ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 31, 2017. ABM provides integrated facility services, including janitorial, engineering, parking, aviation, and specialized technical services. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,318.4 | $1,296.9 | $3,955.6 | $3,822.4 |
| Operating profit | $22.6 | $18.5 | $97.4 | $44.0 |
| Income from continuing operations | $32.9 | $32.9 | $80.6 | $53.3 |
| Net income | $32.9 | $31.1 | $7.4 | $49.4 |
| Diluted earnings per share | $0.58 | $0.55 | $0.13 | $0.87 |
- Q3 revenue rose 1.7% and operating profit rose 22.0%. Gross margin declined 30 basis points to 10.2%; operating profit margin was approximately 1.7%, versus 1.4% a year earlier.
- For the nine-month period, revenue increased 3.5%; gross margin improved 14 basis points to 10.4%. Operating profit included an $18.5 million Government Services impairment recovery and sale gain. Excluding this item, the reported operating-profit increase is not directly comparable to the prior year.
- Nine-month net income fell primarily because of a $73.2 million after-tax loss from discontinued operations, principally related to settlements of former Security business litigation. Continuing-operations income increased 51.3%.
- Q3 income taxes included a $15.8 million benefit, including interest, related to the expiration of the statute of limitations for an uncertain tax position. This discrete benefit materially affected reported earnings.
- Continuing-operations operating cash flow was $82.6 million for nine months, down from $100.7 million. Cash used by discontinued operations was $57.2 million; total operating cash flow was $25.3 million, versus $75.1 million.
- At July 31, cash was $47.7 million, current assets $1,049.0 million, and current liabilities $690.1 million. Line-of-credit borrowings were $264.7 million; ABM reported compliance with its then-existing covenants. Nine-month interest expense was $9.1 million.
- Dividends paid in the nine-month period were $28.4 million; dividends declared were $0.510 per share. Capital expenditures were $42.2 million.
Material changes and business drivers
- Q3 growth reflected organic expansion in Aviation and Business & Industry (B&I) and $8.7 million of incremental acquisition revenue; offsets included the Government Services sale, completion of a large energy-savings project, and lost Emerging Industries contracts.
- Q3 B&I revenue rose 2.2% and operating profit rose 3.6%. Aviation revenue increased 18.2%, but operating profit fell 25.9% and margin contracted 142 basis points to 2.4%, chiefly following a contract termination. Emerging Industries revenue fell 5.0% and operating profit fell 31.1%; Technical Solutions revenue fell 7.6% as a large project ended.
- For nine months, Aviation revenue rose 15.6%; B&I revenue rose 1.4%; Emerging Industries revenue declined 1.9%; and Technical Solutions revenue rose 5.0%. Technical Solutions operating profit increased 55.6%, while Emerging Industries operating profit declined 19.5%.
- ABM sold Government Services on May 31, 2017, for $35.5 million and recorded a $1.1 million Q3 pre-tax gain, in addition to the previously recorded $17.4 million impairment recovery. Future run-off costs may arise.
- ABM increased prior-year insurance claim reserves by $22.3 million during 2017, including $12.3 million in Q3. Management cited adverse development in prior-year general liability and workers’ compensation claims, despite a lower recent frequency of some claims.
Outlook, transactions, risks, and contingencies
- GCA acquisition: Completed September 1, 2017, after quarter-end, for approximately $1.25 billion: $851 million cash, subject to adjustments, plus about 9.5 million ABM shares. ABM said it borrowed approximately $1.3 billion under the new facility. GCA is to be separately managed in Q4 2017, with integration into ABM’s industry structure beginning in Q1 2018.
- Management estimated annual cost synergies of $20–$30 million within two years and approximately $70 million of one-time transaction and integration expenses, including about $17 million of financing costs. It anticipated higher interest and amortization expense. Management projected GCA would increase Education annual revenue from about $250 million to $850 million and add about $500 million in annual revenue across other industry groups; these are estimates, not guarantees.
- The September 1 secured credit facility comprises a $900 million revolving facility and an $800 million five-year amortizing term loan. The revolver reduces to $800 million after one year. Covenants include a maximum leverage ratio of 4.75:1, stepping down to 3.50:1 by July 2020, and a minimum fixed-charge ratio of 1.50:1. Management expected covenant compliance. The added leverage increases debt-service and refinancing risks.
- ABM expected 2020 Vision restructuring charges to be slightly above its original $45–$60 million estimate; cumulative charges were $57.6 million through July 31. The company expected remaining activities to be completed by year-end 2017.
- Hurricane Harvey, which occurred after quarter-end, disrupted ABM’s Sugar Land, Texas, Shared Services Center and services to Houston-area clients. The operational and financial impact and recovery timetable were unknown; continuity plans and alternate offices were being activated.
- ABM paid the remaining $55 million Augustus settlement installment plus $4.8 million in payroll taxes on August 29. The Augustus and Karapetyan settlements totaled $115 million; ABM estimated about $50 million in cash tax savings, mostly in 2018. Accrued probable litigation losses were $71.7 million at July 31; estimated reasonably possible losses were $0–$18 million, excluding matters whose exposure could not be reasonably estimated.
- ABM stated it believed operating cash flow and borrowing capacity would fund requirements for the next 12 months. It also identified client receivable collection timing, insurance claims, litigation, acquisition integration and synergies, and potential additional financing needs as important uncertainties.
Important facts for investors to verify
- Whether GCA’s integration delivers the projected $20–$30 million of annual synergies and revenue opportunities, and how much debt service and integration costs affect earnings and cash flow.
- Post-acquisition debt, leverage, covenant headroom, interest expense, and available revolving capacity; July 31 debt figures predate the GCA financing.
- Cash conversion and receivables collections, given the year-over-year decline in continuing-operations operating cash flow and the increase in trade receivables.
- Further developments in insurance reserves, pending litigation, and the realized tax savings from the settlements.
- The financial and operating effects of Hurricane Harvey, including any interruption to shared services or client work.
- Whether segment margin pressure in Aviation and Emerging Industries persists and whether ABM meets its restructuring and integration plans.