling, general and administrative expenses partly offset the increase. Nine-month gross margin improved 27 basis points, but segment performance varied.
- Segment results were mixed: quarterly Aviation, Technology & Manufacturing, Education, and Technical Solutions operating profit improved; Healthcare operating profit declined, and Business & Industry margin fell to 5.3% from 5.7%. For nine months, Technical Solutions operating profit declined 9.4%, while margins in Business & Industry, Education, and Healthcare also decreased.
- Management cited a tight labor market, lower availability of qualified workers, turnover, and higher wage and personnel costs. The company continues its 2020 Vision operational transformation and GCA integration, including process, procurement, and technology initiatives.
- Management said operating cash flow and credit availability should fund expected cash requirements for the next 12 months. Expected uses include insurance claims, legal settlements, dividends, capital spending, and GCA integration. No specific earnings or revenue guidance was provided.
Outlook, risks, contingencies, and unusual items
- ABM expects its effective tax rate to increase in fiscal 2019 versus 2018. The Tax Act accounting remained provisional; future adjustments could be material, and the company was still assessing the new GILTI tax provisions.
- On September 5, 2018, after quarter-end, ABM amended its credit agreement to increase the maximum leverage ratio by 25 basis points for specified fiscal quarters through April 30, 2021. The amendment followed the quarter-end covenant position and affects borrowing constraints.
- Actuarial reviews led to a roughly $10.0 million increase in reserves for prior-period insurance claims during the first nine months of 2018, including $6.0 million in the third quarter. Management noted adverse development in certain liability, property, workers’ compensation, and auto claims, despite improvements in claim frequency and risk-management practices.
- Accrued probable litigation losses were $11.7 million. Management estimated reasonably possible losses at $0–$4 million where estimable, but stated that these amounts do not represent maximum exposure; some matters cannot be reasonably estimated. The Hussein settlement was preliminarily approved, with final approval scheduled for December 5, 2018. The Bucio matter returned to the trial court after reversal of the denial of class certification.
- ABM retained substantial insurance risk and had $500.4 million of insurance claim reserves excluding medical and dental claims. Other risks include labor and union matters, GCA integration and debt service, client retention and competition, economic conditions, foreign exchange, tax changes, and the impact of lawsuits or sales-tax audits.
- ABM expected to adopt ASC 606 revenue recognition on November 1, 2018 using the modified retrospective method. The company expected changes to timing and presentation of some revenue and contract costs, but said the overall financial-statement impact was not yet estimable.
Important facts for investors to verify
- How much reported growth and cash generation is attributable to GCA, acquisition-related timing, and the $25.9 million swap-termination proceeds versus recurring operations.
- Whether ABM can sustain margins as labor costs rise and as acquired-contract amortization, GCA integration, and restructuring costs continue.
- Current covenant headroom and borrowing availability after the September 5, 2018 amendment, including the impact of the scheduled reduction in revolving-credit commitments.
- Development of insurance reserves and material litigation, including final approval and payment of the Hussein settlement and further proceedings in Bucio and Castro.
- Final Tax Act accounting, the fiscal 2019 tax-rate effect, and quantified impacts from ASC 606 adoption when available.