UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2018
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-8929
ABM INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware |  | 94-1369354 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Liberty Plaza, 7th Floor
New York, New York 10006
(Address of principal executive offices)
(212) 297-0200
(Registrant’s telephone number, including area code)
__________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | New York Stock Exchange | |
__________________________
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | þ | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on April 30, 2018 as reported on the New York Stock Exchange on that date: $2,031,249,279
Number of shares of the registrant’s common stock outstanding as of December 20, 2018: 66,029,479
_______________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the registrant’s Definitive Proxy Statement relating to the registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS | |
PART I | |
Item 1. Business. | |
Item 1A. Risk Factors. | |
Item 1B. Unresolved Staff Comments. | |
Item 2. Properties. | |
Item 3. Legal Proceedings. | |
Item 4. Mine Safety Disclosures. | |
PART II | |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | |
Item 6. Selected Financial Data. | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. | |
Item 8. Financial Statements and Supplementary Data. | |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. | |
Item 9A. Controls and Procedures. | |
Item 9B. Other Information. | |
PART III | |
Item 10. Directors, Executive Officers and Corporate Governance. | |
Item 11. Executive Compensation. | |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | |
Item 13. Certain Relationships and Related Transactions, and Director Independence. | |
Item 14. Principal Accounting Fees and Services. | |
PART IV | |
Item 15. Exhibits, Financial Statement Schedules. | |
SIGNATURES | |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for ABM Industries Incorporated and its subsidiaries (collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”) contains both historical and forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. We make forward-looking statements related to future expectations, estimates, and projections that are uncertain and often contain words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “outlook,” “plan,” “predict,” “should,” “target,” or other similar words or phrases. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and assumptions that are difficult to predict. Factors that might cause such differences include, but are not limited to, those discussed in Part 1 of this Form 10-K under Item 1A., “Risk Factors,” and we urge readers to consider these risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
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PART I
ITEM 1. BUSINESS.
General
ABM Industries Incorporated, which operates through its subsidiaries (collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”), is a leading provider of integrated facility solutions with a mission to make a difference, every person, every day. Our history dates back to 1909, when American Building Maintenance Company began as a window washing company in San Francisco with one employee. In 1985, we were incorporated in Delaware under the name American Building Maintenance Industries, Inc., as the successor to the business originally founded in 1909. In 1994, we changed our name to ABM Industries Incorporated. Over the past ten years, we have grown into a multi-segment facility solutions company, increasing our revenue from $3 billion to $6 billion, particularly through new service offerings and strategic acquisitions.
The acquisition of OneSource in 2007 bolstered ABM as a leader in the janitorial market, while the Linc Group acquisition in 2010 established ABM as a “facility solutions” company with new service offerings, including lighting, mechanical, and electrical “technical solutions.” With demand increasing for industry-specific service providers, in 2012 we purchased Air Serv and established our first industry group, “aviation.” In recent years, we have strategically acquired companies in the United Kingdom, particularly with the GBM and Westway acquisitions, which expanded our janitorial and technical solutions businesses overseas. In 2017, we completed the acquisition of GCA Services Group (“GCA”), a provider of integrated facility services to educational institutions and commercial facilities, for approximately $1.3 billion, the largest acquisition in ABM history. As a result of this acquisition, we are now a leading facility solutions provider in the education market. In recent years, we also evaluated all of our service offerings and sold our Security and Government Services businesses, which did not align with ABM’s long-term industry-group focus.
As a result of these strategic changes, we have strengthened our ability to offer janitorial, facilities engineering, parking, and specialized mechanical and electrical technical solutions, on a standalone basis or in combination, positioning ourselves as a leading integrated facilities management company. Unless otherwise indicated, all references to years are to our fiscal year, which ends on October 31.
2020 Vision
In September 2015, we announced a comprehensive transformation initiative (“2020 Vision”) intended to drive long-term, profitable growth through an industry-based go-to-market approach. In connection with our 2020 Vision, we have achieved savings through the realignment of our organization by industry group, divested businesses that were not at the core of our strategy, centralized key functional areas, strengthened our sales capabilities, initiated investments in service delivery tools and processes, improved our employee engagement programs, and added to our position as a leading integrated service provider through the acquisition of GCA. We continue focusing on several key initiatives across our organization to sustain our 2020 Vision strategy and profitably deliver leading industry-based facility solutions. For additional information on our 2020 Vision, see Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Contract Types
We generate revenues under several types of contracts, as explained below. Generally, the type of contract is determined by the nature of the services. Although many of our service agreements are cancelable on short notice, we have historically had a high rate of client retention and expect to continue maintaining long-term relationships with our clients.
Contract Type | Description |
Monthly Fixed-Price | These arrangements are contracts in which the client agrees to pay a fixed fee every month over a specified contract term. A variation of a fixed-price arrangement is a square-foot arrangement, under which monthly billings are based on the actual square footage serviced. Janitorial contracts are commonly structured as fixed-price arrangements. |
Cost-Plus | These arrangements are contracts in which the clients reimburse us for the agreed-upon amount of wages and benefits, payroll taxes, insurance charges, and other expenses associated with the contracted work, plus a profit margin. Facilities engineering, janitorial, and catering services are commonly structured as cost-plus arrangements. |
Tag Services | Tag work generally consists of supplemental services requested by clients outside of the standard service specification. This contract type is commonly used in janitorial services and includes cleanup after tenant moves, construction cleanup, flood cleanup, and snow removal. |
Transaction-Price | These are agreements in which the clients are billed for each transaction performed on a monthly basis (e.g., wheelchair passengers served or planes cleaned). |
Hourly | These arrangements are contracts in which the client is billed a set hourly rate for each labor hour provided. Certain Aviation contracts are structured as hourly arrangements. |
Management Reimbursement | Under these parking arrangements, we manage a parking facility for a management fee and pass through the revenue and expenses associated with the facility to the owner. |
Leased Location | Under these parking arrangements, we generally pay to the property owner a fixed amount of rent plus a percentage of revenues derived from monthly and transient parkers. We retain all revenues and we are responsible for most operating expenses incurred. |
Allowance | Under these parking arrangements, we are paid a fixed or hourly fee to provide parking services, and we are responsible for certain operating expenses, as specified in the contract. |
Energy Savings Contracts and Fixed-Price Repair and Refurbishment | Under these arrangements, we agree to develop, design, engineer, and construct a project and guarantee that the project will satisfy agreed-upon performance standards. |
Franchise | We franchise certain engineering services through individual and area franchises under the Linc Service and TEGG brands, which are part of ABM Technical Solutions. |
Segment and Geographic Financial Information
Effective November 1, 2017, we reorganized our reportable segments to reflect the integration of GCA into our industry group model. Our reportable segments consist of Business & Industry (“B&I”), Aviation, Technology & Manufacturing (“T&M”), Education, Technical Solutions, and Healthcare. Our principal operations are in the United States, and in 2018 our U.S. operations generated approximately 93% of our revenues. For segment and geographic financial information, see Note 18, “Segment and Geographic Information,” in the Notes to Consolidated Financial Statements.
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REPORTABLE SEGMENTS AND DESCRIPTIONS | |
 | B&I, our largest reportable segment, encompasses janitorial, facilities engineering, and parking services for commercial real estate properties and sports and entertainment venues. B&I also provides vehicle maintenance and other services to rental car providers (“Vehicle Services Contracts”). We typically provide services in this segment pursuant to monthly fixed-price arrangements and cost-plus arrangements that are obtained through a competitive bid process as well as through tag services. |
 | Aviation supports airlines and airports with services ranging from parking and janitorial to passenger assistance, catering logistics, air cabin maintenance, and transportation. We typically provide services to clients in this segment under master services agreements. These agreements are typically re-bid upon renewal and are generally structured as fixed-price arrangements, parking reimbursement contracts, transaction-price arrangements, and hourly arrangements. Two clients accounted for approximately 31% of revenues for this segment in 2018. |
 | T&M combines our legacy Industrial & Manufacturing business, which was previously included in our B&I segment, with our legacy High Tech industry group, which was previously reported as part of our legacy Emerging Industries Group. T&M provides janitorial, facilities engineering, and parking services. We typically provide these services pursuant to monthly fixed-price and cost-plus arrangements that are obtained through a competitive bid process. |
 | Education delivers janitorial, custodial, landscaping and grounds, facilities engineering, and parking services for public school districts, private schools, colleges, and universities. These services are typically provided pursuant to monthly fixed-price and cost-plus arrangements that are obtained through either a competitive bid process or re-bid upon renewal. This business was previously reported as part of our legacy Emerging Industries Group. |
 | Technical Solutions specializes in mechanical and electrical services. These services can also be leveraged for cross-selling across all of our industry groups, both domestically and internationally. Contracts for this segment are structured as cost-plus arrangements, fixed-price arrangements, energy savings contracts, and franchise arrangements. |
 | Healthcare offers janitorial, facilities management, clinical engineering, food and nutrition, laundry and linen, parking and guest services, and patient transportation services at traditional hospitals and non-acute facilities. We typically provide these services, which are obtained through a competitive bid process, pursuant to monthly fixed-price and cost-plus arrangements, as well as parking reimbursement contracts. This business was previously reported as part of our legacy Emerging Industries Group. |
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Service Marks, Trademarks, and Trade Names
We hold various service marks, trademarks, and trade names, such as “ABM,” “ABM Building Value,” “ABM Greencare,” “MPower,” “Linc Service,” “OmniServ,” and “TEGG,” which we deem important to our marketing activities, to our business, and, in some cases, to the franchising activities conducted by our Technical Solutions segment.
Dependence on Significant Client
No client accounted for more than 10% of our consolidated revenues during 2018, 2017, or 2016.
Competition
We believe that each aspect of our business is highly competitive and that such competition is based primarily on price, quality of service, efficiency enhancements, adapting to changing workplace conditions, and ability to anticipate and respond to industry changes. A majority of our revenue is derived from projects requiring competitive bids; however, an invitation to bid is often conditioned upon prior experience, industry expertise, and financial strength. The low cost of entry in the facility services business results in a very competitive market. We mainly compete with regional and local owner-operated companies that may have more acute vision into local markets and significantly lower labor and overhead costs, providing them with competitive advantages in those regards. We also compete indirectly with companies that can perform for themselves one or more of the services we provide.
Sales and Marketing
Our sales and marketing activities include digital engagement and direct interactions with prospective and existing clients, pricing, proposal management, and customer relationship management by dedicated business development teams, operations personnel, and management. These activities are executed by branch and regional sales, marketing, and operations teams assigned to our industry groups and are supported by centralized sales support teams, inside sales teams, corporate marketing personnel, and our Center of Excellence teams. These sales and marketing teams perform lead acquisition, lead nurturing, and lead management as well as training in sales tools and proposal systems, all governed by standard operating procedures.
Regulatory Environment and Environmental Compliance
Our operations are subject to various federal, state, and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water, and air, and the generation, handling, storage, transportation, and disposal of waste and hazardous substances. From time to time we are involved in environmental matters at certain of our locations or in connection with our operations. Historically, the cost of complying with environmental laws or resolving environmental issues relating to locations or operations in the United States or abroad has not had a material adverse effect on our financial position, results of operations, or cash flows.
Employees
As of October 31, 2018, we employed approximately 140,000 persons, of which approximately 48,000, or 34%, were subject to various local collective bargaining agreements.
Available Information
We are required to file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other information with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge on our Internet site at www.abm.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. We provide references to our website for your convenience, but our website does not constitute, and should not be viewed as, a part of this Annual Report, and our website is not incorporated into this or any of our other filings with the SEC.
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Executive Officers of Registrant
Executive Officers on December 21, 2018
Name | Age | Principal Occupations and Business Experience | ||
Scott Salmirs | 56 | President and Chief Executive Officer of ABM since March 2015; Executive Vice President of ABM from September 2014 to March 2015, with global responsibility for ABM’s Aviation division and all international activities; Executive Vice President of ABM’s Onsite Services division focused on the Northeast from 2003 to September 2014; Member of the Board of Directors of ABM since January 2015. | ||
D. Anthony Scaglione | 46 | Executive Vice President and Chief Financial Officer of ABM since April 2015; Senior Vice President, Treasurer, and Head of Mergers and Acquisitions of ABM from January 2012 to April 2015; Vice President and Treasurer of ABM from June 2009 to January 2012; Chairman of the Board of the Association for Financial Professionals (AFP), the professional society that represents finance executives across the globe, from November 2014 to October 2016. | ||
Scott Giacobbe | 56 | Chief Operating Officer of ABM since November 2017; President of ABM’s U.S. Technical Solutions from November 2010 to November 2017. | ||
Andrea R. Newborn | 55 | Executive Vice President, General Counsel, and Corporate Secretary of ABM since July 2017; Executive Vice President and General Counsel for TravelClick, Inc. from July 2014 to June 2017; Senior Vice President, General Counsel, and Secretary of The Reader’s Digest Association, Inc. from March 2007 to February 2014. | ||
Dean A. Chin | 50 | Senior Vice President, Chief Accounting Officer, and Corporate Controller of ABM since June 2010; Vice President and Assistant Controller of ABM from June 2008 to June 2010. | ||
Andrew D. Block | 50 | Executive Vice President and Chief Human Resources Officer of ABM since June 2018; Senior Vice President, Talent and Organizational Performance (Chief HR Officer) of Buffalo Wild Wings, Inc. from April 2010 to June 2018; Director of Human Resources of C.H. Robinson Worldwide, Inc. from December 2002 to April 2010. | ||
Rene Jacobsen | 57 | President of ABM’s Business & Industry Group since February 2016; Executive Vice President of ABM’s West Region from April 2012 to February 2016; Executive Vice President and Chief Operating Officer of Temco Service Industries from November 2007 to April 2012. | ||
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ITEM 1A. RISK FACTORS.
We may not realize the full extent of growth opportunities or potential synergies anticipated from the acquisition of GCA.
The benefits that we expected to result from the acquisition of GCA will depend, in part, on our ability to realize the full extent of the anticipated growth opportunities and to maintain synergies from the acquisition. Our success in realizing these growth opportunities and synergies, and the timing of this realization, depends on a number of factors. There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition as sizable as GCA. While we have completed a significant portion of the integration, the ongoing process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business, including the GCA legacy business. In addition, time and distraction relating to the integration of GCA could detract from our ability to achieve the benefits anticipated with respect to our 2020 Vision. There can be no assurance that we will complete the GCA integration successfully or in a cost efficient manner, and the failure to do so could have a material adverse effect on our business, financial condition, or results of operations.
Even if we are able to complete the GCA integration successfully, this integration may not result in the full realization of the growth opportunities and synergies we anticipated and currently expect from this integration, and we cannot guarantee these benefits will be achieved within anticipated timeframes or at all. In addition, the overall integration may result in unanticipated problems, expenses, liabilities, competitive responses, loss of client and other relationships, or loss of key employees, any of which may adversely affect our results of operations and may cause our stock price to decline.
We incurred a substantial amount of debt to complete the acquisition of GCA. To service our debt, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We also depend on the profitability of our subsidiaries to satisfy our cash needs. If we cannot generate the required cash, we may not be able to make the necessary payments required to service our indebtedness or we may be required to suspend certain discretionary payments, including our dividend.
In connection with the acquisition of GCA, we refinanced and replaced our existing credit facility with a new syndicated secured credit facility (the “Credit Facility”) consisting of a $900 million revolving line of credit and an $800 million amortizing term loan with a five-year term. Although we have paid down portions of this indebtedness, our future ability to make payments on our debt, fund our other liquidity needs, and make planned capital expenditures will depend on our ability to generate cash. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, and other factors that are beyond our control. We cannot guarantee that our business will generate sufficient cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to make payments on our debt, fund other liquidity needs, make planned capital expenditures, or continue our dividend.
The degree to which we are currently leveraged could have important consequences for shareholders. For example, it could: require us to dedicate a substantial portion of our cash flows from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, share repurchases, capital expenditures, acquisitions, and other general corporate purposes; limit our availability to obtain additional financing in the future to enable us to react to changes in our business; and place us at a competitive disadvantage compared to businesses in our industry that have less debt.
Additionally, increased borrowings increase our interest expense, which could negatively impact our profitability. Because current interest rates on our credit facility are variable, an increase in prevailing rates would increase our interest costs. Further, our credit facility contains both financial covenants and other covenants that limit our ability to engage in specific transactions. Any failure to comply with covenants in the credit facility could result in an event of default that, if not cured or waived, would have a material adverse effect on us.
Changes to our businesses, operating structure, financial reporting structure, or personnel relating to the implementation of our 2020 Vision strategic transformation initiative, together with process and technology initiatives following the acquisition of GCA, may not have the desired effects on our financial condition and results of operations.
During the fourth quarter of 2015, we announced our 2020 Vision, which is intended to differentiate ABM in the marketplace, accelerate revenue growth for certain industry groups, and improve our margin profile. While we have made progress in implementing this initiative, we may not be able to fully execute on this strategy to the extent expected within the anticipated timeframe as a result of numerous factors, such as client resistance to an integrated
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approach, inability to deliver requested end-to-end services, and difficulty penetrating certain markets. Moreover, although we may be able to leverage scale to manage costs more efficiently and effectively, the realignment of our business operations may not provide us with the anticipated competitive advantage or revenue growth.
In connection with our 2020 Vision and following the acquisition of GCA, we are making significant investments in information technology, but there can be no assurance these investments will have the desired results in improving the delivery of our services. In addition, planned changes to our business systems and processes may not create the operational efficiencies or cost benefits that we expect and could result in unanticipated consequences, including substantial disruption to our back-office operations and service delivery.
In addition, the planned move of GCA’s back-office functions to the ABM enterprise service center may create risks relating to the processing of transactions and recording of financial information. During the transition period, we could experience a lapse in the operation of internal controls due to turnover, lack of legacy knowledge, or inappropriate training, which could result in significant deficiencies or material weaknesses.
Our success depends on our ability to gain profitable business despite competitive pressures and on our ability to preserve long-term client relationships.
We believe that each aspect of our business is highly competitive and that such competition is based primarily on price, quality of service, and ability to anticipate and respond to industry changes. A majority of our revenue is derived from projects requiring competitive bids. The low cost of entry in the facility services business results in a very competitive market. We mainly compete with regional and local owner-operated companies that may have more acute vision into local markets and significantly lower labor and overhead costs, providing them with a competitive advantage in those regards. We also compete indirectly with companies that can perform for themselves one or more of the services we provide. Additionally, many of our contracts provide that our clients pay certain costs at specified rates, such as insurance, healthcare costs, salary and salary-related expenses, petroleum, and other costs. We may experience higher operating costs related to changes in laws and regulations regarding employee benefits, minimum wage, and other entitlements promulgated by federal, state, or local governments or as a result of increased local wages necessary to attract employees due to changes in the unemployment rate. If actual costs exceed the rates specified in the contracts, our profitability may be negatively impacted. Further, if we are unable to respond adequately to changing technology, we may lose existing clients and fail to win future business opportunities. These strong competitive pressures could inhibit our success in bidding for profitable business and our ability to increase prices as costs rise, thereby reducing margins.
We primarily provide services pursuant to agreements that are cancelable by either party upon 30–90 days’ notice. As we generally incur higher initial costs on new contracts until the labor management and facilities operations normalize, our business associated with long-term client relationships is generally more profitable than short-term client relationships. If we lose a significant number of long-term clients, our profitability could be negatively impacted, even if we gain equivalent revenues from new clients.
We depend to a large extent on our relationships with clients and our reputation for quality integrated facility solutions. Maintaining our existing client relationships, including retaining GCA clients as we complete the rebranding of the GCA entities, is an important factor contributing to our business success. Among other things, adverse publicity stemming from an accident or other incident involving our facility operations or employees related to injury, illness, death, or alleged criminal activity could harm our reputation, result in the cancellation of contracts or inability to retain clients, and expose us to significant liability.
Our business success depends on our ability to attract and retain qualified personnel and senior management.
Our future performance depends on the continuing services and contributions of our senior management and on our continued ability to attract and retain qualified personnel. Any unplanned turnover in senior management or inability to attract and retain qualified personnel could have a negative effect on our results of operations. We employ approximately 140,000 persons, and our operations depend on the services of a large and diverse workforce. We must attract, train, and retain a large and growing number of qualified employees while controlling related labor costs. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including changes in the unemployment rate, changes in immigration policy, regulatory changes, prevailing wage rates, and competition we face from other companies for qualified employees. There is no assurance that we will be able to attract or retain qualified employees in the future, which could have a material adverse effect on our business, financial condition, and results of operations.
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Our use of subcontractors or joint venture partners to perform work under customer contracts exposes us to liability and financial risk.
We depend on subcontractors or other parties, such as joint venture partners, to perform work in situations in which we are not able to self-perform the work involved. Such arrangements may involve subcontracts or joint venture relationships where we do not have direct control over the performing party. A failure, for whatever reason, by one or more of our subcontractors or joint venture partners to perform, or the alleged negligent performance of, the agreed-upon services may expose us to liability. Although we have in place controls and programs to monitor the work of our subcontractors and our joint venture partners, there can be no assurance that these controls or programs will have the desired effect, and we may incur significant liability as a result of the actions or inactions of one or more of our subcontractors or joint venture partners.
Our international business involves risks different from those we face in the United States that could have an effect on our results of operations and financial condition.
We have business operations in jurisdictions outside of the United States, most significantly in the United Kingdom (“U.K.”). Our international operations are subject to risks that are different from those we face in the United States and subject us to complex and frequently changing laws and regulations, including differing labor laws and regulations relating to the protection of certain information that we collect and maintain about our employees, clients, and other third parties. Among these laws is the U.K. Modern Slavery Act, the U.K. Bribery Act, and the European Union General Data Protection Regulation (the “GDPR”), which took effect in May 2018. The failure to comply with these laws or regulations could subject us to significant litigation, monetary damages, regulatory enforcement actions, or fines in one or more jurisdictions. More generally, the economic, political, monetary, and operational impacts of Brexit, including unanticipated impacts to the U.K. real estate market and general economic conditions in the United Kingdom, could negatively impact our U.K. business, including reducing our margins.
In addition, when we participate in joint ventures that operate outside of the United States where we are not a controlling party, we may have limited control over the joint venture. Any improper actions by our joint venture employees, partners, or agents, including but not limited to failure to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and/or laws relating to human trafficking, could result in civil or criminal investigations, monetary and non-monetary penalties, or other consequences, any of which could have an adverse effect on our financial position as well as on our reputation and ability to conduct business.
Additionally, the operating results of our non-U.S. subsidiaries are translated into U.S. dollars, and those results are affected by movements in foreign currencies relative to the U.S. dollar. There can be no assurance that the foregoing factors will not have a material adverse effect on our international operations or on our consolidated financial condition and results of operations.
Unfavorable developments in our class and representative actions and other lawsuits alleging various claims could cause us to incur substantial liabilities.
Our business involves employing tens of thousands of employees, many of whom work at our clients’ facilities. We incur risks relating to our employment of these workers, including but not limited to: claims of misconduct or negligence on the part of our employees; claims related to the employment of unlicensed personnel; and claims by our employees of discrimination, harassment, violations of wage and hour requirements, or violations of other federal, state, or local laws. We also incur risks and claims related to the imposition on our employees of policies or practices of our clients that may be different from our own. Some or all of these claims may lead to litigation, including class action litigation, and these matters may cause us to incur negative publicity with respect to alleged claims. Additionally, there are risks to all employers in some states, such as California, resulting from new and unanticipated judicial interpretations of existing laws and the application of those new interpretations against employers on a retroactive basis. It is not possible to predict the outcome of these lawsuits or any other proceeding, and our insurance may not cover all claims that may be asserted against us. These lawsuits and other proceedings may consume substantial amounts of our financial and managerial resources. An unfavorable outcome with respect to these lawsuits and any future lawsuits could, individually or in the aggregate, cause us to incur substantial liabilities that could have a material adverse effect upon our business, reputation, financial condition, or results of operations.
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We insure our insurable risks through a combination of insurance and self-insurance, and we retain a substantial portion of the risk associated with expected losses under these programs, which exposes us to volatility associated with those risks, including the possibility that changes in estimates of ultimate insurance losses could result in material charges against our earnings.
We use a combination of insured and self-insurance programs to cover workers’ compensation, general liability, automobile liability, property damage, and other insurable risks. We are responsible for claims both within and in excess of our retained limits under our insurance policies, and while we endeavor to purchase insurance coverage that is appropriate to our assessment of risk, we are unable to predict with certainty the frequency, nature, or magnitude of clams for direct or consequential damages. If our insurance coverage proves to be inadequate or unavailable, our business may be negatively impacted.
The determination of required insurance reserves is dependent upon significant actuarial judgments. We use the results of actuarial studies to estimate insurance rates and insurance reserves for future periods and to adjust reserves, if appropriate, for prior years. Actual experience related to our insurance reserves can cause us to change our estimates for reserves and any such changes may materially impact results, causing significant volatility in our operating results. We have previously experienced material negative trends in our actuarial estimates and may continue to experience these and other material negative trends in future periods.
Should we be unable to renew our excess, umbrella, or other commercial insurance policies at competitive rates, it could have a material adverse impact on our business, as would the incurrence of catastrophic uninsured claims or the inability or refusal of our insurance carriers to pay otherwise insured claims. Further, to the extent that we self-insure our losses, deterioration in our loss control and/or our continuing claim management efforts could increase the overall cost of claims within our retained limits. A material change in our insurance costs due to changes in the frequency of claims, the severity of the claims, the costs of excess/umbrella premiums, or regulatory changes could have a material adverse effect on our financial position, results of operations, or cash flows.
In 2015, we formed a wholly-owned captive insurance company, IFM Assurance Company (“IFM”), which we believe has provided us with increased flexibility in the end-to-end management of our insurance program. There can be no assurance that IFM will continue to bring about the intended benefits or the desired flexibility in the management of our insurance programs, because we may experience unanticipated events that will reduce or eliminate expected benefits, including anticipated savings related to coverage provided by IFM to our subsidiaries.
Our risk management and safety programs may not have the intended effect of reducing our liability for personal injury or property loss.
We attempt to mitigate risks relating to personal injury or property loss through the implementation of company-wide safety and loss control efforts designed to decrease the incidence of accidents or events that might increase our liability. It is expected that any such decrease would also have the effect of reducing our insurance costs for our casualty programs. However, incidents involving personal injury or property loss often are caused by multiple factors, a significant number of which are beyond our control. Therefore, there can be no assurance that our risk management and safety programs will have the desired effect of controlling costs and liability exposure.
Impairment of goodwill and long-lived assets could have a material adverse effect on our financial condition and results of operations.
We evaluate goodwill for impairment annually, in the fourth quarter, or more often if impairment indicators exist. We also review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the fair value of one of our reporting units is less than its carrying value, or if as a result of a recoverability test we conclude that the projected undiscounted cash flows are less than the carrying amount, we would record an impairment charge related to goodwill or long-lived assets, respectively. The assumptions used to determine impairment require significant judgment and the amount of the impairment could have a material adverse effect on our reported financial results for the period in which the charge is taken.
Changes in general economic conditions, including changes in energy prices, government regulations, and changing consumer preferences, could reduce the demand for facility services and, as a result, reduce our earnings and adversely affect our financial condition.
In certain geographic areas and service lines, our most profitable revenues are related to supplemental services requested by clients outside of the standard service specification (“tag work”). This contract type is commonly used in janitorial services and includes cleanup after tenant moves, construction cleanup, flood cleanup, and snow removal.
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A decline in occupancy rates could result in a decline in scope of work, including tag work, and depressed prices for our services. Slow domestic and international economic growth or other negative changes in global, national, and local economic conditions could have a negative impact on our business. Specifically, adverse economic conditions may result in clients cutting back on discretionary spending. Additionally, since a significant portion of our aviation services and parking revenues are tied to the number of airline passengers, hotel guests, and sports arena attendees, results for these businesses could be adversely affected by curtailment of business, personal travel, or discretionary spending. The use of ride sharing services and car sharing services may also lead to a decline in parking demand at airports and in urban areas.
Energy efficiency projects are designed to reduce a client’s overall consumption of commodities such as electricity and natural gas. As such, downward fluctuations in commodity prices may reduce client demand for our services. We also depend, in part, on federal and state legislation and policies that support energy efficiency projects. If current legislation or policies are amended, eliminated, or not extended beyond their current expiration dates, or if funding for energy incentives is reduced or delayed, it could also adversely affect our ability to obtain new business. In some instances, we offer certain of these clients guaranteed energy savings on installed equipment. In the event those guaranteed savings are not achieved, we may be required to pay liquidated or other damages. All of these factors could have an adverse effect on our financial position, results of operations, and cash flows.
Our business may be materially affected by changes to fiscal and tax policies. Negative or unexpected tax consequences could adversely affect our results of operations.
The Tax Cuts and Jobs Act of 2017 made significant changes to the U.S. Internal Revenue Code that will go into effect over several years. Such changes include a reduction in the corporate tax rate as well as limitations on certain corporate deductions and credits that could have a negative impact on our business. In addition, adverse changes in the underlying profitability and financial outlook of our operations or changes in tax law could lead to changes in our valuation allowances against deferred tax assets on our consolidated balance sheets, which could materially affect our results of operations. Furthermore, we are subject to tax audits by governmental authorities, primarily in the United States and United Kingdom. If we experience unfavorable results from one or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income.
We may experience breaches of, or disruptions to, our information technology systems or those of our third- party providers or clients, or other compromises of our data that could adversely affect our business.
Our information technology systems and those of our third-party providers or clients could be the target of cyber attacks, hacking, unauthorized access, computer viruses, malware, or other intrusions, which could result in operational disruptions or information misappropriation, such as theft of intellectual property or inappropriate disclosure of confidential, proprietary, or personal information. We maintain confidential, proprietary, and personal information relating to our current, former, and prospective employees, clients, and other third parties in our information technology systems and in systems of third-party providers. We have experienced certain data and security breaches in the past and could experience future data or security breaches stemming from the intentional or negligent acts of our employees or other third parties. Furthermore, while we continue to devote significant resources to monitoring and updating our systems and implementing information security measures to protect our systems, there can be no assurance that any controls and procedures that we have in place will be sufficient to protect us from future security breaches. As cyber threats are continually evolving, our controls and procedures may become inadequate and we may be required to devote additional resources to modifying or enhancing our systems in the future. We may also be required to expend resources to remediate cyber-related incidents or to enhance and strengthen our cyber security.
Any such disruptions to our information technology systems, breaches or compromises of data, and/or misappropriation of information could result in lost sales, negative publicity, litigation, violation of privacy and other laws, or business delays that could have a material adverse effect on our business.
A significant number of our employees are covered by collective bargaining agreements that could expose us to potential liabilities in relationship to our participation in multiemployer pension plans, requirements to make contributions to other benefit plans, and the potential for strikes, work slowdowns or similar activities, and union-organizing drives.
We participate in various multiemployer pension plans that provide defined pension benefits to employees covered by collective bargaining agreements. Because of the nature of multiemployer pension plans, there are risks associated with participation in these plans that differ from single-employer plans. Assets contributed by an employer to a multiemployer pension plan are not segregated into a separate account and are not restricted to provide benefits only to employees of that contributing employer. In the event another participating employer in a multiemployer pension
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plan no longer contributes to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, including us. In the event of the termination of a multiemployer pension plan or a complete or partial withdrawal from a multiemployer pension plan, under applicable law we could incur material withdrawal liabilities. We further discuss our participation in multiemployer pension and postretirement plans in Note 13, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. In addition, the terms of collective bargaining agreements require us to contribute to various fringe benefit plans, including health and welfare, pension, and training plans, all of which require us to have appropriate systems in place to assure timely and accurate payment of contributions. The failure to make timely and accurate contributions as a result of a systems failure could have a negative impact on our financial position.
At October 31, 2018, approximately 34% of our employees were subject to various local collective bargaining agreements, some of which will expire or become subject to renegotiation during 2019. In addition, at any given time we may face union organizing activity. When one or more of our major collective bargaining agreements becomes subject to renegotiation or when we face union organizing drives, we and the union may disagree on important issues that could lead to a strike, work slowdown, or other job actions at one or more of our locations. In a market where we are unionized but competitors are not unionized, we could lose clients to such competitors. A strike, work slowdown, or other job action could disrupt our services, resulting in reduced revenues or contract cancellations. Moreover, negotiating a first time collective bargaining agreement or renegotiating an existing agreement could result in a substantial increase in labor and benefits expenses that we may be unable to pass through to clients.
If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be negatively impacted, which could harm our operating results and investor perceptions of our Company and as a result may have a material adverse effect on the value of our common stock.
Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and related rules, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. We have acquired entities that had no publicly traded debt or equity and therefore were not required to conform to the rules and regulations of the SEC, especially as it relates to internal control structure. When we acquire such entities, they may not have in place all the necessary controls as required by the Public Company Accounting Oversight Board. Integrating acquired entities into our internal control over financial reporting has required and will continue to require significant time and resources from our management and other personnel and increases our compliance costs. We are required to include our assessment of the effectiveness of the internal controls over financial reporting of entities we acquire in our overall assessment. We plan to complete the evaluation and integration of internal controls over financial reporting and report our assessment within the required time frame.
In addition, with the increasing frequency of cyber-related frauds perpetrated to obtain inappropriate payments, we need to ensure our internal controls related to authorizing the transfer of funds and changing our vendor master files are adequate. Failure to maintain an effective internal control environment could have a material adverse effect on our ability to accurately report our financial results, the market’s perception of our business, and our stock price.
Our business may be negatively impacted by adverse weather conditions.
Weather conditions such as snow storms, heavy flooding, hurricanes, and fluctuations in temperatures can negatively impact portions of our business. Within our Technical Solutions segment, cooler than normal temperatures in the summer could reduce the need for servicing of air conditioning units, resulting in reduced revenues and profitability. Within Parking and Aviation services, snow can lead to reduced travel activity, as well as increases in certain costs, both of which negatively affect gross profit. On the other hand, the absence of snow during the winter could cause us to experience reduced revenues in our B&I segment, as many of our contracts specify additional payments for snow-related services.
Catastrophic events, disasters, and terrorist attacks could disrupt our services.
We may encounter disruptions involving power, communications, transportation or other utilities, or essential services depended upon by us or by third parties with whom we conduct business. This could include disruptions as the result of natural disasters, pandemics, weather-related or similar events (such as fires, hurricanes, blizzards, earthquakes, and floods), political instability, labor strikes, or war (including acts of terrorism or hostilities) that could impact our markets. If a disruption occurs in one location and persons in that location are unable to communicate with or travel to or work from other locations, our ability to service and interact with our clients and others may suffer, and
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we may not be able to successfully implement contingency plans that depend on communications or travel. These events may increase the volatility of financial results due to unforeseen costs with partial or no corresponding compensation from clients. There also can be no assurance that the disaster recovery and crisis management procedures we employ will suffice in any particular situation to avoid a significant loss. In addition, to the extent centralized administrative locations are disabled for a long period of time, key business processes, such as accounts payable, information technology, payroll, and general management operations, could be interrupted.
Actions of activist investors could disrupt our business.
Public companies have been the target of activist investors. In the event that a third party, such as an activist investor, proposes to change our governance policies, board of directors, or other aspects of our operations, our review and consideration of such proposals may create a significant distraction for our management and employees. This could negatively impact our ability to execute our 2020 Vision and may require management to expend significant time and resources responding to such proposals. Such proposals may also create uncertainties with respect to our financial position and operations and may adversely affect our ability to attract and retain key employees.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our principal executive office is located at One Liberty Plaza, 7th Floor, New York, New York 10006. As part of our 2020 Vision, in 2016 we began consolidating our operations to increase efficiency and effectiveness.
Principal Properties as of October 31, 2018
Location | Character of Office | Approximate Square Feet | Lease Expiration Date, Unless Owned | Segment | ||||
Alpharetta, Georgia | IT Datacenter and Technical Solutions Headquarters | 25,000 | Owned | All | ||||
Atlanta, Georgia | Operations Support | 37,000 | 10/31/2027 | All | ||||
Cleveland, Ohio | Legacy GCA Headquarters | 32,400 | 1/31/2024 | Education, T&M, and Corporate | ||||
New York, New York | Corporate Headquarters | 44,000(1) | 1/3/2032 | Corporate and B&I | ||||
Sugar Land, Texas | Enterprise Services | 62,500 | 3/31/2028 | All | ||||
Tustin, CA | Operations Support | 40,000 | 7/31/2029 | B&I and Technical Solutions | ||||
(1) Approximately 10,000 square feet are sublet.
In addition to the above properties, we have other offices, warehouses, and parking facilities in various locations, primarily in the United States. We believe that these properties are well maintained, in good operating condition, and suitable for the purposes for which they are used.
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ITEM 3. LEGAL PROCEEDINGS.
We are a party to a number of lawsuits, claims, and proceedings incident to the operation of our business, including those pertaining to labor and employment, contracts, personal injury, and other matters, some of which allege substantial monetary damages. Some of these actions may be brought as class actions on behalf of a class or purported class of employees. While the results of these lawsuits, claims, and proceedings cannot be predicted with any certainty, our management believes that the final outcome of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows.
Certain Legal Proceedings
Certain lawsuits to which we are a party are discussed below. In determining whether to include any particular lawsuit or other proceeding, we consider both quantitative and qualitative factors. These factors include, but are not limited to: the amount of damages and the nature of any other relief sought in the proceeding; if such damages and other relief are specified, our view of the merits of the claims; whether the action is or purports to be a class action, and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; and the potential impact of the proceeding on our reputation.
The Consolidated Cases of Bucio and Martinez v. ABM Janitorial Services filed on April 7, 2006, in the Superior Court of California, County of San Francisco (the “Bucio case”)
The Bucio case is a class action pending in San Francisco Superior Court that alleges we failed to provide legally required meal periods and make additional premium payments for such meal periods, pay split shift premiums when owed, and reimburse janitors for travel expenses. There is also a claim for penalties under the California Labor Code Private Attorneys General Act (“PAGA”). On April 19, 2011, the trial court held a hearing on plaintiffs’ motion to certify the class. At the conclusion of that hearing, the trial court denied plaintiffs’ motion to certify the class. On May 11, 2011, the plaintiffs filed a motion to reconsider, which was denied. The plaintiffs appealed the class certification issues. The trial court stayed the underlying lawsuit pending the decision in the appeal. The Court of Appeal of the State of California, First Appellate District (the “Court of Appeal”), heard oral arguments on November 7, 2017. On December 11, 2017, the Court of Appeal reversed the trial court’s order denying class certification and remanded the matter for certification of a meal period, travel expense reimbursement, and split shift class. The case was remitted to the trial court for further proceedings on class certification, discovery, dispositive motions, and trial.
On September 20, 2018, the trial court entered an order defining four certified subclasses of janitors who were employed by the legacy ABM janitorial companies in California at any time between April 7, 2002 and April 30, 2013, on claims based on previous auto deduction practices for meal breaks, unpaid meal premiums, unpaid split shift premiums, and unreimbursed business expenses, such as mileage reimbursement for use of personal vehicles to travel between worksites. The period of time covered by the PAGA claim will also be considered by the court shortly. This matter has not been set for trial. Prior to trial, we will have the opportunity to move for summary judgment, seek decertification of the classes, or mediate, if we deem such actions appropriate.
Hussein and Hirsi v. Air Serv Corporation filed on January 20, 2016, pending in the United States District Court for the Western District of Washington at Seattle (the “Hussein case”) and
Isse et al. v. Air Serv Corporation filed on February 7, 2017, in the Superior Court of Washington for King County (the “Isse case”)
The Hussein case was a certified class action involving a class of certain hourly Air Serv employees at Seattle-Tacoma International Airport in SeaTac, Washington. The plaintiffs alleged that Air Serv violated a minimum wage requirement in an ordinance applicable to certain employers in the local city of SeaTac (the “Ordinance”). Plaintiffs sought retroactive wages, double damages, interest, and attorneys’ fees. This matter was removed to federal court. In a separate lawsuit brought by Filo Foods, LLC, Alaska Airlines, and several other employers at SeaTac Airport, the King County Superior Court (the “Superior Court”) issued a decision that invalidated the Ordinance as it applied to workers at SeaTac Airport. Subsequently, the Washington Supreme Court reversed the Superior Court’s decision. On February 7, 2017, the Isse case was filed against Air Serv on behalf of 60 individual plaintiffs (who would otherwise be members of the Hussein class), who alleged failure to comply with both the minimum wage provision and the sick and safe time provision of the Ordinance. The Isse plaintiffs sought retroactive wages and sick benefits, double damages for wages and sick benefits, interest, and attorneys’ fees. The Isse case later expanded to approximately 220 individual plaintiffs.
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In mediations on November 2 and 3, 2017, and without admitting liability in either matter, we agreed to settle the Hussein and Isse cases for a combined total of $8.3 million, inclusive of damages, interest, attorneys’ fees, and employer payroll taxes. Eligible employees will be able to participate in either the Hussein or Isse settlements, but cannot recover in both settlements. The settlements in both cases require court approval because of the nature of the claims being released. On December 8, 2017, the Superior Court approved the settlement agreement for the 220 Isse plaintiffs, and we subsequently made a settlement payment of $4.5 million to the Isse plaintiffs in January 2018. $3.8 million remains accrued for the Hussein case.
On July 30, 2018, the United States District Court for the Western District of Washington at Seattle preliminarily approved the settlement in the Hussein case. At the final approval hearing on December 4, 2018, the court (i) accepted opt-out notices from 78 Hussein class members (the “opt-out members”) indicating their intent to participate in separate lawsuits (leaving 386 class members in the Hussein class), (ii) directed the parties to recalculate the settlement amount by deducting the settlement funds attributable to the 78 opt-out members, and (iii) requested other minor changes, but indicated that the court intended to grant final approval of the settlement with these changes. On December 20, 2018, the court issued its order granting final approval of the class action settlement. The Hussein settlement funds will be paid in February 2019, provided there are no appeals or requests for review of the final approval order. The amount of the settlement funds attributable to the 78 opt-out members is approximately $0.9 million.
Castro and Marmolejo v. ABM Industries, Inc., et al., filed on October 24, 2014, pending in the United States District Court for the Northern District of California (the “Castro case”)
On October 24, 2014, Plaintiff Marley Castro filed a class action lawsuit alleging that ABM did not reimburse janitorial employees in California for using their personal cell phones for work-related purposes, in violation of California Labor Code section 2802. On January 23, 2015, Plaintiff Lucia Marmolejo was added to the case as a named plaintiff. On October 27, 2017, plaintiffs moved for class certification seeking to represent a class of all employees who were, are, or will be employed by ABM in the State of California with the Employee Master Job Description Code “Cleaner” (hereafter referred to as “Cleaner Employees”) beginning from October 24, 2010. ABM filed its opposition to class certification on November 27, 2017. On January 26, 2018, the district court granted plaintiffs’ motion for class certification. The court rejected plaintiffs’ proposed class, instead certifying three classes that the court formulated on its own: (1) all employees who were, are, or will be employed by ABM in the State of California as Cleaner Employees who used a personal cell phone to punch in and out of the EPAY system and who (a) worked at an ABM facility that did not provide a biometric clock and (b) were not offered an ABM-provided cell phone during the period beginning on January 1, 2012, through the date of notice to the Class Members that a class has been certified in this action; (2) all employees who were, are, or will be employed by ABM in the State of California as Cleaner Employees who used a personal cell phone to report unusual or suspicious circumstances to supervisors and were not offered (a) an ABM-provided cell phone or (b) a two-way radio during the period beginning four years prior to the filing of the original complaint, October 24, 2014, through the date of notice to the Class Members that a class has been certified in this action; and (3) all employees who were, are, or will be employed by ABM in the State of California as Cleaner Employees who used a personal cell phone to respond to communications from supervisors and were not offered (a) an ABM-provided cell phone or (b) a two-way radio during the period beginning four years prior to the filing of the original complaint, October 24, 2014, through the date of notice to the Class Members that a class has been certified in this action.
On February 9, 2018, ABM filed a petition for permission to appeal the district court’s order granting class certification with the United States Court of Appeals for the Ninth Circuit, which was denied on April 30, 2018. On March 20, 2018, ABM moved to compel arbitration of the claims of certain class members pursuant to the terms of three collective bargaining agreements. In response to that motion, on May 14, 2018, the district court modified the class definition to exclude all claims arising after the operative date(s) of the applicable collective bargaining agreements (which is June 1, 2016 for one agreement and May 1, 2016 for the other two agreements). However, the district court denied the motion to compel arbitration as to claims that arose prior to the operative date(s) of the applicable collective bargaining agreements. ABM has appealed to the Ninth Circuit the district court’s order denying the motion to compel arbitration with respect to the periods preceding the operative dates of the collective bargaining agreements.
After a court-ordered mediation held on October 15, 2018, the parties agreed to a class action settlement of $5.4 million, subject to court approval. We anticipate the plaintiffs’ motion for preliminary approval will be filed with the court in the first quarter of fiscal year 2019, and a hearing on the motion is expected in the first or second quarter of fiscal year 2019.
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ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Dividends
Our common stock is listed on the New York Stock Exchange (NYSE: ABM). The following table sets forth the high and low sales prices of our common stock on the New York Stock Exchange and quarterly cash dividends declared on shares of common stock for the periods indicated.
Fiscal Quarter | |||||||||||||||
(in dollars) | First | Second | Third | Fourth | |||||||||||
Fiscal Year 2018 | |||||||||||||||
Price range of common stock | |||||||||||||||
High | $ | 44.70 | $ | 38.37 | $ | 32.90 | $ | 35.16 | |||||||
Low | $ | 36.61 | $ | 31.07 | $ | 28.17 | $ | 29.48 | |||||||
Dividends declared per share | $ | 0.175 | $ | 0.175 | $ | 0.175 | $ | 0.175 | |||||||
Fiscal Year 2017 | |||||||||||||||
Price range of common stock | |||||||||||||||
High | $ | 45.03 | $ | 44.68 | $ | 44.93 | $ | 45.12 | |||||||
Low | $ | 38.04 | $ | 39.41 | $ | 40.36 | $ | 37.12 | |||||||
Dividends declared per share | $ | 0.170 | $ | 0.170 | $ | 0.170 | $ | 0.170 | |||||||
We have paid cash dividends every quarter since 1965. Future dividends will be determined based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors.
Common Stock Repurchases
On September 2, 2015, our Board of Directors authorized a program to repurchase up to $200.0 million of our common stock. Purchases may take place on the open market or otherwise, and all or part of the repurchases may be made pursuant to Rule 10b5-1 plans or in privately negotiated transactions. The timing of repurchases is at our discretion and will depend upon several factors, including market and business conditions, future cash flows, share price, and share availability. Repurchased shares are retired and returned to an authorized but unissued status. The repurchase program may be suspended or discontinued at any time without prior notice. We did not repurchase any shares during the fourth quarter of 2018. At October 31, 2018, authorization for $134.1 million of repurchases remained under our share repurchase program.
Stockholders
At December 20, 2018, there were 3,053 registered holders of our common stock.
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Performance Graph
The following graph compares the five-year cumulative total return for our common stock against the Standard & Poor’s 500 Index (“S&P 500”) and the Standard & Poor’s SmallCap 600 Index (“S&P 600”). As our competitors are principally privately held, we do not believe it is feasible to construct a peer group comparison on an industry or line-of-business basis.
INDEXED RETURNS Years Ended October 31, | ||||||||||||||||||||||||
Company / Index | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||
ABM Industries Incorporated | $ | 100 | $ | 102.9 | $ | 108.0 | $ | 151.4 | $ | 165.3 | $ | 123.7 | ||||||||||||
S&P 500 Index | 100 | 117.3 | 123.4 | 128.9 | 159.4 | 171.1 | ||||||||||||||||||
S&P SmallCap 600 Index | 100 | 109.3 | 112.4 | 119.5 | 152.9 | 161.5 | ||||||||||||||||||
This performance graph shall not be deemed to be “soliciting material” or “filed” with the Securities and Exchange Commission, or subject to Regulation 14A or 14C, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended. The comparisons in the performance graph are based on historical data and are not indicative of, or intended to forecast, the possible future performance of our common stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8., “Financial Statements and Supplementary Data.” Unless otherwise indicated, all references to years are to our fiscal year, which ends on October 31.
Years Ended October 31, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in millions, except per share amounts) | |||||||||||||||||||
Statements of Comprehensive Income Data | |||||||||||||||||||
Revenues(1) | $ | 6,442.2 | $ | 5,453.6 | $ | 5,144.7 | $ | 4,897.8 | $ | 4,649.7 | |||||||||
Operating profit(2) | 138.6 | 101.9 | 54.7 | 73.6 | 114.8 | ||||||||||||||
Income from continuing operations | 95.9 | 78.1 | 62.3 | 54.1 | 66.9 | ||||||||||||||
Income (loss) from discontinued operations, net of taxes(3) | 1.8 | (74.3 | ) | (5.1 | ) | 22.2 | 8.7 | ||||||||||||
Per Share Data | |||||||||||||||||||
Net income per common share — Basic | |||||||||||||||||||
Income from continuing operations | $ | 1.45 | $ | 1.35 | $ | 1.11 | $ | 0.95 | $ | 1.19 | |||||||||
Net income | $ | 1.48 | $ | 0.07 | $ | 1.02 | $ | 1.35 | $ | 1.35 | |||||||||
Net income per common share — Diluted | |||||||||||||||||||
Income from continuing operations | $ | 1.45 | $ | 1.34 | $ | 1.09 | $ | 0.94 | $ | 1.17 | |||||||||
Net income | $ | 1.47 | $ | 0.07 | $ | 1.01 | $ | 1.33 | $ | 1.32 | |||||||||
Weighted-average common and common equivalent shares outstanding | |||||||||||||||||||
Basic | 66.1 | 57.7 | 56.3 | 56.7 | 56.1 | ||||||||||||||
Diluted | 66.4 | 58.3 | 56.9 | 57.4 | 57.1 | ||||||||||||||
Dividends declared per common share | $ | 0.700 | $ | 0.680 | $ | 0.660 | $ | 0.640 | $ | 0.620 | |||||||||
Statements of Cash Flow Data | |||||||||||||||||||
Net cash provided by operating activities of continuing operations | $ | 299.7 | $ | 101.7 | $ | 110.5 | $ | 145.5 | $ | 115.6 | |||||||||
Income tax (refunds) payments, net(4) | (1.0 | ) | 11.8 | 12.6 | 23.7 | 32.9 | |||||||||||||
At October 31, | |||||||||||||||||||
(in millions) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||
Balance Sheet Data | |||||||||||||||||||
Total assets | $ | 3,627.5 | $ | 3,812.6 | $ | 2,278.8 | $ | 2,130.7 | $ | 2,176.5 | |||||||||
Trade accounts receivable, net of allowances(5) | 1,014.1 | 1,038.1 | 803.7 | 742.9 | 687.3 | ||||||||||||||
Goodwill(6) | 1,834.8 | 1,864.2 | 912.8 | 867.5 | 854.7 | ||||||||||||||
Other intangible assets, net of accumulated amortization(7) | 355.7 | 430.1 | 103.8 | 111.4 | 127.5 | ||||||||||||||
Long-term debt, net(8) | 902.0 | 1,161.3 | 268.3 | 158.0 | 319.8 | ||||||||||||||
Insurance claims | 510.3 | 495.4 | 423.8 | 387.4 | 349.7 | ||||||||||||||
(1) Revenues in 2018 included $858.1 million of incremental revenue from acquisitions, primarily $855.7 million related to the acquisition of GCA Services Group (“GCA”). Revenues in 2017 included $208.1 million of incremental revenue from acquisitions, including $169.7 million related to GCA.
(2) Factors affecting comparability of operating profit consisted of the following:
• | Operating profit in 2018 was positively impacted by $67.6 million of incremental operating profit resulting from the GCA acquisition and an $11.8 million lower self-insurance adjustment, partially offset by $34.4 million of higher amortization expense and impairment charges of $26.5 million. Additionally, 2018 benefited from the absence of $24.2 million of transaction expenses related to the GCA acquisition incurred in 2017, partially offset by a $17.4 million impairment recovery recorded in 2017 related to our Government Services business. |
• | Operating profit in 2017 benefited from a $17.4 million impairment recovery, a $10.9 million lower self-insurance adjustment, a reduction in restructuring and related expenses, and procurement and organizational savings from our 2020 Vision initiatives, all offset by $24.2 million of transaction expenses related to the GCA acquisition. |
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• | Operating profit in 2016 was negatively impacted by insurance expense of $49.6 million, consisting of a $32.9 million unfavorable self-insurance adjustment related to prior year claims and $16.7 million of higher insurance expense due to an increase in the rate used to record our insurance reserves during 2016. Operating profit was also unfavorably impacted by $29.0 million of 2020 Vision restructuring and related charges and a $22.5 million impairment charge for our Government Services business, consisting of both goodwill and long-lived asset charges. Operating profit in 2016 was favorably impacted by approximately $22 million in savings from our 2020 Vision initiatives. |
• | Operating profit in 2015 was negatively impacted by a $35.9 million unfavorable self-insurance adjustment related to prior year claims. |
(3) We had income from discontinued operations in 2018 of $1.8 million due to an insurance reimbursement on a legal settlement and collection of previously written off receivables, partially offset by union audit settlements. The loss from discontinued operations in 2017 included legal settlements associated with our former Security business of $120.0 million. Income from discontinued operations for 2015 reflected the $14.4 million after-tax gain on the sale of the Security business.
(4) Net income tax payments were lower by $19.4 million during 2018 due to a refund received for prior year legal settlements. Additionally, we had cash tax savings of approximately $7 million for 2018 and $10 million for both 2017 and 2016 related to coverage provided by IFM Assurance Company, our wholly-owned captive insurance company. During 2014, net income tax payments increased as certain tax assets were substantially utilized.
(5) Trade accounts receivable, net of allowances, increased by $118.1 million on September 1, 2017 as a result of the GCA acquisition.
(6) Goodwill decreased in 2018 due to an impairment charge of $20.3 million related to the acquisition of Westway Services Holdings (2014) Ltd. (“Westway”) and to a $7.0 million adjustment to the final GCA purchase price allocation. Goodwill increased by $933.9 million on September 1, 2017 as a result of the GCA acquisition and by $53.8 million on December 1, 2015 due to the Westway acquisition.
(7) In 2018, other intangible assets, net of accumulated amortization, was reduced by an impairment charge of $6.2 million related to the Westway acquisition and a $1.0 million adjustment to the final GCA purchase price allocation. During 2017, we recorded $349.0 million of other intangible assets as a result of the GCA acquisition.
(8) On September 1, 2017, we refinanced and replaced our existing $800.0 million credit facility with a new secured $1.7 billion credit facility, which we used to partially fund the GCA acquisition. During 2015, we used the cash proceeds from the sale of the Security business to pay down a portion of our line of credit.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to facilitate an understanding of the results of operations and financial condition of ABM Industries Incorporated and its subsidiaries (collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”). This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes (“Financial Statements”). This MD&A contains both historical and forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. We make forward-looking statements related to future expectations, estimates, and projections that are uncertain and often contain words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “outlook,” “plan,” “predict,” “should,” “target,” or other similar words or phrases. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and assumptions that are difficult to predict. Factors that might cause such differences include, but are not limited to, those discussed in Part 1. of this Form 10-K under Item 1A., “Risk Factors,” which are incorporated herein by reference. Our future results and financial condition may be materially different from those we currently anticipate.
Throughout the MD&A, amounts and percentages may not recalculate due to rounding. In addition, we have revised our prior period segment information to reflect changes to our operating structure following the integration of GCA Services Group (“GCA”). These changes had no impact on our previously reported consolidated balance sheets, statements of comprehensive income (loss), or statements of cash flows. Unless otherwise indicated, all information in the MD&A and references to years are based on our fiscal year, which ends on October 31.
Business Overview |
ABM is a leading provider of integrated facility solutions, customized by industry, with a mission to make a difference, every person, every day.
2020 Vision
In September 2015, we announced a comprehensive transformation initiative (“2020 Vision”) intended to drive long-term, profitable growth through an industry-based go-to-market approach. In connection with our 2020 Vision, we have achieved savings through the realignment of our organization by industry group, divested businesses that were not at the core of our strategy, centralized key functional areas, strengthened our sales capabilities, initiated investments in service delivery tools and processes, improved our employee engagement programs, and added to our position as a leading integrated service provider through the acquisition of GCA. We continue focusing on several key initiatives across our organization to sustain our 2020 Vision strategy and profitably deliver leading industry-based facility solutions.
Systems and Technology Transformation
Following the acquisition and integration of GCA, we are targeting significant investments in our information technology infrastructure. We have begun to upgrade several key platforms, including our human resources information systems, enterprise resource planning system, and labor management system. We are also utilizing technology to help improve processes company-wide, including account planning, labor management, payroll, and procurement. To further improve work order management, we have also launched a “Tag Pricer” tool that allows us to capture work orders more efficiently. We believe these improvements will help simplify our operating environment, drive productivity, and create consistency and efficiency across our organization.
Strategic Growth
We are focused on long-term, profitable growth related to both new and existing clients across and within our industry groups. We believe operational leverage from our strategic growth initiatives, combined with our continued focus on operational efficiency, will increase profitability.
Cost Optimization
We continue to centralize many of our back-office functions through our Enterprise Services Center in Sugar Land, Texas to help drive consistency in practice and support operating efficiency. In addition, by consolidating purchasing activities we have been able to leverage our scale, increase our purchasing power, and identify preferred suppliers, which has enabled cost saving opportunities in supplies and materials procurement.
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Developments and Trends |
Economic Labor Outlook
The U.S. economy continues to demonstrate positive underlying fundamentals, with expanding gross domestic product growth and improving employment conditions, which have led to historically low levels of both unemployment and underemployment across the country. These factors have contributed to the lower availability of qualified labor for our business and higher turnover in certain markets, as our employees have more job opportunities both inside and outside our industry. This in turn has caused, and may continue to cause, higher labor and related personnel costs.
United States Tax Reform
The Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017, represents the most significant overhaul of the U.S. tax code in more than 30 years. Among other provisions, the Tax Act provides for a reduction of the federal corporate income tax rate from 35% to 21% and a “transition tax” to be levied on the deemed repatriation of indefinitely reinvested earnings of international subsidiaries. Since we have an October 31 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 23.3% for fiscal 2018 and 21% for subsequent fiscal years. Other provisions under the Tax Act become effective for us in fiscal 2019, including limitations on deductibility of interest and executive compensation, as well as a new minimum tax on Global Intangible Low-Taxed Income (“GILTI”). As a result, in 2019 we expect our effective tax rate to increase from the 2018 rate. The impact of the Tax Act, as summarized below for the year ended October 31, 2018, is further described in Note 17, “Income Taxes,” in the Financial Statements.
Year Ended | |||
(in millions) | October 31, 2018 | ||
Remeasurement of U.S. deferred tax assets and liabilities | $ | 27.7 | |
Transition tax on non-U.S. subsidiaries’ earnings | (4.5 | ) | |
Total impact of the Tax Act on the benefit for income taxes | $ | 23.2 | |
Due to the complexities of implementing the provisions of the Tax Act, the staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act and permits a measurement period not to exceed one year from the enactment date for companies to complete the required analyses and accounting. As permitted under SAB 118, the adjustments we recorded due to the Tax Act, including the remeasurement of deferred tax assets and liabilities and the transition tax, were based on reasonable estimates and were considered provisional during the year. As of October 31, 2018, the one-time impact of the change in tax rate on our deferred tax assets and liabilities is complete. Additionally, we have completed our assessment of GILTI and have established a policy to account for this tax on a period basis beginning in fiscal year 2019. We have also completed our analysis of the one-time transition tax and recorded the impact.
Acquisition of GCA during 2017
On September 1, 2017 (the “Acquisition Date”), we acquired GCA, a provider of integrated facility services to educational institutions and commercial facilities, for approximately $1.3 billion, consisting of $837.5 million in cash (revised during the second quarter of 2018 to reflect a post-closing purchase price adjustment related to a net working capital settlement) and approximately 9.4 million shares of ABM common stock with a fair value of $421.3 million at closing. Refer to Note 3, “Acquisitions,” in the Financial Statements for more information on this transaction.
Our consolidated statements of comprehensive income and statements of cash flows include GCA’s results of operations in 2018, but exclude GCA’s results of operations in the comparative years prior to the Acquisition Date. During the year ended October 31, 2018, we recognized total revenue from GCA of $1.0 billion, including incremental revenues of $855.7 million, as detailed in the table below.
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Year Ended | Year Ended | ||||||
(in millions) | October 31, 2018 | October 31, 2017 | |||||
Education | $ | 571.9 | $ | 94.9 | |||
Technology & Manufacturing | 238.5 | 39.6 | |||||
Business & Industry | 170.3 | 27.4 | |||||
Healthcare | 29.3 | 5.0 | |||||
Aviation | 18.1 | 2.8 | |||||
Total | $ | 1,028.2 | $ | 169.7 | |||
Following this acquisition, we initiated a restructuring program to achieve cost synergies from our combined operations. We include these costs within corporate expenses. We do not expect to incur significant severance expenses related to GCA restructuring in the future.
Year Ended | ||||||||
(in millions) | October 31, 2018 | Cumulative | ||||||
Employee Severance | $ | 11.8 | $ | 13.5 | ||||
Other Project Fees | 7.9 | 7.9 | ||||||
External Support Fees | 2.0 | 2.0 | ||||||
Total | $ | 21.7 | $ | 23.3 | ||||
Insurance
The adequacy of our reserves for workers’ compensation, general liability, automobile liability, and property damage insurance claims is based upon known trends and events and the actuarial estimates of required reserves considering the most recently completed actuarial reports. We use all available information to develop our best estimate of insurance claims reserves as information is obtained. The results of actuarial studies are used to estimate our insurance rates and insurance reserves for future periods and to adjust reserves, if appropriate, for prior years. The actuarial studies indicated the changes we have made to our risk management program have reduced the frequency of claims; however, we are experiencing adverse developments that impact claim costs relating to prior periods. Claim management initiatives include programs to identify claims that have the potential to develop adversely earlier in the claims cycle and ensure the establishment of reserves consistent with known fact patterns. However, with respect to claims related to certain prior fiscal years, the actuarial studies showed unfavorable developments in our estimates of ultimate losses related to general liability, property damage, workers’ compensation, and automobile liability claims. Additionally, we increased our estimate of ultimate losses for workers’ compensation claims, primarily related to claims in California, due to increases in projected costs and severity of claims in certain prior fiscal years, as well as statutory, regulatory, and legal developments.
Based on the results of the actuarial studies performed during 2018, which included analyzing recent loss development patterns, comparing the loss development against benchmarks, and applying actuarial projection methods to determine the estimate of ultimate losses, we increased our total reserves for known claims as well as our estimate of the loss amounts associated with incurred but not reported claims (“IBNR Claims”) for years prior to 2018 by $10.2 million during 2018. This adjustment was $11.8 million lower than the total adjustment of $22.0 million related to prior year claims in 2017.
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Government Services Business
At October 31, 2016, the assets and liabilities of our former Government Services business were classified as held for sale, at which time we wrote down goodwill and long-lived assets of this business by $22.5 million to reflect our best estimate of fair value less costs to sell, using all information available at that time. During the second quarter of 2017, we received an offer from a strategic buyer to purchase this business for approximately $35.0 million, which was higher than our previous estimate of fair value less costs to sell. As a result, we recorded a $17.4 million impairment recovery to adjust the fair value of certain previously impaired assets to the valuation of the assets as implied by the agreed-upon sales price, less estimated costs to sell. We sold this business on May 31, 2017 for $35.5 million and recorded a pre-tax gain of $1.2 million. The reported results for this business are through the date of sale and future results could include run-off costs. As this business has been sold and is no longer part of our ongoing operations, we have excluded a discussion of its results for the periods in this report.
Key Financial Highlights
• | Revenues increased by $988.6 million, or 18.1%, during 2018, as compared to 2017. This included $855.7 million of incremental revenues from the September 1, 2017 acquisition of GCA. |
• | Operating profit increased by $36.7 million, or 36.1%, during 2018, as compared to 2017. The increase in operating profit is primarily attributable to $67.6 million of incremental operating profit resulting from the GCA acquisition and an $11.8 million lower self-insurance adjustment, partially offset by $34.4 million of higher amortization expense and impairment charges of $26.5 million. Additionally, 2018 benefited from the absence of $24.2 million of transaction expenses related to the GCA acquisition incurred in 2017, partially offset by a $17.4 million impairment recovery recorded in 2017 related to our Government Services business. |
• | Interest expense increased by $34.9 million during 2018, as compared to 2017, primarily related to increased indebtedness incurred to fund the GCA acquisition and higher relative interest rates under our credit facility, partially offset by amortization of $2.5 million related to the gain realized on our interest rate swaps. |
• | Our income taxes from continuing operations for 2018 were favorably impacted by a net tax benefit of $23.2 million related to the Tax Act. |
• | Net cash provided by operating activities of continuing operations was $299.7 million during 2018. |
• | Dividends of $46.0 million were paid to shareholders, and dividends totaling $0.700 per common share were declared during 2018. |
• | At October 31, 2018, total outstanding borrowings under our credit facility were $949.0 million, and we had up to $467.3 million of borrowing capacity under our credit facility; however, covenant restrictions limited our actual borrowing capacity to $441.3 million. |
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Results of Operations |
The Year Ended October 31, 2018 Compared with the Year Ended October 31, 2017
Consolidated
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase / (Decrease) | ||||||||||
Revenues | $ | 6,442.2 | $ | 5,453.6 | $ | 988.6 | 18.1% | ||||||
Operating expenses | 5,747.4 | 4,881.2 | 866.2 | 17.7% | |||||||||
Gross margin | 10.8 | % | 10.5 | % | 29 bps | ||||||||
Selling, general and administrative expenses | 438.0 | 436.6 | 1.4 | 0.3% | |||||||||
Restructuring and related expenses | 25.7 | 20.9 | 4.8 | 23.1% | |||||||||
Amortization of intangible assets | 66.0 | 31.6 | 34.4 | NM* | |||||||||
Impairment loss (recovery) | 26.5 | (18.5 | ) | 45.0 | NM* | ||||||||
Operating profit | 138.6 | 101.9 | 36.7 | 36.1% | |||||||||
Income from unconsolidated affiliates, net | 3.2 | 4.2 | (1.0 | ) | (23.9)% | ||||||||
Interest expense | (54.1 | ) | (19.2 | ) | (34.9 | ) | NM* | ||||||
Income from continuing operations before income taxes | 87.7 | 86.9 | 0.8 | 1.0% | |||||||||
Income tax benefit (provision) | 8.2 | (8.8 | ) | 17.0 | NM* | ||||||||
Income from continuing operations | 95.9 | 78.1 | 17.8 | 22.9% | |||||||||
Income (loss) from discontinued operations, net of taxes | 1.8 | (74.3 | ) | 76.1 | NM* | ||||||||
Net income | 97.8 | 3.8 | 94.0 | NM* | |||||||||
Other comprehensive income (loss) | |||||||||||||
Interest rate swaps | 21.9 | 2.7 | 19.2 | NM* | |||||||||
Foreign currency translation | (4.7 | ) | 9.7 | (14.4 | ) | NM* | |||||||
Income tax provision | (5.9 | ) | (1.1 | ) | (4.8 | ) | NM* | ||||||
Comprehensive income | $ | 109.0 | $ | 15.2 | $ | 93.8 | NM* | ||||||
* Not meaningful |
Revenues
Revenues increased by $988.6 million, or 18.1%, during 2018, as compared to 2017. The increase in revenues was primarily attributable to $858.1 million of incremental revenues from acquisitions, mainly GCA, as well as organic growth in B&I, T&M, Technical Solutions, and Aviation. This increase was partially offset by the sale of our Government Services business on May 31, 2017.
Operating Expenses
Operating expenses increased by $866.2 million, or 17.7%, during 2018, as compared to 2017. The increase was primarily attributable to $763.1 million of incremental operating expenses from the GCA acquisition and an increase in wages and related personnel costs due to a tight labor market. Gross margin increased by 29 bps in 2018, as compared to 2017. The increase in gross margin was primarily associated with a lower self-insurance adjustment related to prior year claims as a result of actuarial studies, favorable margins in our U.S. Technical Solutions business, and the termination of an unprofitable Aviation contract in the third quarter of 2017, all partially offset by lower profit margins on certain B&I accounts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.4 million, or 0.3%, during 2018, as compared to 2017. The increase in selling, general and administrative expenses was primarily related to:
• | $32.9 million of incremental expenses related to the GCA acquisition; |
• | a $6.4 million increase in technology investments and related support; |
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• | the absence of a $3.2 million reimbursement of previously expensed fees associated with a concluded internal investigation into a foreign entity formerly affiliated with a joint venture during the prior year; and |
• | a $3.2 million increase in expenses related to certain incentive plans due to the timing of awards. |
This increase was partially offset by:
• | the absence of $24.2 million of transaction expenses related to the GCA acquisition; |
• | a $3.4 million adjustment to decrease our medical and dental insurance reserves as a result of actuarial evaluations performed in 2018; |
• | a $2.7 million decrease in rental expense due to office consolidations in the prior year; |
• | a $2.5 million decrease in travel and entertainment expenses; |
• | a $2.1 million decrease in legal settlement costs, net of a $7.0 million reimbursement of previously expensed legal settlement costs; |
• | $1.9 million of lower compensation and related expenses; and |
• | a $1.5 million decrease in bad debt expense. |
Restructuring and Related Expenses
Restructuring and related expenses increased by $4.8 million, or 23.1%, during 2018, as compared to 2017, as a result of restructuring related to the GCA acquisition, partially offset by the completion of our 2020 Vision organizational realignment.
Amortization of Intangible Assets
Amortization of intangible assets increased by $34.4 million, during 2018, as compared to 2017, as a result of the amortization of acquired intangible assets associated with the GCA acquisition.
Impairment Loss (Recovery)
During 2018, we recorded impairment charges on goodwill and customer relationships related to our U.K. Technical Solutions business totaling $26.5 million. In 2018, declining operating performance of this business primarily reflected the adverse impact of Brexit and the resulting impact on microeconomic conditions in the U.K. retail sector.
On May 31, 2017, we sold our Government Services business for $35.5 million. Based on the initial offer of $35.0 million received during the second quarter of 2017, we recorded a $17.4 million impairment recovery to adjust the fair value of certain previously impaired assets. In connection with the sale, during the third quarter of 2017 we recorded a pre-tax gain of approximately $1.2 million due to a working capital settlement.
Interest Expense
Interest expense increased by $34.9 million, during 2018, as compared to 2017, primarily related to increased indebtedness incurred to fund the GCA acquisition and higher relative interest rates under our credit facility, partially offset by amortization of $2.5 million related to the interest rate swap gain.
Income Taxes from Continuing Operations
During 2018, we had an income tax benefit of $8.2 million, compared to a provision of $8.8 million in 2017. Our income taxes in 2018 benefited from: a net tax benefit of $23.2 million related to the enactment of the Tax Act; $5.8 million, including interest of $1.0 million, related to expiring statutes of limitations for uncertain tax positions; $3.4 million of excess tax benefits related to the vesting of share-based compensation awards; and $2.8 million related to tax deductions for energy efficient government buildings. These benefits were partially offset by a $1.0 million reduction in certain tax credits, including the prior year WOTC for new hires. Comparatively, 2017 was favorably impacted by: a benefit of $17.8 million, including interest of $1.2 million, related to expiring statutes of limitations for uncertain tax positions; $3.6 million of excess tax benefits related to the vesting of share-based compensation awards; $1.9 million of tax deductions for energy efficient government buildings; and the 2017 WOTC for new hires.
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Discontinued Operations, Net of Taxes
During 2018, we had income from discontinued operations, net of taxes, of $1.8 million, compared with a loss from discontinued operations, net of taxes, of $74.3 million during 2017, a change of $76.1 million. This change was due to an insurance reimbursement on a legal settlement and collection of previously written off receivables, partially offset by union audit settlements during 2018, compared with a legal reserve established in the prior year in connection with certain legal settlement agreements.
Interest Rate Swaps
During April 2018, we elected to terminate all of our interest rate swaps for cash proceeds of $25.9 million. The resulting gain is being amortized from AOCI to interest expense over the term of our Credit Facility.
Foreign Currency Translation
During 2018, we recognized as a component of our comprehensive income a foreign currency translation loss of $4.7 million compared to a gain of $9.7 million during 2017. This change was related to the U.S. Dollar (“USD”) strengthening against the Great Britain Pound (“GBP”) during 2018. Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.
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Segment Information
Our reportable segments consist of Business & Industry (“B&I”), Aviation, Technology & Manufacturing (“T&M”), Education, Technical Solutions, and Healthcare. Refer to Note 2, “Basis of Presentation and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements for information related to our former Government Services business.
Financial Information for Each Reportable Segment
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase / (Decrease) | ||||||||||
Revenues | |||||||||||||
Business & Industry | $ | 2,917.6 | $ | 2,629.1 | $ | 288.5 | 11.0% | ||||||
Aviation | 1,023.8 | 990.4 | 33.4 | 3.4% | |||||||||
Technology & Manufacturing | 924.5 | 697.4 | 227.1 | 32.6% | |||||||||
Education | 837.5 | 363.1 | 474.4 | NM* | |||||||||
Technical Solutions | 465.6 | 439.6 | 26.0 | 5.9% | |||||||||
Healthcare | 273.3 | 247.5 | 25.8 | 10.4% | |||||||||
Government Services | — | 86.5 | (86.5 | ) | NM* | ||||||||
$ | 6,442.2 | $ | 5,453.6 | $ | 988.6 | 18.1% | |||||||
Operating profit (loss) | |||||||||||||
Business & Industry | $ | 154.6 | $ | 135.6 | $ | 19.0 | 14.0% | ||||||
Operating profit margin | 5.3 | % | 5.2 | % | 14 bps | ||||||||
Aviation | 23.2 | 25.3 | (2.1 | ) | (8.5)% | ||||||||
Operating profit margin | 2.3 | % | 2.6 | % | (29) bps | ||||||||
Technology & Manufacturing | 67.4 | 47.8 | 19.6 | 40.8% | |||||||||
Operating profit margin | 7.3 | % | 6.9 | % | 43 bps | ||||||||
Education | 43.8 | 18.0 | 25.8 | NM* | |||||||||
Operating profit margin | 5.2 | % | 5.0 | % | 27 bps | ||||||||
Technical Solutions | 16.5 | 37.6 | (21.1 | ) | (56.0)% | ||||||||
Operating profit margin | 3.6 | % | 8.5 | % | (499) bps | ||||||||
Healthcare | 8.8 | 10.6 | (1.8 | ) | (17.4)% | ||||||||
Operating profit margin | 3.2 | % | 4.3 | % | (108) bps | ||||||||
Government Services | (0.8 | ) | 21.8 | (22.6 | ) | NM* | |||||||
Operating profit margin | NM* | 25.2 | % | NM* | |||||||||
Corporate | (168.8 | ) | (189.0 | ) | 20.2 | 10.7% | |||||||
Adjustment for income from unconsolidated affiliates, net, included in Aviation and Government Services | (3.2 | ) | (4.1 | ) | 0.9 | 21.1% | |||||||
Adjustment for tax deductions for energy efficient government buildings, included in Technical Solutions | (2.8 | ) | (1.9 | ) | (0.9 | ) | (48.1)% | ||||||
$ | 138.6 | $ | 101.9 | $ | 36.7 | 36.1% | |||||||
* Not meaningful |
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Business & Industry | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase | ||||||||||
Revenues | $ | 2,917.6 | $ | 2,629.1 | $ | 288.5 | 11.0% | ||||||
Operating profit(1) | 154.6 | 135.6 | 19.0 | 14.0% | |||||||||
Operating profit margin | 5.3 | % | 5.2 | % | 14 bps | ||||||||
(1) 2018 and 2017 include $7.5 million and $1.3 million, respectively, of amortization expense related to the GCA acquisition.
B&I revenues increased by $288.5 million, or 11.0%, during 2018, as compared to 2017. The increase was primarily attributable to incremental revenues of $143.0 million from the GCA acquisition and to organic net new business, primarily new contract wins in the United Kingdom, as well as targeted expansion of key clients within the United States. Management reimbursement revenues for this segment totaled $257.1 million and $234.1 million during 2018 and 2017, respectively.
Operating profit increased by $19.0 million, or 14.0%, during 2018, as compared to 2017. Operating profit margin increased by 14 bps to 5.3% in 2018 from 5.2% in 2017. Operating profit margin was positively impacted by the management of selling, general and administrative expenses and higher margins on certain accounts. The improvement was partially offset by lower margins on certain accounts and an increase in amortization expense related to the GCA acquisition. While labor challenges are present in certain areas of our B&I business, it is our most mature business and has the highest proportion of unionized labor.
Aviation | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase / (Decrease) | ||||||||||
Revenues | $ | 1,023.8 | $ | 990.4 | $ | 33.4 | 3.4% | ||||||
Operating profit | 23.2 | 25.3 | (2.1 | ) | (8.5)% | ||||||||
Operating profit margin | 2.3 | % | 2.6 | % | (29) bps | ||||||||
Aviation revenues increased by $33.4 million, or 3.4%, during 2018, as compared to 2017. The increase was primarily attributable to higher management reimbursement revenue and organic growth in catering logistics, cabin cleaning, and transportation services, as well as incremental revenues of $14.5 million from the GCA acquisition. This increase was partially offset by the loss of certain passenger services, facility services, and janitorial accounts. Management reimbursement revenues for this segment totaled $99.9 million and $80.4 million during 2018 and 2017, respectively.
Operating profit decreased by $2.1 million, or 8.5%, during 2018, as compared to 2017. Operating profit margin decreased by 29 bps to 2.3% in 2018 from 2.6% in 2017. This decrease in operating profit margin was primarily attributable to lower margins and operational pressures on certain accounts and a provision for the settlement of a union wage and benefits audit. This decrease was partially offset by the termination of an unprofitable contract in the third quarter of 2017.
Technology & Manufacturing | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase | ||||||||||
Revenues | $ | 924.5 | $ | 697.4 | $ | 227.1 | 32.6% | ||||||
Operating profit(1) | 67.4 | 47.8 | 19.6 | 40.8% | |||||||||
Operating profit margin | 7.3 | % | 6.9 | % | 43 bps | ||||||||
(1) 2018 and 2017 include $10.6 million and $1.9 million, respectively, of amortization expense related to the GCA acquisition.
T&M revenues increased by $227.1 million, or 32.6%, during 2018, as compared to 2017. The increase was primarily attributable to incremental revenues from the GCA acquisition of $198.1 million, expansion of existing accounts, and net new business.
Operating profit increased by $19.6 million, or 40.8%, during 2018, as compared to 2017. Operating profit margin increased by 43 bps to 7.3% in 2018 from 6.9% in 2017. Operating profit margin was positively impacted by
29
certain higher margin acquired contracts, partially offset by higher amortization expense related to the GCA acquisition and an increase in wages and related personnel costs in certain markets.
Education | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase | ||||||||||
Revenues | $ | 837.5 | $ | 363.1 | $ | 474.4 | NM* | ||||||
Operating profit(1) | 43.8 | 18.0 | 25.8 | NM* | |||||||||
Operating profit margin | 5.2 | % | 5.0 | % | 27 bps | ||||||||
*Not meaningful
(1) 2018 and 2017 include $26.1 million and $4.6 million, respectively, of amortization expense related to the GCA acquisition.
Education revenues increased by $474.4 million during 2018, as compared to 2017. The increase was primarily attributable to incremental revenues from the GCA acquisition of $475.5 million.
Operating profit increased by $25.8 million during 2018, as compared to 2017. Operating profit margin increased by 27 bps to 5.2% in 2018 from 5.0% in 2017. The increase in operating profit margin was primarily due to certain higher margin contracts and the reversal of certain reserves, partially offset by higher amortization expense related to the GCA acquisition and an increase in wages and related personnel costs in certain markets.
Technical Solutions | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase / (Decrease) | ||||||||||
Revenues | $ | 465.6 | $ | 439.6 | $ | 26.0 | 5.9% | ||||||
Operating profit | 16.5 | 37.6 | (21.1 | ) | (56.0)% | ||||||||
Operating profit margin | 3.6 | % | 8.5 | % | (499) bps | ||||||||
Technical Solutions revenues increased by $26.0 million, or 5.9%, during 2018, as compared to 2017. The increase was primarily attributable to higher bundled energy solutions project revenues in our U.S. business due to the timing of new projects.
Operating profit decreased by $21.1 million, or 56.0%, during 2018, as compared to 2017. Operating profit margin decreased by 499 bps to 3.6% in 2018 from 8.5% in 2017. The decrease in operating profit margin was primarily attributable to impairment charges on goodwill and customer relationships related to our U.K. business totaling $26.5 million during 2018, as well as the loss of certain higher margin contracts in our U.K. business, partially offset by favorable margins on certain projects in our U.S. business and higher tax deductions for energy efficient government building projects.
Healthcare | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Increase / (Decrease) | ||||||||||
Revenues | $ | 273.3 | $ | 247.5 | $ | 25.8 | 10.4% | ||||||
Operating profit | 8.8 | 10.6 | (1.8 | ) | (17.4)% | ||||||||
Operating profit margin | 3.2 | % | 4.3 | % | (108) bps | ||||||||
Healthcare revenues increased by $25.8 million, or 10.4%, during 2018, as compared to 2017. This increase was primarily attributable to incremental revenues from the GCA acquisition of $24.6 million and net new business.
Operating profit decreased by $1.8 million, or 17.4%, during 2018, as compared to 2017. Operating profit margin decreased by 108 bps to 3.2% in 2018 from 4.3% in 2017. This decrease was primarily attributable to lower margin new business, partially offset by the management of selling, general and administrative expenses and the absence of a specific reserve for a client receivable.
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Corporate | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2018 | 2017 | Decrease | ||||||||||
Corporate expenses | $ | 168.8 | $ | 189.0 | $ | (20.2 | ) | (10.7)% | |||||
Corporate expenses decreased by $20.2 million, or 10.7%, during 2018, as compared to 2017. The decrease in corporate expenses was primarily related to:
• | the absence of $24.2 million of transaction expenses related to the GCA acquisition; |
• | an $11.8 million lower adjustment to self-insurance reserves related to prior year claims; |
• | a $3.4 million adjustment to decrease our medical and dental insurance reserves as a result of actuarial evaluations performed in 2018; and |
• | a $2.0 million decrease in legal settlement costs, net of a $7.0 million reimbursement of previously expensed legal settlement costs. |
This decrease was partially offset by:
• | a $6.4 million increase in technology investments and related support; |
• | a $4.8 million increase in restructuring and related costs as a result of the GCA acquisition; |
• | the absence of a $3.2 million reimbursement of previously expensed fees associated with a concluded internal investigation into a foreign entity formerly affiliated with a joint venture during the prior year; |
• | a $3.2 million increase in expenses related to certain incentive plans due to the timing of awards; and |
• | $1.5 million higher compensation and related expenses primarily related to hiring additional personnel to support our 2020 Vision initiatives, as well as incremental expenses related to the GCA acquisition. |
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The Year Ended October 31, 2017 Compared with the Year Ended October 31, 2016
Consolidated
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase / (Decrease) | ||||||||||
Revenues | $ | 5,453.6 | $ | 5,144.7 | $ | 308.9 | 6.0% | ||||||
Operating expenses | 4,881.2 | 4,603.4 | 277.8 | 6.0% | |||||||||
Gross margin | 10.5 | % | 10.5 | % | — | ||||||||
Selling, general and administrative expenses | 436.6 | 410.1 | 26.5 | 6.5% | |||||||||
Restructuring and related expenses | 20.9 | 29.0 | (8.1 | ) | (28.1)% | ||||||||
Amortization of intangible assets | 31.6 | 25.0 | 6.6 | 26.5% | |||||||||
Impairment (recovery) loss | (18.5 | ) | 22.5 | (41.0 | ) | NM* | |||||||
Operating profit | 101.9 | 54.7 | 47.2 | 86.2% | |||||||||
Income from unconsolidated affiliates, net | 4.2 | 7.6 | (3.4 | ) | (44.6)% | ||||||||
Interest expense | (19.2 | ) | (10.4 | ) | (8.8 | ) | (84.3)% | ||||||
Income from continuing operations before income taxes | 86.9 | 51.9 | 35.0 | 67.3% | |||||||||
Income tax (provision) benefit | (8.8 | ) | 10.4 | (19.2 | ) | NM* | |||||||
Income from continuing operations | 78.1 | 62.3 | 15.8 | 25.3% | |||||||||
Loss from discontinued operations, net of taxes | (74.3 | ) | (5.1 | ) | (69.2 | ) | NM* | ||||||
Net income | 3.8 | 57.2 | (53.4 | ) | (93.3)% | ||||||||
Other comprehensive income (loss) | |||||||||||||
Interest rate swaps and other | 2.7 | (0.1 | ) | 2.8 | NM* | ||||||||
Foreign currency translation | 9.7 | (26.3 | ) | 36.0 | NM* | ||||||||
Income tax provision | (1.1 | ) | (0.1 | ) | (1.0 | ) | NM* | ||||||
Comprehensive income | $ | 15.2 | $ | 30.7 | $ | (15.5 | ) | (50.5)% | |||||
*Not meaningful |
Revenues
Revenues increased by $308.9 million, or 6.0%, during 2017, as compared to 2016. The increase in revenues was primarily attributable to $208.1 million of incremental revenues from acquisitions, including GCA, and organic growth of $120.7 million in Aviation and $39.6 million in B&I. This increase was partially offset by the sale of our Government Services business on May 31, 2017, the loss of certain contracts in T&M, and the completion of a large energy savings performance contract (“ESPC”).
Operating Expenses
Operating expenses increased by $277.8 million, or 6.0%, during 2017, as compared to 2016. Gross margin remained flat at 10.5% in 2017 and 2016. Gross margin was positively impacted by a lower self-insurance adjustment related to prior year claims and savings from our 2020 Vision initiatives. However, gross margin was negatively impacted by a contract termination within our Aviation business and the loss of a multi-location janitorial account in T&M.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $26.5 million, or 6.5%, during 2017, as compared to 2016. The increase in selling, general and administrative expenses was primarily related to:
• | $24.2 million of transaction expenses related to the GCA acquisition; |
• | an $8.1 million increase in costs associated with 2020 Vision technology investments; |
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• | $5.8 million of higher compensation and related expenses primarily related to hiring additional personnel to support our 2020 Vision initiatives, which was reduced by a reversal of certain expenses related to incentive plans; |
• | $4.1 million of incremental selling, general and administrative expenses related to the GCA acquisition; and |
• | a $2.3 million increase in legal expenses. |
This increase was partially offset by:
• | an $8.8 million reduction in bad debt expense primarily associated with the absence of specific reserves for certain client receivables that were recorded in 2016; |
• | a $3.2 million reimbursement during 2017 of previously expensed fees associated with a concluded internal investigation into a foreign entity formerly affiliated with a joint venture; |
• | a $2.7 million decrease in sales tax reserve compared with the sales tax reserve in 2016; and |
• | organizational savings from our 2020 Vision initiatives. |
Restructuring and Related Expenses
Restructuring and related costs decreased by $8.1 million, or 28.1%, during 2017, as compared to 2016, as a result of the completion of our 2020 Vision organizational realignment and related employee severance in 2016.
Impairment (Recovery) Loss
On May 31, 2017, we sold our Government Services business for $35.5 million. Based on the initial offer of $35.0 million received during the second quarter of 2017, we recorded a $17.4 million impairment recovery to adjust the fair value of certain previously impaired assets. In connection with the sale, we recorded a pre-tax gain of approximately $1.2 million, which is reflected as part of impairment (recovery) loss in the results of operations table above.
Interest Expense
Interest expense increased by $8.8 million, or 84.3%, during 2017, as compared to 2016, primarily related to increased indebtedness incurred to fund the GCA acquisition and higher relative interest rates under our credit facility.
Income Taxes
During 2017, we had an income tax provision of $8.8 million, compared with an income tax benefit of $10.4 million in the prior year. In 2017 we benefited from $17.8 million related to expiring statutes of limitations for uncertain tax positions, compared with $20.8 million in 2016. The 2017 period also benefited from $3.6 million of excess tax benefits related to the vesting of share-based compensation awards and $1.9 million of tax deductions on energy efficient government buildings, compared with $2.2 million and $1.2 million in 2016, respectively. Additionally, in 2016 we benefited from WOTC of $5.1 million from the retroactive reinstatement of the WOTC for calendar year 2015. Both periods benefited from in-year WOTC.
Loss from Discontinued Operations, Net of Taxes
Loss from discontinued operations, net of taxes was $74.3 million during 2017 related to a legal reserve established in connection with certain settlement agreements.
Foreign Currency Translation
During 2017 we recognized as a component of our comprehensive income a foreign currency translation gain of $9.7 million compared with a loss of $26.3 million during 2016. This change was related to the USD weakening against the GBP during 2017. Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.
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Segment Information
Financial Information for Each Reportable Segment
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase / (Decrease) | ||||||||||
Revenues | |||||||||||||
Business & Industry | $ | 2,629.1 | $ | 2,557.1 | $ | 72.0 | 2.8% | ||||||
Aviation | 990.4 | 851.5 | 138.9 | 16.3% | |||||||||
Technology & Manufacturing | 697.4 | 679.3 | 18.1 | 2.7% | |||||||||
Education | 363.1 | 272.1 | 91.0 | 33.5% | |||||||||
Technical Solutions | 439.6 | 425.3 | 14.3 | 3.4% | |||||||||
Healthcare | 247.5 | 242.7 | 4.8 | 2.0% | |||||||||
Government Services | 86.5 | 116.7 | (30.2 | ) | (25.8)% | ||||||||
$ | 5,453.6 | $ | 5,144.7 | $ | 308.9 | 6.0% | |||||||
Operating profit (loss) | |||||||||||||
Business & Industry | $ | 135.6 | $ | 111.6 | $ | 24.0 | 21.5% | ||||||
Operating profit margin | 5.2 | % | 4.4 | % | 79 bps | ||||||||
Aviation | 25.3 | 27.7 | (2.4 | ) | (8.6)% | ||||||||
Operating profit margin | 2.6 | % | 3.3 | % | (70) bps | ||||||||
Technology & Manufacturing | 47.8 | 54.8 | (7.0 | ) | (12.7)% | ||||||||
Operating profit margin | 6.9 | % | 8.1 | % | (121) bps | ||||||||
Education | 18.0 | 17.4 | 0.6 | 3.7% | |||||||||
Operating profit margin | 5.0 | % | 6.4 | % | (143) bps | ||||||||
Technical Solutions | 37.6 | 28.9 | 8.7 | 29.9% | |||||||||
Operating profit margin | 8.5 | % | 6.8 | % | 175 bps | ||||||||
Healthcare | 10.6 | 12.7 | (2.1 | ) | (16.2)% | ||||||||
Operating profit margin | 4.3 | % | 5.2 | % | (93) bps | ||||||||
Government Services | 21.8 | (23.4 | ) | 45.2 | NM* | ||||||||
Operating profit margin | 25.2 | % | (20.1 | )% | NM* | ||||||||
Corporate | (189.0 | ) | (167.2 | ) | (21.8 | ) | (13.0)% | ||||||
Adjustment for income from unconsolidated affiliates, net, included in Aviation and Government Services | (4.1 | ) | (6.5 | ) | 2.4 | 37.3% | |||||||
Adjustment for tax deductions for energy efficient government buildings, included in Technical Solutions | (1.9 | ) | (1.2 | ) | (0.7 | ) | (52.9)% | ||||||
$ | 101.9 | $ | 54.7 | $ | 47.2 | 86.2% | |||||||
*Not meaningful
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Business & Industry | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase | ||||||||||
Revenues | $ | 2,629.1 | $ | 2,557.1 | $ | 72.0 | 2.8% | ||||||
Operating profit | 135.6 | 111.6 | 24.0 | 21.5% | |||||||||
Operating profit margin | 5.2 | % | 4.4 | % | 79 bps | ||||||||
B&I revenues increased by $72.0 million, or 2.8%, during 2017, as compared to 2016. The increase was primarily attributable to new janitorial business, including new contract wins in the United Kingdom and additional tag revenue, as well as expansion of existing facility services accounts, and $27.4 million of incremental revenues from the GCA acquisition. Management reimbursement revenues for this segment totaled $234.1 million and $227.8 million during 2017 and 2016, respectively.
Operating profit increased by $24.0 million, or 21.5%, during 2017, as compared to 2016. Operating profit margin increased by 79 bps to 5.2% in 2017 from 4.4% in 2016. The increase in operating profit margin was primarily associated with higher margin revenues, cost control savings from our 2020 Vision initiatives, and lower legal settlement costs. This increase was partially offset by reserves recorded for multiemployer union benefit obligations from previous years and by lower profit margins associated with certain leased location arrangements.
Aviation | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase / (Decrease) | ||||||||||
Revenues | $ | 990.4 | $ | 851.5 | $ | 138.9 | 16.3% | ||||||
Operating profit | 25.3 | 27.7 | (2.4 | ) | (8.6)% | ||||||||
Operating profit margin | 2.6 | % | 3.3 | % | (70) bps | ||||||||
Aviation revenues increased by $138.9 million, or 16.3%, during 2017, as compared to 2016. The increase was primarily attributable to organic growth in parking, transportation, passenger services, cabin cleaning, and facility services. Management reimbursement revenues for this segment totaled $80.4 million and $78.2 million during 2017 and 2016, respectively.
Operating profit decreased by $2.4 million, or 8.6%, during 2017, as compared to 2016. Operating profit margin decreased by 70 bps to 2.6% in 2017 from 3.3% in 2016. The decrease in operating profit margin was primarily attributable to a contract termination during 2017 and operational issues in certain geographic markets. This decrease was partially offset by lower allocated costs from our 2020 Vision initiatives and the absence of both a penalty imposed by a regulatory agency and a specific reserve established for a client receivable in 2016.
Technology & Manufacturing | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase / (Decrease) | ||||||||||
Revenues | $ | 697.4 | $ | 679.3 | $ | 18.1 | 2.7% | ||||||
Operating profit | 47.8 | 54.8 | (7.0 | ) | (12.7)% | ||||||||
Operating profit margin | 6.9 | % | 8.1 | % | (121) bps | ||||||||
T&M revenues increased by $18.1 million, or 2.7%, during 2017, as compared to 2016. The increase was primarily related to incremental revenues from the GCA acquisition of $39.6 million, partially offset by the loss of certain accounts.
Operating profit decreased by $7.0 million, or 12.7%, during 2017, as compared to 2016. Operating profit margin decreased by 121 bps to 6.9% in 2017 from 8.1% in 2016. The decrease in operating profit margin was primarily attributable to lower contribution margin from certain contracts, including the loss of a multi-location janitorial account, and higher amortization expense from the GCA acquisition.
35
Education | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase / (Decrease) | ||||||||||
Revenues | $ | 363.1 | $ | 272.1 | $ | 91.0 | 33.5% | ||||||
Operating profit | 18.0 | 17.4 | 0.6 | 3.7% | |||||||||
Operating profit margin | 5.0 | % | 6.4 | % | (143) bps | ||||||||
Education revenues increased by $91.0 million, or 33.5%, during 2017, as compared to 2016. The increase was primarily attributable to incremental revenues from the GCA acquisition of $94.9 million.
Operating profit increased by $0.6 million, or 3.7%, during 2017, as compared to 2016. Operating profit margin decreased by 143 bps to 5.0% in 2017 from 6.4% in 2016. The decrease in operating profit margin was primarily attributable to the loss of certain higher margin contracts and higher amortization expense from the GCA acquisition.
Technical Solutions | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase | ||||||||||
Revenues | $ | 439.6 | $ | 425.3 | $ | 14.3 | 3.4% | ||||||
Operating profit | 37.6 | 28.9 | 8.7 | 29.9% | |||||||||
Operating profit margin | 8.5 | % | 6.8 | % | 175 bps | ||||||||
Technical Solutions revenues increased by $14.3 million, or 3.4%, during 2017, as compared to 2016. The increase was primarily attributable to incremental revenues from acquisitions of $18.1 million and higher project revenues, partially offset by the completion of a large ESPC project.
Operating profit increased by $8.7 million, or 29.9%, during 2017, as compared to 2016. Operating profit margin increased by 175 bps to 8.5% in 2017 from 6.8% in 2016. The increase in operating profit margin was primarily attributable to the completion of a relatively lower margin ESPC project that started in 2016, the management of our selling, general and administrative expenses, a reduction in bad debt, and higher operational tax credits for energy efficient government building projects.
Healthcare | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase / (Decrease) | ||||||||||
Revenues | $ | 247.5 | $ | 242.7 | $ | 4.8 | 2.0% | ||||||
Operating profit | 10.6 | 12.7 | (2.1 | ) | (16.2)% | ||||||||
Operating profit margin | 4.3 | % | 5.2 | % | (93) bps | ||||||||
Healthcare revenues increased by $4.8 million, or 2.0%, during 2017, as compared to 2016. This increase was primarily attributable to incremental revenues from the GCA acquisition of $5.0 million.
Operating profit decreased by $2.1 million, or 16.2%, during 2017, as compared to 2016. Operating profit margin decreased by 93 bps to 4.3% in 2017 from 5.2% in 2016. This decrease was primarily attributable to lower margin new business and a specific reserve established for a client receivable.
36
Corporate | |||||||||||||
Years Ended October 31, | |||||||||||||
($ in millions) | 2017 | 2016 | Increase | ||||||||||
Corporate expenses | $ | 189.0 | $ | 167.2 | $ | 21.8 | 13.0% | ||||||
Corporate expenses increased by $21.8 million, or 13.0%, during 2017, as compared to 2016. The increase in corporate expenses was primarily related to:
• | $24.2 million of transaction expenses related to the GCA acquisition; |
• | an $8.1 million increase in costs associated with 2020 Vision technology investments; |
• | a $5.8 million increase in other costs to support our 2020 Vision initiatives; |
• | a $5.1 million increase in legal settlement costs, including a settlement relating to a case alleging certain minimum wage violations; |
• | $4.0 million of incremental expenses related to the GCA acquisition; and |
• | a $2.3 increase in legal expenses. |
This increase was partially offset by:
• | a $10.9 million decrease in self-insurance expense related to prior year claims as a result of an actuarial evaluation completed during 2017; |
• | a $7.8 million decrease in restructuring and related costs as a result of the completion of our 2020 Vision organizational realignment; |
• | the absence of a $5.2 million specific reserve established during 2016 for a portion of a client receivable that is the subject of ongoing litigation; |
• | a $3.2 million reimbursement during 2017 of previously expensed fees associated with a concluded internal investigation into a foreign entity formerly affiliated with a joint venture; and |
• | a $1.9 million decrease in sales tax reserve. |
37
Liquidity and Capital Resources |
Our primary sources of liquidity are operating cash flows and borrowing capacity under our credit facility. We assess our liquidity in terms of our ability to generate cash to fund our short- and long-term cash requirements. As such, we project our anticipated cash requirements as well as cash flows generated from operating activities to meet those needs.
In addition to normal working capital requirements, we anticipate that our short- and long-term cash requirements will include funding legal settlements, insurance claims, dividend payments, capital expenditures, and integration costs related to the GCA acquisition. We anticipate long-term cash uses may also include strategic acquisitions and share repurchases.
We believe that our operating cash flows and borrowing capacity under our credit facility are sufficient to fund our cash requirements for the next twelve months. In the event that our plans change or our cash requirements are greater than we anticipate, we may need to access the capital markets to finance future cash requirements. However, there can be no assurance that such financing will be available to us should we need it or, if available, that the terms will be satisfactory to us and not dilutive to existing shareholders.
On a long-term basis, we will continue to rely on our credit facility for any long-term funding not provided by operating cash flows. In addition, we anticipate that future cash generated from operations will be augmented by working capital improvements driven by our 2020 Vision, such as the management of costs through consolidated procurement.
IFM Assurance Company (“IFM”) is a wholly-owned captive insurance company that we formed in 2015. IFM is part of our enterprise-wide, multi-year insurance strategy that is intended to better position our risk and safety programs and provide us with increased flexibility in the end-to-end management of our insurance programs. IFM began providing coverage to us as of January 1, 2015. We had accelerated cash tax savings related to coverage provided by IFM of approximately $7 million in 2018 and $10 million in both 2017 and 2016. We project accelerated cash tax savings for 2019 to be approximately $6 million.
Credit Facility
On September 1, 2017, we refinanced and replaced our then-existing $800.0 million credit facility with a new senior, secured five-year syndicated credit facility (the “Credit Facility”), consisting of a $900.0 million revolving line of credit and an $800.0 million amortizing term loan, scheduled to mature on September 1, 2022. In accordance with the terms of the Credit Facility, the line of credit was reduced to $800.0 million on September 1, 2018. Initial borrowings under the Credit Facility were used to finance, in part, the cash portion of the purchase price related to the GCA acquisition, to refinance certain existing indebtedness of ABM, and to pay transaction costs.
Our ability to draw down available capacity under the Credit Facility is subject to, and limited by, compliance with certain financial covenants, which include a minimum fixed charge coverage ratio of 1.50 to 1.0 and a maximum leverage ratio that was 4.75 to 1.0 through April 2018 and steps down to 3.50 to 1.0 by July 2020. On September 5, 2018, we amended our Credit Facility to increase the maximum leverage ratio for fiscal quarters commencing July 31, 2018 through April 30, 2021 by 25 basis points for such quarters. Other covenants under the Credit Facility include limitations on liens, dispositions, fundamental changes, investments, and certain transactions and payments. At October 31, 2018, we were in compliance with these covenants and expect to be in compliance in the foreseeable future.
During the first quarter of 2018, we made $20.0 million of principal payments under the Credit Facility. At October 31, 2018, the total outstanding borrowings under our Credit Facility in the form of cash borrowings and standby letters of credit were $949.0 million and $152.9 million, respectively. At October 31, 2018, we had up to $467.3 million of borrowing capacity under the Credit Facility; however, covenant restrictions limited our actual borrowing capacity to $441.3 million.
Reinvestment of Foreign Earnings
We plan to reinvest our foreign earnings to fund future non-U.S. growth and expansion, and we do not anticipate remitting such earnings to the United States. While U.S. federal tax expense has been recognized as a result of the Tax Act, no deferred tax liabilities with respect to federal and state income taxes or foreign withholding taxes have been recognized. We believe that our cash on hand in the United States, along with our Credit Facility and future domestic cash flows, are sufficient to satisfy our domestic liquidity requirements.
38
Proceeds from Federal Energy Savings Performance Contracts
As part of our Technical Solutions business, we enter into ESPCs with the federal government pursuant to which we agree to develop, design, engineer, and construct a project and guarantee that the project will satisfy agreed-upon performance standards. Proceeds from ESPC projects are generally received in advance of construction through agreements to sell the ESPC receivables to unaffiliated third parties. We use the advances from the third parties under these agreements to finance the projects, which are recorded as cash flows from financing activities. The use of the cash received under these arrangements to pay project costs is classified as operating cash flows.
Effect of Inflation
The rates of inflation experienced in recent years have not had a material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
Regulatory Environment and Environmental Compliance
Our operations are subject to various federal, state, and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water, and air, and the generation, handling, storage, transportation, and disposal of waste and hazardous substances. In addition, from time to time we are involved in environmental matters at certain of our locations or in connection with our operations. Historically, the cost of complying with environmental laws or resolving environmental issues relating to locations or operations in the United States or abroad has not had a material adverse effect on our financial position, results of operations, or cash flows. We do not believe that the resolution of matters known at this time will be material.
Cash Flows
In addition to revenues and operating profit, our management views operating cash flows as a good indicator of financial performance, because strong operating cash flows provide opportunities for growth both organically and through acquisitions. Net cash provided by operating activities of continuing operations was $299.7 million during 2018. Operating cash flows primarily depend on: revenue levels; the quality and timing of collections of accounts receivable; the timing of payments to suppliers and other vendors; the timing and amount of income tax payments; and the timing and amount of payments on insurance claims and legal settlements.
Years Ended October 31, | |||||||||||
(in millions) | 2018 | 2017 | 2016 | ||||||||
Net cash provided by operating activities of continuing operations | $ | 299.7 | $ | 101.7 | $ | 110.5 | |||||
Net cash provided by (used in) operating activities of discontinued operations | 21.2 | (96.1 | ) | (27.0 | ) | ||||||
Net cash provided by operating activities | 320.9 | 5.6 | 83.5 | ||||||||
Net cash used in investing activities of continuing operations | (48.1 | ) | (871.8 | ) | (131.7 | ) | |||||
Net cash used in investing activities of discontinued operations | — | — | (3.1 | ) | |||||||
Net cash used in investing activities | (48.1 | ) | (871.8 | ) | (134.8 | ) | |||||
Net cash (used in) provided by financing activities | (295.8 | ) | 874.0 | 52.6 | |||||||
Operating Activities of Continuing Operations
Net cash provided by operating activities of continuing operations increased by $198.0 million during 2018, as compared to 2017. The increase was primarily related to the timing of client receivable collections, including collections from acquired GCA accounts, as well as proceeds from the termination of our interest rate swaps and a year-over-year reduction of required cash insurance deposits included in other assets. This increase was partially offset by the timing of vendor payments.
Net cash provided by operating activities of continuing operations decreased by $8.8 million during 2017, as compared to 2016. The decrease was primarily related to the timing of client receivable collections and income taxes payable, but was partially offset by the timing of vendor payments.
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Operating Activities of Discontinued Operations
Net cash provided by operating activities of discontinued operations was $21.2 million during 2018, as compared to net cash used in operating activities of discontinued operations of $96.1 million in 2017, a change of $117.3 million, primarily attributable to the payment of a $120.0 million legal settlement during 2017.
Net cash used in operating activities of discontinued operations increased by $69.1 million during 2017, as compared to 2016. This increase was primarily attributable to $120.0 million of legal settlement payments in 2017, compared to the $20.0 million in taxes paid related to the sale of the Security business in 2016.
Investing Activities of Continuing Operations
Net cash used in investing activities of continuing operations decreased by $823.7 million during 2018, as compared to 2017. The decrease was primarily due to an $853.6 million year-over-year decrease in cash paid, net of cash acquired, for acquisitions, partially offset by the absence of $35.5 million of cash proceeds from the sale of our Government Services business in 2017.
Net cash used in investing activities of continuing operations increased by $740.1 million during 2017, as compared to 2016. The increase was primarily related to a $757.6 million year-over-year increase in cash paid, net of cash acquired, for acquisitions, largely due to the GCA acquisition.
Investing Activities of Discontinued Operations
Net cash used in investing activities of discontinued operations decreased by $3.1 million during 2017, as compared to 2016, due to the absence of the final working capital adjustment from the sale of the Security business paid in 2016.
Financing Activities
Net cash used in financing activities was $295.8 million during 2018, as compared to net cash provided by financing activities of $874.0 million during 2017, primarily due to higher repayments of our borrowings in 2018.
Net cash provided by financing activities increased by $821.4 million during 2017, as compared to 2016, primarily related to an increase in net borrowings in the fourth quarter of 2017 to fund the GCA acquisition and $38.7 million in lower common stock repurchases, partially offset by $18.7 million of deferred financing costs paid on the new credit facility and $15.8 million of lower proceeds from ESPC projects during 2017.
Dividends
On December 18, 2018, we announced a quarterly cash dividend of $0.180 per share on our common stock, payable on February 4, 2019. We declared a quarterly cash dividend on our common stock every quarter during 2018, 2017, and 2016. We paid total annual dividends of $46.0 million, $39.5 million, and $36.9 million during 2018, 2017, and 2016, respectively.
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Contractual Obligations
(in millions) | Commitments Due By Period | ||||||||||||||||||
Contractual Obligations | Total | 2019 | 2020-2021 | 2022-2023 | Thereafter | ||||||||||||||
Borrowings under term loan(1) | $ | 780.0 | $ | 40.0 | $ | 180.0 | $ | 560.0 | $ | — | |||||||||
Borrowings under line of credit(1) | 169.0 | — | — | 169.0 | — | ||||||||||||||
Fixed interest related to interest rate swaps(2) | 41.3 | 12.5 | 23.8 | 5.0 | — | ||||||||||||||
Operating leases and other similar commitments(3) | 367.6 | 80.7 | 113.9 | 87.5 | 85.5 | ||||||||||||||
Capital leases(3) | 10.9 | 3.3 | 5.8 | 1.8 | — | ||||||||||||||
Information technology service agreements(4) | 69.2 | 23.2 | |||||||||||||||||