ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2018. ABM provides integrated facility services across Business & Industry, Aviation, Technology & Manufacturing, Education, Technical Solutions and Healthcare. The prior-year comparisons exclude GCA, acquired September 1, 2017, and include the subsequently sold Government Services business.
Key financial metrics
| Metric | Three months ended April 30, 2018 | Six months ended April 30, 2018 |
|---|---|---|
| Revenue | $1,580.8 million; up 20.6% | $3,169.2 million; up 20.2% |
| Operating profit | $45.3 million, versus $51.0 million | $64.8 million, versus $74.8 million |
| Income from continuing operations | $25.4 million, versus $31.6 million | $53.3 million, versus $47.7 million |
| Net income (loss) | $26.6 million, versus $31.3 million | $54.4 million, versus a $25.5 million loss |
| Diluted EPS | $0.40, versus $0.55 | $0.82, versus a loss of $0.45 |
| Operating cash flow | Not presented separately for the quarter | $133.3 million, versus $48.1 million |
| Capital expenditures | Not presented separately for the quarter | $22.1 million |
Gross margin was 11.1% for the quarter and 10.5% for the six-month period, broadly unchanged year over year. Cash from operations less capital expenditures was approximately $111.2 million for the six months; operating cash flow included $25.9 million of proceeds from terminating interest-rate swaps.
At April 30, 2018, cash was $69.7 million; current assets were $1,215.7 million and current liabilities were $704.2 million. Debt carrying value totaled approximately $1,107.3 million, including $338.7 million drawn on the revolver and $145.5 million of standby letters of credit. The company reported $313.4 million of actual borrowing capacity after covenant restrictions, versus $404.5 million before those restrictions. The weighted-average borrowing rate was 4.02%.
Material changes versus the prior comparable period
- GCA contributed $256.4 million of quarterly revenue and $508.0 million for the six months. The acquisition drove much of reported revenue growth; six-month incremental revenue from acquisitions was $510.3 million.
- Quarterly operating profit fell $5.7 million, and six-month operating profit fell $10.0 million. Management cited higher acquired-intangible amortization, GCA-related costs, a tight labor market, and the absence of the prior-year $17.4 million impairment recovery related to the Government Services sale.
- Interest expense rose to $13.8 million for the quarter and $28.1 million for the six months, primarily due to acquisition-related borrowing and higher relative interest rates.
- Six-month continuing-operations income benefited from a $21.7 million net discrete tax benefit related to the Tax Act. The prior-year six-month net loss included a $73.2 million loss from discontinued operations; the current period included $1.1 million of discontinued-operations income.
- Segment results were mixed: B&I and Education operating profit increased, while Aviation and Technical Solutions operating profit declined. Technical Solutions’ six-month operating margin fell to 6.1% from 8.3%.
Outlook, management commentary and risks
- Management stated that operating cash flows and available credit capacity should fund requirements for the next 12 months. Expected uses include legal settlements, insurance claims, dividends, capital expenditures and GCA integration costs.
- No specific revenue or earnings guidance was provided. Management expects the effective tax rate to increase in fiscal 2019 as new Tax Act provisions take effect; GILTI impacts and related accounting remain under evaluation. ABM expects $5 million to $10 million of accelerated cash tax savings in 2018 from its captive insurer.
- ABM expects further GCA-related project-fee and rebranding charges in the second half of 2018; it does not expect significant future GCA severance costs. It also expects no significant future 2020 Vision restructuring costs other than continued real-estate lease consolidation.
- Labor availability and turnover may raise wages and personnel costs. Other identified risks include realizing GCA synergies, servicing substantial debt, insurance-reserve volatility, litigation, sales-tax audits, tax-law changes, and execution of the 2020 Vision transformation.
- Insurance reserves for prior-period claims increased by $4.0 million in the six months. Further adjustments remain possible following expected actuarial evaluations in the third quarter.
- Probable litigation losses accrued were $8.4 million; estimated reasonably possible losses were $0–$5 million, but these figures do not represent maximum possible exposure. Notable matters include the Bucio class-action proceedings and pending court approval of the Hussein settlement.
- ABM terminated its existing interest-rate swaps in April, receiving $25.9 million, and entered into new forward-starting swaps effective November 1, 2018. The company was in compliance with credit-facility covenants at quarter-end.
Important facts for investors to verify
- How much of future revenue and profit growth reflects GCA versus organic growth, and whether expected acquisition synergies are being achieved.
- Debt reduction, covenant headroom, interest costs and the effect of floating-rate exposure as the new swaps take effect.
- Whether cash generation remains strong after excluding the one-time swap-termination proceeds and considering working-capital timing.
- Updated insurance actuarial assessments, legal case developments and any resulting changes to reserves or cash requirements.
- Final Tax Act accounting, the fiscal 2019 effective tax rate, and the effect of adopting ASC 606 on November 1, 2018; the filing says the impact of certain contract-cost changes was not yet estimable.