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.
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 2021 our U.S. operations generated approximately 94% of our revenues.
Strategic Growth
We remain focused on long-term, profitable growth by delivering valued service offerings 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 our strategic growth initiatives, coupled with our continued focus on marketing, capital, and sales resources, will increase profitability.
ELEVATE Transformation
Through our ELEVATE strategy, as described in Item 1., “Business.,” we plan to primarily focus our efforts on:
• the client experience, by enhancing service delivery through the development of a new workforce management platform with modern timekeeping, scheduling, and forecasting modules to create a digital connection with our workforce;
• the team member experience, by investing in development programs, talent acquisition tools, and training; and
• the use of technology and data in our systems, tools, business processes, and operating models.
We believe that our technology and data investments will enable: the development and deployment of client-facing technology to improve service delivery to our clients; the use of advanced data analytics for sales targeting, team member retention, and recruiting; and the upgrade of our Enterprise Resource Planning and payroll systems.
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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 regions all 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. These factors have led to lower demand for some of our services in certain end-markets, particularly in our Aviation segment. 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 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.
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. 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 developed 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.
Management of Direct Labor
As we adapt to the changing demand environment resulting from the Pandemic, we continue to actively manage direct labor and related personnel costs, including furloughs or reduced hours for certain frontline employees in markets significantly impacted by business slowdowns and shutdowns.
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Liquidity, Cash Flows, and Financial Position
We have taken and continue to take actions to help preserve cash, increase liquidity, and strengthen our financial position, including:
• Amending our credit facility on June 28, 2021, to increase our borrowing capacity and further enhance our financial flexibility (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; and
• Utilizing certain governmental relief efforts (as further described below).
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 and determined the impact of the income tax provisions is not material. The impact of the payroll tax provisions was the deferral of approximately $132 million of payroll tax as of October 31, 2021. Additionally, we received grants under the United Kingdom’s job retention scheme to reimburse us for a portion of certain furloughed employees’ salaries from March 2020 through September 2021.
As a result of the actions taken above, we were able to strengthen our cash flow in fiscal 2021. As of October 31, 2021, these actions resulted in a borrowing capacity of $875.0 million.
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 review our estimate of ultimate losses for IBNR Claims on a quarterly basis 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 related to prior years for known claims as well as our estimate of the loss amounts associated with IBNR claims during 2021 by $36.0 million. In 2020, we decreased our total reserves related to prior year claims by $30.2 million.
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Key Financial Highlights
• Revenues increased by $241.0 million, or 4.0%, during 2021, as compared to 2020, primarily driven by a $101.1 million revenue increase due to the Able Acquisition in the fourth quarter of 2021, an increase in work orders (primarily as a result of the Pandemic), new business within B&I, T&M, and Technical Solutions, and the recovery of volume in Education and Technical Solutions as Pandemic-related disruptions eased in the last half of fiscal year 2021.
• Operating profit increased by $110.6 million during 2021, as compared to 2020. The increase in operating profit was attributable to:
◦ the absence of prior year 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;
◦ higher margins on work orders as a result of the Pandemic;
◦ a decrease in bad debt expense, primarily associated with higher reserves established for client receivables in the prior year, due to increasing credit risk resulting from the Pandemic; and
◦ the absence of 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.
The increase was partially offset by:
◦ the accrual of a legal settlement for the Bucio case;
◦ increased expenditures for certain technology projects and other enterprise initiatives (including ELEVATE );
◦ the absence of management and staff furloughs that occurred in the prior year in response to the Pandemic; and
◦ acquisition and integration costs related to the Able Acquisition.
• Our effective tax rate on income from continuing operations was 29.8% for 2021, as compared to 99.6% during 2020, with the decrease primarily due to the impairment of non-deductible goodwill during 2020 and not recurring in 2021.
• Net cash provided by operating activities of continuing operations was $314.3 million during 2021.
• Dividends of $51.0 million were paid to shareholders, and dividends totaling $0.760 per common share were declared during 2021.
• At October 31, 2021, total outstanding borrowings under our credit facility were $888.8 million, and we had up to $875.0 million of borrowing capacity.
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Results of Operations
Consolidated
Years Ended October 31, 2021 vs. 2020
($ in millions) 2021 2020 2019 Increase / (Decrease)
Revenues $ 6,228.6 $ 5,987.6 $ 6,498.6 $ 241.0 4.0%
Operating expenses 5,258.2 5,157.0 5,767.5 101.2 2.0%
Gross margin 15.6 % 13.9 % 11.2 % 171 bps
Selling, general and administrative expenses 719.2 506.1 452.9 213.1 42.1%
Restructuring and related expenses — 7.6 11.2 (7.6) NM*
Amortization of intangible assets 45.0 48.4 58.5 (3.4) (7.1)%
Impairment loss of goodwill and other intangibles — 172.8 — (172.8) NM*
Operating profit 206.3 95.7 208.3 110.6 NM*
Income from unconsolidated affiliates 2.1 2.2 3.0 (0.1) (3.9)%
Interest expense (28.6) (44.6) (51.1) (16.0) 35.9%
Income from continuing operations before
income taxes 179.8 53.3 160.2 126.5 NM*
Income tax provision (53.5) (53.1) (32.7) 0.4 (0.8)%
Income from continuing operations 126.3 0.2 127.5 126.1 NM*
Income (loss) from discontinued operations,
net of taxes — 0.1 (0.1) (0.1) NM*
Net income 126.3 0.3 127.4 126.0 NM*
Other comprehensive income (loss)
Interest rate swaps 4.5 (7.6) (22.4) 12.1 NM*
Foreign currency translation and other 5.3 (1.8) 1.6 7.1 NM*
Income tax (provision) benefit (1.5) 2.4 5.9 (3.9) NM*
Comprehensive income (loss) $ 134.5 $ (6.6) $ 112.5 $ 141.1 NM*
*Not meaningful
The Year Ended October 31, 2021 Compared with the Year Ended October 31, 2020
Revenues
Revenues increased by $241.0 million, or 4.0%, during 2021, as compared to 2020. The increase in revenues was primarily driven by a $101.1 million revenue increase due to the Able Acquisition in the fourth quarter of 2021, an increase in work orders (primarily as a result of the Pandemic), new business within B&I, T&M, and Technical Solutions, and the recovery of volume in Education and Technical Solutions as Pandemic-related disruptions eased in the last half of fiscal year 2021.
Operating Expenses
Operating expenses increased by $101.2 million, or 2.0%, during 2021, as compared to 2020. Gross margin increased by 171 bps to 15.6% in 2021 from 13.9% in 2020. The increase in gross margin was primarily associated with higher margins on new business within B&I and Aviation and an increase in work orders with higher margins as a result of the Pandemic (primarily within B&I). The increase in gross margin was also driven by lower self-insurance expense, due to decreased claim frequency as a result of our safety and claims management program and reduced workplace occupancy as a result of the Pandemic.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $213.1 million, or 42.1%, during 2021, as compared to 2020. The increase in selling, general and administrative expenses was primarily attributable to:
• a $144.2 million increase in legal costs and settlements, primarily attributed to the accrual of a legal settlement for the Bucio case;
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• a $43.2 million increase in certain technology projects and other enterprise initiatives (including ELEVATE ), in addition to marketing events;
• a $38.8 million increase in compensation and related expenses, primarily driven by corporate and staff labor reductions that occurred in the prior period due to the Pandemic, including wage reductions, employee furloughs, and the suspension of certain benefits such as 401(k) matching. The increase was also due to updated assessments regarding financial performance target achievements in connection with certain performance share awards and cash incentive plans;
• a $21.9 million increase in acquisition and integration costs attributable to the Able Acquisition; and
• a $9.1 million non-cash impairment charge for previously capitalized internal-use software related to our ERP system implementation as we determined that certain components developed will no longer be incorporated into the new ERP system;
This increase was partially offset by:
• a $19.0 million decrease in bad debt expense, primarily associated with higher reserves established for client receivables in the prior year, due to increasing credit risk resulting from the Pandemic;
• the absence of 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; and
• an $11.7 million decrease in prior year medical and dental self-insurance reserves as a result of actuarial evaluations completed in fiscal year 2021.
Restructuring and Related Expenses
Restructuring and related expenses decreased by $7.6 million during 2021, as compared to 2020. We substantially completed the restructuring program by the end of fiscal year 2020.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $3.4 million, or 7.1%, during 2021, as compared to 2020, 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 2021, we did not record any impairment charges to goodwill or intangible assets.
Interest Expense
Interest expense decreased by $16.0 million, or 35.9%, during 2021, as compared to 2020, primarily attributable to lower relative interest rates as the result of amending our credit facility in 2021 and lower average outstanding borrowings under our credit facility throughout the year.
Income Taxes from Continuing Operations
During 2021 and 2020, we had effective tax rates of 29.8% and 99.6%, respectively, resulting in a provision for tax of $53.5 million and $53.1 million, respectively. Our effective tax rate for 2021 was also impacted by the following discrete items: a $3.0 million provision for nondeductible transaction costs; a $2.6 million provision for change in tax reserves; a $1.4 million provision for true-ups; and a $1.2 million benefit for energy efficiency incentives. Our effective tax rate for 2020 was 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
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energy efficiency incentives; and a $1.1 million benefit from change of tax reserves. The effective tax rate for the year ended October 31, 2020, excluding a nondeductible impairment loss of $163.8 million, was 24.4%.
Interest Rate Swaps
We had a gain of $4.5 million on interest rate swaps during the year ended October 31, 2021, as compared to a loss of $7.6 million during the year ended October 31, 2020, 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 gain of $5.3 million during the year ended October 31, 2021, as compared to a foreign currency translation loss of $1.8 million during the year ended October 31, 2020. This change was due to fluctuations in the exchange rate between the U.S. Dollar (“USD”) and the British pound sterling (“GBP”). Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.
The Year Ended October 31, 2020 Compared with the Year Ended October 31, 2019
For a comparison of our Results of Operations for the year ended October 31, 2020, to the year ended October 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended October 31, 2020, filed with the SEC on December 17, 2020.
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Segment Information
Our current reportable segments consist of B&I, T&M, Education, Aviation, and Technical Solutions.
Financial Information for Each Reportable Segment
Years Ended October 31, 2021 vs. 2020
($ in millions) 2021 2020 2019 Increase / (Decrease)
Revenues
Business & Industry $ 3,346.5 $ 3,157.8 $ 3,251.4 $ 188.7 6.0%
Technology & Manufacturing 987.1 956.0 917.0 31.1 3.3%
Education 836.4 808.8 847.4 27.6 3.4%
Aviation 668.8 680.9 1,017.3 (12.1) (1.8)%
Technical Solutions 534.0 506.6 593.2 27.4 5.4%
Elimination of inter-segment revenues (144.2) (122.4) (127.7) (21.8) (17.8)%
$ 6,228.6 $ 5,987.6 $ 6,498.6 $ 241.0 4.0%
Operating profit (loss)
Business & Industry $ 337.8 $ 253.7 $ 182.3 $ 84.1 33.1%
Operating profit margin 10.1 % 8.0 % 5.6 % 206 bps
Technology & Manufacturing 103.8 84.4 72.5 19.4 22.9%
Operating profit margin 10.5 % 8.8 % 7.9 % 168 bps
Education 60.5 (41.1) 39.0 101.6 NM*
Operating margin 7.2 % (5.1) % 4.6 % NM*
Aviation 32.5 (59.6) 21.1 92.1 NM*
Operating margin 4.9 % (8.7) % 2.1 % NM*
Technical Solutions 49.8 9.5 55.4 40.3 NM*
Operating profit margin 9.3 % 1.9 % 9.3 % 745 bps
Government Services (0.2) (0.1) (0.1) (0.1) NM*
Operating profit margin NM* NM* NM* NM*
Corporate (374.6) (146.9) (159.0) (227.7) NM*
Adjustment for income from unconsolidated
affiliates, included in Aviation (2.1) (2.2) (3.0) 0.1 3.9%
Adjustment for tax deductions for energy
efficient government buildings, included in
Technical Solutions (1.2) (2.1) 0.1 0.9 44.2%
$ 206.3 $ 95.7 $ 208.3 $ 110.6 NM*
*Not meaningful
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The Year Ended October 31, 2021 Compared with the Year Ended October 31, 2020
Business & Industry
Years Ended October 31,
($ in millions) 2021 2020 Increase
Revenues $ 3,346.5 $ 3,157.8 $ 188.7 6.0%
Operating profit 337.8 253.7 84.1 33.1%
Operating profit margin 10.1 % 8.0 % 206 bps
B&I revenues increased by $188.7 million, or 6.0%, during 2021, as compared to 2020. The increase was primarily driven by a $101.1 million revenue increase due to the Able Acquisition in the fourth quarter of 2021. The remaining increase was due to an increase in work orders (as a result of the Pandemic) and net new business in our U.K. Operations. Management reimbursement revenues for this segment totaled $185.8 million and $221.4 million during 2021 and 2020, respectively.
Operating profit increased by $84.1 million, or 33.1%, during 2021, as compared to 2020. Operating profit margin increased by 206 bps to 10.1% in 2021 from 8.0% in 2020. The increase in operating profit margin was primarily associated with higher margins on certain accounts in both our U.S. and U.K. businesses and an increase in work orders, which have higher margins. Operating margin was also positively impacted by lower insurance expense related to our self-insurance program and a decrease in bad debt expense as higher reserves were recorded in the prior year, mainly associated with increasing credit risk resulting from the Pandemic.
Technology & Manufacturing
Years Ended October 31,
($ in millions) 2021 2020 Increase
Revenues $ 987.1 $ 956.0 $ 31.1 3.3%
Operating profit 103.8 84.4 19.4 22.9%
Operating profit margin 10.5 % 8.8 % 168 bps
T&M revenues increased by $31.1 million, or 3.3%, during 2021, as compared to 2020. The increase was primarily attributable to net new business and an increase in work orders (primarily as a result of the Pandemic).
Operating profit increased by $19.4 million, or 22.9%, during 2021, as compared to 2020. Operating profit margin increased by 168 bps to 10.5% in 2021 from 8.8% in 2020. The increase in operating profit margin was primarily attributable to a decrease in bad debt expense, as higher reserves were recorded in the prior year mainly associated with increasing credit risk resulting from the Pandemic, and higher margins on work orders.
Education
Years Ended October 31,
($ in millions) 2021 2020 Increase
Revenues $ 836.4 $ 808.8 $ 27.6 3.4%
Operating profit (loss) 60.5 (41.1) 101.6 NM*
Operating margin 7.2 % (5.1) % NM*
*Not meaningful
Education revenues increased by $27.6 million, or 3.4%, during 2021, as compared to 2020. The increase was primarily attributable to an increase in work orders as a result of Pandemic-related demands and recovery in the volume of our business as schools gradually reopened. The increase was partially offset by the loss of certain accounts during the year.
Education had an operating profit of $60.5 million during 2021, as compared to an operating loss of $41.1 million during 2020. Operating margin increased to 7.2% in 2021 from (5.1)% in 2020. The increase in operating profit margin was primarily attributable to the absence of prior year goodwill impairment charges of $99.3 million. Additionally, operating margin was positively impacted by higher margin work orders, a decrease in bad debt expense, driven by net recoveries of certain previously reserved receivables, and lower amortization of intangible assets. The increase in operating margin, excluding the impact of prior year impairment, was mostly offset by the increase in direct labor and related costs as schools reopened.
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Aviation
Years Ended October 31,
($ in millions) 2021 2020 Increase / (Decrease)
Revenues $ 668.8 $ 680.9 $ (12.1) (1.8)%
Operating profit (loss) 32.5 (59.6) 92.1 NM*
Operating margin 4.9 % (8.7) % NM*
*Not meaningful
Aviation revenues decreased by $12.1 million, or 1.8%, during 2021, as compared to 2020. The decrease was primarily attributable to travel restrictions and a decline in passenger demand resulting from the Pandemic. While demand and revenue improved during the third and fourth quarter of 2021, Pandemic-related volume reductions continued to impact parking, janitorial, passenger services, transportation, and catering accounts. The decrease was partially offset by Pandemic-related cleaning services and new parking-related services. Management reimbursement revenues for this segment totaled $54.5 million and $74.3 million during 2021 and 2020, respectively.
Aviation had an operating profit of $32.5 million during 2021, as compared to an operating loss of $59.6 million during 2020. Operating margin increased to 4.9% during 2021, from (8.7)% during 2020. This increase in operating profit margin was primarily attributable to the absence of prior year impairment charges of $55.5 million on goodwill and $5.6 million on customer relationships. Additionally, operating margin increased as the result of management of direct labor and related personnel costs during the Pandemic, higher margins on Pandemic-related cleaning services, and a strategic shift toward securing higher margin contracts with airports and related facilities.
Technical Solutions
Years Ended October 31,
($ in millions) 2021 2020 Increase
Revenues $ 534.0 $ 506.6 $ 27.4 5.4%
Operating profit 49.8 9.5 40.3 NM*
Operating profit margin 9.3 % 1.9 % 745 bps
*Not meaningful
Technical Solutions revenues increased by $27.4 million, or 5.4%, during 2021, as compared to 2020. The increase was primarily attributable to an increase in the volume of our U.S. and U.K. businesses due to the easing of Pandemic-related lockdowns, which provided access to facilities that were previously restricted. In addition, the revenue increase was driven by growth in electric vehicle charging station installation sales.
Operating profit increased by $40.3 million during 2021, as compared to 2020. Operating profit margin increased by 745 bps to 9.3% in 2021 from 1.9% in 2020. The increase in operating profit margin was primarily attributable to the absence of a prior year $17.6 million reserve on notes receivable related to a unique, entertainment-related project, mainly associated with increasing credit risk resulting from the Pandemic. The increase was also due to the absence of prior year impairment charges of $9.0 million on goodwill and $3.4 million on customer relationships related to our U.K. business.
Corporate
Years Ended October 31,
($ in millions) 2021 2020 Increase
Corporate expenses $ (374.6) $ (146.9) $ (227.7) NM*
*Not meaningful
Corporate expenses increased by $227.7 million during 2021, as compared to 2020. The increase in corporate expenses was primarily related to:
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• a $145.8 million increase in legal costs and settlements, primarily attributed to the accrual of a legal settlement for the Bucio case;
• a $43.2 million increase in certain technology projects and other enterprise initiatives (including ELEVATE ), in addition to marketing events;
• a $33.4 million increase in compensation and related expenses, primarily driven by corporate and staff labor reductions that occurred in the prior period due to the Pandemic, including wage reductions, employee furloughs, and the suspension of certain benefits such as 401(k) matching. The increase was also due to updated assessments regarding financial performance target achievements in connection with certain performance share awards and cash incentive plans;
• a $21.9 million increase in acquisition and integration costs attributable to the Able Acquisition; and
• a $9.1 million non-cash impairment charge for previously capitalized internal-use software related to our ERP system implementation as we determined that certain components developed will no longer be incorporated into the new ERP system.
This increase was partially offset by:
• a $17.4 million decrease in insurance expense as the result of favorable self-insurance reserve adjustments from actuarial evaluations completed in fiscal year 2021 as compared to 2020; and
• a $7.6 million decrease in restructuring and related expenses due to the completion of our restructuring program in fiscal year 2020.
The Year Ended October 31, 2020 Compared with the Year Ended October 31, 2019
For a comparison of our Segment Information for the year ended October 31, 2020, to the year ended October 31, 2019, 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, 2020, filed with the SEC on December 17, 2020.
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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, mandatory loan repayments, and systems and technology transformation initiatives under our ELEVATE strategy. 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 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 2022 or in the future.
We have taken and continue to take certain steps to preserve liquidity, including: imposing furloughs or reduced hours for certain service employees in markets significantly impacted by business slowdowns and shutdowns; managing our operating expenditures and certain selling, general and administrative expenses; amending our credit facility, as further described under “Credit Facility” below; 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 also evaluated the business tax provisions of the CARES Act and have deferred remittance of approximately $132 million of payroll tax through December 31, 2020, which the CARES Act requires to be remitted by December 31, 2021, and December 31, 2022, in equal parts.
We believe that our operating cash flows and borrowing capacity under our credit facility are sufficient to fund our cash requirements for the next 12 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. In accordance with the terms of the Credit Facility, the revolving line of credit was reduced to $800.0 million on September 1, 2018.
On May 28, 2020, we amended and restated our Credit Facility (“the First Amendment”) to further enhance our financial flexibility as a precautionary measure in response to uncertainty arising from the Pandemic. The First Amendment modified certain financial covenants, the interest rate, interest margins, and commitment fees applicable to loans and commitments under the Credit Facility. The First Amendment made certain additional changes to the negative covenants restrictions under the Credit Facility, including, subject to certain exceptions: restrictions on our ability to make acquisitions, share repurchases, and other defined restricted payments, depending on our total net leverage ratio.
On June 28, 2021, the Company amended and restated the Credit Facility (the “Second Amendment,” and the Credit Facility as amended, the “Amended Credit Facility”), extending the maturity date to June 28, 2026, and increasing the capacity of the revolving credit facility from $800.0 million to $1.3 billion and the then-remaining term loan outstanding from $620.0 million to $650.0 million. The Second Amendment also removed the anti-cash hoarding mandatory prepayment requirement as well as other restrictions that limited our ability to make acquisitions, share repurchases, and other defined restricted payments under the First Amendment. Additionally, the Second Amendment modified certain financial covenants, terms, interest rates, interest margins, and commitment fees applicable to loans and commitments under the prior Credit Facility. The Amended Credit Facility provides for the issuance of up to $350.0 million for standby letters of credit and the issuance of up to $75.0 million in swingline advances. The obligations under the Amended Credit Facility are secured on a first-priority basis by a lien on
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substantially all of our assets and properties, subject to certain exceptions. We may repay amounts borrowed under the Amended Credit Facility at any time without penalty.
Under the Amended Credit Facility, the term loan and U.S.-dollar-denominated borrowings under the revolver bear interest at a rate equal to one-month LIBOR plus a spread based upon our leverage ratio. Euro- and sterling-denominated borrowings under the revolver bear at the interest rate of the Euro Interbank Offered Rate (EURIBOR) and the daily Sterling Overnight Index Average (SONIA) reference rate, respectively, plus a spread that is based upon our leverage ratio. The spread ranges from 1.375% to 2.250% for Eurocurrency loans and 0.375% to 1.250% for base rate loans. At October 31, 2021, the weighted average interest rate on our outstanding borrowings was 1.59%. We also pay a commitment fee, based on our leverage ratio and payable quarterly in arrears, ranging from 0.20% to 0.40% on the average daily unused portion of the line of credit. For purposes of this calculation, irrevocable standby letters of credit, which are issued primarily in conjunction with our insurance programs, and cash borrowings are included as outstanding under the line of credit.
The Amended Credit Facility contains certain covenants, including a maximum total net leverage ratio of 5.00 to 1.00, a maximum secured net leverage ratio of 4.00 to 1.00, and a minimum interest coverage ratio of 1.50 to 1.00, as well as other financial and non-financial covenants. In the event of a material acquisition, as defined in the Amended Credit Facility, we may elect to increase the maximum total net leverage ratio to 5.50 to 1.00 for a total of four fiscal quarters and increase the maximum secured net leverage ratio to 4.50 to 1.00 for a total of four fiscal quarters. We did not make this election for the Able Acquisition. Our borrowing capacity is subject to, and limited by, compliance with the covenants described above. At October 31, 2021, we were in compliance with these covenants and expect to be in compliance in the foreseeable future.
During 2021, we made $76.3 million of principal payments under the term loan. At October 31, 2021, the total outstanding borrowings under our Amended Credit Facility in the form of cash borrowings and standby letters of credit were $888.8 million and $167.7 million, respectively. At October 31, 2021, we had up to $875.0 million of borrowing capacity.
On March 5, 2021, the United Kingdom’s Financial Conduct Authority, the regulator of LIBOR, announced that the USD LIBOR rates will no longer be published after June 30, 2023. While we expect LIBOR to be available in substantially its current form until at least the end of June 30, 2023, it is possible that LIBOR will become unavailable prior to that point, which may impact our Amended 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. Additionally, our interest rate swaps mature before June 30, 2023. As such, we do not anticipate a material impact related to the LIBOR transition and will continue to monitor developments related to the LIBOR transition and/or identification of an alternative, market-accepted rate.
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 Amended Credit Facility and future domestic cash flows, are sufficient to satisfy our domestic liquidity requirements.
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. However, due to the market and business conditions arising from the Pandemic, we suspended further repurchases of our common stock in March 2020 and did not repurchase any shares of our outstanding common stock during fiscal year 2021. At October 31, 2021, authorization for $144.9 million of repurchases remained under the 2019 Share Repurchase Program.
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Years Ended October 31,
(in millions, except per share amounts) 2021 2020
Total number of shares purchased — 0.2
Average price paid per share N/A $ 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.
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. 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) 2021 2020 2019
Net cash provided by operating activities of continuing operations $ 314.3 $ 457.4 $ 262.8
Net cash provided by (used in) operating activities of discontinued operations — 0.1 (0.1)
Net cash provided by operating activities 314.3 457.5 262.7
Net cash used in investing activities (740.0) (27.5) (58.3)
Net cash provided by (used in) financing activities 92.4 (94.1) (184.8)
Operating Activities of Continuing Operations
Net cash provided by operating activities of continuing operations decreased by $143.1 million during 2021, as compared to 2020. The decrease was primarily related to the timing of working capital changes, partially offset by deferred remittance of payroll taxes under the CARES Act.
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.
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Investing Activities
Net cash used in investing activities increased by $712.5 million during 2021, as compared to 2020. The increase was primarily related to the Able Acquisition during the fourth quarter of 2021.
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.
Financing Activities
Net cash provided by financing activities was $92.4 million in 2021, as compared to net cash used in financing activities of $94.1 million in 2020, primarily due to higher net borrowings to partially fund the purchase price of the Able Acquisition.
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.
Dividends
On December 15, 2021, we announced a quarterly cash dividend of $0.195 per share on our common stock, payable on February 7, 2022. We declared a quarterly cash dividend on our common stock every quarter during 2021, 2020, and 2019. We paid total annual dividends of $51.0 million, $49.3 million, and $47.7 million during 2021, 2020, and 2019, respectively.
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Material Cash Requirements from Contractual and Other Obligations
As of October 31, 2021, our material cash requirements for our known contractual and other obligations were as follows:
• Debt Obligations and Interest Payments – Outstanding payments on our Amended Credit Facility were $888.8 million, with $32.5 million payable within 12 months. Additionally, we had future interest payments based on our hedged borrowings under our Amended Credit Facility of $5.0 million, which is payable within 12 months. The interest payments on our remaining borrowings under the Amended Credit Facility will be determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time. See Note 11, “Credit Facility,” in the Financial Statements for further detail of our debt and the timing of expected future principal and interest payments.
• Operating and Finance Leases – We enter into various noncancelable l ease agreements for office space, parking facilities, warehouses, vehicles, and equipment used in the normal course of business. Operating and finance lease obligations were $170.6 million, with $38.9 million payable within 12 months. See Note 5, “Leases,” in the Financial Statements for further detail of our obligations and the timing of expected future payments.
• Service Concession Arrangements – As defined under Topic 853, Service Concession Arrangements , our leased location parking arrangements are represented as service concession arrangements. We had contractual payments for these arrangements of $89.9 million, with $24.9 million payable within 12 months.
• Information Technology Service Agreements – Information technology service agreements represent outsourced services and licensing costs pursuant to our information technology agreements. We had contractual payments for these agreements of $79.9 million, with $44.9 million payable within 12 months.
• Benefit Obligations – Expected future payments relating to our defined benefit, postretirement, and deferred compensation plans were $45.8 million, with $4.5 million payable in 12 months. These amounts are based on expected future service and were calculated using the same assumptions used to measure our benefit obligation at October 31, 2021.
• Litigation Settlements – A litigation settlement of $142.9 million related to the Bucio case is payable in 12 months. See Note 13, “Commitments and Contingencies,” in the Financial Statements for further details.
• CARES Act Tax Obligations – We deferred approximately $132 million of payroll tax provisions under the CARES Act with $66 million payable in 12 months. See Note 16, “Income Taxes,” in the Financial Statements for further details.
In addition, our material cash requirements for other obligations, for which we cannot reasonably estimate future payments, include the following:
• Multiemployer Benefit Plans – In addition to our company sponsored benefit 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 2021, 2020, and 2019, contributions made to these plans were $348.8 million, $335.8 million, and $345.4 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. Amounts of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated. See Note 12, “Employee Benefit Plans,” in the Financial Statements for more information.
• Self-Insurance Obligations – We may make payments for exposures for which we are self-insured, including workers’ compensation, general liability, automobile liability, property damage, and other insurable risks. At October 31, 2021, our self-insurance reserves, net of recoverables, were $508.3 million. 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. See Note 10, “Insurance,” in the Financial Statements for further detail.
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• Unrecognized Tax Benefits – At October 31, 2021, our total liability for unrecognized tax benefits was $12.5 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.
Off-Balance Sheet Arrangements
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, 2021, these letters of credit and surety bonds totaled $167.7 million and $687.3 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.
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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, 2021. We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our Financial Statements.
Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Customer Relationships
When we acquire a company, we determine the fair value on the acquisition date of assets acquired and liabilities assumed.
We anticipate that for most acquisitions, we will exercise significant judgment in estimating the fair value of intangible assets.
In a typical acquisition, customer relationships are our most significant definite-lived intangible asset. In valuing these relationships, we engage a third-party valuation expert to fair value these assets using a version of the income approach known as the “excess earnings method.”
This method uses a discounted cash flow approach that is derived from historical information, future revenue and operating profit margins, contributory asset charges, and the selection of an appropriate discount rate.
We consider this approach the most appropriate valuation technique because the inherent value of these assets is their ability to generate current and future income.
Future revenue growth, future operating performance margin as a percentage of revenues, customer attrition rate, and discount rate applied are the significant estimates used in the excess earnings method to determine the fair value of customer relationships. These estimates are influenced by many factors, including historical financial information, estimated retention rates, and management's expectations for future customer growth as a combined company.
Another estimate that impacts the valuation is the contributory charge for the acquired workforce, which involves management assumptions based on historical experience, including interview time and new hire productivity.
The estimated life is determined by calculating the number of years necessary to obtain 90% of the value of the discounted cash flows of the relationships and is directly tied to the accuracy of the above assumptions.
We have not made any changes in the accounting methodology used to determine the fair value of customer relationships during the last three years.
If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop the values of the identifiable intangible assets, then we could record material impairment losses.
With other assumptions held constant, a 10% increase in the calculated fair value of the Able customer relationships would increase the annual amortization expense by $2.8 million in 2022.
See the “Valuation of Long-Lived Assets” critical accounting policy for information about impairment evaluations.
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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.
At October 31, 2021, we had $2.2 billion of goodwill. Our goodwill is included in the following segments:
$1.1 billion — B&I (includes $554.0 million related to the Able Acquisition on September 30, 2021)
$407.2 million — T&M
$459.3 million — Education
$69.9 million — Aviation
$162.7 million — Technical Solutions
A goodwill impairment analysis was performed for each of our reporting units on August 1, 2021. Based on these studies, the implied fair value of each of our reporting units was substantially in excess of its carrying value. Therefore, we concluded there were no indicators of impairment. A 10% decrease in the estimated fair value of any of our reporting units would not have resulted in a different conclusion.
During the third quarter of 2021, we recognized a non-cash impairment charge totaling $9.1 million in our Corporate segment for previously capitalized internal-use software related to our ERP system implementation. The Company determined that certain components that were previously developed would no longer be integrated into the new ERP system. The impairment charge reduced the carrying value to zero for those components.
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.
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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 related to prior years known claims as well as our estimate of the loss amounts associated with IBNR claims during 2021 by $36.0 million. In 2020, we decreased our total reserves related to prior years claims by $30.2 million.
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 $37.3 million for 2021.
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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 $6 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 Updates Topic Summary Effective Date/
Method of Adoption
2021-01 Reference Rate Reform (Topic 848): Scope This Accounting Standard Update (“ASU”), issued in January 2021, clarifies that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions under Topic 848.
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. This update was effective upon issuance and can be applied to hedging relationships retrospectively or prospectively through December 31, 2022.
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 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.
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. This update was effective upon issuance and can be applied prospectively to contract modifications made and hedging relationships entered into or evaluated through December 31, 2022.
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.
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