Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following MD&A is intended to facilitate an understanding of the results of operations and financial condition of ABM. This MD&A is provided as a supplement to, and should be read in conjunction with, our 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. Unless otherwise indicated, all information in the MD&A and references to years are based on our fiscal year, which ends on October 31.
Effective November 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) and related amendments, using a modified retrospective approach; prior period Financial Statements were not adjusted. Refer to Note 2, “Basis of Presentation and Significant Accounting Policies,” and Note 4, “Leases,” in the Financial Statements for additional information regarding the impact of adoption.
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 . Our principal operations are in the United States, and in 2020 our U.S. operations generated approximately 94% of our revenues.
Strategic Growth
We remain focused on long-term, profitable growth related to both new and existing clients within our industry groups and across our many service lines. Our revenue growth strategy is predicated on pursuing new sales and targeting a favorable retention rate among existing contracts. Cross-selling and up-selling projects and services is also an integral part of our strategy. We believe operational leverage from our strategic growth initiatives, coupled with our continued focus on efficiency, will increase profitability.
Systems and Technology Transformation
We have initiated many technology-based modernization efforts that we believe will enable us to operate more efficiently and provide us with greater data and insights to enhance our business management capabilities. We believe these new tools and systems will equip us for long-term success and position us for an even stronger and more prosperous future.
Human Resources and Labor Management
During 2019 we launched our new cloud-based human capital management system. This investment will create an HR structure that centralizes and standardizes hiring and training practices to help us make more informed decisions and ultimately manage certain costs. We have also introduced new tools to help our operators manage labor more efficiently, and we continue to invest in attracting, developing, and retaining talent.
Enterprise Resource Planning
During 2019 and the first quarter of 2020 we also made progress with the multi-phased deployment of our new ERP system, and in the future we anticipate having a unified system where we can integrate our legacy ABM and our legacy GCA finance environments for the first time. This newly combined system will streamline the operational and financial execution of our business and lead to more effective decision making in the future. Due to the Pandemic-related disruptions, the implementation of the new ERP system was temporarily suspended in the second and third quarters of 2020. In the fourth quarter of 2020, we re-engaged the implementation.
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Developments and Trends
COVID-19 Pandemic
COVID-19 has resulted in a worldwide health Pandemic. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in business slowdowns and shutdowns, as well as global travel restrictions. We, along with many of our clients, have been impacted by recommendations and/or mandates from federal, state, and local authorities to practice social distancing, to refrain from gathering in groups, and, in some areas, to refrain from non-essential movements outside of homes. The Pandemic has also created unanticipated circumstances and uncertainty, disruption, and significant volatility in the broader economy. Refer to “Consolidated Results of Operations” and “Results of Operations by Segment” for additional information related to the impact of the Pandemic on our financial results.
Given the unprecedented and uncertain nature and potential duration of this situation, we cannot reasonably estimate the full extent of the impact the Pandemic will have on our financial condition, results of operations, or cash flows. The ultimate extent of the effects of the Pandemic on our company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the Pandemic subsides.
Our priority has been and continues to be the health, safety, and support of our employees, our clients, and the communities that we serve. We have also taken actions to strengthen our liquidity, cash flows, and financial position to help mitigate potential future impacts on our operations and financial performance. These priorities and measures include, but are not limited to, the following:
Health and Safety of our Employees and Clients
As the Pandemic has developed, we have taken steps to support our employees and clients based on recommendations from various global experts, including the World Health Organization, the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, and the U.K. National Health Service. To help protect our employees and our clients, face masks and other personal protective equipment (“PPE”) are being used by our employees. We have also encouraged our employees to practice social distancing and wash hands frequently. Additionally, we transitioned many office-based employees to a remote work environment, suspended non-essential travel, and adopted technologies to allow employees to effectively perform their functions remotely.
Client Focus
Over the past few years, we have focused on consolidating purchasing activities to leverage our scale and identify preferred suppliers. While we have seen a reduction in the availability of supplies and an increase in costs, our procurement efforts have helped create a positive supply chain for our company and clients during the Pandemic, particularly as city and state mandates on PPE for employees have arisen. We will continue to monitor our supply chain for potential impacts as future developments unfold.
The Pandemic continues to create a dynamic client environment, and we are working diligently to ensure our clients’ changing staffing and service needs are met. We are also developing new cleaning initiatives in accordance with various protocols issued by global experts, including deep cleaning services, special project cleaning services, and other work orders.
In April 2020, we announced our EnhancedClean TM Program (“EnhancedClean”), an innovative solution that helps provide clients with healthy spaces. We designed EnhancedClean under the guidance of experts on infectious diseases and industrial hygiene to help provide our clients with processes that use hospital-grade disinfectants, specialized equipment, and innovative solutions and technology. These solutions include: hygiene and safety protocols, utilization of disinfecting procedures and products for high-touch surfaces, employment of PPE, and communication and training protocols.
Expense Management
As we adapted to the changing demand environment resulting from the Pandemic, during 2020 we implemented numerous cost cutting actions, such as:
• Various human capital management actions, including: temporary pay reductions for executives, certain employees, and our Board of Directors, with full pay reinstated as of August 1, 2020;
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temporary furloughs or reduced working hours for certain staff and management employees, most of whom returned to work effective August 1, 2020; and the temporary suspension of certain benefits, including our 401(k) match, which will be reinstated effective January 1, 2021;
• Actively managing direct labor and related personnel costs, including furloughs or reduced hours for certain service employees in markets significantly impacted by business slowdowns and shutdowns;
• Reducing our planned capital expenditures and operating expenditures for 2020, including the postponement of various technology initiatives (such as implementing our ERP system) that were deemed non-critical to our operations, some of which we re-engaged during the fourth quarter; and limiting travel and entertainment expenses; and
• Reducing our sales expenses and discretionary spending projects across the Company.
Liquidity, Cash Flows, and Financial Position
As of October 31, 2020, we had $394.2 million of cash and cash equivalents, and we had net cash provided by operating activities of $457.5 million during th e year ended October 31, 2020. We have taken and continue to take actions to help preserve cash, increase liquidity, and strengthen our financial position, including:
• Borrowing approximately $300 million under our line of credit in March 2020, which represented all remaining amounts then available under our Credit Facility, as a precautionary measure to provide increased liquidity and preserve financial flexibility due to uncertainty resulting from the Pandemic (refer to “Liquidity and Capital Resources” for more information). During the quarter ended July 31, 2020, we repaid substantially all of these amounts borrowed under the revolving line of credit without penalty. We have not borrowed additionally in the fourth quarter of 2020;
• Amending our Credit Facility on May 28, 2020, to further enhance our financial flexibility as a precautionary measure in response to uncertainty arising from the Pandemic (refer to “Liquidity and Capital Resources” for more information);
• Focusing on collection of client receivables and monitoring the adequacy of our reserves;
• Extending vendor payment terms where possible;
• Utilizing certain governmental relief efforts (as further described below); and
• Suspending share repurchases under our share repurchase program.
As a result of the actions taken above, we were able to strengthen our cash flow in fiscal 2020, allowing us to pay down our line of credit borrowings. As of October 31, 2020, this resulted in a borrowing capacity of $596.6 million, reflecting covenant restrictions. In addition, we had $394.2 million of cash and cash equivalents, as noted above.
In response to the Pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020. The CARES Act provides various stimulus measures, including several income tax and payroll tax provisions. Among the payroll tax provisions is the creation of a refundable credit for employee retention and the deferral of certain payroll tax remittances through December 31, 2020, to future years (with 50% of the deferred amount due by December 31, 2021, and the remaining 50% due by December 31, 2022). We evaluated the impact of business tax provisions in the CARES Act. The impact of the income tax provisions was not material. The impact of the payroll tax provisions was the deferral of approximately $101 million of payroll tax as of October 31, 2020. Additionally, we received grants under the United Kingdom’s job retention scheme to reimburse us for a portion of certain furloughed employees’ salaries.
The Pandemic is an unprecedented situation and is continuously evolving. Since we cannot predict the duration or scope of the Pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in 2021 or in the future. Even after the Pandemic has moderated and the business and social distancing restrictions have eased, we may continue to experience adverse effects on our business, consolidated results of operations, financial position, and cash flows resulting from a recessionary economic environment that may persist.
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The Pandemic has had a profoundly negative impact on the public health and safety of the global and American public. As a result, the global and U.S. economies continue to experience significant uncertainty. Gross domestic product has demonstrated considerable volatility since the onset of the Pandemic, contracting to a historic and sudden low during 2020. The unemployment rate has more than doubled, as well, given the struggling macroeconomic environment. These factors have led to lower demand for some of our services in certain end-markets. To date, the Pandemic has impacted and is expected to continue impacting global communities and commerce for the foreseeable future.
Restructuring and Related Costs
We may periodically engage in various restructuring activities intended to drive long-term profitable growth and increase operational efficiency, which can include streamlining and realigning our overall organizational structure and reallocating resources. These activities may result in restructuring costs related to employee severance, other project fees, external support fees, lease exit costs, and asset impairment charges.
GCA Restructuring and Other Initiatives
Following the acquisition of GCA, during the first quarter of 2018, we initiated a restructuring program to achieve cost synergies and subsequently incurred expenses primarily related to employee severance, the migration and upgrade of several key technology platforms, and the consolidation of certain real estate leases. Additionally, during 2019, we reorganized our former Healthcare business and incurred immaterial severance expense. In early 2020, we continued our technology-based modernization efforts, including standardizing our financial systems. However, due to the Pandemic, the majority of these projects have been temporarily suspended since the second quarter of 2020.
Year Ended
(in millions) October 31, 2020 Cumulative
Employee severance $ 0.3 $ 18.3
Other project fees 3.2 15.5
External support fees 1.4 4.9
Lease exit costs 2.7 3.4
Total $ 7.6 $ 42.2
Insurance Reserves
We use a combination of insured and self-insurance programs to cover workers’ compensation, general liability, automobile liability, property damage, and other insurable risks. Insurance claim liabilities represent our estimate of retained risks without regard to insurance coverage. We retain a substantial portion of the risk related to certain workers’ compensation and medical claims. Liabilities associated with these losses include estimates of both filed claims and incurred but not reported claims (“IBNR Claims”).
With the assistance of third-party actuaries, we periodically review our estimate of ultimate losses for IBNR Claims and adjust our required self-insurance reserves as appropriate. As part of this evaluation, we review the status of existing and new claim reserves as established by third-party claims administrators. The third-party claims administrators establish the case reserves based upon known factors related to the type and severity of the claims, demographic factors, legislative matters, and case law, as appropriate. We compare actual trends to expected trends and monitor claims developments. The specific case reserves estimated by the third-party administrators are provided to an actuary who assists us in projecting an actuarial estimate of the overall ultimate losses for our self-insured or high deductible programs, which includes the case reserves plus an actuarial estimate of reserves required for additional developments, such as IBNR Claims. We utilize the results of actuarial studies to estimate our insurance rates and insurance reserves for future periods and to adjust reserves, if appropriate, for prior years.
The actuarial reviews demonstrate that the changes we have made to our risk management program continue to positively impact the frequency and severity of claims. The claims management strategies and programs that we have implemented have resulted in improvements. Furthermore, we continue to adjust our reserves consistent with known fact patterns. Based on the results of the actuarial reviews performed, we decreased our total reserves for known claims as well as our estimate of the loss amounts associated with IBNR Claims by $36.6 million, $30.2 million of which relates to prior years, during 2020. In 2019, we decreased our total reserves related to prior year claims by $3.4 million.
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Key Financial Highlights
• Revenues decreased by $511.0 million, or 7.9%, during 2020, as compared to 2019, primarily due to the impact of Pandemic-related disruptions across our businesses. Revenues were also impacted by the loss of certain accounts, primarily in our Aviation business and our U.S. B&I business. However, this decrease was partially offset by the expansion of certain accounts and new business within B&I, T&M, and Technical Solutions (primarily before Pandemic-related disruptions), as well as by a significant increase in work orders and new services, including EnhancedClean, primarily relating to the Pandemic.
• Operating profit decreased by $112.6 million, or 54.0%, during 2020, as compared to 2019. The decrease in operating profit is primarily attributable to impairment charges recorded on goodwill and intangible assets totaling $172.8 million due to the adverse impact of market and business conditions resulting from the Pandemic. The decrease was also driven by account compression resulting from: Pandemic-related disruptions in certain markets; a reserve on notes receivable related to a unique, entertainment-related project within Technical Solutions, mainly associated with increasing credit risk resulting from the Pandemic; an increase in bad debt expense primarily due to specific reserves established for client receivables associated with increasing credit risk in certain industries (including for clients with deteriorating credit ratings and resulting bankruptcies) arising from the Pandemic; and investments in EnhancedClean, other Pandemic-related projects, and certain corporate initiatives. These factors were partially offset by: the management of direct labor and related personnel costs during the Pandemic; higher margins on work orders and new services, including EnhancedClean, relating to the Pandemic (particularly within B&I and T&M); the loss of certain lower margin accounts within B&I and Aviation; a decrease in self-insurance reserves related to adjustments for prior years; and various human capital management cost reduction measures.
• Our effective tax rate on income from continuing operations was 99.6% for 2020, as compared to 20.4% during 2019, with the increase primarily due to the impairment of non-deductible goodwill during 2020.
• Net cash provided by operating activities of continuing operations was $457.4 million during 2020.
• Dividends of $49.3 million were paid to shareholders, and dividends totaling $0.740 per common share were declared during 2020.
• At October 31, 2020, total outstanding borrowings under our credit facility were $725.3 million, and we had up to $596.6 million of borrowing capacity, reflecting covenant restrictions.
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Results of Operations
Consolidated
Years Ended October 31, 2020 vs. 2019
($ in millions) 2020 2019 2018 Increase / (Decrease)
Revenues $ 5,987.6 $ 6,498.6 $ 6,442.2 $ (511.0) (7.9)%
Operating expenses 5,157.0 5,767.5 5,747.4 (610.5) (10.6)%
Gross margin 13.9 % 11.2 % 10.8 % 262 bps
Selling, general and administrative expenses 506.1 452.9 438.0 53.2 11.7%
Restructuring and related expenses 7.6 11.2 25.7 (3.6) (32.2)%
Amortization of intangible assets 48.4 58.5 66.0 (10.1) (17.3)%
Impairment loss 172.8 — 26.5 172.8 NM*
Operating profit 95.7 208.3 138.6 (112.6) (54.0)%
Income from unconsolidated affiliates 2.2 3.0 3.2 (0.8) (28.3)%
Interest expense (44.6) (51.1) (54.1) (6.5) (12.8)%
Income from continuing operations before
income taxes 53.3 160.2 87.7 (106.9) (66.7)%
Income tax (provision) benefit (53.1) (32.7) 8.2 20.4 62.5%
Income from continuing operations 0.2 127.5 95.9 (127.3) (99.8)%
Income (loss) from discontinued operations,
net of taxes 0.1 (0.1) 1.8 0.2 NM*
Net income 0.3 127.4 97.8 (127.1) (99.8)%
Other comprehensive (loss) income
Interest rate swaps (7.6) (22.4) 21.9 14.8 66.1%
Foreign currency translation and other (1.8) 1.6 (4.7) (3.4) NM*
Income tax benefit (provision) 2.4 5.9 (5.9) (3.5) (58.9)%
Comprehensive (loss) income $ (6.6) $ 112.5 $ 109.0 $ (119.1) NM*
*Not meaningful
The Year Ended October 31, 2020 Compared with the Year Ended October 31, 2019
Revenues
Revenues decreased by $511.0 million, or 7.9%, during 2020, as compared to 2019. The decrease in revenues was primarily due to the impact of Pandemic-related disruptions across our businesses. Revenues were also impacted by the loss of certain accounts, primarily in our Aviation business and our U.S. B&I business. However, this decrease was partially offset by the expansion of certain accounts and new business within B&I, T&M, and Technical Solutions (primarily before Pandemic-related disruptions), as well as a significant increase in work orders and new services, including EnhancedClean, primarily relating to the Pandemic.
Operating Expenses
Operating expenses decreased by $610.5 million, or 10.6%, during 2020, as compared to 2019. Gross margin increased by 262 bps to 13.9% in 2020 from 11.2% in 2019. The increase in gross margin was primarily associated with the management of direct labor and related personnel costs during the Pandemic; higher margins on work orders and new services, including EnhancedClean, relating to the Pandemic (primarily within B&I and T&M); the loss of certain lower margin accounts within B&I and Aviation; and a decrease in self-insurance reserves related to adjustments for prior years.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $53.2 million, or 11.7%, during 2020, as compared to 2019. The increase in selling, general and administrative expenses was primarily attributable to:
• a $17.6 million reserve on notes receivable related to a unique, entertainment-related project within Technical Solutions, mainly associated with increasing credit risk resulting from the Pandemic;
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• a $13.1 million increase related to investments in EnhancedClean, other Pandemic-related projects, and certain corporate initiatives;
• a $12.9 million increase in bad debt expense primarily due to specific reserves established for client receivables associated with increasing credit risk in certain industries (including for clients with deteriorating credit ratings and resulting bankruptcies) arising from the Pandemic;
• an $11.6 million increase in legal costs and settlements; and
• a $4.6 million increase in medical and dental insurance expense as a result of actuarial evaluations performed in the year ended October 31, 2020.
This increase was partially offset by:
• the absence of a $3.9 million reserve for an anticipated union pension settlement in the prior year; and
• a $3.5 million decrease in compensation and related expenses mainly due to management and staff labor reductions, including wage reductions, employee furloughs, and the suspension of certain benefits such as 401(k) matching, and also due to a decrease in travel and entertainment expenses, partially offset by additional share-based compensation expense.
Restructuring and Related Expenses
Restructuring and related expenses decreased by $3.6 million, or 32.2%, during 2020, as compared to 2019. The decrease was primarily due to a decline in severance, other expenses incurred in the prior year related to the GCA integration, and expenses related to our ongoing technology initiatives. The majority of these initiatives have been temporarily suspended since the second quarter of 2020 due to the Pandemic.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $10.1 million, or 17.3%, during 2020, as compared to 2019, mainly due to the lower intangible assets balance resulting from the impairment loss recorded in the second quarter of 2020 and to certain intangible assets being amortized using the sum-of-the-years’-digits method, which results in declining amortization expense over the useful lives of the assets.
Impairment Loss
During 2020, we recorded impairment charges on goodwill related to our Education, Aviation, and U.K. Technical Solutions businesses totaling $163.8 million. Additionally, we recorded impairment charges on customer relationships related to our Aviation and U.K. Technical Solutions businesses totaling $9.0 million. During the second quarter of 2020, these businesses were adversely impacted by the market and business conditions resulting from the Pandemic. During 2019, we did not record any impairment charges.
Interest Expense
Interest expense decreased by $6.5 million, or 12.8%, during 2020, as compared to 2019, primarily due to lower relative interest rates and lower outstanding borrowing under our credit facility.
Income Taxes from Continuing Operations
During 2020 and 2019, we had effective tax rates of 99.6% and 20.4%, respectively, resulting in a provision for tax of $53.1 million and a provision for tax of $32.7 million, respectively. The effective tax rate for the year ended October 31, 2020, excluding a nondeductible impairment loss of $163.8 million, was 24.4%. Our effective tax rate for 2020 was also impacted by the following discrete items: a $5.7 million benefit from true-ups; a $2.3 million provision related to the Work Opportunity Tax Credit (“WOTC”); a $2.1 million benefit from energy efficiency incentives; and a $1.1 million benefit from change of tax reserves. Our effective tax rate for 2019 was impacted by the following discrete items: a $1.8 million benefit from the transition tax (including foreign tax credits); a $1.7 million benefit from state true-ups; a $1.6 million benefit from federal true-ups; a $1.3 million provision related to WOTC; a $1.3 million benefit from expiring statutes of limitations; a $1.1 million benefit from the vesting of share-based compensation awards; and a $0.9 million benefit from research and development credits.
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Interest Rate Swaps
The unrealized loss on interest rate swaps decreased by $14.8 million, or 66.1%, during the year ended October 31, 2020, as compared to the year ended October 31, 2019, primarily due to underlying changes in the fair value of our interest rate swaps.
Foreign Currency Translation and Other
We had a foreign currency translation loss of $1.8 million during the year ended October 31, 2020 as compared to a foreign currency translation gain of $1.6 million during the year ended October 31, 2019. This change was due to fluctuations in the exchange rate between the U.S. Dollar (“USD”) and the Great Britain Pound (“GBP”). Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.
The Year Ended October 31, 2019 Compared with the Year Ended October 31, 2018
For a comparison of our Results of Operations for the year ended October 31, 2019 to the year ended October 31, 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended October 31, 2019, filed with the SEC on December 20, 2019.
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Segment Information
Our current reportable segments consist of B&I, T&M, Education, Aviation, and Technical Solutions.
Financial Information for Each Reportable Segment
Years Ended October 31, 2020 vs. 2019
($ in millions) 2020 2019 2018 Increase / (Decrease)
Revenues
Business & Industry $ 3,157.8 $ 3,251.4 $ 3,268.4 $ (93.6) (2.9)%
Technology & Manufacturing 956.0 917.0 925.4 39.0 4.3%
Education 808.8 847.4 856.7 (38.6) (4.6)%
Aviation 680.9 1,017.3 1,038.7 (336.4) (33.1)%
Technical Solutions 506.6 593.2 500.1 (86.6) (14.6)%
Elimination of inter-segment revenues (122.4) (127.7) (147.1) 5.3 4.2%
$ 5,987.6 $ 6,498.6 $ 6,442.2 $ (511.0) (7.9)%
Operating profit (loss)
Business & Industry $ 253.7 $ 182.3 $ 157.9 $ 71.4 39.2%
Operating profit margin 8.0 % 5.6 % 4.8 % 243 bps
Technology & Manufacturing 84.4 72.5 67.4 11.9 16.5%
Operating profit margin 8.8 % 7.9 % 7.3 % 93 bps
Education (41.1) 39.0 44.1 (80.1) NM*
Operating profit margin (5.1) % 4.6 % 5.1 % (969) bps
Aviation (59.6) 21.1 23.2 (80.7) NM*
Operating profit margin (8.7) % 2.1 % 2.2 % NM*
Technical Solutions 9.5 55.4 21.8 (45.9) (82.9)%
Operating profit margin 1.9 % 9.3 % 4.4 % (747) bps
Government Services (0.1) (0.1) (0.8) — NM*
Operating profit margin NM* NM* NM* NM*
Corporate (146.9) (159.0) (168.8) 12.1 7.6%
Adjustment for income from unconsolidated
affiliates, included in Aviation (2.2) (3.0) (3.2) 0.8 27.4%
Adjustment for tax deductions for energy
efficient government buildings, included in
Technical Solutions (2.1) 0.1 (2.8) (2.2) NM*
$ 95.7 $ 208.3 $ 138.6 $ (112.6) (54.0)%
*Not meaningful
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The Year Ended October 31, 2020 Compared with the Year Ended October 31, 2019
Business & Industry
Years Ended October 31,
($ in millions) 2020 2019 (Decrease) / Increase
Revenues $ 3,157.8 $ 3,251.4 $ (93.6) (2.9)%
Operating profit 253.7 182.3 71.4 39.2%
Operating profit margin 8.0 % 5.6 % 243 bps
B&I revenues decreased by $93.6 million, or 2.9%, during 2020, as compared to 2019. The decrease was primarily attributable to account compression resulting from Pandemic-related disruptions in certain markets within both our U.S. and U.K. businesses and the loss of certain accounts in our U.S. business, including the exit from certain lower margin or underperforming accounts that occurred primarily towards the end of the prior year. The decrease was partially offset by: the targeted expansion of certain key clients and new business within our U.S. business; an increase in work orders and other services, including EnhancedClean (primarily relating to the Pandemic); and net new business in our U.K. operations. Management reimbursement revenues for this segment totaled $221.4 million and $283.1 million during 2020 and 2019, respectively.
Operating profit increased by $71.4 million, or 39.2%, during 2020, as compared to 2019. Operating profit margin increased by 243 bps to 8.0% in 2020 from 5.6% in 2019. The increase in operating profit margin was primarily associated with higher margins on work orders and higher margins on certain accounts in both our U.S. and U.K. businesses, driven by the management of direct labor and related personnel costs during the Pandemic. The increase was also driven by the exit from certain lower margin or underperforming accounts in our U.S. business. The increase was partially offset by account compression resulting from Pandemic-related disruptions in certain markets and higher reserves established for client receivables mainly associated with increasing credit risk in certain industries resulting from the Pandemic.
Technology & Manufacturing
Years Ended October 31,
($ in millions) 2020 2019 Increase
Revenues $ 956.0 $ 917.0 $ 39.0 4.3%
Operating profit 84.4 72.5 11.9 16.5%
Operating profit margin 8.8 % 7.9 % 93 bps
T&M revenues increased by $39.0 million, or 4.3%, during 2020, as compared to 2019. The increase was primarily attributable to: an increase in work orders and other services, including EnhancedClean (primarily relating to the Pandemic); new business; and the expansion of certain accounts. The increase was partially offset by the loss of certain accounts.
Operating profit increased by $11.9 million, or 16.5%, during 2020, as compared to 2019. Operating profit margin increased by 93 bps to 8.8% in 2020 from 7.9% in 2019. The increase in operating profit margin was primarily attributable to higher margins on work orders and lower amortization of intangible assets, all partially offset by higher reserves established for client receivables mainly associated with increasing credit risk resulting from the Pandemic and by the loss of certain higher margin accounts that occurred in the prior year.
Education
Years Ended October 31,
($ in millions) 2020 2019 Decrease
Revenues $ 808.8 $ 847.4 $ (38.6) (4.6)%
Operating (loss) profit (41.1) 39.0 (80.1) NM*
Operating margin (5.1) % 4.6 % (969) bps
Education revenues decreased by $38.6 million, or 4.6%, during 2020, as compared to 2019. The decrease was attributable to compression of certain accounts, mainly resulting from Pandemic-related school closures.
Education had an operating loss of $41.1 million during 2020, as compared to an operating profit of $39.0 million during 2019. Operating margin decreased by 969 bps to (5.1)% in 2020 from 4.6% in 2019. The decrease in operating profit margin was primarily attributable to goodwill impairment charges of $99.3 million due to the adverse
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impact of market and business conditions resulting from the Pandemic and to higher reserves established for client receivables mainly associated with increasing credit risk resulting from the Pandemic. The decrease was partially offset by the management of direct labor and related personnel costs during Pandemic-related school closures, lower amortization of intangible assets, and higher margins on work orders relating to the Pandemic.
Aviation
Years Ended October 31,
($ in millions) 2020 2019 Decrease
Revenues $ 680.9 $ 1,017.3 $ (336.4) (33.1)%
Operating (loss) profit (59.6) 21.1 (80.7) NM*
Operating margin (8.7) % 2.1 % NM*
Aviation revenues decreased by $336.4 million, or 33.1%, during 2020, as compared to 2019. The decrease was primarily attributable to travel restrictions and a dramatic decline in passenger demand resulting from the Pandemic. Significant volume reductions impacted cabin cleaning, parking, janitorial, passenger services, transportation, and catering accounts. In addition, we lost certain cabin cleaning and passenger services accounts primarily in the prior year. The decrease was partially offset by Pandemic-related cleaning services. Management reimbursement revenues for this segment totaled $74.3 million and $95.5 million during 2020 and 2019, respectively.
Aviation had an operating loss of $59.6 million during 2020, as compared to an operating profit of $21.1 million during 2019. Operating margin decreased to (8.7)% during 2020, from 2.1% during 2019. This decrease in operating profit margin was primarily attributable to impairment charges of $55.5 million on goodwill and $5.6 million on customer relationships due to the adverse impact of market and business conditions resulting from the Pandemic. Operating margin was also negatively impacted by Pandemic-related volume reductions and higher reserves established for client receivables mainly associated with increasing credit risk resulting from the Pandemic. Operating margin was positively impacted by the management of direct labor and related personnel costs during the Pandemic, higher margins on work orders, and the loss of lower margin cabin cleaning and passenger service accounts in the prior year.
Technical Solutions
Years Ended October 31,
($ in millions) 2020 2019 Decrease
Revenues $ 506.6 $ 593.2 $ (86.6) (14.6)%
Operating profit 9.5 55.4 (45.9) (82.9)
Operating profit margin 1.9 % 9.3 % (747) bps
Technical Solutions revenues decreased by $86.6 million, or 14.6%, during 2020, as compared to 2019. The decrease was primarily attributable to a lower volume of projects in both our U.S. and U.K. businesses due to Pandemic-related disruptions beginning in the second quarter of 2020 as well as to the loss of certain accounts in our U.K. business that primarily occurred during the prior year. The decrease was partially offset by growth in our U.S. business related to bundled energy solutions projects and power projects prior to Pandemic-related disruptions.
Operating profit decreased by $45.9 million during 2020, as compared to 2019. Operating profit margin decreased by 747 bps to 1.9% in 2020 from 9.3% in 2019. The decrease in operating profit margin was primarily attributable to a $17.6 million reserve on notes receivable related to a unique, entertainment-related project, mainly associated with increasing credit risk resulting from the Pandemic. In addition, the decrease was due to impairment charges of $9.0 million on goodwill and $3.4 million on customer relationships related to our U.K. business due to the adverse impact of market and business conditions resulting from the Pandemic. In addition, during the current year we were negatively impacted by: revenue compression resulting from Pandemic-related disruptions; higher commissions expense due to the amortization of commissions that were capitalized in the prior year; and the loss of certain higher margin contracts in our U.K. business. The decrease was partially offset by the management of project related expenses, management and staff employee furloughs, and lower amortization of intangible assets.
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Corporate
Years Ended October 31,
($ in millions) 2020 2019 Decrease
Corporate expenses $ 146.9 $ 159.0 $ (12.1) (7.6)%
Corporate expenses decreased by $12.1 million, or 7.6%, during 2020, as compared to 2019. The decrease in corporate expenses was primarily related to:
• a $26.8 million decrease in self-insurance reserve adjustments, related to prior years, as a result of actuarial evaluations completed in the year ended October 31, 2020;
• the absence of a $3.9 million reserve for an anticipated union pension settlement in the prior year; and
• a $3.6 million decrease in restructuring and related expenses due to a decline in severance, other expenses incurred in the prior year related to the GCA integration, and a decrease in expenses related to our ongoing technology initiatives. The majority of these initiatives have been temporarily suspended since the second quarter of 2020 due to the Pandemic.
This decrease was partially offset by:
• a $9.1 million increase in legal costs and settlements;
• an $8.5 million increase related to investments in EnhancedClean, other Pandemic-related projects, and certain corporate initiatives; and
• a $4.6 million increase in medical and dental insurance expenses as a result of actuarial evaluations performed in the current year.
The Year Ended October 31, 2019 Compared with the Year Ended October 31, 2018
For a comparison of our Segment Information for the year ended October 31, 2019, to the year ended October 31, 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended October 31, 2019, filed with the SEC on December 20, 2019.
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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, share repurchases, and continued systems and technology transformation initiatives. We anticipate long-term cash uses may also include strategic acquisitions. 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.
We believe that the Pandemic has had, and will likely continue to have, an adverse impact on our consolidated financial position, results of operations, and cash flows. Since we cannot predict the duration or scope of the Pandemic, we cannot fully anticipate or reasonably estimate all the ways in which the current global health crisis and financial market conditions could adversely impact our business in fiscal 2021 or in the future. It is also possible that our accounts receivable cash collections will be adversely impacted by our clients’ Pandemic-related challenges.
We have taken and continue to take certain steps to preserve liquidity, including: temporary pay reductions with full pay reinstated as of August 1, 2020; temporary furloughs or working hour reductions for certain staff and management employees, most of whom returned to work effective August 1, 2020; and the temporary suspension of certain benefits. We have also actively managed direct labor and related personnel costs, including: imposing furloughs or reduced hours for certain service employees in markets significantly impacted by business slowdowns and shutdowns; reducing our planned capital and operating expenditures and management of other expenses; and suspending share repurchases under our share repurchase program. In addition, we continue focusing on collection of customer receivables, monitoring the adequacy of our reserves, and extending vendor payment terms where possible. We evaluated the business tax provisions of the CARES Act and have deferred remittance of approximately $101 million of payroll tax as of October 31, 2020.
In addition, we are taking certain steps to ensure adequate access to liquidity. In late March 2020, we borrowed approximately $300 million under our revolving line of credit, which represented all amounts then available under the Credit Facility, as a precautionary measure to provide increased liquidity and preserve financial flexibility due to uncertainty resulting from the Pandemic. On May 28, 2020, we amended our Credit Facility (the “Amendment”) in order to enhance our financial flexibility, as further described under “Credit Facility” below. During the quarter ended July 31, 2020, we repaid substantially all of the amounts borrowed under the revolving line of credit without penalty.
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.
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, both of which are scheduled to mature on September 1, 2022. In accordance with the terms of the Credit Facility, the revolving line of credit was reduced to $800.0 million on September 1, 2018. In late March 2020, we borrowed approximately $300 million as a precautionary measure to provide increased liquidity and preserve financial flexibility in response to uncertainty resulting from the Pandemic. This represented all remaining amounts then available under the revolving line of credit. During the quarter ended July 31, 2020, we repaid substantially all of these amounts borrowed under the revolving line of credit without penalty.
The Amendment modified the financial covenants under the Credit Facility, including: (i) replacing a maximum total leverage ratio with a maximum total net leverage ratio (allowing for up to $100 million in cash and cash equivalents to be excluded from the calculation of total indebtedness) that varies on a quarterly basis and
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adjusted to 6.50 to 1.00 by the quarter ending October 31, 2020, and will adjust back to 4.00 to 1.00 by the quarter ending October 31, 2022; (ii) modifying the minimum fixed charge coverage ratio on a quarterly basis, which adjusts to 1.25 to 1.00 as of the quarter ending April 30, 2022; and (iii) adding a minimum liquidity (defined in the Amendment as domestic cash plus available revolving loans) of $250.0 million. These financial covenants were effective with the quarter ended April 30, 2020. Our borrowing capacity is subject to, and limited by, compliance with these covenants.
The Amendment changed the interest rate, interest margins, and commitment fees applicable to loans and commitments under the Credit Facility. It also added a new anti-cash hoarding mandatory prepayment that requires us to repay outstanding revolving loans or swingline loans if, at any time, we have in excess of $250 million of cash and cash equivalents on our balance sheet. The Amendment made certain additional changes to the negative covenants restrictions under the Credit Facility, including, subject to certain exceptions, restrictions to our ability to make acquisitions, share repurchases, and other defined restricted payments, depending on our total net leverage ratio. The anti-cash hoarding provision and certain of these restrictions were terminated from the Credit Facility in the fourth quarter of 2020 due to our favorable cash flow position and leverage ratios. At October 31, 2020, we were in compliance with these covenants and expect to be in compliance in the foreseeable future.
During 2020, we made $60.0 million of principal payments under the term loan. At October 31, 2020, the total outstanding borrowings under our Credit Facility in the form of cash borrowings and standby letters of credit were $725.3 million and $153.1 million, respectively. At October 31, 2020, we had up to $596.6 million of borrowing capacity, reflecting covenant restrictions.
In July 2017, the U.K. Financial Conduct Authority, the regulator of LIBOR, indicated that it will no longer require banks to submit rates to the LIBOR administrator after 2021. This announcement signaled that the calculation of LIBOR and its continued use could not be guaranteed after 2021. A change away from LIBOR after 2021 may impact our Credit Facility and interest rate swaps. Our current credit agreement as well as our International Swaps and Derivatives Association, Inc. agreement provide for any changes away from LIBOR to a successor rate to be based on prevailing or equivalent standards. We continue to monitor developments related to the LIBOR transition and/or identification of an alternative, market-accepted rate. The impact related to any changes cannot be predicted at this time.
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 Cuts and Jobs Act of 2017, 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.
IFM Insurance Company
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 $8 million in 2020, $6 million in 2019, and $7 million in 2018.
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Share Repurchases
Effective December 18, 2019, our Board of Directors replaced our then-existing share repurchase program with a new share repurchase program under which we may repurchase up to $150.0 million of our common stock. We repurchased shares under the 2019 Share Repurchase Program during the second quarter of 2020, as summarized below. However, due to the market and business conditions arising from the Pandemic, in March 2020 we suspended further repurchases of our common stock. At October 31, 2020, authorization for $144.9 million of repurchases remained under the 2019 Share Repurchase Program.
Year Ended
(in millions, except per share amounts) October 31, 2020
Total number of shares purchased 0.2
Average price paid per share $ 36.16
Total cash paid for share repurchases $ 5.1
Proceeds from Federal Energy Savings Performance Contracts
As part of our Technical Solutions business, we enter into energy savings performance contracts (“ESPC”) 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
Our operations are subject to various federal, state, and/or local laws, rules, and regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, as well as laws and regulations relating to, among other things, labor, wages, and health and safety matters. Historically, the cost of complying with these laws, rules, and regulations has not had a material adverse effect on our financial position, results of operations, or cash flows.
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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 $457.4 million, which includes the deferral of approximately $101 million of payroll tax under the CARES Act, during 2020. 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) 2020 2019 2018
Net cash provided by operating activities of continuing operations $ 457.4 $ 262.8 $ 299.7
Net cash provided by (used in) operating activities of discontinued operations 0.1 (0.1) 21.2
Net cash provided by operating activities 457.5 262.7 320.9
Net cash used in investing activities (27.5) (58.3) (48.1)
Net cash used in financing activities (94.1) (184.8) (295.8)
Operating Activities of Continuing Operations
Net cash provided by operating activities of continuing operations increased by $194.6 million during 2020, as compared to 2019. The increase was primarily related to the timing of client receivable collections and deferred remittance of approximately $101 million of payroll taxes under the CARES Act, partially offset by the timing of vendor payments.
Net cash provided by operating activities of continuing operations decreased by $36.9 million during 2019, as compared to 2018. The decrease was primarily related to the timing of client receivable collections, including a one-time settlement payment received from a client in 2018, and the absence of proceeds from the termination of interest rate swaps in 2018, partially offset by the timing of vendor payments.
Operating Activities of Discontinued Operations
Net cash provided by operating activities of discontinued operations was $0.1 million during 2020, as compared to net cash used in operating activities of discontinued operations of $0.1 million during 2019, a change of $0.2 million.
Net cash used in operating activities of discontinued operations was $0.1 million during 2019, as compared to net cash provided by operating activities of discontinued operations of $21.2 million during 2018, a change of $21.3 million, primarily attributable to an income tax refund received on a legal settlement during 2018.
Investing Activities
Net cash used in investing activities decreased by $30.8 million during 2020, as compared to 2019. The decrease was primarily related to lower additions to property, plant and equipment in 2020. Additionally, the implementation of the new ERP system was temporarily suspended during 2020 due to the Pandemic.
Net cash used in investing activities increased by $10.2 million during 2019, as compared to 2018. The increase was primarily related to higher additions to property, plant and equipment in 2019.
Financing Activities
Net cash used in financing activities decreased by $90.7 million during 2020, as compared to 2019, primarily due to lower repayments of our borrowings in 2020.
Net cash used in financing activities decreased by $111.0 million during 2019, as compared to 2018, primarily due to lower repayments of our borrowings in 2019.
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Dividends
On December 16, 2020, we announced a quarterly cash dividend of $0.190 per share on our common stock, payable on February 1, 2021. We declared a quarterly cash dividend on our common stock every quarter during 2020, 2019, and 2018. We paid total annual dividends of $49.3 million, $47.7 million, and $46.0 million during 2020, 2019, and 2018, respectively.
Contractual Obligations
(in millions) Commitments Due By Period
Contractual Obligations 2021 2022-2023 2024-2025 Thereafter Total
Borrowings under term loan (1)
$ 120.0 $ 560.0 $ — $ — $ 680.0
Borrowings under line of credit (1)
— 45.3 — — 45.3
Fixed interest related to interest rate swaps (2)
11.2 5.0 — — 16.2
Operating leases and other similar commitments (3)
41.3 63.5 42.3 43.3 190.4
Service concession arrangements (4)
21.2 30.9 30.9 9.0 92.0
Finance leases (3)
3.3 2.6 — — 5.9
Information technology service agreements (5)
36.5 31.1 1.0 — 68.6
Benefit obligations (6)
4.7 6.3 5.1 12.1 28.2
Total $ 238.2 $ 744.7 $ 79.3 $ 64.4 $ 1,126.6
(1) Borrowings under our term loan and line of credit are presented at face value.
(2) Our estimates of future interest payments are calculated based on our hedged borrowings under our Credit Facility, using the fixed rates under our interest rate swap agreements for the applicable notional amounts. See Note 11, “Credit Facility,” in the Financial Statements for additional disclosure related to our interest rate swaps. We exclude interest payments on our remaining borrowings from this table because the cash outlay for the interest is unknown. The interest payments on the borrowings under the Credit Facility will be determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time.
(3) Reflects our contractual obligations to make future payments under non-cancelable operating leases, finance lease agreements, and other similar commitments for various facilities, vehicles, and other equipment. See Note 4, “Leases,” for additional information on our lease arrangements.
(4) Represents leased location parking arrangements that meet the definition of service concession arrangements under Topic 853.
(5) Reflects our contractual obligations to make future payments for outsourced services and licensing costs pursuant to our information technology agreements.
(6) Reflects future expected payments relating to our defined benefit, postretirement, and deferred compensation plans. These amounts are based on expected future service and were calculated using the same assumptions used to measure our benefit obligation at October 31, 2020. In addition to our company sponsored plans, we participate in certain multiemployer pension and other postretirement plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining arrangements. During 2020, 2019, and 2018, contributions made to these plans were $335.8 million, $345.4 million, and $339.3 million, respectively; however, our future contributions to the multiemployer plans are dependent upon a number of factors, including the funded status of the plans, the ability of other participating companies to meet ongoing funding obligations, and the level of our ongoing participation in these plans. As the amount of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated, such amounts have been excluded from the above table. See Note 12, “Employee Benefit Plans,” in the Financial Statements for more information.
At October 31, 2020, our total liability for unrecognized tax benefits was $10.1 million. The resolution or settlement of these tax positions with the taxing authorities is subject to significant uncertainty, and therefore we are unable to make a reliable estimate of the amount or timing of cash that may be required to settle these matters. In addition, certain of these matters may not require cash settlements due to the exercise of credits and net operating loss carryforwards as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available.
Excluded from the contractual obligations table are payments we may make for exposures for which we are self-insured, including workers’ compensation, general liability, automobile liability, property damage, and other insurable risks. At October 31, 2020, our self-insurance reserves, net of recoverables, were $434.8 million. In
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general, these amounts are recorded on an undiscounted basis and are classified on the Consolidated Balance Sheets as current or long-term based on the expected settlement date. As these obligations do not have scheduled maturities, we are unable to make a reliable estimate of the amount or timing of cash that may be required to settle these matters.
We have no off-balance sheet arrangements other than unrecorded standby letters of credit and surety bonds. We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations and to collateralize self-insurance obligations in the event we are unable to meet our claim payment obligations. As we already have reserves on our books for the claims costs, these do not represent additional liabilities. The surety bonds typically remain in force for one to five years and may include optional renewal periods. As of October 31, 2020, these letters of credit and surety bonds totaled $153.1 million and $632.9 million, respectively. Neither of these arrangements has a material current effect, or is reasonably likely to have a material future effect, on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with United States generally accepted accounting principles requires our management to make certain estimates that affect the reported amounts. We base our estimates on historical experience, known or expected trends, independent valuations, and various other assumptions that we believe to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. There have been no significant changes to our critical accounting policies and estimates for the year ended October 31, 2020. We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our Financial Statements.
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Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Valuation of Long-Lived Assets
We evaluate our fixed assets and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. These events and circumstances include, but are not limited to: higher than expected attrition for customer relationships; a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, such as when we classify a business as held for sale; a significant adverse change in the extent or manner in which we use a long-lived asset; or a change in the physical condition of a long-lived asset.
Undiscounted cash flow analyses are used to determine if impairment exists; if impairment is determined to exist, the loss is calculated based on estimated fair value.
Goodwill is not amortized but rather tested at least annually for impairment or more often if events or changes in circumstances indicate it is more-likely-than-not that the carrying amount of the asset may not be recoverable. Goodwill is tested for impairment at the reporting unit level, which represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all of our reporting units and instead perform a quantitative impairment test.
Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more- likely-than-not that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life. Incorrect estimation of useful lives may result in inaccurate depreciation and amortization charges over future periods leading to future impairment.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
We estimate the fair value of each reporting unit using a combination of the income approach and the market approach.
The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal value are calculated for each reporting unit and then discounted to present value using an appropriate discount rate.
The valuation of our reporting units requires significant judgment in evaluation of recent indicators of market activity and estimated future cash flows, discount rates, and other factors. Our impairment analyses contain inherent uncertainties due to uncontrollable events that could positively or negatively impact anticipated future economic and operating conditions.
In making these estimates, the weighted-average cost of capital is utilized to calculate the present value of future cash flows and terminal value. Many variables go into estimating future cash flows, including estimates of our future revenue growth and operating results. When estimating our projected revenue growth and future operating results, we consider industry trends, economic data, and our competitive advantage.
The market approach estimates fair value of a reporting unit by using market comparables for reasonably similar public companies.
During the last three years, we have not made any changes in the accounting methodology used to evaluate the impairment of long-lived assets or to estimate the useful lives of our long-lived assets.
Additionally, we have not made any changes in the accounting methodology used to evaluate impairment of goodwill during the last three years.
During the second quarter of 2020, given the general deterioration in economic and market conditions arising from the Pandemic, we identified a triggering event indicating possible impairment of goodwill and intangible assets. For the three goodwill reporting units tested quantitatively, we estimated the fair value using a weighting of fair values derived from an income approach and a market approach. Based on the evaluation performed, we determined that goodwill was impaired for each of the three goodwill reporting units evaluated and recognized a non-cash impairment charge totaling $163.8 million ($99.3 million related to Education, $55.5 million related to Aviation, and $9.0 million related to our U.K. Technical Solutions business). We also recognized intangible asset impairment charges of $5.6 million related to Aviation and $3.4 million related to our U.K. Technical Solutions business. We performed our annual goodwill impairment analysis on August 1, 2020 using a qualitative approach since there were no indicators of impairment subsequent to our quantitative analysis performed in the second quarter of 2020 as discussed above. As a result of the qualitative analysis, we concluded that there were no further impairments.
During the third quarter of 2019, in connection with the reorganization of our Healthcare business, a goodwill impairment analysis was performed on the underlying reporting unit immediately before the reorganization, and we concluded that the estimated fair value of the underlying reporting unit substantially exceeded its carrying value immediately before the reorganization and that no further evaluation of impairment was necessary. Additionally, we performed our annual goodwill impairment analysis on August 1, 2019, and concluded that the implied fair value of each of our reporting units was substantially in excess of its carrying value and that no further evaluation of impairment was necessary. A 10% decrease in the estimated fair value of any of our reporting units would not have resulted in a different conclusion.
During 2018 we performed a qualitative goodwill impairment analysis for each of our reporting units on November 1, 2017, when we reorganized our reportable segments and reporting units following the integration of GCA into our industry group model. We concluded that goodwill related to those reporting units was not impaired and further quantitative testing was not required.
In connection with our annual goodwill impairment analysis performed on August 1, 2018, we recorded an impairment charge of $20.3 million on goodwill and $6.2 million on customer relationships for one of our reporting units within the Technical Solutions segment. This reporting unit’s performance declined during 2018 primarily due to the adverse impact of Brexit and the resulting impact on microeconomic conditions in the U.K. retail sector, as well as the anticipated loss of a significant customer contract. In performing our annual goodwill impairment analysis, we determined there was a revised future outlook for this business, including reduced expectations of future sales, operating margins, and cash flows. In analyzing our other goodwill reporting units, we concluded that goodwill related to these other reporting units was not impaired.
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Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Insurance Reserves
We use a combination of insured and self-insurance programs to cover workers’ compensation, general liability, automobile liability, property damage, and other insurable risks.
Insurance claim liabilities represent our estimate of retained risks without regard to insurance coverage. We retain a substantial portion of the risk related to certain workers’ compensation and medical claims. Liabilities associated with these losses include estimates of both claims filed and IBNR Claims.
With the assistance of third-party actuaries, we periodically review our estimate of ultimate losses for IBNR Claims and adjust our required self-insurance reserves as appropriate. As part of this evaluation, we review the status of existing and new claim reserves as established by our third-party claims administrators.
The third-party claims administrators establish the case reserves based upon known factors related to the type and severity of the claims, demographic data, legislative matters, and case law, as appropriate.
We compare actual trends to expected trends and monitor claims development.
The specific case reserves estimated by the third-party administrators are provided to an actuary who assists us in projecting an actuarial estimate of the overall ultimate losses for our self-insured or high deductible programs. The projection includes the case reserves plus an actuarial estimate of reserves required for additional developments, including IBNR Claims.
We utilize the results of actuarial studies to estimate our insurance rates and insurance reserves for future periods and to adjust reserves, if appropriate, for prior years.
Our self-insurance liabilities contain uncertainties due to assumptions required and judgment used.
Costs to settle our obligations, including legal and healthcare costs, could fluctuate and cause estimates of our self-insurance liabilities to change.
Incident rates, including frequency and severity, could fluctuate and cause the estimates in our self-insurance liabilities to change.
These estimates are subject to: changes in the regulatory environment; fluctuations in projected exposures, including payroll, revenues, and the number of vehicle units; and the frequency, lag, and severity of claims.
The full extent of certain claims, especially workers’ compensation and general liability claims, may not be fully determined for several years.
In addition, if the reserves related to self-insurance or high deductible programs from acquired businesses are not adequate to cover damages resulting from future accidents or other incidents, we may be exposed to substantial losses arising from future claim developments. We have not made any changes in the accounting methodology used to establish our self-insurance liabilities during the past three years.
After analyzing recent loss development patterns, comparing the loss development patterns against benchmarks, and applying actuarial projection methods to estimate the ultimate losses, we decreased our total reserves for known claims as well as our estimate of the loss amounts associated with IBNR Claims by $36.6 million, $30.2 million of which relates to prior years, during 2020. During 2019 and 2018, we decreased such reserves by $3.4 million and increased such reserves by $10.2 million, respectively.
It is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our projected ultimate losses would have affected net income by approximately $32.4 million for 2020.
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Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Contingencies and Litigation
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.
We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability.
We do not accrue for contingent losses that, in our judgment, are considered to be reasonably possible but not probable.
Litigation outcomes are difficult to predict and are often resolved over long periods of time.
Estimating probable and reasonably possible losses requires the analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties, such as future changes in facts and circumstances, differing interpretations of the law, assessments of the amount of damages, and other factors beyond our control. There is the potential for a material adverse effect on our Financial Statements if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated.
In addition, in some cases, although a loss is probable or reasonably possible, we cannot reasonably estimate the maximum potential losses for probable matters or the range of losses for reasonably possible matters. Therefore, our accrual for probable losses and our estimated range of loss for reasonably possible losses do not represent our maximum possible exposure. We have not made any changes in the accounting methodology used to establish our loss contingencies during the past three years.
Our management currently estimates the range of loss for all reasonably possible losses for which a reasonable estimate of the loss can be made is between zero and $4 million. Factors underlying this estimated range of loss may change from time to time, and actual results may vary significantly from this estimate.
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Recent Accounting Pronouncements
Accounting Standard Update(s) Topic Summary Effective Date/
Method of Adoption
2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting This ASU, issued in March 2020, provides optional expedients to assist with the discontinuance of the London Interbank Offered Rate (“LIBOR”). The expedients allow companies to ease the potential accounting burden when modifying contracts and hedging relationships that use LIBOR as a reference rate, if certain criteria are met.
We are currently evaluating the impact of implementing this guidance on our financial statements. This update can be adopted prospectively no later than December 1, 2022, with early adoption permitted.
2020-03 Codification Improvements to Financial Instruments This ASU, issued in March 2020, makes narrow-scope improvements to various financial instruments topics, including the new credit losses standard. Certain amendments contained within this update were effective upon issuance and had no material impact on our financial statements. The amendments related to ASU 2019-04 and ASU 2016-13 will be adopted in conjunction with ASU 2016-13, as described below.
2020-01 Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 This ASU, issued in January 2020, clarifies the interaction between Topic 321, Topic 323, and Topic 815. The new guidance, among other things, states that a company should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative immediately before applying or upon discontinuing the equity method.
While we are currently evaluating the impact of implementing this guidance on our financial statements, we do not expect adoption to have a material impact. November 1, 2021
This update will be applied prospectively.
2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes This ASU, issued in December 2019, removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This ASU also amends other aspects of the guidance to help simplify and promote consistent application of Topic 740.
We are currently evaluating the impact of implementing this guidance on our financial statements. November 1, 2021
The amendments have differing adoption methods including retrospectively, prospectively, and/or on a modified retrospective basis.
2019-04 Codification Improvements to Topic 326: Financial
Instruments—Credit Losses; Topic 815: Derivatives and Hedging; and Topic 825: Financial Instruments This ASU, issued in April 2019, provides narrow-scope amendments designed to assist in the application of the following updates and the related accounting standards:
(1) ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;
(2) ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities; and
(3) ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
We are currently evaluating the impact of implementing the guidance related to (1) and (3) on our financial statements. We do not expect the adoptions to have a material impact. (1) The amendments related to ASU 2016-13 will be adopted in conjunction with that ASU, as further described below.
(2) We adopted this guidance effective November 1, 2019, on a prospective basis with no significant impact on our consolidated financial statements.
(3) Since we already adopted ASU 2016-01, the related amendments will be effective for us on November 1, 2020, and will be applied using a modified retrospective adoption approach with a cumulative-effect adjustment to retained earnings.
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Accounting Standard Update(s) Topic Summary Effective Date/Method of Adoption
2018-18 Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 This ASU, issued in November 2018, provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606. It specifically addresses when the participant is a customer in the context of a unit of account, adds unit of account guidance in Topic 808 to align with guidance in Topic 606, and precludes presenting the collaborative arrangement transaction together with revenue recognized under Topic 606 if the collaborative arrangement participant is not a customer.
We do not expect adoption to have a material impact. November 1, 2020
This update will be applied retrospectively.
2018-17 Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities This ASU, issued in October 2018, provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interest.
We do not expect adoption to have a material impact. November 1, 2020
This update will be applied retrospectively.
2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract This ASU, issued in August 2018, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
We do not expect adoption to have a material impact. November 1, 2020
This update will be applied prospectively to all implementation costs incurred after the date of adoption.
2018-14 Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans This ASU, issued in August 2018, modifies the disclosure requirements on company-sponsored defined benefit plans.
We do not expect adoption to have a material impact. November 1, 2020
This update will be applied retrospectively.
2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement This ASU, issued in August 2018, modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements.
We do not expect adoption to have a material impact. November 1, 2020
The amendments related to disclosure requirements within this update will be applied prospectively and the other amendments will be applied retrospectively.
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Accounting Standard Update(s) Topic Summary Effective Date/Method of Adoption
2016-13
2018-19
2019-11
2019-05 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ASU 2016-13, issued in June 2016, replaces the existing guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and investments in certain debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset’s life based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectibility. This “expected loss” model will result in earlier recognition of credit losses than the current “as incurred” model, under which losses are recognized only upon occurrence of an event that gives rise to the incurrence of a probable loss.
ASU 2018-19 was issued in November 2018 and clarifies that receivables arising from operating leases are should be accounted for in accordance with Topic 842, Leases.
ASU 2019-11 was issued in November 2019 to clarify, improve, and amend certain aspects of ASU 2016-13, such as disclosures related to accrued interest receivables and the estimation of credit losses associated with financial assets secured by collateral.
ASU 2019-05 was issued in May 2019 to provide targeted transition relief allowing entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets previously measured at amortized cost (except held-to-maturity securities) using the fair value option.
We do not expect adoption to have a material impact. November 1, 2020
This guidance will be applied using a modified retrospective adoption approach with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, except for certain provisions that are required to be applied prospectively.