ABM Industries Incorporated — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019. Results are unaudited and compared with the three months ended January 31, 2018. ABM provides integrated facility services through six reporting segments: Business & Industry, Aviation, Technology & Manufacturing, Education, Technical Solutions, and Healthcare.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $1,607.9 million | $1,588.3 million | Up 1.2% |
| Gross margin | 10.1% | 10.0% | Up 6 basis points |
| Operating profit | $30.3 million | $19.5 million | Up 55.4% |
| Income from continuing operations | $13.0 million | $28.0 million | Down 53.4% |
| Net income | $13.0 million | $27.8 million | Down $14.8 million |
| Basic net income per share | $0.20 | $0.42 | Down $0.22 |
| Operating cash flow | $(39.3) million | $33.7 million | Down $73.0 million |
Higher operating profit reflected improved gross margin, especially in B&I, and lower restructuring costs. The effective comparison of net income was affected by the prior-year $22.2 million income tax benefit, primarily from provisional Tax Act adjustments; this quarter ABM recorded a $4.7 million tax provision.
Operating cash use was attributed mainly to the timing of client receivable collections and first-quarter working-capital needs. Investing cash use was $11.4 million, including $11.6 million of capital expenditures. Financing provided $42.0 million, primarily reflecting net borrowing activity. Cash and cash equivalents were $30.6 million at January 31, 2019, down from $39.1 million at October 31, 2018.
Total debt, net of financing costs, was $987.9 million ($42.1 million current and $945.8 million long-term); gross credit-facility borrowings were $997.0 million. The weighted-average borrowing rate was 4.32%. Covenant restrictions limited available borrowing capacity to $352.5 million, although stated capacity before those restrictions was $410.2 million. ABM reported compliance with its credit covenants. Dividends paid were $11.9 million; dividends declared were $0.18 per share.
Material changes and segment performance
- Revenue growth was led by B&I, up 2.4%, T&M, up 1.7%, and Technical Solutions, up 3.7%. Aviation revenue fell 2.9%, Education fell 1.1%, and Healthcare fell 1.6%.
- B&I operating profit rose to $36.5 million from $28.5 million. Aviation operating profit fell to $3.9 million from $5.8 million, and Healthcare fell to $1.2 million from $2.7 million. T&M, Education, and Technical Solutions reported higher operating profit.
- Restructuring and related expense declined to $3.8 million from $14.3 million, largely because the prior-year period included GCA acquisition-related restructuring, mainly severance. ABM expects further GCA integration project fees.
- SG&A increased 3.4% to $112.7 million, including higher technology investment and bad-debt expense and the absence of a prior-year legal-cost reimbursement.
Outlook, risks, and unusual items
- Management expected positive operating cash flow for FY2019 and believed operating cash flows plus credit-facility capacity would cover cash requirements for the next 12 months. It noted that actual needs or changed plans could require capital-markets financing.
- ABM increased casualty-insurance reserves by $5.0 million after actuarial reviews found adverse prior-year claim developments in general liability, property damage, workers’ compensation, and auto liability. Further reserve adjustments remain possible.
- The company cited tight labor availability, employee turnover, and rising labor costs as ongoing pressures. Segment-specific concerns included Aviation account losses and operational issues, and weaker Healthcare profitability from lost contracts, lower-margin new business, and receivable reserves.
- Probable litigation losses accrued were $12.1 million; management estimated reasonably possible losses with estimable ranges at up to $6 million, while noting actual exposure could be higher. Matters include California employment cases and the Castro cell-phone reimbursement settlement, which was subject to final court approval.
- ABM reported $179.5 million of energy-savings guarantees extending through 2038 and joint-and-several guarantees of certain joint-venture contracts. It reported no material historical losses on the energy guarantees.
- Adoption of Topic 606 and Topic 853 reduced reported Q1 revenue by $10.0 million and increased reported net income by $1.7 million versus historical accounting for this quarter; prior-year statements were not restated. Topic 606 also produced a $9.1 million pre-tax increase to opening retained earnings. ABM expected lease-accounting adoption on November 1, 2019 to significantly increase balance-sheet assets and liabilities.
- Interest-rate swap fair-value movements reduced other comprehensive income by $8.7 million in Q1, versus a $18.6 million gain in the prior-year quarter. Management described the change as driven by movements in swap fair values.
- ABM continued its 2020 Vision transformation, technology-system upgrades, shared-services consolidation, and GCA integration. Management cautioned that these initiatives may not deliver anticipated benefits and could affect internal controls during system transitions.
Important facts for investors to verify
- Whether receivable collections and operating cash flow improve as management expects; receivables and costs incurred in excess of billings increased during the quarter.
- Developments in insurance claims and reserve estimates, particularly adverse prior-period claim costs.
- Progress in Aviation and Healthcare, where operating profit and margins declined, and sustainability of B&I’s margin improvement.
- Debt levels, covenant headroom, interest-rate exposure, and the ability to fund dividends, settlements, capital spending, and integration costs.
- Outcomes and approval status of material litigation settlements, and any changes in contingent-loss estimates.
- The balance-sheet impact of lease accounting and the execution, costs, and control implications of GCA integration and technology upgrades.